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AMCON DISTRIBUTING CO - Quarter Report: 2011 June (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2011

 

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

 


 

(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 x 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 x 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 x

(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 x

 

The Registrant had 609,320 shares of its $.01 par value common stock outstanding as of July 18, 2011.

 

 

 



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, 2011 (unaudited) and September 30, 2010

3

 

 

Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2011 and 2010

4

 

 

Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2011 and 2010

5

 

 

Notes to condensed consolidated unaudited financial statements

7

 

 

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

16

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

23

 

 

Item 4. Controls and Procedures

24

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

24

 

 

Item 1A. Risk Factors

24

 

 

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

25

 

 

Item 3. Defaults Upon Senior Securities

25

 

 

Item 4. (Removed and Reserved)

25

 

 

Item 5. Other Information

25

 

 

Item 6. Exhibits

25

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2011 and September 30, 2010

 

 

 

June
2011

 

September
2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

1,330,474

 

$

356,735

 

Accounts receivable, less allowance for doubtful accounts of $0.8 million and $1.6 million at June 2011 and September 2010, respectively

 

34,508,718

 

27,903,689

 

Inventories, net

 

59,663,739

 

35,005,957

 

Deferred income taxes

 

1,584,981

 

1,905,974

 

Prepaid and other current assets

 

6,492,944

 

3,013,485

 

Total current assets

 

103,580,856

 

68,185,840

 

 

 

 

 

 

 

Property and equipment, net

 

14,087,436

 

11,855,669

 

Goodwill

 

6,149,168

 

6,149,168

 

Other intangible assets, net

 

5,747,387

 

4,807,644

 

Other assets

 

1,255,596

 

1,069,050

 

 

 

$

130,820,443

 

$

92,067,371

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

19,249,594

 

$

16,656,257

 

Accrued expenses

 

7,298,871

 

6,007,900

 

Accrued wages, salaries and bonuses

 

2,605,329

 

3,161,817

 

Income taxes payable

 

510,945

 

2,366,667

 

Current maturities of long-term debt

 

1,466,525

 

893,291

 

Total current liabilities

 

31,131,264

 

29,085,932

 

 

 

 

 

 

 

Credit facility

 

47,350,031

 

18,816,709

 

Deferred income taxes

 

2,276,551

 

1,075,861

 

Long-term debt, less current maturities

 

6,521,334

 

5,226,586

 

Other long-term liabilities

 

431,524

 

587,479

 

Series A cumulative, convertible preferred stock, $.01 par value 100,000 shares 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 shares authorized, 62,000 shares outstanding at June 2011 and 80,000 shares outstanding at September 2010, liquidation preference $25.00 per share

 

1,550,000

 

2,000,000

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000,000 shares authorized, 162,000 and 180,000 shares outstanding and issued in Series A and B referred to above

 

 

 

Common stock, $.01 par value, 3,000,000 shares authorized, 609,320 shares outstanding at June 2011 and 577,432 shares outstanding at September 2010

 

6,093

 

5,774

 

Additional paid-in capital

 

9,960,895

 

8,376,640

 

Retained earnings

 

29,092,751

 

24,392,390

 

Total shareholders’ equity

 

39,059,739

 

32,774,804

 

 

 

$

130,820,443

 

$

92,067,371

 

 

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

 

3



Table of Contents

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three and nine months ended June 30, 2011 and 2010

 

 

 

For the three months
ended June

 

For the nine months
ended June

 

 

 

2011

 

2010

 

2011

 

2010

 

Sales (including excise taxes of $85.9 million and $87.9 million, and $238.1 million and $246.3 million, respectively)

 

$

263,828,199

 

$

267,062,440

 

$

725,388,399

 

$

741,502,607

 

Cost of sales

 

245,610,146

 

247,932,676

 

673,193,512

 

688,204,656

 

Gross profit

 

18,218,053

 

19,129,764

 

52,194,887

 

53,297,951

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

13,781,556

 

14,070,483

 

40,378,569

 

41,215,024

 

Depreciation and amortization

 

519,099

 

440,466

 

1,523,815

 

1,243,307

 

 

 

14,300,655

 

14,510,949

 

41,902,384

 

42,458,331

 

Operating income

 

3,917,398

 

4,618,815

 

10,292,503

 

10,839,620

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

372,525

 

370,873

 

1,020,980

 

1,144,543

 

Other (income), net

 

(73,878

)

(32,758

)

(141,970

)

(69,184

)

 

 

298,647

 

338,115

 

879,010

 

1,075,359

 

Income from operations before income tax

 

3,618,751

 

4,280,700

 

9,413,493

 

9,764,261

 

Income tax expense

 

1,791,000

 

1,532,000

 

4,169,000

 

3,495,000

 

Net income

 

1,827,751

 

2,748,700

 

5,244,493

 

6,269,261

 

Preferred stock dividend requirements

 

(70,649

)

(74,052

)

(218,755

)

(222,158

)

Net income available to common shareholders

 

$

1,757,102

 

$

2,674,648

 

$

5,025,738

 

$

6,047,103

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common shareholders:

 

$

2.93

 

$

4.72

 

$

8.53

 

$

10.73

 

Diluted earnings per share available to common shareholders:

 

$

2.36

 

$

3.67

 

$

6.81

 

$

8.39

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

599,281

 

566,224

 

589,084

 

563,505

 

Diluted weighted average shares outstanding

 

775,416

 

749,350

 

769,870

 

747,035

 

 

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

 

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Table of Contents

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the nine months ended June 30, 2011 and 2010

 

 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

5,244,493

 

$

6,269,261

 

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

 

 

 

 

 

Depreciation

 

1,268,397

 

1,043,186

 

Amortization

 

255,418

 

200,121

 

Gain on sale of property and equipment

 

(37,177

)

(31,843

)

Stock based compensation

 

1,740,969

 

376,422

 

Net excess tax benefit on equity-based awards

 

(125,904

)

(130,126

)

Deferred income taxes

 

1,521,683

 

(380,575

)

Provision for (recoveries) losses on doubtful accounts

 

(768,000

)

750,489

 

Provision for losses on inventory obsolescence

 

104,871

 

82,778

 

Other

 

(6,033

)

77,094

 

 

 

 

 

 

 

Changes in assets and liabilities net of effects of business acquisition:

 

 

 

 

 

Accounts receivable

 

3,044,399

 

(2,325,168

)

Inventories

 

(20,191,024

)

(4,923,666

)

Prepaid and other current assets

 

(3,444,459

)

(2,830,201

)

Other assets

 

(186,546

)

(35,850

)

Accounts payable

 

2,598,310

 

3,388,920

 

Accrued expenses and accrued wages, salaries and bonuses

 

(824,500

)

(375,910

)

Income tax payable

 

(1,729,818

)

(1,326,635

)

Net cash flows from operating activities

 

(11,534,921

)

(171,703

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(1,641,035

)

(1,423,912

)

Proceeds from sales of property and equipment

 

64,375

 

62,406

 

Acquisition

 

(13,368,057

)

(3,099,836

)

Net cash flows from investing activities

 

(14,944,717

)

(4,461,342

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net borrowings on bank credit agreements

 

28,533,322

 

5,646,484

 

Principal payments on long-term debt

 

(684,108

)

(682,574

)

Proceeds from exercise of stock options

 

22,391

 

126,973

 

Net excess tax benefit on equity-based awards

 

125,904

 

130,126

 

Dividends paid on convertible preferred stock

 

(218,755

)

(222,158

)

Dividends on common stock

 

(325,377

)

(310,358

)

Net cash flows from financing activities

 

27,453,377

 

4,688,493

 

Net change in cash

 

973,739

 

55,448

 

 

 

 

 

 

 

Cash, beginning of period

 

356,735

 

309,914

 

Cash, end of period

 

$

1,330,474

 

$

365,362

 

 

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

 

5



Table of Contents

 

 

 

2011

 

2010

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

994,280

 

$

1,141,934

 

Cash paid during the period for income taxes

 

4,377,134

 

5,202,208

 

 

 

 

 

 

 

Supplemental disclosure of non-cash information:

 

 

 

 

 

Conversion by holders of Series B Convertible Preferred Stock to common stock

 

450,000

 

 

Equipment acquisitions classified as accounts payable

 

33,233

 

35,866

 

Acquisition of equipment through capital leases

 

 

14,969

 

 

 

 

 

 

 

Business acquisition (see Note 2):

 

 

 

 

 

Accounts receivable

 

8,881,428

 

 

Inventory

 

4,571,629

 

1,981,498

 

Property and equipment

 

1,891,000

 

122,978

 

Prepaid assets

 

35,000

 

 

Non-competition agreement

 

444,428

 

 

Customer relationships intangible assets

 

661,090

 

1,620,000

 

Goodwill

 

 

300,360

 

Accrued expenses

 

(120,000

)

 

Note payable

 

(2,552,090

)

(500,000

)

Amount due under non-competition agreement

 

(444,428

)

 

Contingent consideration due

 

 

(425,000

)

 

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

 

6



Table of Contents

 

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, Southern, and Southeastern 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 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. In October 2010, “Convenience Store News” ranked our Wholesale Segment as the ninth (9th) largest convenience store distributor in the United States based on annual sales.

 

Our Wholesale Segment distributes 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.

 

RETAIL SEGMENT

 

The Company’s retail health food stores, 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.

 

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, 2010, 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, 2011 and June 30, 2010 have been referred to throughout this quarterly report as Q3 2011 and Q3 2010, respectively. The fiscal balance sheet dates as of June 30, 2011, June 30, 2010, and September 30, 2010 have been referred to as June 2011, June 2010, and September 2010, respectively.

 

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Table of Contents

 

2. ACQUISITIONS

 

On May 27, 2011, the Company, through its wholly-owned subsidiary, acquired the convenience store distribution assets of L.P. Shanks Company Inc. (“LPS”).  LPS was a wholesale distributor to convenience stores in Tennessee, Kentucky, Georgia, Virginia, West Virginia, and North Carolina with annual sales of approximately $200 million. In exchange for certain accounts receivable, inventory, fixed assets, and customer lists of LPS, the Company paid $13.4 million in cash, issued a $2.6 million note payable  to the seller due in quarterly installments over three years bearing interest at 4% annually, and will pay $0.5 million in quarterly installments over five years related to a non-competition agreement with the seller. The Company also entered into warehouse leases with the seller and assumed certain operating leases in conjunction with the transaction. No significant liabilities were assumed in connection with the transaction and the costs incurred to effectuate the acquisition were  expensed as incurred. The transaction was funded through the Company’s existing credit facility and the issuance of a note payable to the seller. The acquisition expands the Company’s strategic footprint in the Southeastern 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.

 

Total Consideration

 

Amount
(in millions)

 

Cash

 

$

13.4

 

Note payable

 

2.6

 

Non-competition agreement

 

0.4

 

Total fair value of consideration transferred

 

$

16.4

 

 

Recognized amounts of identifiable assets acquired

 

 

 

Amount
(in millions)

 

Weighted
Average
Amortization
 Period

 

Accounts Receivable

 

$

8.9

 

 

Inventory

 

4.6

 

 

Property and equipment

 

1.9

 

5 years

 

Identifiable intangible assets:

 

 

 

 

 

Non-competition agreement

 

0.4

 

5 years

 

Customer relationships

 

0.7

 

8 years

 

Liabilities

 

(0.1

)

 

 

Total identifiable assets

 

$

16.4

 

 

 

 

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.

 

 

 

Three months ended

 

Nine months ended

 

 

 

June

 

June

 

(In millions)

 

2011

 

2010

 

2011

 

2010

 

Revenue — Actual Results

 

$

263.8

 

$

267.1

 

$

725.4

 

$

741.5

 

Revenue — Supplemental pro forma results

 

$

299.4

 

$

318.3

 

$

859.1

 

$

890.6

 

Net Income — Actual Results

 

$

1.8

 

$

2.7

 

$

5.2

 

$

6.3

 

Net Income — Supplemental pro forma results

 

$

1.9

 

$

2.8

 

$

5.1

 

$

6.4

 

 

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Table of Contents

 

3. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at June 2011 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

 

$

1,550,000

 

Number of shares:

 

100,000

 

62,000

 

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

 

62,881

 

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 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 nominated to this seat in 2004.  During Q3 2011, the holders of the Series B Convertible Preferred Stock converted 18,000 shares with a carrying value of $450,000 into 18,255 shares of the Company’s common stock.

 

4. INVENTORIES

 

Inventories consisted of finished goods at June 2011 and September 2010 and are stated at the lower of cost, determined on a first in first out, or FIFO basis, or market. The Wholesale Segment and Retail Segment inventories consist of products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods include total reserves of approximately $0.9 million at June 2011 and $0.8 million at September 2010. These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable or non-refundable inventory based on an evaluation of slow moving and discontinued products.

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

 

June
 2011

 

September
 2010

 

Wholesale Segment

 

$

4,236,291

 

$

4,236,291

 

Retail Segment

 

1,912,877

 

1,912,877

 

 

 

$

6,149,168

 

$

6,149,168

 

 

Other intangible assets of the Company consisted of the following:

 

 

 

June
 2011

 

September
 2010

 

Trademarks and tradenames

 

$

3,373,269

 

$

3,373,269

 

Non-competition agreement (less accumulated amortization of $7,400 at June 2011)

 

 

437,028

 

 

 

Customer relationships (less accumulated amortization of $343,700 and $185,625 at June 2011 and September 2010, respectively)

 

1,937,090

 

1,434,375

 

 

 

$

5,747,387

 

$

4,807,644

 

 

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Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. The Company performs annual impairment testing of goodwill and other intangible assets during the fourth fiscal quarter of each year.

 

At June 2011, intangible assets considered to have finite lives represent acquired customer relationships and a non-competition agreement.  The customer relationships are being amortized over eight years and the non-competition agreement over five years.  These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted.  Amortization expense related to these assets totaled was $0.2 million in each of the nine month periods ended June 2011 and June 2010, respectively.  Amortization expense for the periods subsequent to June 2011 is as follows:

 

Customer relationships

 

June
 2011

 

Fiscal 2011 (1)

 

$

93,525

 

Fiscal 2012

 

374,100

 

Fiscal 2013

 

374,100

 

Fiscal 2014

 

374,100

 

Fiscal 2015

 

374,100

 

Thereafter

 

784,193

 

 

 

$

2,374,118

 

 


(1)  Represents amortization for the remaining three months of Fiscal 2011.

 

6. DIVIDENDS:

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.5 million for the three and nine month periods, respectively, ended in both June 2011 and June 2010.

 

7. EARNINGS PER SHARE

 

Basic earnings per share available to common shareholders is calculated by dividing income from continuing operations 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 continuing 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. There were no anti-dilutive stock options or potential common stock options at either June 2011 or June 2010.

 

 

 

For the three months ended June

 

 

 

2011

 

2010

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Weighted average common shares outstanding

 

599,281

 

599,281

 

566,224

 

566,224

 

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

 

 

176,135

 

 

183,126

 

Weighted average number of shares outstanding

 

599,281

 

775,416

 

566,224

 

749,350

 

Income from operations

 

$

1,827,751

 

$

1,827,751

 

$

2,748,700

 

$

2,748,700

 

Deduct: convertible preferred stock dividends (2)

 

(70,649

)

 

(74,052

)

 

Net income available to common shareholders

 

1,757,102

 

1,827,751

 

2,674,648

 

2,748,700

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

2.93

 

$

2.36

 

$

4.72

 

$

3.67

 

 


(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 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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For the nine months ended June

 

 

 

2011

 

2010

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Weighted average common shares outstanding

 

589,084

 

589,084

 

563,505

 

563,505

 

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

 

 

180,786

 

 

183,530

 

Weighted average number of shares outstanding

 

589,084

 

769,870

 

563,505

 

747,035

 

Income from operations

 

$

5,244,493

 

$

5,244,493

 

$

6,269,261

 

$

6,269,261

 

Deduct: convertible preferred stock dividends (2)

 

(218,755

)

 

(222,158

)

 

 

 

5,025,738

 

5,244,493

 

6,047,103

 

6,269,261

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

8.53

 

$

6.81

 

$

10.73

 

$

8.39

 

 


(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 dividends for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company.

 

8. DEBT

 

At June 2011, the Company had a credit agreement as amended (the “Facility”) with Bank of America which included the following significant terms.

 

Significant Terms

 

·    April 2014 maturity date and a $70.0 million revolving credit limit.

 

·    Includes a loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·    Provides for an additional $5.0 million of credit advances available for certain inventory purchases.

 

·    Contains an 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 the original term of the agreement or the end of any renewal period.

 

·    Includes a prepayment penalty equal to one-half of one percent (½%) if the Company prepays the entire Facility or terminates it in year one of the agreement, and one-fourth of one percent (¼%) if the Company prepays the entire Facility or terminates it in year two of the agreement. The prepayment penalty is calculated based on the original loan amount.

 

·    The Facility bears interest at either the bank’s prime rate or at LIBOR plus 175 basis points, 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.

 

·    Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis.

 

·    Includes a financial covenant requiring a fixed charge coverage ratio of at least 1.1 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.

 

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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 Company’s calculated credit limit of the Facility at June 30 was $69.7 million of which $47.4 million was outstanding leaving $22.3 million available.

 

At June 2011, 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 2.93% at June 2011.  At June 2011, the Company had $8.0 million in long-term debt outstanding. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of this long-term debt approximated its carrying value at June 2011.

 

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 June 2011. 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.

 

Other

 

AMCON 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.

 

9. 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 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.  The number of shares issuable under the Omnibus Plan is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock.  As of June 2011, awards with respect to a total of 87,900 shares had been awarded pursuant to the Omnibus Plan and awards with respect to another 62,100 shares may be awarded under the plan.

 

Stock Options

 

During the Company’s third fiscal quarter of 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 is being 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:

 

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Stock Option Pricing
Assumptions

 

Risk-free interest rate

 

3.04

%

Dividend yield

 

1.30

%

Expected volatility

 

49.30

%

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 at June 2011 are summarized as follows:

 

 

 

 

 

 

 

Remaining

 

 

 

Exercisable

 

 

 

Exercise
 Price

 

Number
 Outstanding

 

Weighted-Average
 Contractual Life

 

Weighted-Average
 Exercise Price

 

Number
 Exercisable

 

Weighted-Average
 Exercise Price

 

2003 Options

 

$

28.80

 

84

 

1.32 years

 

$

28.80

 

84

 

$

28.80

 

2007 Options

 

$

18.00

 

25,000

 

5.45 years

 

$

18.00

 

25,000

 

$

18.00

 

2010 Options

 

$

51.50

 

5,500

 

8.83 years

 

$

51.50

 

1,100

 

$

51.50

 

 

 

 

 

30,584

 

 

 

$

24.05

 

26,184

 

$

19.44

 

 

The following is a summary of stock options activity for the nine months ended June 2011:

 

 

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

Outstanding at September 2010

 

31,918

 

$

24.56

 

Granted

 

 

$

 

Exercised

 

(834

)

$

26.94

 

Forfeited/Expired

 

(500

)

$

51.50

 

Outstanding at June 2011

 

30,584

 

$

24.05

 

 

At June 2011, 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 46 months.

 

Restricted Stock Units

 

During the first fiscal quarter of 2011, the Compensation Committee of the Board of Directors authorized and approved the following restricted stock units awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plan:

 

 

 

Restricted Stock Units (1)

 

Restricted Stock Units (2)

 

Date of award:

 

November 22, 2010

 

November 22, 2010

 

Number of shares:

 

38,400

 

12,000

 

Service period:

 

24 months

 

36 months

 

Estimated fair value of award at grant date:

 

$

2,765,000

 

$

864,000

 

Fair value of outstanding (non-vested) awards at June 2011:

 

$

2,667,000

 

$

833,000

 

 


(1)

12,800 of the restricted stock unit awards vested were vested at Q3 2011. The remaining 25,600 restricted stock units will vest in equal amounts (12,800 per year) on October 26, 2011 and October 26, 2012.

(2)

The 12,000 restricted stock units will vest in equal amounts (4,000 per year) on November 22, 2011, November 22, 2012, and November 22, 2013.

 

There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The recipients of the restricted stock units are entitled to 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 restricted stock units provide that the recipients can elect, at their option, to receive either common stock in the Company, or a cash settlement based upon the closing price of the Company’s shares, at the time of vesting.  Based on these award provisions, the compensation expense recorded in the Company’s Condensed Statement of Operations reflects the straight-line amortized fair value based on the period end closing price.

 

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For the three and nine months ended June 2011, net income before income taxes included compensation expense of $0.2 million and $1.7 million, respectively, related to the amortization of the Company’s restricted stock unit awards.  Total unamortized compensation expense for these awards based on the June 2011 closing price was approximately $1.9 million. This unamortized compensation expense, plus any changes in the fair value of the awards through the settlement date, are expected to be amortized over approximately the next 12 months (the weighted-average period). The following summarizes restricted stock unit activity under the Omnibus Plan for the nine months ended June 2011:

 

 

 

Number
of
Shares

 

Weighted Average
 Fair Value

 

Nonvested restricted stock units at September 2010

 

 

$

 

Granted

 

50,400

 

$

72.01

 

Vested

 

(12,800

)

$

72.50

 

Expired

 

 

$

 

Nonvested restricted stock units at June 2011

 

37,600

 

$

69.45

 

 

10. 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
Segment

 

Retail
Segment

 

Other

 

Consolidated

 

THREE MONTHS ENDED JUNE 2011:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

190,156,165

 

$

 

$

 

$

190,156,165

 

Confectionery

 

18,125,809

 

 

 

18,125,809

 

Health food

 

 

9,509,251

 

 

9,509,251

 

Tobacco, food service & other

 

46,036,974

 

 

 

46,036,974

 

Total external revenue

 

254,318,948

 

9,509,251

 

 

263,828,199

 

Depreciation

 

316,032

 

106,308

 

937

 

423,277

 

Amortization

 

95,822

 

 

 

95,822

 

Operating income (loss)

 

4,092,131

 

803,020

 

(977,753

)

3,917,398

 

Interest expense

 

117,643

 

93,381

 

161,501

 

372,525

 

Income (loss) from continuing operations before taxes

 

3,997,180

 

715,497

 

(1,093,926

)

3,618,751

 

Total assets

 

116,520,925

 

13,285,407

 

1,014,111

 

130,820,443

 

Capital expenditures

 

624,284

 

59,497

 

 

683,781

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED JUNE 2010:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

192,819,138

 

$

 

$

 

$

192,819,138

 

Confectionery

 

18,276,797

 

 

 

18,276,797

 

Health food

 

 

9,220,081

 

 

9,220,081

 

Tobacco, food service & other

 

46,746,424

 

 

 

46,746,424

 

Total external revenue

 

257,842,359

 

9,220,081

 

 

267,062,440

 

Depreciation

 

270,627

 

92,763

 

936

 

364,326

 

Amortization

 

76,140

 

 

 

76,140

 

Operating income (loss)

 

4,820,946

 

911,760

 

(1,113,891

)

4,618,815

 

Interest expense

 

119,356

 

111,322

 

140,195

 

370,873

 

Income (loss) from continuing operations before taxes

 

4,708,303

 

811,190

 

(1,238,793

)

4,280,700

 

Total assets

 

88,755,030

 

12,238,486

 

1,019,791

 

102,013,307

 

Capital expenditures

 

136,591

 

184,392

 

 

320,983

 

 

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Table of Contents

 

 

 

Wholesale
Segment

 

Retail
 Segment

 

Other

 

Consolidated

 

NINE MONTHS ENDED JUNE 2011:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

520,018,745

 

$

 

$

 

$

520,018,745

 

Confectionery

 

48,253,405

 

 

 

48,253,405

 

Health food

 

 

28,509,834

 

 

28,509,834

 

Tobacco, food service & other

 

128,606,415

 

 

 

128,606,415

 

Total external revenue

 

696,878,565

 

28,509,834

 

 

725,388,399

 

Depreciation

 

944,662

 

320,923

 

2,812

 

1,268,397

 

Amortization

 

255,418

 

 

 

255,418

 

Operating income (loss)

 

12,182,183

 

2,712,105

 

(4,601,785

)

10,292,503

 

Interest expense

 

343,807

 

293,369

 

383,804

 

1,020,980

 

Income (loss) from continuing operations before taxes

 

11,880,020

 

2,435,886

 

(4,902,413

)

9,413,493

 

Total assets

 

116,520,925

 

13,285,407

 

1,014,111

 

130,820,443

 

Capital expenditures

 

1,474,382

 

166,653

 

 

1,641,035

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED JUNE 2010:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

537,317,934

 

$

 

$

 

$

537,317,934

 

Confectionery

 

48,472,133

 

 

 

48,472,133

 

Health food

 

 

27,639,474

 

 

27,639,474

 

Tobacco, food service & other

 

128,073,066

 

 

 

128,073,066

 

Total external revenue

 

713,863,133

 

27,639,474

 

 

741,502,607

 

Depreciation

 

808,338

 

231,618

 

3,230

 

1,043,186

 

Amortization

 

200,121

 

 

 

200,121

 

Operating income (loss)

 

12,354,842

 

2,922,249

 

(4,437,471

)

10,839,620

 

Interest expense

 

366,547

 

351,612

 

426,384

 

1,144,543

 

Income (loss) from continuing operations before taxes

 

12,010,720

 

2,601,688

 

(4,848,147

)

9,764,261

 

Total assets

 

88,755,030

 

12,238,486

 

1,019,791

 

102,013,307

 

Capital expenditures

 

740,175

 

683,737

 

 

1,423,912

 

 

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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 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,

 

·             integration risk related to acquisitions or other efforts to expand,

 

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

 

·             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 such as products including menthol additives,

 

·             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,

 

·             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.

 

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Table of Contents

 

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, 2010, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the fiscal quarter ended June 2011.

 

THIRD FISCAL QUARTER 2011 (Q3 2011)

 

The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2011 and June 2010.

 

Wholesale Segment

 

Our Wholesale Segment serves approximately 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. In October 2010, Convenience Store News ranked our Wholesale Segment as the ninth (9th) largest convenience store distributor in the United States based on annual sales.

 

Our Wholesale Segment distributes 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.

 

Retail Segment

 

The Company’s Retail Segment, which is 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.

 

Business Update — General

 

Higher food commodity prices, combined with stagnate economic conditions continue to leave retail consumers extremely price sensitive and value conscious.  While our businesses have generally remained more resilient than many other distribution and retail formats, we believe the possibility of additional regulatory pressures and higher excise taxes could adversely affect our sales, gross margins, and operating profits.  Additionally, the long-term implications of the new healthcare legislation remains uncertain.

 

Business Update — Wholesale Segment

 

The competitive landscape in our wholesale distribution business is intensifying on a number of fronts. Convenience stores, which constitute the largest portion of our customer base, continue to remake their businesses, focusing on food service offerings such as hot on-the-go meals and over-sized beverage and coffee bars.  Most recently, higher fuel and food commodity prices have began to stress discretionary consumer spending, squeezing profit margins for our customers. These factors are driving consolidation among convenience stores, as business owners seek to maximize economies of scale. Wholesale distributors who service convenience stores are challenged by the same structural and macro-economic issues.  Declining revenue streams from tobacco products, higher inventory carrying costs, gross margin compression, and access to capital have accelerated consolidation among wholesale distributors.

 

Despite these issues, we believe the current market conditions offer some unique opportunities. The ability of smaller distributors to compete moving forward will be difficult, presenting our Company with attractive opportunities to expand such as our recent purchase of LPS (see Note 2).  Further, the long-term sustainability of the convenience store industry remains strong.  According to a January 2011 report by the National Association of Convenience Stores (NACS), the total number of convenience stores nation-wide grew to a record high of 146,000 during the 2010 calendar year, which is more than the total number of other competing retail channel locations (supermarkets, drug stores, and mass merchandiser/dollar stores) in the United States combined.  Furthermore, the industry remains highly fragmented with independent single-store operators still accounting for more than 63% of all stores, a market segment our Company specializes in serving. While the particular products sold by convenience stores may evolve and change over time, we feel the primary value they convey (speedy service for time starved customers) will not.

 

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Business Update — Retail Segment

 

Natural foods is one of the fastest growing categories in food retailing. While our Retail Segment has benefited from the overall growth in this category, we believe much of our success in this area is attributable to a loyal customer following.  Both of our retail businesses (Chamberlin’s Market & Café and Akin’s Natural Foods Market) have had a local presence for over 75 years, affording us tremendous brand recognition in the area of natural products.

 

Forward looking, we will continue to face a highly competitive environment based on the expansion of both regional and national chains. While our stores have recently shown a modest improvement in sales, higher food commodity prices may dampen near term sales growth. We believe, however, that our health food stores continue to offer a unique value proposition, carrying product lines not readily found in other stores, coupled with highly trained store associates. As the economy continues to recover and consumer confidence improves, we believe our stores will be well positioned to benefit from the long-term growth trends in natural products retailing.

 

RESULTS OF OPERATIONS

 

 

 

For the three months ended June

 

 

 

2011

 

2010

 

Incr
(Decr)

 

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

Sales (1)

 

$

263,828,199

 

$

267,062,440

 

$

(3,234,241

)

(1.2

)

Cost of sales

 

245,610,146

 

247,932,676

 

(2,322,530

)

(0.9

)

Gross profit

 

18,218,053

 

19,129,764

 

(911,711

)

(4.8

)

Gross profit percentage

 

6.9

%

7.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

14,300,655

 

14,510,949

 

(210,294

)

(1.4

)

Operating income

 

3,917,398

 

4,618,815

 

(701,417

)

(15.2

)

Interest expense

 

372,525

 

370,873

 

1,652

 

0.4

 

Income tax expense

 

1,791,000

 

1,532,000

 

259,000

 

16.9

 

Income from continuing operations before income taxes

 

1,827,751

 

2,748,700

 

(920,949

)

(33.5

)

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

Sales

 

$

254,318,948

 

$

257,842,359

 

$

(3,523,411

)

(1.4

)

Gross profit

 

14,177,301

 

15,054,498

 

(877,197

)

(5.8

)

Gross profit percentage

 

5.6

%

5.8

%

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

Sales

 

$

9,509,251

 

$

9,220,081

 

$

289,170

 

3.1

 

Gross profit

 

4,040,752

 

4,075,266

 

(34,514

)

(0.8

)

Gross profit percentage

 

42.5

%

44.2

%

 

 

 

 

 


(1)               Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $3.7 million in Q3 2011 and $3.9 million in Q3 2010.

 

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Table of Contents

 

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 2011 vs. Q3 2010

 

Sales in our Wholesale Segment decreased $3.5 million during Q3 2011 as compared to Q3 2010.  Significant items impacting sales during Q3 2011 included a $20.9 million increase in sales related to our acquisition of LPS and a $4.6 million increase in sales related to cigarette price increases implemented by manufacturers.  These increases were partially offset by a $23.8 million decrease in sales primarily related to the volume and mix of cigarette cartons sold, and a $5.2 million decrease in sales 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 $0.3 million in Q3 2011 as compared to Q3 2010. The increase in sales is primarily related to improved sales in our Oklahoma and Florida markets which have shown improved results coming off the depths of the recession.

 

GROSS PROFIT — Q3 2011 vs. Q3 2010

 

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 $0.9 million in Q3 2011 as compared to Q3 2010.  This decrease in gross profit was primarily related to lower overall sales in our cigarette and Other Products categories, partially offset by an increase in gross profit related to our acquisition of LPS.

 

Our Q3 2011 Retail Segment gross profit was even with Q3 2010, on slightly lower gross profit margins.

 

OPERATING EXPENSE — Q3 2011 vs. Q3 2010

 

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.

 

Q3 2011 operating expenses decreased $0.2 million as compared to Q3 2010.  Significant items impacting operating expenses during Q3 2011 included $0.8 million in operating expenses servicing our new business added with the LPS acquisition, partially offset by a $0.6 million reduction in bad debt expense, and a $0.4 million reduction in compensation and other operating expenses.

 

INCOME TAX EXPENSE — Q3 2011 vs. Q3 2010

 

The effective income tax rate for Q3 2011 was 49.5% as compared to 35.8% in Q3 2010.  The increase effective tax rates over Q3 2010 is primarily related to Internal Revenue Service limitations on the deductibility of certain expenses for the current year.

 

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Table of Contents

 

RESULTS OF OPERATIONS — NINE MONTHS ENDED JUNE 2011:

 

 

 

For the nine months

 

 

 

ended June

 

 

 

 

 

 

 

Incr

 

 

 

 

 

2011

 

2010

 

(Decr)

 

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

Sales

 

$

725,388,399

 

$

741,502,607

 

$

(16,114,208

)

(2.2

)

Cost of sales

 

673,193,512

 

688,204,656

 

(15,011,144

)

(2.2

)

Gross profit

 

52,194,887

 

53,297,951

 

(1,103,064

)

(2.1

)

Gross profit percentage

 

7.2

%

7.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

41,902,384

 

42,458,331

 

(555,947

)

(1.3

)

Operating income

 

10,292,503

 

10,839,620

 

(547,117

)

(5.0

)

Interest expense

 

1,020,980

 

1,144,543

 

(123,563

)

(10.8

)

Income tax expense

 

4,169,000

 

3,495,000

 

674,000

 

19.3

 

Income from continuing operations before income taxes

 

5,244,493

 

6,269,261

 

(1,024,768

)

(16.3

)

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

Sales

 

$

696,878,565

 

$

713,863,133

 

$

(16,984,568

)

(2.4

)

Gross profit

 

39,977,660

 

41,250,675

 

(1,273,015

)

(3.1

)

Gross profit percentage

 

5.7

%

5.8

%

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

Sales

 

$

28,509,834

 

$

27,639,474

 

$

870,360

 

3.1

 

Gross profit

 

12,217,227

 

12,047,276

 

169,951

 

1.4

 

Gross profit percentage

 

42.9

%

43.6

%

 

 

 

 

 


(1)

 

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $11.1 million for the nine months ended June 2011 and $11.5 million for the nine months ended June 2010.

 

SALES — Nine months Ended June 2011

 

Sales in our Wholesale Segment decreased $17.0 million for the nine months ended June 2011 as compared to the same prior year period.  Significant items impacting our Wholesale Segment sales for the nine months ended June 2011 included a $20.9 increase in sales related to the acquisition of LPS and a $15.9 million increase in sales related to cigarette price increases implemented by manufacturers.  These increases were partially offset by a $49.8 million decrease in sales primarily related to the volume and mix of cigarette cartons sold and a $4.0 million decrease in sales in our Other Products categories.

 

Sales in our Retail Segment for the nine months ended June 2011 increased approximately $0.9 million as compared to the same prior year period.  Of this increase, approximately $0.4 million related to the addition of our new retail store in Tulsa, Oklahoma which opened during the prior fiscal year (Q2 2010) and $0.5 million related to higher overall sales in our existing retail stores.

 

GROSS PROFIT — Nine months Ended June 2011

 

Gross profit in our Wholesale Segment decreased $1.3 million for the nine month period ended June 2011 as compared to the same prior year period. This decrease is primarily related to lower overall sales in our cigarette and Other Product categories, partially offset an increase in gross profit related to our acquisition of LPS.

 

Gross profit for the Retail Segment increased $0.2 million for the nine month period ended June 2011 as compared to the same period year period. This increase was primarily related to higher overall sales in our existing stores, in addition to the impact of our new Tulsa, Oklahoma retail store.

 

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Table of Contents

 

OPERATING EXPENSE — Nine months Ended June 2011

 

Operating expenses decreased $0.6 million for the nine months ended June 2011 as compared to the same prior year period.    Significant items impacting operating expenses for the nine months ended June 2011 included $0.8 million in operating expenses related to servicing our new business added with the LPS acquisition, a $0.3 million increase in depreciation expense, and a $0.4 million increase in other operating expenses. These items were partially offset by a $1.6 million reduction in bad debt expense, and a $0.5 million decrease in compensation expense.

 

INTEREST EXPENSE — Nine months Ended June 2011

 

Interest expense for the nine months ended June 2011 decreased $0.1 million as compared to the same prior year period. This change in interest expense primarily resulted from a $2.2 million reduction in average credit facility borrowings during the nine months ended June 2011.

 

INCOME TAX EXPENSE — Nine months Ended June 2011

 

The effective income tax rate for the nine months ended was 44.3% as compared to 35.8% in the same prior year period. The increase in effective income tax rates over the prior year period is primarily related to Internal Revenue Service limitations on the deductibility of certain expenses for the current year.

 

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.  The Company used cash of approximately $11.5 million for operating activities during the nine months ended June 2011. The cash used primarily resulted from higher inventory and prepaid assets, partially offset by a decrease in net deferred income taxes, accounts receivable, and accounts 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 $14.9 million of cash during the nine month period ended June 2011 for investing activities. Cash used for investing activities were primarily related to the acquisition of LPS and other capital expenditures for property and equipment.

 

Financing Activities.  The Company used cash of $27.5 million for financing activities during the nine months ended June 2011.  Of this amount, $28.5 million related to net borrowings on the Company’s credit facility, $13.4 million of which was related to the Company’s acquisition of LPS. The remaining items impacting financing activities included $0.7 million related to payments on existing long-term debt, $0.5 million related to dividends on the Company’s common and preferred stock and $0.2 million related to equity-based awards.

 

Cash on Hand/Working Capital.   At June 2011, the Company had cash on hand of $1.3 million and working capital (current assets less current liabilities) of $72.4 million. This compares to cash on hand of $0.4 million and working capital of $39.1 million at September 2010.  The increase in working capital as compared to September 2010 primarily relates to our acquisition of LPS and higher overall inventory levels which were funded through borrowing on our credit facility agreement.

 

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Table of Contents

 

CREDIT AGREEMENT

 

At June 2011, the Company had a credit agreement, as amended (the “Facility”) with Bank of America which included the following significant terms:

 

·             April 2014 maturity date and a $70.0 million revolving credit limit.

 

·             Includes a loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·             Provides for an additional $5.0 million of credit advances available for certain inventory purchases.

 

·             Contains an 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 the original term of the agreement or the end of any renewal period.

 

·             Includes a prepayment penalty equal to one-half of one percent (½%) if the Company prepays the entire Facility or terminates it in year one of the agreement, and one-fourth of one percent (¼%) if the Company prepays the entire Facility or terminates it in year two of the agreement. The prepayment penalty is calculated based on the original loan amount.

 

·             The Facility bears interest at either the bank’s prime rate or at LIBOR plus 175 basis points, 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.

 

·             Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis.

 

·             Includes a financial covenant requiring a fixed charge coverage ratio of at least 1.1 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 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 calculated credit limit of the Facility at June 2011 was $69.7 million, of which $47.4 million was outstanding, leaving $22.3 million available.

 

At June 2011, 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 2.93% at June 2011.

 

At June 2011, the Company had $8.0 million in long-term debt outstanding. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of this long-term debt approximated its carrying value at June 2011.

 

For the nine months ended June 2011, our peak borrowings under the Facility were $53.5 million and our average borrowings and average availability were $29.0 million and $24.2 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.

 

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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 June 2011.  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.

 

Dividends Payments

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.5 million for the three and nine month periods, respectively, ended in both June 2011 and June 2010.

 

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, 2010.

 

OTHER

 

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 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 or secure bank credit.

 

Item 3.                                   Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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Table of Contents

 

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(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 June 30, 2011 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, 2011, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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, 2010.

 

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Table of Contents

 

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

 

During Q3 2011, the Company issued 12,170 shares of common stock, par value $0.01 per share, pursuant to the May 3, 2011 conversion of 12,000 shares of its Series B Convertible Preferred Stock, par value $0.01 per share, by the holder of such Series B Convertible Preferred Stock. During Q3 2011, the Company also issued 6,085 shares of common stock, par value $0.01 per share, pursuant to the June 13, 2011 conversion of 6,000 shares of its Series B Convertible Preferred Stock, par value $0.01 per share, by the holder of such Series B Convertible Preferred Stock.

 

These 18,255 shares of common stock were issued without registration in reliance upon the transactional exemption afforded by Section 3(a)(9) of the Securities Act of 1933, and the Company received no payment in connection with such issuances.  No underwriters were involved with the issuance of such shares and no commissions were paid in connection with such issuances.

 

Item 3.                                   Defaults Upon Senior Securities

 

Not Applicable

 

Item 4.                                   (Removed and Reserved)

 

Item 5.                                   Other Information

 

Not applicable.

 

Item 6.                                   Exhibits

 

(a) Exhibits

 

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, Chief Financial Officer, and Principal 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, 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 19, 2011

/s/ Christopher H. Atayan

 

Christopher H. Atayan,

 

Chief Executive Officer and Chairman

 

 

Date: July 19, 2011

/s/ Andrew C. Plummer

 

Andrew C. Plummer,

 

Vice President, Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

26