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 March 31, 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 604,022 shares of its $.01 par value common stock outstanding as of April 18, 2016.

 

 

 


 

Table of Contents

Form 10-Q

2nd Quarter

 

INDEX

 

 

PAGE

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements: 

 

 

 

Condensed consolidated balance sheets at March 31, 2016 (unaudited) and September 30, 2015 

3

 

 

Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2016 and 2015 

4

 

 

Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 2016 and 2015 

5

 

 

Notes to condensed consolidated unaudited financial statements 

6

 

 

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

March 31, 2016 and September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

March

 

September

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

321,990

 

$

219,536

 

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

 

 

29,255,947

 

 

31,866,787

 

Inventories, net

 

 

56,594,107

 

 

60,793,478

 

Deferred income taxes

 

 

1,278,006

 

 

1,553,726

 

Income taxes receivable

 

 

 —

 

 

113,238

 

Prepaid and other current assets

 

 

4,080,280

 

 

2,125,908

 

Total current assets

 

 

91,530,330

 

 

96,672,673

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

12,465,906

 

 

12,753,145

 

Goodwill

 

 

6,349,827

 

 

6,349,827

 

Other intangible assets, net

 

 

3,908,478

 

 

4,090,978

 

Other assets

 

 

296,717

 

 

317,184

 

 

 

$

114,551,258

 

$

120,183,807

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

16,033,216

 

$

17,044,726

 

Accrued expenses

 

 

5,860,058

 

 

7,224,963

 

Accrued wages, salaries and bonuses

 

 

2,558,420

 

 

3,282,354

 

Income taxes payable

 

 

230,066

 

 

 —

 

Current maturities of long-term debt

 

 

357,000

 

 

351,383

 

Total current liabilities

 

 

25,038,760

 

 

27,903,426

 

 

 

 

 

 

 

 

 

Credit facility

 

 

17,609,387

 

 

20,902,207

 

Deferred income taxes

 

 

3,772,620

 

 

3,696,098

 

Long-term debt, less current maturities

 

 

3,204,052

 

 

3,384,319

 

Other long-term liabilities

 

 

30,838

 

 

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 March 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 March 2016 and September 2015, and a total liquidation preference of $0.4 million at both March 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, 604,022 shares outstanding at March 2016 and 621,104 shares outstanding at September 2015

 

 

7,197

 

 

7,061

 

Additional paid-in capital

 

 

16,697,234

 

 

15,509,199

 

Retained earnings

 

 

55,519,822

 

 

53,527,606

 

Treasury stock at cost

 

 

(10,228,652)

 

 

(7,680,969)

 

Total shareholders’ equity

 

 

61,995,601

 

 

61,362,897

 

 

 

$

114,551,258

 

$

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 six months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March

 

For the six months ended March

 

 

    

2016

    

2015

    

2016

    

2015

 

Sales (including excise taxes of $88.7 million and $87.4 million, and $186.0 million and $184.4 million, respectively)

 

$

296,449,126

 

$

287,443,864

 

$

618,457,375

 

$

602,877,340

 

Cost of sales

 

 

278,908,888

 

 

269,710,529

 

 

581,955,233

 

 

565,617,473

 

Gross profit

 

 

17,540,238

 

 

17,733,335

 

 

36,502,142

 

 

37,259,867

 

Selling, general and administrative expenses

 

 

14,770,358

 

 

15,485,757

 

 

30,615,492

 

 

31,666,879

 

Depreciation and amortization

 

 

575,681

 

 

590,857

 

 

1,142,630

 

 

1,167,162

 

 

 

 

15,346,039

 

 

16,076,614

 

 

31,758,122

 

 

32,834,041

 

Operating income

 

 

2,194,199

 

 

1,656,721

 

 

4,744,020

 

 

4,425,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

161,402

 

 

194,375

 

 

373,856

 

 

431,517

 

Other (income), net

 

 

(35,827)

 

 

(35,987)

 

 

(63,082)

 

 

(43,054)

 

 

 

 

125,575

 

 

158,388

 

 

310,774

 

 

388,463

 

Income from operations before income tax expense

 

 

2,068,624

 

 

1,498,333

 

 

4,433,246

 

 

4,037,363

 

Income tax expense

 

 

922,000

 

 

729,000

 

 

1,931,000

 

 

1,722,000

 

Net income

 

 

1,146,624

 

 

769,333

 

 

2,502,246

 

 

2,315,363

 

Preferred stock dividend requirements

 

 

(48,643)

 

 

(48,108)

 

 

(97,820)

 

 

(97,285)

 

Net income available to common shareholders

 

$

1,097,981

 

$

721,225

 

$

2,404,426

 

$

2,218,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common shareholders

 

$

1.81

 

$

1.17

 

$

3.90

 

$

3.61

 

Diluted earnings per share available to common shareholders

 

$

1.61

 

$

1.04

 

$

3.46

 

$

3.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

606,080

 

 

615,822

 

 

615,768

 

 

614,173

 

Diluted weighted average shares outstanding

 

 

712,547

 

 

737,180

 

 

723,317

 

 

735,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.18

 

$

0.18

 

$

0.64

 

$

0.36

 

 

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 six months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

2,502,246

 

$

2,315,363

 

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

 

 

 

 

 

 

 

Depreciation

 

 

960,130

 

 

984,662

 

Amortization

 

 

182,500

 

 

182,500

 

(Gain) loss on sale of property and equipment

 

 

(34,482)

 

 

7,036

 

Equity-based compensation

 

 

660,203

 

 

607,661

 

Deferred income taxes

 

 

352,242

 

 

238,555

 

Provision (recovery) for losses on doubtful accounts

 

 

(67,000)

 

 

159,999

 

Provision (recovery) for losses on inventory obsolescence

 

 

70,818

 

 

(34,189)

 

Other

 

 

(4,022)

 

 

(4,023)

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

2,677,840

 

 

2,279,407

 

Inventories

 

 

4,128,553

 

 

(21,852,218)

 

Prepaid and other current assets

 

 

(1,954,372)

 

 

1,708,944

 

Other assets

 

 

20,467

 

 

111,792

 

Accounts payable

 

 

(1,005,681)

 

 

200,996

 

Accrued expenses and accrued wages, salaries and bonuses

 

 

(1,479,465)

 

 

(862,235)

 

Income taxes payable

 

 

343,304

 

 

(1,577,138)

 

Net cash flows from operating activities

 

 

7,353,281

 

 

(15,532,888)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(692,402)

 

 

(611,106)

 

Proceeds from sales of property and equipment

 

 

48,164

 

 

7,800

 

Net cash flows from investing activities

 

 

(644,238)

 

 

(603,306)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net (payments) borrowings on bank credit agreements

 

 

(3,292,820)

 

 

16,881,883

 

Principal payments on long-term debt

 

 

(174,650)

 

 

(169,782)

 

Repurchase of common stock

 

 

(2,547,683)

 

 

 —

 

Dividends paid on convertible preferred stock

 

 

(97,820)

 

 

(97,285)

 

Dividends on common stock

 

 

(412,210)

 

 

(232,488)

 

Withholdings on the exercise of equity-based awards

 

 

(81,406)

 

 

(156,497)

 

Net cash flows from financing activities

 

 

(6,606,589)

 

 

16,225,831

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

102,454

 

 

89,637

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

219,536

 

 

99,922

 

Cash, end of period

 

$

321,990

 

$

189,559

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

391,130

 

$

403,758

 

Cash paid during the period for income taxes

 

 

1,235,454

 

 

3,060,584

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash information:

 

 

 

 

 

 

 

Equipment acquisitions classified as accounts payable

 

 

17,500

 

 

48,754

 

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 sixteen 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 sixteen 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 six 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 March 31, 2016 and March 31, 2015 have been referred to throughout this quarterly report as Q2 2016 and Q2 2015, respectively. The fiscal balance sheet dates as of March 31, 2016, March 31, 2015, and September 30, 2015 have been referred to as March 2016, March 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

 

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

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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 March 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 March 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.

 

3. INVENTORIES

 

At March 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 $1.0 million at March 2016 and $0.9 million at 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.

 

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4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

 

 

 

 

 

 

 

 

    

March

    

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:

 

 

 

 

 

 

 

 

 

 

    

March

    

September

 

 

 

2016

 

2015

 

Trademarks and tradenames

 

$

3,373,269

 

$

3,373,269

 

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

 

 

16,667

 

 

66,667

 

Customer relationships (less accumulated amortization of approximately $1.6 million and $1.5 million at March 2016 and September 2015, respectively)

 

 

518,542

 

 

651,042

 

 

 

$

3,908,478

 

$

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 March 2016, identifiable intangible assets considered to have finite lives were represented by customer relationships and the value of a non-competition agreement acquired as part of acquisitions. The customer relationships are being amortized over eight years and the value of the non-competition agreement is being amortized over five 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 $0.2 million for the three and six month periods ended March 2016, respectively, and $0.1 million and $0.2 million for the three and six month periods ended March 2015, respectively.  

 

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

 

 

 

 

 

 

 

 

March

 

 

    

2016

 

Fiscal 2016 (1)

 

$

149,167

 

Fiscal 2017

 

 

265,000

 

Fiscal 2018

 

 

79,375

 

Fiscal 2019

 

 

41,667

 

Fiscal 2020

 

 

 —

 

 

 

$

535,209

 


(1)

Represents amortization for the remaining six months of Fiscal 2016.

 

5. DIVIDENDS

 

The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million and $0.5 million for the three and six month periods ended March 2016, respectively, and $0.2 million and $0.3 million for the three and six month periods ended March 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 March

 

 

 

2016

 

2015

 

 

    

Basic

    

Diluted

    

Basic

    

Diluted

 

Weighted average common shares outstanding

 

 

606,080

 

 

606,080

 

 

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)

 

 

 —

 

 

106,467

 

 

 —

 

 

121,358

 

Weighted average number of shares outstanding

 

 

606,080

 

 

712,547

 

 

615,822

 

 

737,180

 

Net income

 

$

1,146,624

 

$

1,146,624

 

$

769,333

 

$

769,333

 

Deduct: convertible preferred stock dividends (2)

 

 

(48,643)

 

 

 —

 

 

(48,108)

 

 

 —

 

Net income available to common shareholders

 

$

1,097,981

 

$

1,146,624

 

$

721,225

 

$

769,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

1.81

 

$

1.61

 

$

1.17

 

$

1.04

 


(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 six months ended March

 

 

 

2016

 

2015

 

 

    

Basic

    

Diluted

    

Basic

    

Diluted

 

Weighted average common shares outstanding

 

 

615,768

 

 

615,768

 

 

614,173

 

 

614,173

 

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

 

 

 

 

107,549

 

 

 

 

121,426

 

Weighted average number of shares outstanding

 

 

615,768

 

 

723,317

 

 

614,173

 

 

735,599

 

Net income

 

$

2,502,246

 

$

2,502,246

 

$

2,315,363

 

$

2,315,363

 

Deduct: convertible preferred stock dividends (2)

 

 

(97,820)

 

 

 

 

(97,285)

 

 

 

Net income available to common shareholders

 

$

2,404,426

 

$

2,502,246

 

$

2,218,078

 

$

2,315,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

3.90

 

$

3.46

 

$

3.61

 

$

3.15

 

 


(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 MARCH 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

211,638,962

 

$

 

$

 —

 

$

211,638,962

 

Tobacco 

 

 

35,756,254

 

 

 

 

 —

 

 

35,756,254

 

Confectionery

 

 

19,045,686

 

 

 

 

 —

 

 

19,045,686

 

Health food

 

 

 

 

7,537,713

 

 

 —

 

 

7,537,713

 

Foodservice & other

 

 

22,470,511

 

 

 

 

 —

 

 

22,470,511

 

Total external revenue

 

 

288,911,413

 

 

7,537,713

 

 

 —

 

 

296,449,126

 

Depreciation

 

 

367,530

 

 

116,901

 

 

 —

 

 

484,431

 

Amortization

 

 

91,250

 

 

 

 

 

 

91,250

 

Operating income

 

 

3,073,641

 

 

474,545

 

 

(1,353,987)

 

 

2,194,199

 

Interest expense

 

 

29,368

 

 

 —

 

 

132,034

 

 

161,402

 

Income from operations before taxes

 

 

3,075,629

 

 

479,017

 

 

(1,486,022)

 

 

2,068,624

 

Total assets

 

 

101,775,492

 

 

12,554,229

 

 

221,537

 

 

114,551,258

 

Capital expenditures

 

 

255,324

 

 

75,513

 

 

 

 

330,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

204,852,169

 

$

 —

 

$

 —

 

$

204,852,169

 

Tobacco

 

 

34,317,596

 

 

 

 

 

 

 

 

34,317,596

 

Confectionery

 

 

18,507,301

 

 

 —

 

 

 —

 

 

18,507,301

 

Health food

 

 

 

 

8,234,613

 

 

 

 

8,234,613

 

Foodservice & other

 

 

21,532,185

 

 

 —

 

 

 —

 

 

21,532,185

 

Total external revenue

 

 

279,209,251

 

 

8,234,613

 

 

 —

 

 

287,443,864

 

Depreciation

 

 

380,065

 

 

118,605

 

 

937

 

 

499,607

 

Amortization

 

 

91,250

 

 

 

 

 

 

91,250

 

Operating income

 

 

2,555,166

 

 

457,458

 

 

(1,355,903)

 

 

1,656,721

 

Interest expense

 

 

32,574

 

 

48,690

 

 

113,111

 

 

194,375

 

Income from operations before taxes

 

 

2,554,005

 

 

413,342

 

 

(1,469,014)

 

 

1,498,333

 

Total assets

 

 

111,867,087

 

 

13,476,227

 

 

242,331

 

 

125,585,645

 

Capital expenditures

 

 

207,666

 

 

62,644

 

 

 

 

270,310

 

 

 

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Wholesale

    

Retail

    

 

 

    

 

 

 

 

 

Segment

 

Segment

 

Other

 

Consolidated

 

SIX MONTHS ENDED MARCH 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

443,592,290

 

$

 —

 

$

 —

 

$

443,592,290

 

Tobacco 

 

 

73,384,745

 

 

 

 

 

 

 

 

73,384,745

 

Confectionery

 

 

38,891,522

 

 

 —

 

 

 —

 

 

38,891,522

 

Health food

 

 

 

 

14,811,831

 

 

 —

 

 

14,811,831

 

Foodservice & other

 

 

47,776,987

 

 

 —

 

 

 —

 

 

47,776,987

 

Total external revenue

 

 

603,645,544

 

 

14,811,831

 

 

 —

 

 

618,457,375

 

Depreciation

 

 

726,097

 

 

234,033

 

 

 —

 

 

960,130

 

Amortization

 

 

182,500

 

 

 

 

 

 

182,500

 

Operating income

 

 

6,922,793

 

 

538,670

 

 

(2,717,443)

 

 

4,744,020

 

Interest expense

 

 

59,400

 

 

 —

 

 

314,456

 

 

373,856

 

Income from operations before taxes

 

 

6,917,371

 

 

547,775

 

 

(3,031,900)

 

 

4,433,246

 

Total assets

 

 

101,775,492

 

 

12,554,229

 

 

221,537

 

 

114,551,258

 

Capital expenditures

 

 

581,877

 

 

110,525

 

 

 —

 

 

692,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIX MONTHS ENDED MARCH 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

431,089,283

 

$

 —

 

$

 —

 

$

431,089,283

 

Tobacco

 

 

71,870,285

 

 

 

 

 

 

 

 

71,870,285

 

Confectionery

 

 

38,068,539

 

 

 —

 

 

 —

 

 

38,068,539

 

Health food

 

 

 

 

16,005,580

 

 

 

 

16,005,580

 

Foodservice & other

 

 

45,843,653

 

 

 —

 

 

 —

 

 

45,843,653

 

Total external revenue

 

 

586,871,760

 

 

16,005,580

 

 

 —

 

 

602,877,340

 

Depreciation

 

 

746,595

 

 

236,193

 

 

1,874

 

 

984,662

 

Amortization

 

 

182,500

 

 

 

 

 

 

182,500

 

Operating income

 

 

6,576,083

 

 

581,923

 

 

(2,732,180)

 

 

4,425,826

 

Interest expense

 

 

66,131

 

 

96,385

 

 

269,001

 

 

431,517

 

Income from operations before taxes

 

 

6,543,711

 

 

494,833

 

 

(3,001,181)

 

 

4,037,363

 

Total assets

 

 

111,867,087

 

 

13,476,227

 

 

242,331

 

 

125,585,645

 

Capital expenditures

 

 

504,789

 

 

106,317

 

 

 —

 

 

611,106

 

 

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 March 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 (2.48% at March 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 March 2016 was $69.6 million, of which $17.6 million was outstanding, leaving $52.0 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 March 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 six month periods ended March 2016, the Company repurchased 5,317 and 30,719 shares of its common stock, respectively, for cash totaling approximately $0.4 million and $2.5 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 and tobacco 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 and 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 March 2016.

 

SECOND FISCAL QUARTER 2016 (Q2 2016)

 

The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2016 and March 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 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s,

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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 sixteen 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 six 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

 

Time constrains and around-the-clock snacking has redefined traditional meal-time routines for many consumers across the country. For convenience stores, this change in consumer behavior has fueled the demand for products such as premium beverages and on-the-go foodservice items. Items such as to-go-pouches and snack mixes are increasingly in demand. This trend has benefited convenience store retailers as these products typically offer higher profit margins and help create repeat in-store business. Our Company has deep expertise across these product categories and is working  closely with food manufacturers and convenience store owners to optimize their merchandise assortments in these categories as new offerings come to market.

 

The industry remains highly fragmented in regards to convenience store ownership and the distributors who serve them. As consumers and convenience stores owners migrate towards higher end product offerings such as foodservice and increasingly rely on digital technologies to run their businesses, we believe opportunities to win market share from less sophisticated and under capitalized competitors will be enhanced. Accordingly, we continue to make targeted investments to expand our foodservice and technology platforms.

 

Forward looking, maintaining a disciplined growth strategy centered on risk-adjusted returns remains a top priority. We continue to be highly focused on organic growth initiatives and identifying acquisition targets which can both expand geographic reach and build upon our portfolio of services.

 

Business Update — Retail Segment

 

The operating environment for retailers who maintain a physical footprint remains intense as consumers migrate towards digital and web-based shopping formats. In addition to this change in consumer shopping behavior, independent healthfood retailers continue to experience an influx of new competition from large 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. Conventional grocery stores have also begun to aggressively expand their offerings of natural, organic, and fresh products. All of these factors have stressed sales industry-wide and have impacted the sales in our business as well. 

 

16