XASE:DIT Amcon Distributing Co Quarterly Report 10-Q Filing - 3/31/2012

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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 March 31, 2012

 

OR

 

o         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 o

 

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 o

 

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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

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 o No x

 

The Registrant had 608,271 shares of its $.01 par value common stock outstanding as of April 16, 2012.

 

 

 



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, 2012 (unaudited) and September 30, 2011

3

 

 

Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2012 and 2011

4

 

 

Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 2012 and 2011

5

 

 

Notes to condensed consolidated unaudited financial statements

7

 

 

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

17

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

 

 

Item 4. Controls and Procedures

25

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

25

 

 

Item 1A. Risk Factors

25

 

 

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

26

 

 

Item 3. Defaults Upon Senior Securities

26

 

 

Item 4. Mine Safety Disclosures

26

 

 

Item 5. Other Information

26

 

 

Item 6. Exhibits

26

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2012 and September 30, 2011

 

 

 

March
2012

 

September
2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

851,114

 

$

1,389,665

 

Accounts receivable, less allowance for doubtful accounts of $1.3 million and $1.2 million at March 2012 and September 2011, respectively

 

31,985,614

 

32,963,693

 

Inventories, net

 

34,794,458

 

38,447,982

 

Deferred income taxes

 

1,603,345

 

1,707,889

 

Prepaid and other current assets

 

7,382,190

 

6,073,536

 

Total current assets

 

76,616,721

 

80,582,765

 

 

 

 

 

 

 

Property and equipment, net

 

13,361,627

 

13,713,238

 

Goodwill

 

6,349,827

 

6,349,827

 

Other intangible assets, net

 

5,368,476

 

5,550,978

 

Other assets

 

1,287,249

 

1,238,825

 

 

 

$

102,983,900

 

$

107,435,633

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

16,371,894

 

$

18,439,446

 

Accrued expenses

 

5,951,438

 

7,153,672

 

Accrued wages, salaries and bonuses

 

1,867,615

 

2,460,558

 

Income taxes payable

 

831,785

 

2,100,180

 

Current maturities of long-term debt

 

1,917,753

 

1,384,625

 

Total current liabilities

 

26,940,485

 

31,538,481

 

 

 

 

 

 

 

Credit facility

 

19,306,967

 

20,771,613

 

Deferred income taxes

 

3,092,683

 

2,743,238

 

Long-term debt, less current maturities

 

4,928,627

 

6,194,195

 

Other long-term liabilities

 

425,490

 

429,513

 

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 2012 and September 2011

 

2,500,000

 

2,500,000

 

Series B cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized, 62,000 shares outstanding and a total liquidation preference of $1.6 million at March 2012 and September 2011

 

1,550,000

 

1,550,000

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $.01 par value, 3,000,000 shares authorized, 608,271 shares outstanding at March 2012 and 609,320 shares outstanding at September 2011

 

6,252

 

6,093

 

Additional paid-in capital

 

10,900,041

 

9,981,055

 

Retained earnings

 

34,251,355

 

31,721,445

 

Treasury stock, 17,000 shares at cost

 

(918,000

)

 

Total shareholders’ equity

 

44,239,648

 

41,708,593

 

 

 

$

102,983,900

 

$

107,435,633

 

 

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 six months ended March 31, 2012 and 2011

 

 

 

For the three months
ended March

 

For the six months
ended March

 

 

 

2012

 

2011

 

2012

 

2011

 

Sales (including excise taxes of $86.1 million and $70.8 million, and $176.6 million and $152.1 million, respectively)

 

$

275,829,266

 

$

216,603,039

 

$

559,392,316

 

$

461,560,200

 

Cost of sales

 

256,612,867

 

200,233,927

 

521,538,240

 

427,583,366

 

Gross profit

 

19,216,399

 

16,369,112

 

37,854,076

 

33,976,834

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

15,901,755

 

12,909,642

 

31,251,757

 

26,597,013

 

Depreciation and amortization

 

613,927

 

507,133

 

1,227,421

 

1,004,716

 

 

 

16,515,682

 

13,416,775

 

32,479,178

 

27,601,729

 

Operating income

 

2,700,717

 

2,952,337

 

5,374,898

 

6,375,105

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

319,841

 

263,872

 

743,951

 

648,455

 

Other (income), net

 

(93,874

)

(45,211

)

(245,138

)

(68,092

)

 

 

225,967

 

218,661

 

498,813

 

580,363

 

Income from operations before income tax

 

2,474,750

 

2,733,676

 

4,876,085

 

5,794,742

 

Income tax expense

 

1,010,000

 

1,149,000

 

1,973,000

 

2,378,000

 

Net income

 

1,464,750

 

1,584,676

 

2,903,085

 

3,416,742

 

Preferred stock dividend requirements

 

(66,906

)

(73,239

)

(134,547

)

(148,106

)

Net income available to common shareholders

 

$

1,397,844

 

$

1,511,437

 

$

2,768,538

 

$

3,268,636

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to common shareholders:

 

$

2.26

 

$

2.56

 

$

4.47

 

$

5.60

 

Diluted earnings per share available to common shareholders:

 

$

1.87

 

$

2.05

 

$

3.70

 

$

4.47

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

619,480

 

589,454

 

619,705

 

583,986

 

Diluted weighted average shares outstanding

 

784,429

 

771,738

 

785,281

 

765,067

 

 

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

 

4



Table of Contents

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the six months ended March 31, 2012 and 2011

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

2,903,085

 

$

3,416,742

 

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

 

 

 

 

 

Depreciation

 

1,035,231

 

845,120

 

Amortization

 

192,190

 

159,596

 

Gain on sale of property and equipment

 

(22,216

)

(8,722

)

Equity-based compensation

 

674,180

 

1,514,567

 

Net excess tax benefit on equity-based awards

 

 

(125,904

)

Deferred income taxes

 

453,989

 

456,871

 

Provision (recoveries) for losses on doubtful accounts

 

164,757

 

(843,000

)

Provision for losses on inventory obsolescence

 

7,827

 

26,538

 

Other

 

(4,023

)

(4,022

)

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

813,322

 

3,945,809

 

Inventories

 

3,645,697

 

1,039,737

 

Prepaid and other current assets

 

(1,308,654

)

(1,141,257

)

Other assets

 

(48,424

)

(108,564

)

Accounts payable

 

(2,062,052

)

(319,457

)

Accrued expenses and accrued wages, salaries and bonuses

 

(1,509,628

)

(1,625,822

)

Income tax payable

 

(1,268,395

)

(1,708,879

)

Net cash flows from operating activities

 

3,666,886

 

5,519,353

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(707,724

)

(957,254

)

Proceeds from sales of property and equipment

 

40,820

 

27,475

 

Net cash flows from investing activities

 

(666,904

)

(929,779

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net payments on bank credit agreements

 

(1,464,646

)

(3,836,212

)

Principal payments on long-term debt

 

(732,440

)

(471,968

)

Repurchase of common stock

 

(918,000

)

 

Net excess tax benefit on equity-based awards

 

 

125,904

 

Dividends paid on convertible preferred stock

 

(134,547

)

(148,106

)

Dividends on common stock

 

(238,628

)

(216,945

)

Proceeds from exercise of stock options

 

1,180

 

 

Withholdings on the exercise of equity-based awards

 

(51,452

)

 

Net cash flows from financing activities

 

(3,538,533

)

(4,547,327

)

Net change in cash

 

(538,551

)

42,247

 

 

 

 

 

 

 

Cash, beginning of period

 

1,389,665

 

356,735

 

Cash, end of period

 

$

851,114

 

$

398,982

 

 

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

 

5



Table of Contents

 

 

 

2012

 

2011

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

770,110

 

$

668,389

 

Cash paid during the period for income taxes

 

2,787,407

 

3,630,007

 

 

 

 

 

 

 

Supplemental disclosure of non-cash information:

 

 

 

 

 

Equipment acquisitions classified as accounts payable

 

5,185

 

8,953

 

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

 

950,562

 

 

 

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, and Southern regions of the United States. Additionally, our Wholesale Segment provides programs, services and technology to assist our customers in managing their business and profitability.

 

 

·

Our retail health food segment (“Retail Segment”) operates fourteen 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 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 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 foodservice products. We also provide consultative services in the areas of marketing, merchandising, inventory optimization, and information systems which are designed to enhance the ability of our customers to compete and maximize their profitability. Convenience stores represent our largest customer category. In October 2011, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

 

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 601,000 square feet of permanent floor space. Our principal suppliers include Philip Morris USA, RJ Reynolds, Commonwealth Brands, Lorillard, Proctor & Gamble, Hershey, Mars, Quaker, and Nabisco. We also market private label lines of snuff, water, candy products, batteries, film, and other products. We do not maintain any long-term purchase contracts with these suppliers.

 

RETAIL SEGMENT

 

Our retail segment is comprised of fourteen retail health food stores which are operated as Chamberlin’s Market & Café (“Chamberlin’s”) and Akin’s Natural Foods Market (“Akin’s”). These stores carry over 30,000 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 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 (“Midwest”).

 

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, 2011, 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, 2012 and March 31, 2011 have been referred to throughout this quarterly report as Q2 2012 and Q2 2011, respectively. The fiscal balance sheet dates as of March 31, 2012, March 31, 2011, and September 30, 2011 have been referred to as March 2012, March 2011, and September 2011, respectively.

 

7



Table of Contents

 

2. ACQUISITION

 

In May 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, property and equipment, and customer lists of LPS, the Company paid $13.4 million in cash, issued a $2.6 million note payable due to the seller due in quarterly installments over three years and bearing interest at 4% annually, and will also pay a total of $0.5 million over five years in annual installments 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 Accounting Standards Codification (“ASC”) 805 “Business Combinations.” In valuing identifiable intangible assets, the Company has estimated the fair value using the discounted cash flows methodology. The acquired assets are reported as a component of our Wholesale Segment.

 

Total Consideration

 

Amount
(in millions)

 

Cash

 

$

13.4

 

Note payable

 

2.6

 

Fair value of 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

 

1.8

 

5 years

 

Identifiable intangible assets:

 

 

 

 

 

Non-competition agreement

 

0.5

 

5 years

 

Customer relationships

 

0.5

 

8 years

 

Liabilities

 

(0.1

)

 

 

Total identifiable net assets

 

16.2

 

 

 

Goodwill

 

0.2

 

 

 

Total identifiable assets and goodwill

 

$

16.4

 

 

 

 

Goodwill totaling approximately $0.2 million arose from the acquisition and primarily represents synergies and economies of scale expected to be generated through reductions in selling, general, and administrative expenses. This goodwill has been assigned to the Company’s Wholesale Segment and is expected to be deductible for tax purposes.  No significant measurement adjustments related to this transaction were recorded during Q2 2012.

 

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.

 

8



Table of Contents

 

 

 

Three months ended

 

Six months ended

 

 

 

March

 

March

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Revenue — Actual results

 

$

275.8

 

$

216.6

 

$

559.4

 

$

461.6

 

Revenue — Supplemental pro forma results

 

$

275.8

 

$

267.1

 

$

559.4

 

$

559.7

 

Net Income — Actual results

 

$

1.5

 

$

1.6

 

$

2.9

 

$

3.4

 

Net Income — Supplemental pro forma results

 

$

1.5

 

$

1.5

 

$

2.9

 

$

3.2

 

 

3. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at March 2012 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

 

62,880

 

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. Christopher 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 first nominated and elected to this seat in 2004.

 

4. INVENTORIES

 

Inventories consisted of finished goods at March 2012 and September 2011 and are stated at the lower of cost, determined on a First-in, First-out (“FIFO”) basis, or market. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $0.9 million at both March 2012 and September 2011, respectively. These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

 

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Table of Contents

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

 

March
2012

 

September
2011

 

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
2012

 

September
2011

 

Trademarks and tradenames

 

$

3,373,269

 

$

3,373,269

 

Non-competition agreement (less accumulated amortization of $0.1 million at both March 2012 and September 2011)

 

416,666

 

466,667

 

Customer relationships (less accumulated amortization of $0.5 million and $0.4 million at March 2012 and September 2011, respectively)

 

1,578,541

 

1,711,042

 

 

 

$

5,368,476

 

$

5,550,978

 

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At March 2012, 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 2012, and $0.1 million for both the three and six month periods ended March 2011.

 

Estimated future amortization expense related to identifiable intangible assets with finite lives is as follows at March 2012:

 

Customer relationships

 

March
2012

 

Fiscal 2012 (1)

 

$

182,498

 

Fiscal 2013

 

365,000

 

Fiscal 2014

 

365,000

 

Fiscal 2015

 

365,000

 

Fiscal 2016

 

331,667

 

Thereafter

 

386,042

 

 

 

$

1,995,207

 

 


(1)     Represents amortization for the remaining six months of Fiscal 2012.

 

6. DIVIDENDS:

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.4 million for the three and six month periods, respectively, in both March 2012 and March 2011.

 

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7. 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

 

 

 

2012

 

2011

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Weighted average common shares outstanding

 

619,480

 

619,480

 

589,454

 

589,454

 

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

 

 

164,949

 

 

182,284

 

Weighted average number of shares outstanding

 

619,480

 

784,429

 

589,454

 

771,738

 

Income from operations

 

$

1,464,750

 

$

1,464,750

 

$

1,584,676

 

$

1,584,676

 

Deduct: convertible preferred stock dividends (2)

 

(66,906

)

 

(73,239

)

 

Net income available to common shareholders

 

1,397,844

 

1,464,750

 

1,511,437

 

1,584,676

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

2.26

 

$

1.87

 

$

2.56

 

$

2.05

 

 


(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

 

 

 

2012

 

2011

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Weighted average common shares outstanding

 

619,705

 

619,705

 

583,986

 

583,986

 

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

 

 

165,576

 

 

181,081

 

Weighted average number of shares outstanding

 

619,705

 

785,281

 

583,986

 

765,067

 

Income from operations

 

$

2,903,085

 

$

2,903,085

 

$

3,416,742

 

$

3,416,742

 

Deduct: convertible preferred stock dividends (2)

 

(134,547

)

 

(148,106

)

 

 

 

2,768,538

 

2, 903,085

 

3,268,636

 

3,416,742

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

4.47

 

$

3.70

 

$

5.60

 

$

4.47

 

 


(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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Table of Contents

 

8. DEBT

 

The Company primarily finances its operations through a credit facility agreement with Bank of America (the “Facility”) and long-term debt agreements with banks.

 

The Facility included the following significant terms at March 2012:

 

·    April 2014 maturity date and a $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 $5.0 million of credit advances for certain inventory purchases.

 

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

 

·    Prepayment penalty equal to one-half of one percent (1/2%) if the Company prepays the entire Facility or terminates it in year one of the agreement, and one-fourth of one percent (1/4%) if the Company prepays the entire Facility or terminates it in year two of the agreement. The prepayment penalty is calculated based on the maximum loan limit.

 

·    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.

 

·    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.

 

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 are financed through term loans with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loans contain cross default provisions which cause all loans with BMO to be considered in default if any one of the loans where BMO is a lender, including the revolving credit facility, is in default. There were no such cross defaults at March 2012.  In addition, the BMO loans contain 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

 

AMCON has issued a letter of credit in the amount of approximately $0.4 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

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Table of Contents

 

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.  At March 2012, awards with respect to a total of 109,800 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plan and awards with respect to another 40,200 shares may be awarded under the plan.

 

Stock Options

 

During the six month period ended March 2012, the Company issued 6,500 incentive stock options to various employees pursuant to the provisions of the Company’s Omnibus Plan. These awards vest in equal installments over a five year service period and had an estimated fair value of approximately $0.1 million using the Black-Scholes option pricing model. The following assumptions were used in connection with the Black-Scholes option pricing calculation:

 

 

 

Stock Option Pricing
Assumptions

 

Risk-free interest rate

 

2.39

%

Dividend yield

 

1.10

%

Expected volatility

 

27.90

%

Expected life in years

 

6

 

 

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 March 2012 are summarized as follows:

 

 

 

 

 

 

 

Remaining

 

 

 

Exercisable

 

 

 

Exercise
Price

 

Number
Outstanding

 

Weighted-Average
Contractual Life

 

Weighted-Average
Exercise Price

 

Number
Exercisable

 

Weighted-Average
Exercise Price

 

Fiscal 2003

 

$28.80

 

42

 

0.57 years

 

$

28.80

 

42

 

$

28.80

 

Fiscal 2007

 

$18.00

 

25,000

 

4.70 years

 

$

18.00

 

25,000

 

$

18.00

 

Fiscal 2010

 

$51.50

 

5,500

 

8.08 years

 

$

51.50

 

1,100

 

$

51.50

 

Fiscal 2012

 

$53.80 - $65.97

 

6,500

 

9.60 years

 

$

54.74

 

 

$

 

 

 

 

 

37,042

 

 

 

$

29.43

 

26,142

 

$

19.43

 

 

The following is a summary of stock options activity for the six months ended March 2012:

 

 

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

Outstanding at September 2011

 

30,583

 

$

24.05

 

Granted

 

6,500

 

54.74

 

Exercised

 

(41

)

28.80

 

Forfeited/Expired

 

 

 

Outstanding at March 2012

 

37,042

 

$

29.43

 

 

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Table of Contents

 

Restricted Stock Units

 

During the first fiscal quarter of 2012, the Company issued 15,900 restricted stock unit awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plan.  Restricted stock units issued and outstanding at March 2012 are as follows:

 

 

 

Restricted Stock Units (1)

 

Restricted Stock Units (2)

 

Restricted Stock Units (3)

 

Date of award:

 

November 22, 2010

 

November 22, 2010

 

October 26, 2011

 

Original number of awards issued:

 

38,400

 

12,000

 

15,900

 

Service period:

 

24 months

 

36 months

 

36 months

 

Estimated fair value of award at grant date:

 

$

2,765,000

 

$

864,000

 

$

855,000

 

Fair value of non-vested awards at March 2012:

 

$

813,000

 

$

508,000

 

$

1,010,000

 

 


(1)

25,600 of the restricted stock unit awards were vested as of Q2 2012. The remaining 12,800 restricted stock units will vest on October 26, 2012.

 

 

(2)

4,000 of the restricted stock units were vested at Q2 2012. The remaining 8,000 restricted stock units will vest in equal amounts (4,000 per year) on November 22, 2012 and November 22, 2013.

 

 

(3)

The 15,900 restricted stock units will vest in equal amounts (5,300 per year) on October 25, 2012, October 25, 2013 and October 25, 2014.

 

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 amortization of these awards over their respective service life. The awards and their related compensation and amortization expense are also adjusted to fair value at each reporting date until vested. The following summarizes restricted stock unit activity under the Omnibus Plan for the six months ended March 2012:

 

 

 

Number
of
Shares

 

Weighted Average
Fair Value

 

Nonvested restricted stock units at September 2011

 

37,600

 

$

57.00

 

Granted

 

15,900

 

$

53.80

 

Vested

 

(16,800

)

$

56.58

 

Expired

 

 

$

 

Nonvested restricted stock units at March 2012

 

36,700

 

$

64.40

 

 

All Equity-Based Awards (stock options and restricted stock units)

 

For the three and six months ended March 2012, net income before income taxes included compensation expense of $0.4 million and $0.7 million, respectively, related to the amortization of all equity-based compensation awards.  Total unamortized compensation expense for these awards at March 2012 was approximately $1.9 million.

 

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Table of Contents

 

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 MARCH 2012:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

198,856,415

 

$

 

$

 

$

198,856,415

 

Confectionery

 

17,860,388

 

 

 

17,860,388

 

Health food

 

 

10,143,215

 

 

10,143,215

 

Tobacco, foodservice & other

 

48,969,248

 

 

 

48,969,248

 

Total external revenue

 

265,686,051

 

10,143,215

 

 

275,829,266

 

Depreciation

 

419,695

 

102,044

 

937

 

522,676

 

Amortization

 

91,251

 

 

 

91,251

 

Operating income (loss)

 

2,961,121

 

1,125,248

 

(1,385,652

)

2,700,717

 

Interest expense

 

133,993

 

75,418

 

110,430

 

319,841

 

Income (loss) from operations before taxes

 

2,873,713

 

1,055,015

 

(1,453,978

)

2,474,750

 

Total assets

 

89,010,587

 

12,809,831

 

1,163,482

 

102,983,900

 

Capital expenditures

 

355,961

 

90,046

 

 

446,007

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED MARCH 2011:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

154,090,343

 

$

 

$

 

$

154,090,343

 

Confectionery

 

14,258,544

 

 

 

14,258,544

 

Health food

 

 

9,908,134

 

 

9,908,134

 

Tobacco, foodservice & other

 

38,346,018

 

 

 

38,346,018

 

Total external revenue

 

206,694,905

 

9,908,134

 

 

216,603,039

 

Depreciation

 

318,398

 

107,219

 

938

 

426,555

 

Amortization

 

80,578

 

 

 

80,578

 

Operating income (loss)

 

3,153,065

 

1,116,996

 

(1,317,724

)

2,952,337

 

Interest expense

 

115,095

 

96,438

 

52,339

 

263,872

 

Income (loss) from operations before taxes

 

3,054,200

 

1,026,304

 

(1,346,828

)

2,733,676

 

Total assets

 

74,636,163

 

13,098,611

 

1,030,977

 

88,765,751

 

Capital expenditures

 

602,351

 

61,866

 

 

664,217

 

 

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Table of Contents

 

 

 

Wholesale
Segment

 

Retail
Segment

 

Other

 

Consolidated

 

SIX MONTHS ENDED MARCH 2012:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

405,029,273

 

$

 

$

 

$

405,029,273

 

Confectionery

 

35,359,329

 

 

 

35,359,329

 

Health food

 

 

18,676,642

 

 

18,676,642

 

Tobacco, foodservice & other

 

100,327,072

 

 

 

100,327,072

 

Total external revenue

 

540,715,674

 

18,676,642

 

 

559,392,316

 

Depreciation

 

830,277

 

203,080

 

1,874

 

1,035,231

 

Amortization

 

192,190

 

 

 

192,190

 

Operating income (loss)

 

6,329,267

 

1,538,411

 

(2,492,780

)

5,374,898

 

Interest expense

 

269,060

 

158,412

 

316,479

 

743,951

 

Income (loss) from operations before taxes

 

6,154,807

 

1,390,017

 

(2,668,739

)

4,876,085

 

Total assets

 

89,010,587

 

12,809,831

 

1,163,482

 

102,983,900

 

Capital expenditures

 

583,352

 

124,372

 

 

707,724

 

 

 

 

 

 

 

 

 

 

 

SIX MONTHS ENDED MARCH 2011:

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

329,862,580

 

$

 

$

 

$

329,862,580

 

Confectionery

 

30,127,596

 

 

 

30,127,596

 

Health food

 

 

19,000,583

 

 

19,000,583

 

Tobacco, foodservice & other

 

82,569,441

 

 

 

82,569,441

 

Total external revenue

 

442,559,617

 

19,000,583

 

 

461,560,200

 

Depreciation

 

628,630

 

214,615

 

1,875

 

845,120

 

Amortization

 

159,596

 

 

 

159,596

 

Operating income (loss)

 

8,090,052

 

1,909,085

 

(3,624,032

)

6,375,105

 

Interest expense

 

226,164

 

199,988

 

222,303

 

648,455

 

Income (loss) from operations before taxes

 

7,882,840

 

1,720,389

 

(3,808,487

)

5,794,742

 

Total assets

 

74,636,163

 

13,098,611

 

1,030,977

 

88,765,751

 

Capital expenditures

 

850,098

 

107,156

 

 

957,254

 

 

11. COMMON STOCK REPURCHASE

 

The Board of Directors of the Company had previously authorized the repurchase of up to 50,000 shares of the Company’s common stock in open market or negotiated transactions.  During Q2 2012, the Company repurchased 17,000 shares of its common stock in a negotiated transaction for $918,000, or $54.00 per share. The share repurchase was funded with cash from operations and the revolving credit facility.  All repurchased shares were recorded in treasury stock at cost.

 

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Table of Contents

 

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

 

·    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 and wholesale distribution industry,

 

·    natural disasters and domestic unrest,

 

·    other risks over which the Company has little or no control, and any other factors not identified herein.

 

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Table of Contents

 

FORWARD-LOOKING STATEMENTS (continued)

 

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, 2011, 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 2012.

 

SECOND FISCAL QUARTER 2012 (Q2 2012)

 

The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2012 and March 2011.

 

Wholesale Segment

 

Our wholesale segment is one of the largest wholesale distributors in the United States serving approximately 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops.  In October 2011, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

 

We currently distribute over 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 foodservice products. We also provide consultative services to our customers in the areas of marketing, merchandising, inventory optimization, and information systems which are designed to enhance the ability of our customers to compete and maximize their profitability. Convenience stores represent our largest customer category.

 

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.

 

Business Update — Wholesale Segment

 

The competitive landscape remains intense and is reflected in our gross margins.  However, we continue to develop new programs and product offerings to capitalize on the constantly changing convenience store industry which is highly focused on expanding foodservice offerings such as hot on-the-go meals and expanded beverage bars. Most recently, higher food and fuel prices have begun to stress discretionary consumer spending, which impact the non-petroleum sales of our customers.  These factors are driving consolidation within the convenience store industry as business owners seek to maximize economies of scale. From time to time, some of our customers are acquired by larger chains who either self distribute or have preexisting relationships with competing distributors.

 

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Table of Contents

 

Business Update — Wholesale Segment (continued)

 

Despite these issues, we believe the current market conditions offer opportunities to AMCON. It is becoming increasingly difficult for smaller distributors to compete. This presents our Company with acquisition opportunities. Further, we believe the long-term sustainability of the convenience store industry is strong.  The convenience store industry is growing and remains highly fragmented with independent single-store operators accounting for more than 63% of all stores according to the National Association of Convenience Stores (“NACS”). Our customer service orientation enables us to provide added value to these smaller customers and provides us a competitive advantage and the opportunity to share in the customers’ growth.

 

Business Update — Retail Segment

 

Our Chamberlin’s stores in Florida have shown improved sales results as that region of the country gradually recovers from the severity of the economic downturn.  Our Akin’s stores, which are located in the Midwest, have experienced increased competition in certain markets resulting from the expansion of national and regional health food chains.  We are actively seeking opportunities for expansion.

 

The popularity and awareness of natural products continues to grow. Consumers of natural products tend to be a better educated customer segment who demand a higher level of product knowledge by in-store associates; a level of service which is difficult for mass merchandisers to deliver in a big box retail format.  This is particularly true in product categories such as vitamin supplements which involve a high degree of expert consultation and personal interaction throughout the sales engagement process.  Given these considerations, we believe our business model and store formats are well suited to compete in the coming years.

 

RESULTS OF OPERATIONS

 

 

 

For the three months ended March

 

 

 

2012

 

2011

 

Incr
(Decr)

 

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

Sales (1)

 

$

275,829,266

 

$

216,603,039

 

$

59,226,227

 

27.3

 

Cost of sales

 

256,612,867

 

200,233,927

 

56,378,940

 

28.2

 

Gross profit

 

19,216,399

 

16,369,112

 

2,847,287

 

17.4

 

Gross profit percentage

 

7.0

%

7.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

16,515,682

 

13,416,775

 

3,098,907

 

23.1

 

Operating income

 

2,700,717

 

2,952,337

 

(251,620

)

(8.5

)

Interest expense

 

319,841

 

263,872

 

55,969

 

21.2

 

Income tax expense

 

1,010,000

 

1,149,000

 

(139,000

)

(12.1

)

Income from operations before income taxes

 

1,464,750

 

1,584,676

 

(119,926

)

(7.6

)

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

Sales

 

$

265,686,051

 

$

206,694,905

 

$

58,991,146

 

28.5

 

Gross profit

 

14,803,178

 

12,091,918

 

2,711,260

 

22.4

 

Gross profit percentage

 

5.6

%

5.9

%

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

Sales

 

$

10,143,215

 

$

9,908,134

 

$

235,081

 

2.4

 

Gross profit

 

4,413,221

 

4,277,194

 

136,027

 

3.2

 

Gross profit percentage

 

43.5

%

43.2

%

 

 

 

 

 


(1)     Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $4.2 million in Q2 2012 and $3.5 million in Q2 2011.

 

19



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 — Q2 2012 vs. Q2 2011

 

Sales in our Wholesale Segment increased $59.0 million during Q2 2012 as compared to Q2 2011.  Significant items impacting sales during Q2 2012 included a $44.4 million increase in sales related to our acquisition of LPS in May 2011, a $5.6 million increase in sales related to price increases implemented by cigarette manufacturers, a $4.2 million increase in sales related to the volume and mix of cigarette cartons sold, and a $4.8 million increase in sales in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”).

 

Sales in our Retail Segment increased approximately $0.2 million in Q2 2012 as compared to Q2 2011. The change in sales is primarily related to higher sales in our Florida market stores which continue to show improved results coming off the depths of the severe recession in that region, partially offset by lower sales in our Akin’s retail stores which have experienced increased competition from the expansion of national and regional health food chains in our markets.

 

GROSS PROFIT — Q2 2012 vs. Q2 2011

 

Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.

 

Gross profit in our Wholesale Segment increased $2.7 million in Q2 2012 as compared to Q2 2011.  Of this increase, approximately $2.4 million related to our acquisition of LPS and $0.3 million related to the volume and mix of sales in our cigarette and Other Product categories.

 

Gross profit for the Retail Segment increased $0.1 million in Q2 2012 as compared to Q2 2011.  This increase was primarily related to improved sales in our Florida market stores.

 

OPERATING EXPENSE — Q2 2012 vs. Q2 2011

 

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.

 

Q2 2012 operating expenses increased $3.1 million as compared to Q2 2011.  Significant items impacting operating expenses during Q2 2012 included an additional $2.2 million in operating expenses related to servicing our new business added in conjunction with the LPS acquisition, a $0.4 million net increase in bad debt expense, and a $0.5 million increase in other operating expenses.

 

20



Table of Contents

 

RESULTS OF OPERATIONS — SIX MONTHS ENDED MARCH 2011:

 

 

 

For the six months

 

 

 

ended March

 

 

 

 

 

 

 

Incr

 

 

 

 

 

2012

 

2011

 

(Decr)

 

% Change

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

Sales

 

$

559,392,316

 

$

461,560,200

 

$

97,832,116

 

21.2

 

Cost of sales

 

521,538,240

 

427,583,366

 

93,954,874

 

22.0

 

Gross profit

 

37,854,076

 

33,976,834

 

3,877,242

 

11.4

 

Gross profit percentage

 

6.8

%

7.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

32,479,178

 

27,601,729

 

4,877,449

 

17.7

 

Operating income

 

5,374,898

 

6,375,105

 

(1,000,207

)

(15.7

)

Interest expense

 

743,951

 

648,455

 

95,496

 

14.7

 

Income tax expense

 

1,973,000

 

2,378,000

 

(405,000

)

(17.0

)

Income from operations before income taxes

 

2,903,085

 

3,416,742

 

(513,657

)

(15.0

)

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

Sales

 

$

540,715,674

 

$

442,559,617

 

$

98,156,057

 

22.2

 

Gross profit

 

29,860,736

 

25,800,359

 

4,060,377

 

15.7

 

Gross profit percentage

 

5.5

%

5.8

%

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

Sales

 

$

18,676,642

 

$

19,000,583

 

$

(323,941

)

(1.7

)

Gross profit

 

7,993,340

 

8,176,475

 

(183,135

)

(2.2

)

Gross profit percentage

 

42.8

%

43.0

%

 

 

 

 

 


(1)     Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $8.2 million for the six month ended March 2012 and $7.3 million for the six months ended March 2011.

 

SALES — Six months Ended March 2012

 

Sales in our Wholesale Segment increased $98.2 million for the six months ended March 2012 as compared to the same prior year period.  Significant items impacting our Wholesale Segment sales for the six months ended March 2012 included a $90.7 increase in sales related to the acquisition of LPS, a $12.0 million increase in sales related to price increases implemented by cigarette manufacturers, and a $4.1 million increase in our Other Product categories sales.  These increases were partially offset by a $8.6 million reduction in sales related to the volume and mix of cigarette cartons sold.

 

Sales in our Retail Segment for the six months ended March 2012 decreased approximately $0.3 million as compared to the same prior year period. The change in sales is primarily related to lower sales in our Akin’s retail stores which have experienced increased competition from the expansion of national and regional health food chains, partially offset by higher sales in our Florida market stores which continue to show improved results coming off the depths of the severe recession in that region.

 

GROSS PROFIT — Six months Ended March 2012

 

Gross profit in our Wholesale Segment increased $4.1 million for the six month period ended March 2012 as compared to the same prior year period.  Of this increase, approximately $4.9 million related to our acquisition of LPS.  Partially offsetting this was a $0.8 million reduction in gross profit related to the volume and mix of sales in our cigarette and Other Product categories.

 

Gross profit in our Retail Segment decreased $0.2 million for the six month period ended March 2012 as compared to the same prior year period.  This decrease was primarily related to lower sales volumes in our Akin’s retail stores.

 

21



Table of Contents

 

OPERATING EXPENSE — Six months Ended March 2012

 

Operating expenses increased $4.9 million for the six months ended March 2012 as compared to the same prior year period. Significant items impacting operating expenses during the six month period ended March 2012 included an additional $4.4 million in operating expenses related to servicing our new business added in conjunction with the LPS acquisition, a $1.0 million net increase in bad debt expense, a $0.2 million increase in our Retail Segment operating expenses, and $0.5 million increase in other operating expenses.  These increases were partially offset by a $1.2 million reduction in compensation expense.

 

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 generated cash of approximately $3.7 million for operating activities during the six months ended March 2012. Significant sources of cash during the period included decreases in accounts receivable and inventory, in addition to the impact of net earnings. These sources of cash were partially offset by an increase in prepaid and other current assets, and decreases in accounts payable, accrued expenses, and income taxes 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 cash of $0.7 million during the six month period ended March 2012 for investing activities, primarily related to capital expenditures for property and equipment.

 

 

·

Financing Activities. The Company used cash of $3.5 million from financing activities during the six months ended March 2012. Of this amount, approximately $1.5 million related to net payments on the Company’s credit facility, $0.9 million related to the repurchase of the Company’s common shares, $0.7 million related to repayment on long-term debt, and $0.4 million related to dividends on the Company’s common and preferred stock.

 

 

·

Cash on Hand/Working Capital. At March 2012, the Company had cash on hand of $0.9 million and working capital (current assets less current liabilities) of $49.7 million. This compares to cash on hand of $1.4 million and working capital of $49.0 million at September 2011.

 

22



Table of Contents

 

CREDIT AGREEMENT

 

The Company primarily finances its operations through a credit facility agreement with Bank of America (the “Facility”) and long-term debt agreements with banks.

 

The Facility included the following significant terms at March 2012:

 

·    April 2014 maturity date and a $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 $5.0 million of credit advances for certain inventory purchases.

 

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

 

·    Prepayment penalty equal to one-half of one percent (1/2%) if the Company prepays the entire Facility or terminates it in year one of the agreement, and one-fourth of one percent (1/4%) if the Company prepays the entire Facility or terminates it in year two of the agreement. The prepayment penalty is calculated based on the maximum loan limit.

 

·    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.

 

·    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 credit limit of the Facility at March 2012 was $60.1 million, of which $19.3 million was outstanding, leaving $40.8 million available.

 

At March 2012, 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 2.28% at March 2012.

 

At March 2012, the Company had $6.8 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 the Company’s long-term debt approximated its carrying value at March 2012.

 

For the six months ended March 2012, our peak borrowings under the Facility were $50.7 million, and our average borrowings and average availability under the Facility were $33.3 million and $29.8 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.

 

23



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 are financed through term loans with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loans contain cross default provisions which cause all loans with BMO to be considered in default if any one of the loans where BMO is a lender, including the revolving credit facility, is in default. There were no such cross defaults at March 2012.  In addition, the BMO loans contain co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

Dividends Payments

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.4 million for the three and six month periods, respectively, in both March 2012 and March 2011.

 

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, 2011.

 

OTHER

 

AMCON has issued a letter of credit in the amount of approximately $0.4 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Liquidity Risk

 

The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.

 

The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.

 

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.

 

24



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 March 31, 2012 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 March 31, 2012, 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, 2011.

 

25



Table of Contents

 

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

 

The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the quarterly period ended March 31, 2012:

 

 

 

Total Number
of Shares
(or Units)
Purchased

 

Average
Price Paid
Per Share
(or Unit)

 

Total Number of Shares (or Units)
Purchased as Part of Publicly
Announced Plans or Programs

 

Maximum Number (or Approximate Dollar
Value) of Shares (or Units) that May Yet Be
Purchased Under the Plans or Programs (1)

 

January 1-31, 2012

 

 

 

 

50,000

 

February 1-29, 2012

 

 

 

 

50,000

 

March 1-31, 2012

 

17,000

 

$

54.00

 

17,000

 

33,000

 

Total

 

17,000

 

$

54.00

 

17,000

 

33,000

 

 


(1)

On October 27, 2009, our Company announced that our Board of Directors authorized the purchase of up to 50,000 shares of our Company’s common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the timing of any such purchases.

 

Item 3.      Defaults Upon Senior Securities

 

Not Applicable

 

Item 4.      Mine Safety Disclosures

 

Not Applicable

 

Item 5.      Other Information

 

Not applicable.

 

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)

 

26



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: April 19, 2012

 

/s/ Christopher H. Atayan

 

 

Christopher H. Atayan,

 

 

Chief Executive Officer and Chairman

 

 

 

Date: April 19, 2012

 

/s/ Andrew C. Plummer

 

 

Andrew C. Plummer,

 

 

Vice President, Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

27


XASE:DIT Amcon Distributing Co Quarterly Report 10-Q Filling

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