AMCON DISTRIBUTING CO
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
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
þ
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
o
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 þ | |||
| (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
þ
The Registrant had 575,439 shares of its $.01 par value common stock outstanding as of January 11,
2010.
Form 10-Q
1st Quarter
1st Quarter
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| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
2
Table of Contents
| Item 1. |
Financial Statements
|
AMCON Distributing Company and Subsidiaries
December 31, 2009 and September 30, 2009
| December | September | |||||||
| 2009 | 2009 | |||||||
| (Unaudited) | ||||||||
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ASSETS
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Current assets:
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Cash
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$ | 517,964 | $ | 309,914 | ||||
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Accounts receivable, less
allowance for doubtful accounts
of $0.9 million
at December 2009 and September 2009 |
23,681,183 | 28,393,198 | ||||||
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Inventories, net
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32,948,314 | 34,486,027 | ||||||
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Deferred income taxes
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1,703,413 | 1,701,568 | ||||||
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Prepaid and other current assets
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4,407,930 | 1,728,576 | ||||||
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Total current assets
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63,258,804 | 66,619,283 | ||||||
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Property and equipment, net
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11,642,259 | 11,256,627 | ||||||
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Goodwill
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6,149,168 | 5,848,808 | ||||||
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Other intangible assets
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4,959,519 | 3,373,269 | ||||||
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Other assets
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1,025,876 | 1,026,395 | ||||||
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$ | 87,035,626 | $ | 88,124,382 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$ | 13,914,745 | $ | 15,222,689 | ||||
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Accrued expenses
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5,895,614 | 6,768,924 | ||||||
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Accrued wages, salaries and bonuses
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2,003,255 | 3,257,832 | ||||||
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Income taxes payable
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904,099 | 3,984,258 | ||||||
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Current maturities of credit facility
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127,067 | 177,867 | ||||||
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Current maturities of long-term debt
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995,327 | 1,470,445 | ||||||
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Total current liabilities
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23,840,107 | 30,882,015 | ||||||
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Credit facility, less current maturities
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25,476,512 | 22,655,861 | ||||||
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Deferred income taxes
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1,268,662 | 1,256,713 | ||||||
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Long-term debt, less current maturities
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5,858,402 | 5,066,185 | ||||||
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Other long-term liabilities
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440,420 | — | ||||||
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Series A cumulative, convertible preferred stock, $.01 par value
100,000 shares authorized and issued, liquidation preference
$25.00 per share
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2,500,000 | 2,500,000 | ||||||
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Series B cumulative, convertible preferred stock, $.01 par value
80,000 shares authorized and issued, liquidation preference
$25.00 per share
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2,000,000 | 2,000,000 | ||||||
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Shareholders’ equity:
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Preferred stock, $0.01 par, 1,000,000 shares authorized,
180,000 shares outstanding and issued in Series A and B
referred to above
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— | — | ||||||
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Common stock, $.01 par value, 3,000,000 shares authorized,
575,439 shares outstanding at December 2009 and 573,232
shares outstanding at September 2009
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5,754 | 5,732 | ||||||
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Additional paid-in capital
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7,954,295 | 7,617,494 | ||||||
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Retained earnings
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17,691,474 | 16,140,382 | ||||||
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Total shareholders’ equity
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25,651,523 | 23,763,608 | ||||||
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$ | 87,035,626 | $ | 88,124,382 | ||||
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The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
3
Table of Contents
AMCON Distributing Company and Subsidiaries
for the three months ended December 31, 2009 and 2008
| 2009 | 2008 | |||||||
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Sales (including excise taxes of $81.6 million
and $50.3 million, respectively
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$ | 243,941,038 | $ | 217,377,363 | ||||
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Cost of sales
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226,713,025 | 201,532,714 | ||||||
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Gross profit
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17,228,013 | 15,844,649 | ||||||
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Selling, general and administrative expenses
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13,778,739 | 12,797,583 | ||||||
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Depreciation and amortization
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387,269 | 310,334 | ||||||
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14,166,008 | 13,107,917 | ||||||
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Operating income
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3,062,005 | 2,736,732 | ||||||
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Other expense (income):
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Interest expense
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405,245 | 489,199 | ||||||
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Other (income), net
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(13,380 | ) | (14,067 | ) | ||||
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391,865 | 475,132 | ||||||
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Income from continuing operations
before income taxes
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2,670,140 | 2,261,600 | ||||||
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Income tax expense
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941,000 | 860,000 | ||||||
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Income from continuing operations
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1,729,140 | 1,401,600 | ||||||
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Loss from discontinued operations, net of income
tax benefit of $0.1 million
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— | (102,038 | ) | |||||
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Net income
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1,729,140 | 1,299,562 | ||||||
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Preferred stock dividend requirements
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(74,867 | ) | (105,533 | ) | ||||
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Net income available to common shareholders
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$ | 1,654,273 | $ | 1,194,029 | ||||
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Basic earnings (loss) per share
available to common shareholders:
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Continuing operations
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$ | 2.95 | $ | 2.38 | ||||
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Discontinued operations
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— | (0.19 | ) | |||||
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Net basic earnings per share
available to common shareholders
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$ | 2.95 | $ | 2.19 | ||||
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Diluted earnings (loss) per share
available to common shareholders:
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Continuing operations
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$ | 2.32 | $ | 1.64 | ||||
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Discontinued operations
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— | (0.12 | ) | |||||
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Net diluted earnings per share
available to common shareholders
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$ | 2.32 | $ | 1.52 | ||||
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Weighted average shares outstanding:
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Basic
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560,119 | 545,593 | ||||||
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Diluted
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745,223 | 856,052 | ||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
4
Table of Contents
AMCON Distributing Company and Subsidiaries
for the three months ended December 31, 2009 and 2008
| 2009 | 2008 | |||||||
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$ | 1,729,140 | $ | 1,299,562 | ||||
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Deduct: Loss from discontinued operations, net of tax
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— | (102,038 | ) | |||||
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Income from continuing operations
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1,729,140 | 1,401,600 | ||||||
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Adjustments to reconcile net income from
continuing operations to net cash flows
from operating activities:
|
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Depreciation
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338,099 | 310,334 | ||||||
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Amortization
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49,170 | — | ||||||
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Gain on sale of property and equipment
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(16,935 | ) | (43,697 | ) | ||||
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Stock based compensation
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163,364 | 132,900 | ||||||
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Net excess tax (benefit) deficiency
on equity-based awards
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(107,048 | ) | 16,592 | |||||
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Deferred income taxes
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10,104 | 47,411 | ||||||
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Provision for losses on doubtful accounts
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16,426 | 77,006 | ||||||
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Provision for losses on inventory obsolescence
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76,703 | 92,790 | ||||||
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Changes in
assets and liabilities, net of effect of acquisition:
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Accounts receivable
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4,695,589 | 3,791,365 | ||||||
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Inventories
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3,442,508 | 1,733,268 | ||||||
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Prepaid and other current assets
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(2,679,354 | ) | 833,568 | |||||
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Other assets
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519 | (351,942 | ) | |||||
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Accounts payable
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(1,329,456 | ) | 1,023,735 | |||||
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Accrued expenses and accrued wages, salaries and bonuses
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(2,127,887 | ) | (1,321,463 | ) | ||||
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Income tax payable
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(2,973,111 | ) | 572,219 | |||||
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Net cash flows from operating activities — continuing operations
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1,287,831 | 8,315,686 | ||||||
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Net cash flows from operating activities — discontinued operations
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— | 19,727 | ||||||
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Net cash flows from operating activities
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1,287,831 | 8,335,413 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(596,612 | ) | (265,971 | ) | ||||
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Proceeds from sales of property and equipment
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34,306 | 71,900 | ||||||
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Acquisition
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(3,099,836 | ) | — | |||||
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Net cash flows from investing activities
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(3,662,142 | ) | (194,071 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
|
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Net borrowings (payments) on bank credit agreement
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2,769,851 | (7,866,594 | ) | |||||
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Principal payments on long-term debt
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(182,901 | ) | (197,731 | ) | ||||
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Proceeds from exercise of stock options
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66,411 | — | ||||||
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Net excess tax benefit (deficiency)
on equity-based awards
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107,048 | (16,592 | ) | |||||
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Dividends paid on preferred stock
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(74,867 | ) | (105,533 | ) | ||||
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Dividends on common stock
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(103,181 | ) | (57,039 | ) | ||||
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Net cash flows from financing activities
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2,582,361 | (8,243,489 | ) | |||||
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Net change in cash
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208,050 | (102,147 | ) | |||||
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Cash, beginning of period
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309,914 | 457,681 | ||||||
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Cash, end of period
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$ | 517,964 | $ | 355,534 | ||||
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5
Table of Contents
| 2009 | 2008 | |||||||
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Supplemental disclosure of cash flow information:
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Cash paid during the period for interest
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$ | 381,746 | $ | 544,238 | ||||
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Cash paid during the period for income taxes
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3,903,998 | 182,371 | ||||||
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Supplemental disclosure of non-cash information:
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Equipment acquisitions classified as accounts payable
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21,512 | — | ||||||
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Business acquisition (see Note 2):
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Inventory
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1,981,498 | — | ||||||
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Property and equipment
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122,978 | — | ||||||
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Customer relationships intangible asset
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1,620,000 | — | ||||||
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Goodwill
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300,360 | — | ||||||
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Note payable
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500,000 | — | ||||||
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Contingent consideration
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425,000 | — | ||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial
statements.
6
Table of Contents
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate two business
segments:
| • |
Our wholesale distribution segment (“ADC”) distributes consumer products
in the Central and Rocky Mountain regions of the United States.
|
| • |
Our retail health food segment operates thirteen health food retail
stores located throughout the Midwest and Florida.
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WHOLESALE DISTRIBUTION SEGMENT
ADC serves approximately 4,200 retail outlets including convenience stores, grocery stores, liquor
stores, drug stores, and tobacco shops. In October 2009, Convenience Store News ranked ADC as the
eighth (8th) largest convenience store distributor in the United States based on annual sales.
ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco
products, candy and other confectionery, beverages, groceries, paper products, health and beauty
care products, frozen and chilled products and institutional food service products.
RETAIL HEALTH FOOD SEGMENT
The Company’s retail health food stores, which are operated as Chamberlin’s Market & Café
(“Chamberlin’s” or “CNF”) and Akin’s Natural Foods Market (“Akin’s” or “ANF”), 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 seven locations in Oklahoma, Nebraska, Missouri, and
Kansas and will be opening a new store in Tulsa, Oklahoma during the Company’s second fiscal
quarter of 2010.
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. In preparing the accompanying financial statements,
management has evaluated subsequent
7
Table of Contents
events through January 18, 2010 (the financial statement issue date).
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, 2009, 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. The
wholesale distribution segment of our Company will be separately referred to as “ADC”.
Additionally, the three month fiscal periods ended December 31, 2009 and December 31, 2008 have
been referred to throughout this quarterly report as Q1 2010 and Q1 2009, respectively. The fiscal
balance sheet dates as of December 31, 2009, December 31, 2008, and September 30, 2009 have been
referred to as December 2009, December 2008, and September 2009, respectively.
Adoption of New Accounting Standards
The Company adopted the following accounting standards during Q1 2010, none of which had a material
impact on our consolidated results of operations or financial condition.
Accounting Standards Update (“ASU”) No. 2009-05, (“Measuring Liabilities at Fair Value”) – provides
amendments to Financial Accounting Standards Board “FASB” ASC Topic 820, “Fair Value Measurements
and Disclosure” for the fair value measurement of liabilities.
FASB ASC 260-10
(“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities”)
– provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. Upon adoption, companies are required to retrospectively adjust their
earnings per share data (including any amounts related to interim periods, summaries of earnings,
and selected financial data) to conform to this pronouncement.
FASB ASC 350-30
(“Determination of the Useful Life of Intangible Assets”)
– requires companies
estimating the useful life of a recognized intangible asset to consider their historical experience
in renewing or extending similar arrangements or, in the absence of historical experience, to
consider assumptions that market participants would use about renewal or extension.
8
Table of Contents
FASB ASC 820
(“Fair Value Measurements”)
– delayed the effective date of certain fair value
measurements to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for
all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). Assets and liabilities
subject to this deferral included goodwill, intangible assets, and long-lived assets measured at
fair value for impairment assessments, and nonfinancial assets and liabilities initially measured
at fair value in a business combination. These items are required to be recognized at fair value
when they are considered to be other than temporarily impaired. In Q1 2010, there were no required
fair value measurements for assets and liabilities measured at fair value on a non-recurring basis.
FASB ASC 810 (transitional: ASC 810-10-65-1)
(“Noncontrolling Interest in Consolidated Financial
Statements”)
– establishes accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary.
FASB ASC 805
(“Business Combinations – revised”)
– establishes principles and requirements
regarding how an acquirer in a business combination recognizes and measures the assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree.
FASB ASC 805-20
(“Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise From Contingencies”)
– addresses application issues on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination.
Recently Issued Accounting Pronouncements
The Company is currently evaluating the impact of implementing the following new accounting
standards:
FASB ASC 860
(“Accounting for Transfers of Financial Assets”)
– requires additional disclosures
regarding the transfer and derecognition of financial assets and eliminates the concept of
qualifying special-purpose entities. This
pronouncement is effective for fiscal years beginning after November 15, 2009 (fiscal 2011 for the
Company).
FASB ASC 810
(“Amendments to FASB Interpretation: Consolidation of Variable Interest Entities”)
–
eliminates the quantitative approach previously required for determining the primary beneficiary of
a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity. Additionally, this pronouncement requires
additional disclosures about an enterprise’s involvement in variable interest entities and is
effective for fiscal periods beginning after November 15, 2009 (fiscal 2011 for the Company).
9
Table of Contents
2. ACQUISITION
On October 30, 2009, the Company acquired the convenience store distribution assets of Discount
Distributors from its parent Harps Food Stores, Inc. (“Harps”). Discount Distributors is a
wholesale distributor to convenience stores in Arkansas, Oklahoma, and Missouri with annual sales
of approximately $59.8 million. The Company paid $3.1 million cash, issued a $0.5 million note
payable in quarterly installments over two years, and could pay an additional $1.0 million in
contingent consideration for certain fixed assets, inventory, and customer lists of Discount
Distributors. The contingent consideration is based on achieving predetermined two-year revenue
targets. This transaction was funded through the Company’s existing credit facility. No significant liabilities
were assumed in connection with the transaction and the costs incurred to effect the acquisition
were not significant and were expensed as incurred. The acquisition expands the Company’s strategic
footprint in the southern portion of the United States and enhances our ability to service
customers in that region.
The following table summarizes the consideration paid for the acquired assets and their related
acquisition date fair values. The fair value of the assets acquired have been measured in
accordance with ASC 805 “Business Combinations.” In valuing identifiable intangible assets, the
Company has estimated the fair value using the discounted cash flows methodology. The purchase price
allocation reflects various preliminary estimates and analyses and is subject to change during the
measurement period (generally one year from the acquisition date). The acquired assets will be
reported as a component of our wholesale distribution segment.
| Total Consideration (in millions): | Amount | |||
|
Cash
|
$ | 3.1 | ||
|
Note payable
|
0.5 | |||
|
Fair value of contingent consideration
|
0.4 | |||
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Fair value of consideration transferred
|
$ | 4.0 | ||
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Recognized amounts of identifiable assets acquired (in millions):
| Weighted | ||||||||
| Average | ||||||||
| Amortization | ||||||||
| Amount | Period | |||||||
|
Inventory
|
$ | 2.0 | — | |||||
|
Property and equipment
|
0.1 | 5 years | ||||||
|
Identifiable intangible assets:
|
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Customer relationships
|
1.6 | 8 years | ||||||
|
|
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Total identifiable net assets
|
3.7 | |||||||
|
Goodwill
|
0.3 | |||||||
|
|
||||||||
|
Total identifiable assets and goodwill
|
$ | 4.0 | ||||||
|
|
||||||||
10
Table of Contents
The Company has estimated that the undiscounted payments required under the contingent
consideration arrangement will approximate $0.7 million ($0.4 million fair value). The $0.3 million
of goodwill arising from the acquisition primarily represents synergies and economies of scale
generated through reductions in selling, general, and administrative expenses. This goodwill has
been assigned to the Company’s wholesale distribution segment and is expected to be deductible for
tax purposes.
The following table sets forth the unaudited actual revenue and earnings included in the Company’s
statement of operations for Q1 2010 related to the acquisition and the pro forma revenue and
earnings of the combined entity had the acquisition occurred as of the beginning of the prior year
reporting period (Q1 2009). These pro forma amounts do not purport to be indicative of the actual
results that would have been obtained had the acquisition occurred at the beginning of Q1 2009.
| (In millions) | Period | Revenue | Net Income | |||||||
|
Actual Results from
|
10/30/09-12/31/09 | $ | 9.2 | $ | 0.1 | |||||
|
Supplemental pro forma results
|
10/01/09-12/31/09 | $ | 14.2 | $ | 0.1 | |||||
|
Supplemental pro forma results
|
10/01/08-12/31/08 | $ | 11.7 | $ | 0.0 | |||||
3. CONVERTIBLE PREFERRED STOCK:
The Company has two series of convertible preferred stock outstanding at December 2009 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 | $ | 2,000,000 | ||||
|
Number of shares:
|
100,000 | 80,000 | ||||||
|
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 | 81,136 | ||||||
|
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, which is 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.
11
Table of Contents
The shares of Preferred Stock are optionally redeemable by the Company beginning on various
dates, as listed in the above table, at redemption prices equal to 112% of the liquidation
preference. The redemption prices decrease 1% annually thereafter until the redemption price
equals the liquidation preference, after which date it remains the liquidation preference. The
Preferred Stock is redeemable at the liquidation value and at the option of the holder. The
Series A Preferred Stock is owned by Mr. Chris Atayan, AMCON’s Chief Executive Officer and Chairman
of the Board. The Series B Preferred Stock is owned by an institutional investor which has elected
Mr. Atayan, pursuant to the voting rights in the Certificate of Designation creating the Series B,
as its representative.
4. INVENTORIES
Inventories consisted of finished goods at December 2009 and September 2009 and are stated at the
lower of cost, determined on a first in first out, or FIFO basis, or market. The wholesale
distribution and retail health food segment inventories consist of products purchased in bulk
quantities to be redistributed to the Company’s customers or sold at retail. Finished goods include
total reserves of approximately $1.0 million at December 2009 and $0.9 million at September 2009.
These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable or
non-refundable inventory based on an evaluation of slow moving and discontinued products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
| December | September | |||||||
| 2009 | 2009 | |||||||
|
Wholesale Distribution Segment
|
$ | 4,236,291 | $ | 3,935,931 | ||||
|
Retail Health Food Segment
|
1,912,877 | 1,912,877 | ||||||
|
|
||||||||
|
|
$ | 6,149,168 | $ | 5,848,808 | ||||
|
|
||||||||
Other intangible assets of the Company consisted of the following:
| December | September | |||||||
| 2009 | 2009 | |||||||
|
Trademarks and tradenames
|
$ | 3,373,269 | $ | 3,373,269 | ||||
|
Customer relationships (less accumulated
amortization of $33,750)
|
1,586,250 | — | ||||||
|
|
||||||||
|
|
$ | 4,959,519 | $ | 3,373,269 | ||||
|
|
||||||||
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and
therefore no amortization has been taken on these assets. The Company performs annual impairment
testing of goodwill and other intangible assets during the fourth fiscal quarter of each year.
12
Table of Contents
At December 2009, intangible assets considered to have finite lives represent acquired
customer relationships. The customer relationships are being amortized over 8 years and Q1 2010
amortization expense related to this intangible asset was $33,750. Amortization expense for the
customer relationships for the eight years subsequent to September 30, 2009 (the Company’s prior
fiscal year end) is estimated as follows:
| Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||
| 2010/1/ | 2011 | 2012 | 2013 | Thereafter | ||||||||||||||||
|
Customer relationships
|
151,875 | 202,500 | 202,500 | 202,500 | 826,875 | |||||||||||||||
|
|
||||||||||||||||||||
| /1/ |
Represents amortization for the remaining nine months of Fiscal 2010.
|
6. DIVIDENDS:
On October 27, 2009, the Company declared a cash dividend of $0.18 per common share payable on
November 30, 2009 to shareholders of record as of November 9, 2009. Cash dividends paid to common
shareholders during Q1 2010 totaled $103,181.
7. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share available to common shareholders is calculated by dividing income
(loss) from continuing operations less preferred stock dividend requirements and income (loss) from
discontinued operations by the weighted average common shares outstanding for each period. Diluted
earnings (loss) per share available to common shareholders is calculated by dividing income (loss)
from continuing operations less preferred stock dividend requirements (when anti-dilutive) and
income (loss) from discontinued operations by the sum of the weighted average common shares
outstanding and the weighted average dilutive options, using the treasury stock method.
Anti-dilutive stock options and potential common stock outstanding at December 2008 were excluded
from the computation of diluted earnings per share. At December 2008, such potential common shares
totaled 41,983 and had an average exercise price of $26.74. There were no anti-dilutive shares
excluded from the computation of diluted earnings per share at December 2009.
13
Table of Contents
| For the three months ended December | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Basic | Diluted | Basic | Diluted | |||||||||||||
|
Weighted average common
shares outstanding
|
560,119 | 560,119 | 545,593 | 545,593 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average of net
additional shares outstanding
assuming dilutive options
exercised and proceeds
used to purchase treasury
stock and conversion of
preferred stock /1/
|
— | 185,104 | — | 310,459 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average number of
shares outstanding
|
560,119 | 745,223 | 545,593 | 856,052 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
$ | 1,729,140 | $ | 1,729,140 | $ | 1,401,600 | $ | 1,401,600 | ||||||||
|
Deduct: preferred stock
dividend requirements /2/
|
(74,867 | ) | — | (105,533 | ) | — | ||||||||||
|
|
||||||||||||||||
|
|
1,654,273 | 1,729,140 | 1,296,067 | 1,401,600 | ||||||||||||
|
|
||||||||||||||||
|
Loss from discontinued
operations
|
$ | — | $ | — | $ | (102,038 | ) | $ | (102,038 | ) | ||||||
|
|
||||||||||||||||
|
Net income available
to common shareholders
|
$ | 1,654,273 | $ | 1,729,140 | $ | 1,194,029 | $ | 1,299,562 | ||||||||
|
|
||||||||||||||||
|
Income per share from
continuing operations
|
$ | 2.95 | $ | 2.32 | $ | 2.38 | $ | 1.64 | ||||||||
|
|
||||||||||||||||
|
Loss per share from
discontinued operations
|
$ | — | $ | — | $ | (0.19 | ) | $ | (0.12 | ) | ||||||
|
|
||||||||||||||||
|
Net earnings per share
available to common shareholders
|
$ | 2.95 | $ | 2.32 | $ | 2.19 | $ | 1.52 | ||||||||
|
|
||||||||||||||||
| /1/ |
Diluted earnings per share calculation includes all stock options,
Convertible Preferred Stock, and restricted stock, in each case, that
are deemed to be dilutive.
|
|
| /2/ |
Diluted earnings per share calculation excludes dividend payments for
Convertible Preferred Stock deemed to be dilutive, as those amounts
are assumed to have been converted to common stock of the Company.
|
The Company has a credit agreement (the “Facility”) with Bank of America, which includes the
following significant terms:
| • |
A June 2011 maturity date.
|
| • |
A $55.0 million revolving credit limit, plus the outstanding balance on Term Note A. Term
Note A had an outstanding balance of $0.1 million at December 2009.
|
| • |
The Facility bears interest at either the bank’s prime rate or at LIBOR plus 250 basis
points, at the election of the Company.
|
14
Table of Contents
| • |
The Facility provides for an additional $5.0 million of credit available for certain
inventory purchases. These advances bear interest at the bank’s prime rate plus one-quarter
of one-percent (1/4%) per annum and are payable within 45 days of each advance.
|
| • |
Lending limits subject to accounts receivable and inventory limitations, and 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.
|
| • |
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 $0.72 per
share on an annual basis.
|
| • |
The Facility includes a prepayment penalty equal to one-half of one percent (
1
/
2
%) of the
original maximum loan limit ($60.4 million) if the Company prepays the entire Facility or
terminates the credit agreement on or before June 30, 2010.
|
The Facility includes a financial covenant which requires the Company to maintain a minimum debt
service ratio of 1.0 to 1.0 as measured by the previous twelve month period then ended. The Company
was in compliance with this covenant at December 2009.
The amount available for use on the Facility at any given time is subject to a number of factors
including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on
our collateral and loan limits as defined in the Facility agreement, the Company’s availability was
approximately $25.1 million at December 2009 and the outstanding balance on the revolving portion
of the Facility was $25.5 million. The resulting credit limit on the Facility at December 2009 was
$50.6 million.
At December 2009, 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 3.04% at December 2009.
At December 2009, the Company had $6.9 million in long-term debt outstanding. Based on the
borrowing rates currently available to the Company for bank loans with similar terms and average
maturities, the fair value of this long-term debt approximated its carrying value at December 2009.
Cross Default and Co-Terminus Provisions
The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain
warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Marshall
and Ilsley Bank (“M&I”), which is also a participant lender on the Company’s revolving line of
credit. The M&I loans contain cross default provisions which cause all loans with M&I to be
considered in default if any one of the loans where M&I is a lender, including the revolving credit
facility, is in default. There were no such cross defaults at December 2009. In addition, the M&I loans contain co-terminus provisions which require
all loans with M&I to be paid in full if any of the loans are paid in full prior to the end of
their specified terms.
15
Table of Contents
OTHER
AMCON has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier
as part of its self-insured loss control program.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
9. EQUITY-BASED INCENTIVE AWARDS
Stock Options
The Company’s stock options have varying vesting schedules ranging up to five years and expire ten
years from the grant date. Stock options issued and outstanding to management employees at December
2009 are summarized as follows:
| Number of | ||||||||||||
| Options | Number | |||||||||||
| Date | Exercise Price | Outstanding | Exercisable | |||||||||
|
Fiscal 2000
|
$ | 34.50 | 1,456 | 1,456 | ||||||||
|
Fiscal 2003
|
$ | 28.80 | 629 | 629 | ||||||||
|
Fiscal 2007
|
$ | 18.00 | 25,000 | 25,000 | ||||||||
|
|
||||||||||||
|
|
27,085 | 27,085 | ||||||||||
|
|
||||||||||||
Stock options issued and outstanding to the Company’s outside directors at December 2009 are
summarized as follows:
| Number of | ||||||||||||
| Options | Number | |||||||||||
| Date | Exercise Price | Outstanding | Exercisable | |||||||||
|
Fiscal 2002
|
$ | 26.94 | 834 | 834 | ||||||||
|
|
||||||||||||
The following summarizes all stock options outstanding at December 2009:
| Remaining | Exercisable | |||||||||||||||||||||||
| Exercise | Number | Weighted-Average | Weighted-Average | Number | Weighted-Average | |||||||||||||||||||
| Price | Outstanding | Contractual Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||||
|
2000 Options
|
$ | 34.50 | 1,456 | 0.45 years | $ | 34.50 | 1,456 | $ | 34.50 | |||||||||||||||
|
2002 Options
|
$ | 26.94 | 834 | 2.62 years | $ | 26.94 | 834 | $ | 26.94 | |||||||||||||||
|
2003 Options
|
$ | 28.80 | 629 | 2.79 years | $ | 28.80 | 629 | $ | 28.80 | |||||||||||||||
|
2007 Options
|
$ | 18.00 | 25,000 | 6.95 years | $ | 18.00 | 25,000 | $ | 18.00 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
27,919 | $ | 19.37 | 27,919 | $ | 19.37 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
16
Table of Contents
The following is a summary of the activity of the stock plans for the three months ended
December 2009:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Exercise | |||||||
| Shares | Price | |||||||
|
Outstanding at September 2009
|
30,126 | $ | 20.16 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
(2,207 | ) | $ | 30.09 | ||||
|
Forfeited/Expired
|
— | — | ||||||
|
|
||||||||
|
Outstanding at December 2009
|
27,919 | $ | 19.37 | |||||
|
|
||||||||
Net income before income taxes included compensation expense related to stock options of
approximately $0.1 million in both Q1 2010 and Q1 2009. At December 2009, there was no unamortized
compensation expense related to stock options. The aggregate intrinsic value of stock options
outstanding and exercisable at December 2009 was approximately $1.3 million.
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.
Pursuant to the Omnibus Plan, the Compensation Committee of the Board of Directors has authorized
and approved the restricted stock awards as summarized below:
| Restricted Stock /1/ | Restricted Stock /2/ | |||||||
|
Date of award:
|
December 6, 2007 | January 29, 2008 | ||||||
|
Number of shares:
|
24,000 | 7,500 | ||||||
|
Service period:
|
34 months | 36 months | ||||||
|
Estimated fair value of
award at grant date/3/:
|
$ | 963,000 | $ | 229,000 | ||||
|
Intrinsic value of awards
outstanding at December 2009:
|
$ | 528,000 | $ | 330,000 | ||||
| /1/ |
16,000 shares were vested at December 2009. The remaining 8,000 shares will vest on October 16, 2010.
|
|
| /2/ |
2,500 shares were vested at December 2009. The remaining 5,000 shares will vest in equal amounts (2,500 per year) on
January 29, 2010 and January 29, 2011.
|
|
| /3/ |
Amount is net of estimated forfeitures.
|
17
Table of Contents
There is no direct cost to the recipients of the restricted stock awards, except for any
applicable taxes. The recipients of restricted stock are entitled to full voting rights and 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 Company recognizes compensation expense related to restricted stock awards on a straight-line
basis over the requisite service period. Accordingly, net income before income taxes included
compensation expense of $0.1 million in both Q1 2010 and Q1 2009. Total unamortized compensation
expense related to restricted stock awards at December 2009 was approximately $0.4 million. This
unamortized compensation expense is expected to be amortized over approximately the next twelve
months (the expected weighted-average period).
The following summarizes restricted stock activity under the Omnibus Plan for the three months
ended December 2009:
| Number | Weighted Average | |||||||
| of | Grant Date | |||||||
| Shares | Fair Value | |||||||
|
Nonvested restricted stock at September 2009
|
21,000 | $ | 40.16 | |||||
|
Granted
|
— | — | ||||||
|
Vested
|
(8,000 | ) | $ | 42.50 | ||||
|
Expired
|
— | — | ||||||
|
|
||||||||
|
Nonvested restricted stock at December 2009
|
13,000 | $ | 38.72 | |||||
|
|
||||||||
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 is intercompany eliminations,
charges incurred by the holding company, and assets of discontinued operations. The segments are
evaluated on revenues, gross margins, operating income (loss), and income before taxes.
18
Table of Contents
| Wholesale | ||||||||||||||||
| Distribution | Retail | Other /1/ | Consolidated | |||||||||||||
|
THREE MONTHS ENDED DECEMBER 2009:
|
||||||||||||||||
|
External revenue:
|
||||||||||||||||
|
Cigarettes
|
$ | 177,584,045 | $ | — | $ | — | $ | 177,584,045 | ||||||||
|
Confectionery
|
15,307,821 | — | — | 15,307,821 | ||||||||||||
|
Health food
|
— | 8,926,489 | — | 8,926,489 | ||||||||||||
|
Tobacco, food service & other
|
42,122,683 | — | — | 42,122,683 | ||||||||||||
|
|
||||||||||||||||
|
Total external revenue
|
235,014,549 | 8,926,489 | — | 243,941,038 | ||||||||||||
|
Depreciation
|
266,580 | 70,372 | 1,147 | 338,099 | ||||||||||||
|
Amortization
|
49,170 | — | — | 49,170 | ||||||||||||
|
Operating income (loss)
|
3,998,612 | 917,307 | (1,853,914 | ) | 3,062,005 | |||||||||||
|
Interest expense
|
122,197 | 124,624 | 158,424 | 405,245 | ||||||||||||
|
Income (loss) from continuing
operations before taxes
|
3,879,649 | 802,830 | (2,012,339 | ) | 2,670,140 | |||||||||||
|
Total assets
|
74,327,598 | 11,729,960 | 978,068 | 87,035,626 | ||||||||||||
|
Capital expenditures
|
437,314 | 159,297 | — | 596,611 | ||||||||||||
| Wholesale | ||||||||||||||||
| Distribution | Retail | Other /1/ | Consolidated | |||||||||||||
|
THREE MONTHS ENDED DECEMBER 2008:
|
||||||||||||||||
|
External revenue:
|
||||||||||||||||
|
Cigarettes
|
$ | 152,262,945 | $ | — | $ | — | $ | 152,262,945 | ||||||||
|
Confectionery
|
15,461,696 | — | — | 15,461,696 | ||||||||||||
|
Health food
|
— | 8,980,794 | — | 8,980,794 | ||||||||||||
|
Tobacco, food service & other
|
40,671,928 | — | — | 40,671,928 | ||||||||||||
|
|
||||||||||||||||
|
Total external revenue
|
208,396,569 | 8,980,794 | — | 217,377,363 | ||||||||||||
|
Depreciation
|
248,164 | 61,023 | 1,147 | 310,334 | ||||||||||||
|
Amortization
|
— | — | — | — | ||||||||||||
|
Operating income (loss)
|
3,288,077 | 587,839 | (1,139,184 | ) | 2,736,732 | |||||||||||
|
Interest expense
|
132,679 | 169,545 | 186,975 | 489,199 | ||||||||||||
|
Income (loss) from continuing
operations before taxes
|
3,159,150 | 428,609 | (1,326,159 | ) | 2,261,600 | |||||||||||
|
Total assets
|
71,535,006 | 11,341,987 | 4,025,032 | 86,902,025 | ||||||||||||
|
Capital expenditures
|
128,490 | 137,481 | — | 265,971 | ||||||||||||
| /1/ |
Includes intercompany eliminations, charges incurred by the holding company, and assets of
discontinued operations.
|
19
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, including
recent increases in federal excise taxes imposed in connection with the State Children’s
Health Insurance Program (“SCHIP”) law,
|
| • |
regulation of cigarette and tobacco products by the U.S. Food and Drug Administration
(“FDA”), in addition to existing state and federal regulations by other agencies,
|
| • |
potential bans imposed by the FDA on the manufacture, distribution, and sale of certain
cigarette and tobacco products,
|
| • |
increases in manufacturer prices,
|
| • |
increases in inventory carrying costs and customer credit risk,
|
| • |
changes in promotional and incentive programs offered by manufacturers,
|
| • |
decreased availability of capital resources,
|
| • |
demand for the Company’s products, particularly cigarette and tobacco products,
|
| • |
new business ventures or acquisitions,
|
| • |
domestic regulatory and legislative risks,
|
| • |
competition,
|
| • |
poor weather conditions,
|
| • |
increases in fuel prices,
|
| • |
consolidation trends within the convenience store industry,
|
| • |
other risks over which the Company has little or no control, and
|
| • |
any other factors not identified herein.
|
20
Table of Contents
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 Form
10-K for the fiscal year ended September 30, 2009, as filed with the Securities and Exchange
Commission. There have been no significant changes with respect to these policies during the three
months ended December 2009.
FIRST FISCAL QUARTER 2010 (Q1 2010)
The following discussion and analysis includes the Company’s results of operations from continuing
operations for the three months ended December 2009 and 2008. Continuing operations are comprised
of our wholesale distribution and retail health food segments. A separate discussion of
discontinued operations has been presented following our analysis of continuing operations.
During Q1 2010, the Company:
| • |
acquired the distribution assets of Discount Distributors, a wholesale distributor to
convenience stores with annual sales of approximately $59.8 million.
|
| • |
recorded net income available to common shareholders of $1.7 million, a $0.5 million increase
over Q1 2009.
|
| • |
paid a $0.18 dividend per common share, an 80% increase over Q1 2009.
|
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Table of Contents
WHOLESALE DISTRIBUTION SEGMENT (“ADC”)
ADC serves approximately 4,200 retail outlets including convenience stores, grocery stores, liquor
stores, drug stores, and tobacco shops. In October 2009,
Convenience Store News ranked ADC as the eighth (8th) largest convenience store distributor in the
United States based on annual sales.
ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco
products, candy and other confectionery, beverages, groceries, paper products, health and beauty
care products, frozen and chilled products and institutional food service products.
RETAIL HEALTH FOOD SEGMENT
The Company’s retail health food stores, which are operated as Chamberlin’s Market & Café
(“Chamberlin’s” or “CNF”) and Akin’s Natural Foods Market (“Akin’s” or “ANF”), 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 seven locations in Oklahoma, Nebraska, Missouri, and
Kansas.
Business Update — General
Economic conditions continue to impact consumer confidence and discretionary spending patterns
across the states in which we operate. Customers in both of our businesses are increasingly
value-conscious and price-sensitive. Accordingly, we have undertaken a number of initiatives
designed to highlight the value propositions we offer customers in a number of areas such as
exclusive product offerings and the delivery of customized technology solutions at competitive
prices.
Looking forward, we believe that a combination of economic and regulatory factors and the potential
of higher fuel prices could adversely affect our sales, gross margins, and operating profits into
the foreseeable future. However, we anticipate that our conservative strategy of cost containment,
aggressively targeting new business, and maintaining maximum liquidity, will position us well to
capture market share, execute strategic acquisitions, open new retail stores, and ultimately create
shareholder value.
Business Update — Wholesale Distribution Segment
The wholesale distribution industry is mature and intensely competitive. Historically, cigarette
and tobacco products have represented one of the largest sales categories for convenience stores
and their distributors alike. Recent legislative actions such as excise tax increases and smoking
bans, however, have decreased the demand for these products.
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In June 2009, new legislation was signed into law which provided the FDA with broad
authority to regulate the manufacture, distribution, marketing, and sale of cigarette and tobacco
products. In one of its first major regulatory actions in September 2009, the FDA banned the
manufacture, shipment, and sale of certain
flavored cigarettes. If such regulatory actions were to continue, we believe decreasing demand
trends for cigarette and tobacco products could accelerate.
The long-term implications of the above considerations on smaller distributors may be detrimental.
A combination of declining revenue streams and limited access to credit and/or new capital may
force many distributors from the market, resulting in substantial industry consolidation. As one
of the nation’s largest wholesale distributors, we believe the Company is well-positioned to
capitalize on these trends and expand our strategic footprint.
Business Update — Retail Health Food Segment
Sales in our retail health food segment have been negatively impacted by weakness in both of our
geographic markets. In particular, sales in our Florida stores have been hurt by the severe
economic downturn in that state, in addition to increased competition from other natural food
chains.
In the near term, our retail segment faces a challenging operating environment as consumer behavior
has been adversely impacted by the recession. In response, we have worked to better align our cost
structure to demand, while reemphasizing the value choices found throughout our stores, such as
our private label offerings and other product lines unique to our stores.
Despite the impact of the recession, we believe the long-term prospects for this segment remain
attractive and continue to pursue growth through ongoing evaluations of potential new locations.
If health food retailers can demonstrate value and provide consumers with affordable choices, we
believe overall demand for natural food products will rebound as the current economic conditions
begin to dissipate.
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RESULTS OF OPERATIONS
| For the three months ended December | ||||||||||||||||
| Incr | ||||||||||||||||
| 2009 | 2008 | (Decr) | % Change | |||||||||||||
|
CONSOLIDATED:
|
||||||||||||||||
|
Sales /1/
|
$ | 243,941,038 | $ | 217,377,363 | $ | 26,563,675 | 12.2 | |||||||||
|
Cost of sales
|
226,713,025 | 201,532,714 | 25,180,311 | 12.5 | ||||||||||||
|
Gross profit
|
17,228,013 | 15,844,649 | 1,383,364 | 8.7 | ||||||||||||
|
Gross profit percentage
|
7.1 | % | 7.3 | % | ||||||||||||
|
Operating expense
|
14,166,008 | 13,107,917 | 1,058,091 | 8.1 | ||||||||||||
|
Operating income
|
3,062,005 | 2,736,732 | 325,273 | 11.9 | ||||||||||||
|
Interest expense
|
405,245 | 489,199 | (83,954 | ) | (17.2 | ) | ||||||||||
|
Income tax expense
|
941,000 | 860,000 | 81,000 | 9.4 | ||||||||||||
|
Income from continuing operations
|
1,729,140 | 1,401,600 | 327,540 | 23.4 | ||||||||||||
|
|
||||||||||||||||
|
BUSINESS SEGMENTS:
|
||||||||||||||||
|
Wholesale
|
||||||||||||||||
|
Sales
|
$ | 235,014,549 | $ | 208,396,569 | $ | 26,617,980 | 12.8 | |||||||||
|
Gross profit
|
13,386,777 | 12,197,029 | 1,189,748 | 9.8 | ||||||||||||
|
Gross profit percentage
|
5.7 | % | 5.9 | % | ||||||||||||
|
Retail
|
||||||||||||||||
|
Sales
|
$ | 8,926,489 | $ | 8,980,794 | $ | (54,305 | ) | (0.6 | ) | |||||||
|
Gross profit
|
3,841,236 | 3,647,620 | 193,616 | 5.3 | ||||||||||||
|
Gross profit percentage
|
43.0 | % | 40.6 | % | ||||||||||||
| /1/ |
Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $3.8 million in both Q1 2010 and Q1 2009.
|
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 — Q1 2010 vs. Q1 2009
Sales in our wholesale distribution segment increased $26.6 million in Q1 2010 as compared to Q1
2009. This change included a $25.3 million increase in cigarette sales and a net $1.3 million
increase in sales of tobacco, beverages, snacks, candy, grocery, health & beauty products,
automotive, food service, and store supplies categories (“Other Products”).
Significant items impacting our Q1 2010 wholesale segment sales included:
| • |
$9.2 million increase in sales related the acquisition of Discount Distributors during the
period.
|
| • |
$32.0 million increase in cigarette sales due to price increases implemented by manufacturers
as compared to Q1 2009.
|
| • |
$15.9 million decrease in sales, primarily related to a reduction in cigarette cartons sold
as compared to Q1 2009.
|
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Table of Contents
Sales in our retail health food segment decreased approximately $0.1 million in Q1 2010 as
compared to Q1 2009. This decrease was primarily related to lower sales volumes in our highly
perishable food categories, particularly in our Florida retail stores, which have
been impacted by a severe regional economic downturn and increased competition from other natural
food chains.
GROSS PROFIT — Q1 2010 vs. Q1 2009
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 $1.2 million in Q1 2010 as compared to Q1 2009.
This increase primarily resulted from higher gross margins in our tobacco product categories
totaling approximately $1.4 million and a $0.7 million increase in gross profit related to changes
in promotional allowances and the acquisition of Discount Distributors. These increases were partially
offset by a $0.9 million decrease in gross profit primarily attributable to a decrease in the
volume of cigarette cartons sold.
Gross profit for the retail health segment increased $0.2 million in Q1 2010 as compared to Q1
2009. This increase was primarily related to lower throw-out costs and improved gross margins.
OPERATING EXPENSE — Q1 2010 vs. Q1 2009
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.
Operating expenses increased approximately $1.1 million in Q1 2010 as compared to Q1 2009. This
increase primarily resulted from higher compensation costs during the current period.
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Table of Contents
INTEREST EXPENSE — Q1 2010 vs. Q1 2009
Q1 2010 interest expense decreased $0.1 million as compared to Q1 2009. This change was principally
related to lower interest rates and average borrowings on the Company’s credit facility. In Q1
2010, the Company’s average interest rates and average borrowings on its revolving credit facility
were 0.2% and $1.0 million lower, respectively, as compared to Q1 2009.
DISCONTINUED OPERATIONS — Q1 2010 vs. Q1 2009
Losses from discontinued operations in Q1 2009 primarily represented interest charges and costs
incurred to preserve the Company’s assets. All discounted operations were wound-down during the
Company’s prior fiscal year (fiscal 2009).
| Q1 2010 | Q1 2009 | |||||||
|
Operating loss
|
— | (44,129 | ) | |||||
|
Interest expense
|
— | (116,009 | ) | |||||
|
Income tax benefit
|
— | (58,000 | ) | |||||
|
Loss from discontinued operations
|
— | (102,038 | ) | |||||
LIQUIDITY AND CAPITAL RESOURCES
Overview
| • |
Operating Activities.
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.
During Q1 2010, the Company generated cash of approximately $1.3 million from operating
activities. The cash generated resulted from higher overall earnings and reductions in
accounts receivable and inventory. These items were partially offset by an increase in prepaid
and other assets and reductions 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.
|
26
Table of Contents
| • |
Investing Activities.
The Company used approximately $3.7 million of cash during Q1 2010
for investing activities, primarily related to the acquisition of the distribution assets of
Discount Distributors.
|
| • |
Financing Activities.
The Company generated cash of $2.6 million for financing activities
during Q1 2010. Of this amount, $2.8 million related to net advances on the Company’s credit
facility which was used to fund the Company’s acquisition of Discount Distributors, and $0.2
million related to the exercise of stock options. Offsetting these items was $0.2 million of
payments on long-term debt, and $0.2 million related to dividends on the Company’s common and
preferred stock.
|
| • |
Cash on Hand/Working Capital. At December 2009, the Company had cash on hand of $0.5 million
and working capital (current assets less current liabilities) of $39.4 million. This compares
to cash on hand of $0.3 million and working capital of $35.7 million at September 2009.
|
CREDIT AGREEMENT
The Company has a credit agreement (the “Facility”) with Bank of America, which includes the
following significant terms:
| • |
A June 2011 maturity date.
|
| • |
A $55.0 million revolving credit limit, plus the outstanding balance on Term Note A. Term
Note A had an outstanding balance of $0.1 million at December 2009.
|
| • |
The Facility bears interest at either the bank’s prime rate or at LIBOR plus 250 basis
points, at the election of the Company.
|
| • |
The Facility provides for an additional $5.0 million of credit available for certain
inventory purchases. These advances bear interest at the bank’s prime rate plus one-quarter
of one-percent (1/4%) per annum and are payable within 45 days of each advance.
|
| • |
Lending limits subject to accounts receivable and inventory limitations, and 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.
|
| • |
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 $0.72 per
share on an annual basis.
|
| • |
The Facility includes a prepayment penalty equal to one-half of one percent (1/2%) of the
original maximum loan limit ($60.4 million) if the Company prepays the entire Facility or
terminates the credit agreement on or before June 30, 2010.
|
27
Table of Contents
The Facility includes a financial covenant which requires the Company to maintain a minimum
debt service ratio of 1.0 to 1.0 as measured by the previous twelve month period then ended. The
Company was in compliance with this covenant at December 2009.
The amount available for use on the Facility at any given time is subject to a number of factors
including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on
our collateral and loan limits as defined in the Facility agreement, the Company’s availability was
approximately $25.1 million at December 2009 and the outstanding balance on the revolving portion
of the Facility was $25.5 million. The resulting credit limit on the Facility at December 31, 2009
was $50.6 million.
At
December 2009, 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 3.04% at December 2009.
At December 2009, the Company had $6.9 million in long-term debt outstanding. Based on the
borrowing rates currently available to the Company for bank loans with similar terms and average
maturities, the fair value of this long-term debt approximated its carrying value at December 2009.
During Q1 2010, our peak borrowings under the Facility were $39.6 million and our average
borrowings and average availability were $31.6 and $20.0 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.
CROSS DEFAULT AND CO-TERMINUS PROVISIONS
The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain
warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Marshall
and Ilsley Bank (“M&I”), which is also a participant lender on the Company’s revolving line of
credit. The M&I loans contain cross default provisions which cause all loans with M&I to be
considered in default if any one of the loans where M&I is a lender, including the revolving credit
facility, is in default. In addition, the M&I loans contain co-terminus provisions which require
all loans with M&I to be paid in full if any of the loans are paid in full prior to the end of
their specified terms.
DIVIDEND PAYMENTS
The Company paid cash dividends of $103,181 or $0.18 per common share, in Q1 2010, and $57,039 or
$0.10 per common share, in Q1 2009. The Company paid cash dividends related to the Convertible
Preferred Stock of $74,867 and $105,533, respectively, during Q1 2010 and Q1 2009.
28
Table of Contents
OTHER
The Company has issued a letter of credit for $0.5 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’s credit facility with Bank of America expires in June 2011. We believe the Company
continues to have a strong working relationship with Bank of America and has maintained compliance
with all related debt covenants. The Company also aggressively monitors its customer credit risk to
limit exposure in that area.
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 or a further deterioration in economic
conditions could materially impact the Company’s future revenue stream as well as its ability to
collect on customer accounts receivable balances and secure bank credit.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
Not applicable.
| Item 4. |
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed in company reports filed or submitted under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in company reports filed or submitted
under the Exchange Act is accumulated and communicated to management, including our principal
executive officer and principal financial and accounting officer, as appropriate to allow timely
decisions regarding required disclosure.
29
Table of Contents
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 December
31, 2009 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 and accounting 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
December 31, 2009, that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
| 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” on Form 10-K for the fiscal year ended September 30, 2009.
30
Table of Contents
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
|
Not applicable.
| Item 3. |
Defaults Upon Senior Securities
|
Not Applicable
| Item 4. |
Submission of Matters to a Vote of Security Holders
|
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
|
31
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: January 18, 2010 | /s/ Christopher H. Atayan | |||
| Christopher H. Atayan, | ||||
| Chief Executive Officer and Chairman | ||||
| Date: January 18, 2010 | /s/ Andrew C. Plummer | |||
| Andrew C. Plummer, | ||||
|
Vice President, Chief Financial Officer, and
Principal Financial Officer |
||||
32
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits