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:
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Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products in the Central, Rocky Mountain, and Southern regions of the United States. Additionally, our Wholesale Segment provides a full range of programs and services to assist our customers in managing their business and profitability.
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·
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Our retail health food segment (“Retail Segment”) operates fifteen health food retail stores located throughout the Midwest and Florida.
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WHOLESALE SEGMENT
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional foodservice products. Convenience stores represent our largest customer category. In September 2015, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.
Our wholesale business offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross dock facilities, include approximately 641,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.
RETAIL SEGMENT
Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.
We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates fifteen retail health food stores as Chamberlin’s Market & Café and Akin’s Natural Foods Market. These stores carry over 32,000 different national and regionally branded and private label products including high-
quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, operates five stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ten locations in Arkansas, Kansas, Missouri, Nebraska, and Oklahoma.
FINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein, such as adjustments consisting of normal recurring items. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended June 30, 2016 and June 30, 2015 have been referred to throughout this quarterly report as Q3 2016 and Q3 2015, respectively. The fiscal balance sheet dates as of June 30, 2016, June 30, 2015, and September 30, 2015 have been referred to as June 2016, June 2015, and September 2015, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company is currently evaluating the following new accounting pronouncements and their potential impact, if any, on our consolidated financial statements:
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting: Topic 718” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of how companies account for share-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and early adoption is permitted.
In February 2016, FASB issued ASU No. 2016-02 "Leases - Topic 842” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year.
In November 2015, FASB issued ASU No. 2015-17 "Income Taxes: Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The amendments for ASU 2015-17 can be applied retrospectively or prospectively and early adoption is permitted.
In July 2015, FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within that fiscal year.
2. CONVERTIBLE PREFERRED STOCK
The Company has two series of convertible preferred stock outstanding at June 2016 as identified in the following table:
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Series A
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Series B
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Date of issuance:
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June 17, 2004
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October 8, 2004
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Optionally redeemable beginning
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June 18, 2006
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October 9, 2006
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Par value (gross proceeds):
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$
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2,500,000
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$
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400,000
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Number of shares outstanding at June 2016:
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100,000
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16,000
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Liquidation preference per share:
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$
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25.00
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$
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25.00
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Conversion price per share:
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$
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30.31
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$
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24.65
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Number of common shares in which to be converted:
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82,481
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16,227
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Dividend rate:
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6.785
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%
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6.37
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%
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The Series A Convertible Preferred Stock (“Series A”) and Series B Convertible Preferred Stock (“Series B”), (collectively, the “Preferred Stock”), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted multiplied by a fraction equal to $25.00 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year.
In the event of a liquidation of the Company, the holders of the Preferred Stock are entitled to receive the liquidation preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The shares of Preferred Stock are optionally redeemable by the Company beginning on various dates, as listed in the above table, at redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference, after which date it remains the liquidation preference. The Preferred Stock is redeemable, at the holder’s option, at the liquidation value. The Series A Preferred Stock and 8,000 shares of the Series B Preferred Stock are owned by Mr. Christopher Atayan, AMCON’s Chief Executive Officer and Chairman of the Board. The Series B Preferred Stock holders have the right to elect one member of our Board of Directors, pursuant to the voting rights in the Certificate of Designation creating the Series B. Christopher H. Atayan was first nominated and elected to this seat in 2004.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect,” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward- looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
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increasing competition in our wholesale and retail health food segments,
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increases in state and federal excise taxes on cigarette and tobacco products,
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higher commodity prices which could impact food ingredient costs for many of the products we sell,
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regulation of cigarette, tobacco, and e-cigarette products by the FDA, in addition to existing state and federal regulations by other agencies,
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potential bans or restrictions imposed by the FDA on the manufacture, distribution, and sale of certain cigarette and tobacco products,
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changes in fuel prices,
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increases in manufacturer prices,
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increases in inventory carrying costs and customer credit risk,
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changes in promotional and incentive programs offered by manufacturers,
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demand for the Company’s products, particularly cigarette and tobacco products,
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risks associated with opening new retail stores,
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the expansion of large and well capitalized national and regional health food retail store chains,
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increasing competition in our retail health food segment from conventional retailers (grocery stores, mass merchants etc.),
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·
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management periodically reviews market conditions and the demand for various assets that may lead to acquisitions, divestitures, new business ventures, or efforts to expand, each which carries integration and execution risk,
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·
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increasing health care costs and the potential impact on discretionary consumer spending,
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·
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changes in laws and regulations and ongoing compliance with the Patient Protection and Affordable Care Act,
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·
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decreased availability of capital resources,
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·
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domestic regulatory and legislative risks,
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poor weather conditions,
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·
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consolidation trends within the convenience store, wholesale distribution, and retail health food industries,
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natural disasters and domestic unrest,
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·
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other risks over which the Company has little or no control, and any other factors not identified herein
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Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company’s financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during our fiscal quarter ended June 2016.
THIRD FISCAL QUARTER 2016 (Q3 2016)
The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2016 and June 2015:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional foodservice products. Convenience stores represent our largest customer category. In September 2015, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.
Our wholesale business offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross dock facilities, include approximately 641,000
square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.
Retail Segment
Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.
We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates fifteen retail health food stores as Chamberlin’s Market & Café and Akin’s Natural Foods Market. These stores carry over 32,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, operates five stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ten locations in Arkansas, Kansas, Missouri, Nebraska, and Oklahoma.
Business Update - Wholesale Segment
The wholesale distribution industry which services convenience stores (c-stores) is facing a number of headwinds. Growing compliance costs related to a number of new federal regulations has increased operating costs. At the same time, consolidation and changing ownership of the industry’s vendor base has led to more cautious marketing and promotional spending by product manufacturers. Additionally, cash strapped local governments across the country are proposing a range of new consumption taxes on products such as soda.
We believe these trends will drive further consolidation within the wholesale distribution industry as distributors without sufficient scale seek to exit the market. The growing demand for robust technology solutions by c-store owners will likely only accelerate this trend.
Despite these factors, our business remains healthy. The convenience store industry continues to grow sales and add new stores and the trends discussed above should present our Company with additional opportunies to make strategic acquisitions and expand our geopgraphic reach.
Ultimately, we view our business as a platform to help c-stores deliver convenience to on-the-go customers. A platform which is highly nimble and responsive to changes in consumer tastes and preferences, delivering a wide range of products, services, and technologies. We remain
committed to developing programs that enable our customers to compete against quick service restaurants.
Business Update - Retail Segment
The retail health food sector remains challenged with an influx of new competition and aggressive expansion efforts by regional and nations chains such as
Whole Foods Market, Trader Joe’s, Sprouts Farmers Market, Natural Grocers, Vitamin Shoppe, General Nutrition Centers (“GNC”), Lucky’s Market, and Fresh Thyme. At the same time, we have seen conventional grocery stores aggressively expand their natural, organic, and fresh product offerings. This highly competitive environment has pressured sales across the industry and has impacted our stores as well.
In response to this competitive landscape, we are taking a number of steps to better position our stores. Many of these efforts are centered around a comprehensive plan to update certain stores within our portfolio, providing for a modern and highly engaged shopping experience. These efforts will be coupled with a program to customize a unique product set for each store, overlaid by new marketing and promotional campaigns. In some cases, we may opportunistically relocate certain stores as existing leases expire. This was the case in May 2016 when we closed one of our Florida market stores at the end of its lease. This store is being relocated and is expected to open in the fall of 2016. Our Q3 2016 operating results were impacted as we work to transition existing customers and develop new customer relationships for this new location. We expect this store relocation to impact our future near term operating results as well.
We will continue to refine our business model as the market evolves. Carrying a highly differentiated product mix that is more difficult to copy has been the hallmark of our business over the years and will be central to our strategy as we work towards implementing various growth initiatives.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 2016:
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For the three months ended June
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2016
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2015
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Incr (Decr)
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% Change
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CONSOLIDATED:
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Sales(1)
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$
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333,398,723
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$
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334,456,509
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$
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(1,057,786)
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(0.3)
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Cost of sales
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314,235,192
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314,957,889
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(722,697)
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(0.2)
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Gross profit
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19,163,531
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19,498,620
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(335,089)
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(1.7)
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Gross profit percentage
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5.7
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%
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5.8
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%
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Operating expense
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15,848,351
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15,947,983
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(99,632)
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(0.6)
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Operating income
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3,315,180
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3,550,637
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(235,457)
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(6.6)
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Interest expense
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188,798
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242,266
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(53,468)
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(22.1)
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Income tax expense
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1,310,000
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1,333,000
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(23,000)
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(1.7)
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Net income
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1,851,934
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1,996,224
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(144,290)
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(7.2)
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BUSINESS SEGMENTS:
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Wholesale
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Sales
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$
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326,856,934
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$
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326,711,991
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$
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144,943
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0.0
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Gross profit
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16,416,415
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16,334,296
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82,119
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0.5
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Gross profit percentage
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5.0
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%
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5.0
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%
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Retail
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Sales
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$
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6,541,789
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$
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7,744,518
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$
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(1,202,729)
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(15.5)
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Gross profit
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2,747,116
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3,164,324
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(417,208)
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(13.2)
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Gross profit percentage
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42.0
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%
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40.9
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%
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(1)
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Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $5.8 million in Q3 2016 and $5.9 million in Q3 2015.
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SA
LES
Changes in sales are driven by two primary components:
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(i)
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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
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(ii)
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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.
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SALES — Q3 2016 vs. Q3 2015
Sales in our Wholesale Segment increased $0.1 million during Q3 2016 as compared to Q3 2015. Significant items impacting sales during Q3 2016 included a $6.7 million increase in sales related to price increases implemented by cigarette manufacturers and a $0.8 million increase in sales related to higher sales volume in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”). These increases were partially offset by a $7.4 million decrease in sales related to the volume and mix of cigarette cartons sold.
Sales in our Retail Segment decreased $1.2 million in Q3 2016 as compared to Q3 2015. Of this change, approximately $0.7 million related to the impact of closing one of our Florida market stores as we relocate it as previously discussed and $0.5 million related to lower sales in our remaining stores which have experienced increased competition.
GROSS PROFIT — Q3 2016 vs. Q3 2015
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment increased $0.1 million during Q3 2016 as compared to Q3 2015 primarily related to higher sales in our Other Products category. Q3 2016 gross profit in our Retail Segment decreased $0.4 million as compared to Q3 2015.
Of this change, $0.3 million related to the impact of closing one of our Florida market stores as we relocate it and $0.1 million related to lower sales volume in our remaining stores.
OPERATING EXPENSE — Q3 2016 vs. Q3 2015
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, fuel costs, and insurance costs. Our Q3 2016 operating expenses decreased $0.1 million as compared to Q3 2015. Significant items impacting Q3 2016 operating expenses included a $0.2 million reduction in our wholesale delivery costs and $0.3 million reduction in our Retail Segment operating costs. These reductions in operating costs were partially offset by a $0.4 million increase in other operating costs including employee benefits.
RESULTS OF OPERATIONS — NINE MONTHS ENDED JUNE 2016:
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For the nine months ended June
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2016
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2015
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Incr (Decr)
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% Change
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CONSOLIDATED:
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Sales(1)
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$
|
951,856,098
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$
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937,333,849
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$
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14,522,249
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1.5
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Cost of sales
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896,190,425
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880,575,362
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15,615,063
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|
1.8
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Gross profit
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55,665,673
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56,758,487
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(1,092,814)
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(1.9)
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Gross profit percentage
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5.8
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%
|
|
6.1
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%
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Operating expenses
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47,606,473
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48,782,024
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(1,175,551)
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(2.4)
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Operating income
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8,059,200
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|
7,976,463
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|
|
82,737
|
|
1.0
|
|
Interest expense
|
|
|
562,654
|
|
|
673,783
|
|
|
(111,129)
|
|
(16.5)
|
|
Income tax expense
|
|
|
3,241,000
|
|
|
3,055,000
|
|
|
186,000
|
|
6.1
|
|
Net income
|
|
|
4,354,180
|
|
|
4,311,587
|
|
|
42,593
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BUSINESS SEGMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
930,502,477
|
|
$
|
913,583,751
|
|
$
|
16,918,726
|
|
1.9
|
|
Gross profit
|
|
|
46,555,712
|
|
|
46,794,647
|
|
|
(238,935)
|
|
(0.5)
|
|
Gross profit percentage
|
|
|
5.0
|
%
|
|
5.1
|
%
|
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
21,353,621
|
|
$
|
23,750,098
|
|
$
|
(2,396,477)
|
|
(10.1)
|
|
Gross profit
|
|
|
9,109,961
|
|
|
9,963,840
|
|
|
(853,879)
|
|
(8.6)
|
|
Gross profit percentage
|
|
|
42.7
|
%
|
|
42.0
|
%
|
|
|
|
|
|
|
(1)
|
|
Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $17.2 million for the nine months ended June 2016 and $16.2 million for the nine months
ended June 2015.
|
SALES — Nine months Ended June 2016
Sales in our Wholesale Segment increased $16.9 million for the nine months ended June 2016 as compared to the same prior year period. Significant items impacting sales during the period included a $19.4 million increase in sales related to price increases implemented by cigarette manufacturers and a $5.1 million increase in sales related to higher sales in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”). These increases were partially offset by a $7.6 million decrease in sales related to the volume and mix of cigarette cartons sold.
Sales in our Retail Segment for the nine months ended June 2016 decreased $2.4 million as compared to the same prior year period.
Of this change, approximately $0.7 million related to the impact of closing one of our Florida market stores as we relocate it and $1.7 million related to lower sales in our remaining stores which have experienced increased competition.
GROSS PROFIT — Nine months Ended June 2016
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment decreased $0.2 million for the nine month period ended June 2016 as compared to the same prior year period. Significant items impacting gross profit during the period included a $1.0 million decrease in gross profit related to the volume and mix of cigarette cartons sold. This decrease was partially offset by a $0.8 million increase in our Other Product category gross profit resulting from higher sales.
Gross profit in our Retail Segment decreased $0.9 million for the nine month period ended June 2016 as compared to the same prior year period. Of this change, $0.3 million related to the impact of closing one of our Florida market stores as we relocate it and $0.6 million related to lower sales volume at our remaining stores.
OPERATING EXPENSE — Nine months Ended June 2016
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses include costs related to our sales, warehouse, delivery and administrative departments for all segments. Specifically, purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, fuel costs, and insurance costs. Operating expenses decreased $1.2 million during the nine months ended June 2016 as compared to the same prior year period. Significant items impacting operating costs during the nine month period ended June 2016 included a $0.8 million decrease in our Wholesale Segment delivery costs and a $0.7 million reduction in our Retail Segment operating costs. These decreases were partially offset by a $0.3 million increase in other operating costs including employee benefits.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company requires cash to pay operating expenses, purchase inventory, and make capital investments. In general, the Company finances its cash flow requirements through a credit facility agreement (the “Facility”), long
‑term debt agreements with banks, and cash generated from operations. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank participating in a loan syndication. The Facility included the following significant terms at June 2016:
|
·
|
|
A July 2018 maturity date without a penalty for prepayment.
|
|
·
|
|
$70.0 million revolving credit limit.
|
|
·
|
|
Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.
|
|
·
|
|
A provision providing an additional $10.0 million of credit advances for certain inventory purchases.
|
|
·
|
|
Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement.
|
|
·
|
|
The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 175 basis points depending on certain credit facility utilization measures, at the election of the Company.
|
|
·
|
|
Lending limits subject to accounts receivable and inventory limitations.
|
|
·
|
|
An unused commitment fee equal to one-quarter of one percent (
1
/
4
%) per annum on the difference between the maximum loan limit and average monthly borrowings.
|
|
·
|
|
Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable.
|
|
·
|
|
A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s availability has not fallen below 10% of the maximum loan limit and the Company’s fixed charge ratio is over 1.0.
|
|
·
|
|
Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis. There is, however, no limit on common stock dividends if certain excess availability measurements have been maintained for the thirty day period immediately prior to the payment of any such dividends or distributions and if immediately after giving effect to any such dividend or distribution payments the Company has a Fixed Charge Coverage Ratio of at least 1.10 to 1.0 as defined in the credit facility agreement.
|
The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at June 2016 was $69.6 million, of which $13.7 million was outstanding, leaving $55.9 million available.
At June 2016, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 2.71% at June 2016. For the nine months ended June 2016, our peak borrowings under the Facility were $40.1 million, and our average borrowings and average availability under the Facility were $22.7 million and $45.1 million, respectively.
Cross Default and Co-Terminus Provisions
The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, is financed through a term loan with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loan contains cross default provisions which cause the loan with BMO to be considered in default if the loans where BMO is the lender, including the revolving credit facility, is in default. There were no such cross defaults at June 2016. In addition, the BMO loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.
Dividends Payments
The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million
and $0.7 million for the three and nine month periods ended June 2016, respectively, and $0.2 million and $0.5 million for the three and nine month periods ended June 2015, respectively.
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as set forth in the Company’s annual report on Form 10-K for the fiscal period ended September 30, 2015.
Other
The Company has issued a letter of credit in the amount of approximately $0.4 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Liquidity Risk
The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.
The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.
The Company believes its liquidity position going forward will be adequate to sustain operations. However, a precipitous change in operating environment could materially impact the Company’s future revenue stream as well as its ability to collect on customer accounts receivable or secure bank credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2016 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control that occurred during the fiscal quarter ended June 30, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.