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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2011

 

OR

 

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

 

For the transition period from             to             

 

Commission File Number 1-15589

 

 

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (402) 331-3727

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)   Yes x No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes £ No x

 

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

 

 

Table of Contents

 

Form 10-Q

3rd Quarter

 

INDEX

 

	PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets at June 30, 2011 (unaudited) and September 30, 2010	3
Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2011 and 2010	4
Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2011 and 2010	5
Notes to condensed consolidated unaudited financial statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. (Removed and Reserved)	25
Item 5. Other Information	25
Item 6. Exhibits	25

 

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PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2011 and September 30, 2010

 

		June 2011			September 2010
		(Unaudited)
ASSETS
Current assets:
Cash		$	1,330,474		$	356,735
Accounts receivable, less allowance for doubtful accounts of $0.8 million and $1.6 million at June 2011 and September 2010, respectively		34,508,718			27,903,689
Inventories, net		59,663,739			35,005,957
Deferred income taxes		1,584,981			1,905,974
Prepaid and other current assets		6,492,944			3,013,485
Total current assets		103,580,856			68,185,840
Property and equipment, net		14,087,436			11,855,669
Goodwill		6,149,168			6,149,168
Other intangible assets, net		5,747,387			4,807,644
Other assets		1,255,596			1,069,050
		$	130,820,443		$	92,067,371
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	19,249,594		$	16,656,257
Accrued expenses		7,298,871			6,007,900
Accrued wages, salaries and bonuses		2,605,329			3,161,817
Income taxes payable		510,945			2,366,667
Current maturities of long-term debt		1,466,525			893,291
Total current liabilities		31,131,264			29,085,932
Credit facility		47,350,031			18,816,709
Deferred income taxes		2,276,551			1,075,861
Long-term debt, less current maturities		6,521,334			5,226,586
Other long-term liabilities		431,524			587,479
Series A cumulative, convertible preferred stock, $.01 par value 100,000 shares authorized and issued, liquidation preference $25.00 per share		2,500,000			2,500,000
Series B cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized, 62,000 shares outstanding at June 2011 and 80,000 shares outstanding at September 2010, liquidation preference $25.00 per share		1,550,000			2,000,000
Shareholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 162,000 and 180,000 shares outstanding and issued in Series A and B referred to above		—			—
Common stock, $.01 par value, 3,000,000 shares authorized, 609,320 shares outstanding at June 2011 and 577,432 shares outstanding at September 2010		6,093			5,774
Additional paid-in capital		9,960,895			8,376,640
Retained earnings		29,092,751			24,392,390
Total shareholders’ equity		39,059,739			32,774,804
		$	130,820,443		$	92,067,371

 

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

 

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

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

 

		For the three months ended June						For the nine months ended June
		2011			2010			2011			2010
Sales (including excise taxes of $85.9 million and $87.9 million, and $238.1 million and $246.3 million, respectively)		$	263,828,199		$	267,062,440		$	725,388,399		$	741,502,607
Cost of sales		245,610,146			247,932,676			673,193,512			688,204,656
Gross profit		18,218,053			19,129,764			52,194,887			53,297,951
Selling, general and administrative expenses		13,781,556			14,070,483			40,378,569			41,215,024
Depreciation and amortization		519,099			440,466			1,523,815			1,243,307
		14,300,655			14,510,949			41,902,384			42,458,331
Operating income		3,917,398			4,618,815			10,292,503			10,839,620
Other expense (income):
Interest expense		372,525			370,873			1,020,980			1,144,543
Other (income), net		(73,878		)	(32,758		)	(141,970		)	(69,184		)
		298,647			338,115			879,010			1,075,359
Income from operations before income tax		3,618,751			4,280,700			9,413,493			9,764,261
Income tax expense		1,791,000			1,532,000			4,169,000			3,495,000
Net income		1,827,751			2,748,700			5,244,493			6,269,261
Preferred stock dividend requirements		(70,649		)	(74,052		)	(218,755		)	(222,158		)
Net income available to common shareholders		$	1,757,102		$	2,674,648		$	5,025,738		$	6,047,103
Basic earnings per share available to common shareholders:		$	2.93		$	4.72		$	8.53		$	10.73
Diluted earnings per share available to common shareholders:		$	2.36		$	3.67		$	6.81		$	8.39
Basic weighted average shares outstanding		599,281			566,224			589,084			563,505
Diluted weighted average shares outstanding		775,416			749,350			769,870			747,035

 

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

 

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the nine months ended June 30, 2011 and 2010

 

		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,244,493		$	6,269,261
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,268,397			1,043,186
Amortization		255,418			200,121
Gain on sale of property and equipment		(37,177		)	(31,843		)
Stock based compensation		1,740,969			376,422
Net excess tax benefit on equity-based awards		(125,904		)	(130,126		)
Deferred income taxes		1,521,683			(380,575		)
Provision for (recoveries) losses on doubtful accounts		(768,000		)	750,489
Provision for losses on inventory obsolescence		104,871			82,778
Other		(6,033		)	77,094
Changes in assets and liabilities net of effects of business acquisition:
Accounts receivable		3,044,399			(2,325,168		)
Inventories		(20,191,024		)	(4,923,666		)
Prepaid and other current assets		(3,444,459		)	(2,830,201		)
Other assets		(186,546		)	(35,850		)
Accounts payable		2,598,310			3,388,920
Accrued expenses and accrued wages, salaries and bonuses		(824,500		)	(375,910		)
Income tax payable		(1,729,818		)	(1,326,635		)
Net cash flows from operating activities		(11,534,921		)	(171,703		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,641,035		)	(1,423,912		)
Proceeds from sales of property and equipment		64,375			62,406
Acquisition		(13,368,057		)	(3,099,836		)
Net cash flows from investing activities		(14,944,717		)	(4,461,342		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements		28,533,322			5,646,484
Principal payments on long-term debt		(684,108		)	(682,574		)
Proceeds from exercise of stock options		22,391			126,973
Net excess tax benefit on equity-based awards		125,904			130,126
Dividends paid on convertible preferred stock		(218,755		)	(222,158		)
Dividends on common stock		(325,377		)	(310,358		)
Net cash flows from financing activities		27,453,377			4,688,493
Net change in cash		973,739			55,448
Cash, beginning of period		356,735			309,914
Cash, end of period		$	1,330,474		$	365,362

 

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

 

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		2011			2010
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	994,280		$	1,141,934
Cash paid during the period for income taxes		4,377,134			5,202,208
Supplemental disclosure of non-cash information:
Conversion by holders of Series B Convertible Preferred Stock to common stock		450,000			—
Equipment acquisitions classified as accounts payable		33,233			35,866
Acquisition of equipment through capital leases		—			14,969
Business acquisition (see Note 2):
Accounts receivable		8,881,428			—
Inventory		4,571,629			1,981,498
Property and equipment		1,891,000			122,978
Prepaid assets		35,000			—
Non-competition agreement		444,428			—
Customer relationships intangible assets		661,090			1,620,000
Goodwill		—			300,360
Accrued expenses		(120,000		)	—
Note payable		(2,552,090		)	(500,000		)
Amount due under non-competition agreement		(444,428		)	—
Contingent consideration due		—			(425,000		)

 

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

 

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AMCON Distributing Company and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

 

AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate two business segments:

 

·	Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products in the Central, Rocky Mountain, Southern, and Southeastern regions of the United States.
·	Our retail health food segment (“Retail Segment”) operates fourteen health food retail stores located throughout the Midwest and Florida.

 

WHOLESALE SEGMENT

 

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

 

Our Wholesale Segment distributes approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products.

 

RETAIL SEGMENT

 

The Company’s retail health food stores, which are operated as Chamberlin’s Market & Café and Akin’s Natural Foods Market, carry over 30,000 different national and regionally branded and private label products. These products include high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was first established in 1935, operates six stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of eight locations in Oklahoma, Nebraska, Missouri, and Kansas.

 

FINANCIAL STATEMENTS

 

The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein, such as adjustments consisting of normal recurring items. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2010, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended June 30, 2011 and June 30, 2010 have been referred to throughout this quarterly report as Q3 2011 and Q3 2010, respectively. The fiscal balance sheet dates as of June 30, 2011, June 30, 2010, and September 30, 2010 have been referred to as June 2011, June 2010, and September 2010, respectively.

 

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2. ACQUISITIONS

 

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

 

The following table summarizes the consideration paid for the acquired assets and their related acquisition date fair values. The fair value of the assets acquired have been measured in accordance with ASC 805 “Business Combinations.” In valuing identifiable intangible assets, the Company has estimated the fair value using the discounted cash flows methodology. The purchase price allocation reflects various preliminary estimates and analyses and is subject to change during the measurement period (generally one year from the acquisition date). The acquired assets are reported as a component of our Wholesale Segment.

 

Total Consideration		Amount (in millions)
Cash		$	13.4
Note payable		2.6
Non-competition agreement		0.4
Total fair value of consideration transferred		$	16.4

 

Recognized amounts of identifiable assets acquired

 

		Amount (in millions)			Weighted Average Amortization  Period
Accounts Receivable		$	8.9		—
Inventory		4.6			—
Property and equipment		1.9			5 years
Identifiable intangible assets:
Non-competition agreement		0.4			5 years
Customer relationships		0.7			8 years
Liabilities		(0.1		)
Total identifiable assets		$	16.4

 

The following table sets forth the unaudited actual revenue and earnings included in the Company’s statement of operations related to the acquisition and the pro forma revenue and earnings of the combined entity if the acquisition had occurred as of the beginning of the Company’s prior fiscal year. These pro forma amounts do not purport to be indicative of the actual results that would have been obtained had the acquisition occurred at that time.

 

		Three months ended						Nine months ended
		June						June
(In millions)		2011			2010			2011			2010
Revenue — Actual Results		$	263.8		$	267.1		$	725.4		$	741.5
Revenue — Supplemental pro forma results		$	299.4		$	318.3		$	859.1		$	890.6
Net Income — Actual Results		$	1.8		$	2.7		$	5.2		$	6.3
Net Income — Supplemental pro forma results		$	1.9		$	2.8		$	5.1		$	6.4

 

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3. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at June 2011 as identified in the following table:

 

		Series A			Series B
Date of issuance:		June 17, 2004			October 8, 2004
Optionally redeemable beginning		June 18, 2006			October 9, 2006
Par value (gross proceeds):		$	2,500,000		$	1,550,000
Number of shares:		100,000			62,000
Liquidation preference per share:		$	25.00		$	25.00
Conversion price per share:		$	30.31		$	24.65
Number of common shares in which to be converted:		82,481			62,881
Dividend rate:		6.785		%	6.37		%

 

The Series A Convertible Preferred Stock (“Series A”) and Series B Convertible Preferred Stock (“Series B”), (collectively, the “Preferred Stock”), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted multiplied by a fraction equal to $25.00 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year.

 

In the event of a liquidation of the Company, the holders of the Preferred Stock are entitled to receive the liquidation preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock. The shares of Preferred Stock are optionally redeemable by the Company beginning on various dates, as listed in the above table, at redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference, after which date it remains the liquidation preference. The Preferred Stock is redeemable at the liquidation value and at the option of the holder. The Series A Preferred Stock is owned by Mr. Chris Atayan, AMCON’s Chief Executive Officer and Chairman of the Board. The Series B Preferred Stock is owned by an institutional investor which has the right to elect one member of our Board of Directors, pursuant to the voting rights in the Certificate of Designation creating the Series B. Christopher H. Atayan was nominated to this seat in 2004.  During Q3 2011, the holders of the Series B Convertible Preferred Stock converted 18,000 shares with a carrying value of $450,000 into 18,255 shares of the Company’s common stock.

 

4. INVENTORIES

 

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

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

		June  2011			September  2010
Wholesale Segment		$	4,236,291		$	4,236,291
Retail Segment		1,912,877			1,912,877
		$	6,149,168		$	6,149,168

 

Other intangible assets of the Company consisted of the following:

 

		June  2011			September  2010
Trademarks and tradenames		$	3,373,269		$	3,373,269
Non-competition agreement (less accumulated amortization of $7,400 at June 2011)			437,028			—
Customer relationships (less accumulated amortization of $343,700 and $185,625 at June 2011 and September 2010, respectively)		1,937,090			1,434,375
		$	5,747,387		$	4,807,644

 

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

 

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

 

Customer relationships		June  2011
Fiscal 2011 (1)		$	93,525
Fiscal 2012		374,100
Fiscal 2013		374,100
Fiscal 2014		374,100
Fiscal 2015		374,100
Thereafter		784,193
		$	2,374,118

 

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

 

6. DIVIDENDS:

 

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

 

7. EARNINGS PER SHARE

 

Basic earnings per share available to common shareholders is calculated by dividing income from continuing operations less preferred stock dividend requirements by the weighted average common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from continuing operations less preferred stock dividend requirements (when anti-dilutive) by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method. There were no anti-dilutive stock options or potential common stock options at either June 2011 or June 2010.

 

		For the three months ended June
		2011						2010
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		599,281			599,281			566,224			566,224
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			176,135			—			183,126
Weighted average number of shares outstanding		599,281			775,416			566,224			749,350
Income from operations		$	1,827,751		$	1,827,751		$	2,748,700		$	2,748,700
Deduct: convertible preferred stock dividends (2)		(70,649		)	—			(74,052		)	—
Net income available to common shareholders		1,757,102			1,827,751			2,674,648			2,748,700
Net earnings per share available to common shareholders		$	2.93		$	2.36		$	4.72		$	3.67

 

 

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		For the nine months ended June
		2011						2010
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		589,084			589,084			563,505			563,505
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			180,786			—			183,530
Weighted average number of shares outstanding		589,084			769,870			563,505			747,035
Income from operations		$	5,244,493		$	5,244,493		$	6,269,261		$	6,269,261
Deduct: convertible preferred stock dividends (2)		(218,755		)	—			(222,158		)	—
		5,025,738			5,244,493			6,047,103			6,269,261
Net earnings per share available to common shareholders		$	8.53		$	6.81		$	10.73		$	8.39

 

 

8. DEBT

 

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

 

Significant Terms

 

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

 

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

 

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

 

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

 

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

 

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

 

·    Lending limits subject to accounts receivable and inventory limitations.

 

·    An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings.

 

·    Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable.

 

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

 

·    Includes a financial covenant requiring a fixed charge coverage ratio of at least 1.1 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement.

 

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The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day based on our collateral and loan limits as defined in the Facility agreement.  The Company’s calculated credit limit of the Facility at June 30 was $69.7 million of which $47.4 million was outstanding leaving $22.3 million available.

 

At June 2011, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 2.93% at June 2011.  At June 2011, the Company had $8.0 million in long-term debt outstanding. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of this long-term debt approximated its carrying value at June 2011.

 

Cross Default and Co-Terminus Provisions

 

The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Marshall and Ilsley Bank (“M&I”), which is also a participant lender on the Company’s revolving line of credit. The M&I loans contain cross default provisions which cause all loans with M&I to be considered in default if any one of the loans where M&I is a lender, including the revolving credit facility, is in default. There were no such cross defaults at June 2011. In addition, the M&I loans contain co-terminus provisions which require all loans with M&I to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

Other

 

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

 

Off-Balance Sheet Arrangements

 

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

 

9. EQUITY-BASED INCENTIVE AWARDS

 

Omnibus Plan

 

The Company has an Omnibus Incentive Plan (“the Omnibus Plan”) which provides for equity incentives to employees. The Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plan permits the issuance of up to 150,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash.  The number of shares issuable under the Omnibus Plan is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock.  As of June 2011, awards with respect to a total of 87,900 shares had been awarded pursuant to the Omnibus Plan and awards with respect to another 62,100 shares may be awarded under the plan.

 

Stock Options

 

During the Company’s third fiscal quarter of 2010, the Compensation Committee of the Board of Directors awarded various employees of the Company incentive stock options to purchase 6,000 shares of the Company’s common stock.  These awards vest in equal installments over a five year service period and have an exercise price of $51.50 per share.

 

The Company has estimated that the fair value of the incentive stock option awards was approximately $0.1 million using the Black-Scholes option pricing model. This amount is being amortized to compensation expense on a straight-line basis over the five year service period.  The following assumptions were used in connection with the Black-Scholes option pricing calculation:

 

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		Stock Option Pricing Assumptions
Risk-free interest rate		3.04	%
Dividend yield		1.30	%
Expected volatility		49.30	%
Expected life in years		7

 

The stock options issued by the Company expire ten years from the grant date and include graded vesting schedules up to five years in length.  Stock options issued and outstanding at June 2011 are summarized as follows:

 

							Remaining					Exercisable
		Exercise  Price			Number  Outstanding		Weighted-Average  Contractual Life		Weighted-Average  Exercise Price			Number  Exercisable		Weighted-Average  Exercise Price
2003 Options		$	28.80		84		1.32 years		$	28.80		84		$	28.80
2007 Options		$	18.00		25,000		5.45 years		$	18.00		25,000		$	18.00
2010 Options		$	51.50		5,500		8.83 years		$	51.50		1,100		$	51.50
					30,584				$	24.05		26,184		$	19.44

 

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

 

		Number of Shares		Weighted Average Exercise Price
Outstanding at September 2010		31,918		$	24.56
Granted		—		$	—
Exercised		(834	)	$	26.94
Forfeited/Expired		(500	)	$	51.50
Outstanding at June 2011		30,584		$	24.05

 

At June 2011, total unamortized compensation expense related to stock options was approximately $0.1 million. This unamortized compensation expense is expected to be amortized over approximately the next 46 months.

 

Restricted Stock Units

 

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

 

		Restricted Stock Units (1)			Restricted Stock Units (2)
Date of award:		November 22, 2010			November 22, 2010
Number of shares:		38,400			12,000
Service period:		24 months			36 months
Estimated fair value of award at grant date:		$	2,765,000		$	864,000
Fair value of outstanding (non-vested) awards at June 2011:		$	2,667,000		$	833,000

 

 

There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The recipients of the restricted stock units are entitled to the customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock.  All cash dividends and/or distributions payable to restricted stock recipients will be held in escrow until all the conditions of vesting have been met.

 

The restricted stock units provide that the recipients can elect, at their option, to receive either common stock in the Company, or a cash settlement based upon the closing price of the Company’s shares, at the time of vesting.  Based on these award provisions, the compensation expense recorded in the Company’s Condensed Statement of Operations reflects the straight-line amortized fair value based on the period end closing price.

 

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

 

		Number of Shares		Weighted Average  Fair Value
Nonvested restricted stock units at September 2010		—		$	—
Granted		50,400		$	72.01
Vested		(12,800	)	$	72.50
Expired		—		$	—
Nonvested restricted stock units at June 2011		37,600		$	69.45

 

10. BUSINESS SEGMENTS

 

AMCON has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores’ operations are aggregated to comprise the Retail Segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. Included in the “Other” column are intercompany eliminations, and assets held and charges incurred by our holding company. The segments are evaluated on revenues, gross margins, operating income (loss), and income before taxes.

 

		Wholesale Segment			Retail Segment			Other			Consolidated
THREE MONTHS ENDED JUNE 2011:
External revenue:
Cigarettes		$	190,156,165		$	—		$	—		$	190,156,165
Confectionery		18,125,809			—			—			18,125,809
Health food		—			9,509,251			—			9,509,251
Tobacco, food service & other		46,036,974			—			—			46,036,974
Total external revenue		254,318,948			9,509,251			—			263,828,199
Depreciation		316,032			106,308			937			423,277
Amortization		95,822			—			—			95,822
Operating income (loss)		4,092,131			803,020			(977,753		)	3,917,398
Interest expense		117,643			93,381			161,501			372,525
Income (loss) from continuing operations before taxes		3,997,180			715,497			(1,093,926		)	3,618,751
Total assets		116,520,925			13,285,407			1,014,111			130,820,443
Capital expenditures		624,284			59,497			—			683,781
THREE MONTHS ENDED JUNE 2010:
External revenue:
Cigarettes		$	192,819,138		$	—		$	—		$	192,819,138
Confectionery		18,276,797			—			—			18,276,797
Health food		—			9,220,081			—			9,220,081
Tobacco, food service & other		46,746,424			—			—			46,746,424
Total external revenue		257,842,359			9,220,081			—			267,062,440
Depreciation		270,627			92,763			936			364,326
Amortization		76,140			—			—			76,140
Operating income (loss)		4,820,946			911,760			(1,113,891		)	4,618,815
Interest expense		119,356			111,322			140,195			370,873
Income (loss) from continuing operations before taxes		4,708,303			811,190			(1,238,793		)	4,280,700
Total assets		88,755,030			12,238,486			1,019,791			102,013,307
Capital expenditures		136,591			184,392			—			320,983

 

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		Wholesale Segment			Retail  Segment			Other			Consolidated
NINE MONTHS ENDED JUNE 2011:
External revenue:
Cigarettes		$	520,018,745		$	—		$	—		$	520,018,745
Confectionery		48,253,405			—			—			48,253,405
Health food		—			28,509,834			—			28,509,834
Tobacco, food service & other		128,606,415			—			—			128,606,415
Total external revenue		696,878,565			28,509,834			—			725,388,399
Depreciation		944,662			320,923			2,812			1,268,397
Amortization		255,418			—			—			255,418
Operating income (loss)		12,182,183			2,712,105			(4,601,785		)	10,292,503
Interest expense		343,807			293,369			383,804			1,020,980
Income (loss) from continuing operations before taxes		11,880,020			2,435,886			(4,902,413		)	9,413,493
Total assets		116,520,925			13,285,407			1,014,111			130,820,443
Capital expenditures		1,474,382			166,653			—			1,641,035
NINE MONTHS ENDED JUNE 2010:
External revenue:
Cigarettes		$	537,317,934		$	—		$	—		$	537,317,934
Confectionery		48,472,133			—			—			48,472,133
Health food		—			27,639,474			—			27,639,474
Tobacco, food service & other		128,073,066			—			—			128,073,066
Total external revenue		713,863,133			27,639,474			—			741,502,607
Depreciation		808,338			231,618			3,230			1,043,186
Amortization		200,121			—			—			200,121
Operating income (loss)		12,354,842			2,922,249			(4,437,471		)	10,839,620
Interest expense		366,547			351,612			426,384			1,144,543
Income (loss) from continuing operations before taxes		12,010,720			2,601,688			(4,848,147		)	9,764,261
Total assets		88,755,030			12,238,486			1,019,791			102,013,307
Capital expenditures		740,175			683,737			—			1,423,912

 

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