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

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 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 o

 

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

 

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

 

 

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 590,232 shares of its $.01 par value common stock outstanding as of April 18, 2011.

 

 

Table of Contents

 

Form 10-Q

2nd Quarter

 

INDEX

 

	PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets at March 31, 2011 (unaudited) and September 30, 2010	3
Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2011 and 2010	4
Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 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	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. (Removed and Reserved)	25
Item 5. Other Information	25
Item 6. Exhibits	26

 

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PART I — FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2011 and September 30, 2010

 

		March  2011			September  2010
		(Unaudited)
ASSETS
Current assets:
Cash		$	398,982		$	356,735
Accounts receivable, less allowance for doubtful accounts of $0.8 million and $1.6 million at March 2011 and September 2010, respectively		24,800,880			27,903,689
Inventories, net		33,939,682			35,005,957
Deferred income taxes		1,518,492			1,905,974
Prepaid and other current assets		4,154,742			3,013,485
Total current assets		64,812,778			68,185,840
Property and equipment, net		11,919,797			11,855,669
Goodwill		6,149,168			6,149,168
Other intangible assets, net		4,706,394			4,807,644
Other assets		1,177,614			1,069,050
		$	88,765,751		$	92,067,371
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,307,547		$	16,656,257
Accrued expenses		6,569,164			6,007,900
Accrued wages, salaries and bonuses		2,080,139			3,161,817
Income taxes payable		531,884			2,366,667
Current maturities of long-term debt		745,177			893,291
Total current liabilities		26,233,911			29,085,932
Credit facility		14,980,497			18,816,709
Deferred income taxes		1,145,250			1,075,861
Long-term debt, less current maturities		4,902,732			5,226,586
Other long-term liabilities		71,061			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 and issued, liquidation preference $25.00 per share		2,000,000			2,000,000
Shareholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 180,000 shares outstanding and issued in Series A and B referred to above		—			—
Common stock, $.01 par value, 3,000,000 shares authorized, 590,232 shares outstanding at March 2011 and 577,432 shares outstanding at September 2010		5,902			5,774
Additional paid-in capital		9,482,317			8,376,640
Retained earnings		27,444,081			24,392,390
Total shareholders’ equity		36,932,300			32,774,804
		$	88,765,751		$	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 six months ended March 31, 2011 and 2010

 

		For the three months  ended March						For the six months  ended March
		2011			2010			2011			2010
Sales (including excise taxes of $70.8 million and $76.9 million, and $152.1 million and $158.4 million, respectively)		$	216,603,039		$	230,499,129		$	461,560,200		$	474,440,167
Cost of sales		200,233,927			213,558,955			427,583,366			440,271,980
Gross profit		16,369,112			16,940,174			33,976,834			34,168,187
Selling, general and administrative expenses		12,909,642			13,365,802			26,597,013			27,144,541
Depreciation and amortization		507,133			415,572			1,004,716			802,841
		13,416,775			13,781,374			27,601,729			27,947,382
Operating income		2,952,337			3,158,800			6,375,105			6,220,805
Other expense (income):
Interest expense		263,872			368,425			648,455			773,670
Other (income), net		(45,211		)	(23,046		)	(68,092		)	(36,426		)
		218,661			345,379			580,363			737,244
Income from operations before income tax		2,733,676			2,813,421			5,794,742			5,483,561
Income tax expense		1,149,000			1,022,000			2,378,000			1,963,000
Net income		1,584,676			1,791,421			3,416,742			3,520,561
Preferred stock dividend requirements		(73,239		)	(73,239		)	(148,106		)	(148,106		)
Net income available to common shareholders		$	1,511,437		$	1,718,182		$	3,268,636		$	3,372,455
Basic earnings per share available to common shareholders:		$	2.56		$	3.05		$	5.60		$	6.00
Diluted earnings per share available to common shareholders:		$	2.05		$	2.40		$	4.47		$	4.72
Basic weighted average shares outstanding		589,454			564,216			583,986			562,145
Diluted weighted average shares outstanding		771,738			746,873			765,067			745,773

 

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

 

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the six months ended March 31, 2011 and 2010

 

		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,416,742		$	3,520,561
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		845,120			678,860
Amortization		159,596			123,981
Gain on sale of property and equipment		(8,722		)	(16,935		)
Stock based compensation		1,514,567			267,464
Net excess tax benefit on equity-based awards		(125,904		)	(130,126		)
Deferred income taxes		456,871			(34,196		)
Provision for (recoveries) losses on doubtful accounts		(843,000		)	178,367
Provision for losses on inventory obsolescence		26,538			16,393
Other		(4,022		)	—
Changes in assets and liabilities:
Accounts receivable		3,945,809			491,271
Inventories		1,039,737			1,125,441
Prepaid and other current assets		(1,141,257		)	(519,415		)
Other assets		(108,564		)	(47,087		)
Accounts payable		(319,457		)	1,144,665
Accrued expenses and accrued wages, salaries and bonuses		(1,625,822		)	(1,878,536		)
Income tax payable		(1,708,879		)	(2,977,213		)
Net cash flows from operating activities		5,519,353			1,943,495
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(957,254		)	(1,102,929		)
Proceeds from sales of property and equipment		27,475			42,905
Acquisition		—			(3,099,836		)
Net cash flows from investing activities		(929,779		)	(4,159,860		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on bank credit agreements		(3,836,212		)	3,025,076
Principal payments on long-term debt		(471,968		)	(433,443		)
Proceeds from exercise of stock options		—			68,965
Net excess tax benefit on equity-based awards		125,904			130,126
Dividends paid on convertible preferred stock		(148,106		)	(148,106		)
Dividends on common stock		(216,945		)	(206,759		)
Net cash flows from financing activities		(4,547,327		)	2,435,859
Net change in cash		42,247			219,494
Cash, beginning of period		356,735			309,914
Cash, end of period		$	398,982		$	529,408

 

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		$	668,389		$	760,727
Cash paid during the period for income taxes		3,630,007			4,974,408
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		8,953			85,939
Business acquisition:
Inventory		—			1,981,498
Property and equipment		—			122,978
Customer relationships intangible asset		—			1,620,000
Goodwill		—			300,360
Note payable		—			500,000
Contingent consideration		—			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, and Southern 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 4,300 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 March 31, 2011 and March 31, 2010 have been referred to throughout this quarterly report as Q2 2011 and Q2 2010, respectively. The fiscal balance sheet dates as of March 31, 2011, March 31, 2010, and September 30, 2010 have been referred to as March 2011, March 2010, and September 2010, respectively.

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

2. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at March 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		$	2,000,000
Number of shares:		100,000			80,000
Liquidation preference per share:		$	25.00		$	25.00
Conversion price per share:		$	30.31		$	24.65
Number of common shares in which to be converted:		82,481			81,136
Dividend rate:		6.785		%	6.37		%

 

The Series A Convertible Preferred Stock (“Series A”) and Series B Convertible Preferred Stock (“Series B”), (collectively, the “Preferred Stock”), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted multiplied by a fraction 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 who, under certain conditions, has a right to nominate members of our Board of Directors. The Series B Preferred Stock is owned by an institutional investor which has the right to nominate one member of our Board of Directors, pursuant to the voting rights in the Certificate of Designation creating the Series B Preferred Stock. Christopher H. Atayan was nominated to this seat in 2004.

 

3. INVENTORIES

 

Inventories consisted of finished goods at March 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 $0.8 million at both March 2011 and 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.

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

		March  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

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

Other intangible assets of the Company consisted of the following:

 

		March 2011			September 2010
Trademarks and tradenames		$	3,373,269		$	3,373,269
Customer relationships (less accumulated amortization of $286,875 and $185,625 at March 2011 and September 2010, respectively)		1,333,125			1,434,375
		$	4,706,394		$	4,807,644

 

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 March 2011, intangible assets considered to have finite lives represented acquired customer relationships. These customer relationships are being amortized over eight years.  Amortization expense related to these assets totaled $0.1 million in each of the six month periods ended March 2011 and March 2010. In addition, these relationships are evaluated for accelerated attrition or amortization adjustments if warranted. Amortization expense for customer relationships for the periods subsequent to March 2011 is as follows:

 

Customer relationships		March  2011
Fiscal 2011 (1)		$	101,250
Fiscal 2012		202,500
Fiscal 2013		202,500
Fiscal 2014		202,500
Fiscal 2015		202,500
Thereafter		421,875
		$	1,333,125

 

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

 

5. DIVIDENDS:

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.4 million for the three and six months ended, respectively, at both March 2011 and March 2010.

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

6. 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 March 2011 or March 2010.

 

		For the three months ended March
		2011						2010
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		589,454			589,454			564,216			564,216
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			182,284			—			182,657
Weighted average number of shares outstanding		589,454			771,738			564,216			746,873
Income from operations		$	1,584,676		$	1,584,676		$	1,791,421		$	1,791,421
Deduct: convertible preferred stock dividends (2)		(73,239		)	—			(73,239		)	—
Net income available to common shareholders		1,511,437			1,584,676			1,718,182			1,791,421
Net earnings per share available to common shareholders		$	2.56		$	2.05		$	3.05		$	2.40

 

(1)   Diluted earnings per share calculation includes all stock options, convertible preferred stock, and restricted stock deemed to be dilutive.

 

(2)   Diluted earnings per share calculation excludes dividends for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company.

 

		For the six months ended March
		2011						2010
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		583,986			583,986			562,145			562,145
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			181,081			—			183,628
Weighted average number of shares outstanding		583,986			765,067			562,145			745,773
Income from operations		$	3,416,742		$	3,416,742		$	3,520,561		$	3,520,561
Deduct: convertible preferred stock dividends (2)		(148,106		)	—			(148,106		)	—
		3,268,636			3,416,742			3,372,455			3,520,561
Net earnings per share available to common shareholders		$	5.60		$	4.47		$	6.00		$	4.72

 

(1)   Diluted earnings per share calculation includes all stock options, convertible preferred stock, and restricted stock deemed to be dilutive.

 

(2)   Diluted earnings per share calculation excludes dividends for convertible preferred stock deemed to be dilutive, as those amounts are assumed to have been converted to common stock of the Company.

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

7. DEBT

 

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

 

Significant Terms

 

·    A January 1, 2012 maturity date and a $55.0 million revolving credit limit.

 

·    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.

 

·    The Facility bears interest at either the bank’s prime rate or at LIBOR plus 250 basis points, at the election of the Company.

 

·    The Facility provides for an additional $5.0 million of credit advances available for certain inventory purchases. These advances bear interest at the bank’s prime rate plus one-quarter of one-percent (1/4%) per annum and are payable within 45 days of each advance.

 

·    Lending limits subject to accounts receivable and inventory limitations.

 

·    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 $0.72 per share on an annual basis.

 

The Facility includes a financial covenant which requires the Company to maintain a 1.0 to 1.0 fixed charge coverage ratio of as measured by the previous twelve month period then ended. The Company was in compliance with this covenant at March 2011.

 

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 March 31 was $48.0 million of which $15.0 million was outstanding leaving $33.0 million available.

 

At March 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 3.01% at March 2011. At March 2011, the Company had $5.6 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 March 2011.

 

As discussed in Note 10, on April 18, 2011 the Company renewed and extended its credit facility through April 2014.

 

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 March 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.

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

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.

 

8. 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 March 2011, a total of 87,900 shares of common stock had been issued pursuant to the Omnibus Plan and another 62,100 shares may be issued 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 annually 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:

 

		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 to management employees at March 2011 are summarized as follows:

 

Date		Exercise Price			Number of Options Outstanding		Number Exercisable
Fiscal 2003		$	28.80		84		84
Fiscal 2007		$	18.00		25,000		25,000
Fiscal 2010		$	51.50		5,500		—
					30,584		25,084

 

Stock options issued and outstanding to the Company’s outside directors at March 2011 are summarized as follows:

 

Date		Exercise Price			Number of Options Outstanding		Number Exercisable
Fiscal 2002		$	26.94		834		834

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

The following summarizes all stock options issued and outstanding at March 2011:

 

							Remaining					Exercisable
		Exercise Price			Number Outstanding		Weighted-Average Contractual Life		Weighted-Average Exercise Price			Number Exercisable		Weighted-Average Exercise Price
2002 Options		$	26.94		834		1.37 years		$	26.94		834		$	26.94
2003 Options		$	28.80		84		1.57 years		$	28.80		84		$	28.80
2007 Options		$	18.00		25,000		5.70 years		$	18.00		25,000		$	18.00
2010 Options		$	51.50		5,500		9.08 years		$	51.50		—		—
					31,418				$	24.13		25,918		$	18.32

 

The following is a summary of stock options activity for the six months ended March 2011:

 

		Number of Shares		Weighted Average Exercise Price
Outstanding at September 2010		31,918		$	24.56
Granted		—		—
Exercised		—		—
Forfeited/Expired		(500	)	$	51.50
Outstanding at March 2011		31,418		$	24.13

 

At March 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 49 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 March 2011:		$	2,053,000		$	962,000

 

(1)   12,800 of the restricted stock unit awards were vested at Q2 2011. The remaining 25,600 restricted stock units will vest in equal amounts (12,800 per year) on October 26, 2011 and October 26, 2012.

 

(2)   The 12,000 restricted stock units will vest in equal amounts (4,000 per year) on November 22, 2011, November 22 2012, and November 22, 2013.

 

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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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

For the three and six months ended March 2011, net income before income taxes included compensation expense of $0.3 million and $1.5 million, respectively, related to the amortization of the Company’s restricted stock unit awards.  Total unamortized compensation expense for these awards based on the March 2011 closing price was approximately $2.5 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 23 months (the weighted-average period). The following summarizes restricted stock unit activity under the Omnibus Plan for the six months ended March 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 March 2011		37,600		$	80.20

 

9. BUSINESS SEGMENTS

 

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

 

		Wholesale Segment			Retail Segment			Other			Consolidated
THREE MONTHS ENDED MARCH 2011:
External revenue:
Cigarettes		$	154,090,343		$	—		$	—		$	154,090,343
Confectionery		14,258,544			—			—			14,258,544
Health food		—			9,908,134			—			9,908,134
Tobacco, food service & other		38,346,018			—			—			38,346,018
Total external revenue		206,694,905			9,908,134			—			216,603,039
Depreciation		318,398			107,219			938			426,555
Amortization		80,578			—			—			80,578
Operating income (loss)		3,153,065			1,116,996			(1,317,724		)	2,952,337
Interest expense		115,095			96,438			52,339			263,872
Income (loss) from continuing operations before taxes		3,054,200			1,026,304			(1,346,828		)	2,733,676
Total assets		74,636,163			13,098,611			1,030,977			88,765,751
Capital expenditures		602,351			61,866			—			664,217
THREE MONTHS ENDED MARCH 2010:
External revenue:
Cigarettes		$	166,914,751		$	—		$	—		$	166,914,751
Confectionery		14,887,515			—			—			14,887,515
Health food		—			9,492,904			—			9,492,904
Tobacco, food service & other		39,203,959			—			—			39,203,959
Total external revenue		221,006,225			9,492,904			—			230,499,129
Depreciation		271,131			68,483			1,147			340,761
Amortization		74,811			—			—			74,811
Operating income (loss)		3,535,284			1,093,182			(1,469,666		)	3,158,800
Interest expense		124,994			115,666			127,765			368,425
Income (loss) from continuing operations before taxes		3,422,768			987,668			(1,597,015		)	2,813,421
Total assets		78,290,787			12,198,955			1,034,096			91,523,838
Capital expenditures		166,270			340,048			—			506,318

 

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Notes to Condensed Consolidated Unaudited Financial Statements — (Continued)

 

		Wholesale  Segment			Retail  Segment			Other			Consolidated
SIX MONTHS ENDED MARCH 2011:
External revenue:
Cigarettes		$	329,862,580		$	—		$	—		$	329,862,580
Confectionery		30,127,596			—			—			30,127,596
Health food		—			19,000,583			—			19,000,583
Tobacco, food service & other		82,569,441			—			—			82,569,441
Total external revenue		442,559,617			19,000,583			—			461,560,200
Depreciation		628,630			214,615			1,875			845,120
Amortization		159,596			—			—			159,596
Operating income (loss)		8,090,052			1,909,085			(3,624,032		)	6,375,105
Interest expense		226,164			199,988			222,303			648,455
Income (loss) from continuing operations before taxes		7,882,840			1,720,389			(3,808,487		)	5,794,742
Total assets		74,636,163			13,098,611			1,030,977			88,765,751
Capital expenditures		850,098			107,156			—			957,254
SIX MONTHS ENDED MARCH 2010:
External revenue:
Cigarettes		$	344,498,796		$	—		$	—		$	344,498,796
Confectionery		30,195,336			—			—			30,195,336
Health food		—			18,419,393			—			18,419,393
Tobacco, food service & other		81,326,642			—			—			81,326,642
Total external revenue		456,020,774			18,419,393			—			474,440,167
Depreciation		537,711			138,855			2,294			678,860
Amortization		123,981			—			—			123,981
Operating income (loss)		7,533,896			2,010,489			(3,323,580		)	6,220,805
Interest expense		247,191			240,290			286,189			773,670
Income (loss) from continuing operations before taxes		7,302,417			1,790,498			(3,609,354		)	5,483,561
Total assets		78,290,787			12,198,955			1,034,096			91,523,838
Capital expenditures		603,584			499,345			—			1,102,929

 

10. SUBSEQUENT EVENTS

 

On April 18, 2011, the Company executed a Second Amended and Restated Revolving Line of Credit Agreement with Bank of America. This new credit agreement replaces the Company’s existing Facility with Bank of America which was scheduled to mature in January 2012. The significant provisions of the new credit agreement include the following:

 

·    April 2014 maturity date and a $55.0 million revolving credit limit.

 

·    Includes a loan accordion allowing the Company to increase the size of the credit facility agreement up to $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-quarter 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 maximum loan amount.

 

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