AMCON DISTRIBUTING CO - Quarter Report: 2012 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, 2012

 

OR

 

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

 

For the transition period from             to             

 

Commission File Number 1-15589

 

 

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

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

 

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

 

 

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

 

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

 

 

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, 2012 (unaudited) and September 30, 2011	3
Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2012 and 2011	4
Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2012 and 2011	5
Notes to condensed consolidated unaudited financial statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	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. Mine Safety Disclosures	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

June 30, 2012 and September 30, 2011

 

		June 2012			September 2011
		(Unaudited)
ASSETS
Current assets:
Cash		$	568,960		$	1,389,665
Accounts receivable, less allowance for doubtful accounts of $1.2 million at both June 2012 and September 2011		34,032,935			32,963,693
Inventories, net		49,381,171			38,447,982
Deferred income taxes		1,784,114			1,707,889
Prepaid and other current assets		4,976,295			6,073,536
Total current assets		90,743,475			80,582,765
Property and equipment, net		13,128,075			13,713,238
Goodwill		6,349,827			6,349,827
Other intangible assets, net		5,277,225			5,550,978
Other assets		1,289,963			1,238,825
		$	116,788,565		$	107,435,633
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,060,295		$	18,439,446
Accrued expenses		6,660,965			7,153,672
Accrued wages, salaries and bonuses		2,979,030			2,460,558
Income taxes payable		303,998			2,100,180
Current maturities of long-term debt		1,185,647			1,384,625
Total current liabilities		27,189,935			31,538,481
Credit facility		30,080,482			20,771,613
Deferred income taxes		3,842,164			2,743,238
Long-term debt, less current maturities		5,374,586			6,194,195
Other long-term liabilities		338,197			429,513
Series A cumulative, convertible preferred stock, $.01 par value 100,000 shares authorized and issued, and a total liquidation preference of $2.5 million at both June 2012 and September 2011		2,500,000			2,500,000
Series B cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized, 62,000 shares outstanding and a total liquidation preference of $1.6 million at both June 2012 and September 2011		1,550,000			1,550,000
Shareholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 162,000 shares outstanding and issued in Series A and B referred to above		—			—
Common stock, $.01 par value, 3,000,000 shares authorized, 608,271 shares outstanding at June 2012 and 609,320 shares outstanding at September 2011		6,252			6,093
Additional paid-in capital		10,910,595			9,981,055
Retained earnings		35,914,354			31,721,445
Treasury stock, 17,000 shares at cost		(918,000		)	—
Total shareholders’ equity		45,913,201			41,708,593
		$	116,788,565		$	107,435,633

 

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, 2012 and 2011

 

		For the three months ended June						For the nine months ended June
		2012			2011			2012			2011
Sales (including excise taxes of $96.1 million and $85.9 million, and $272.7 million and $238.1 million, respectively)		$	307,112,774		$	263,828,199		$	866,505,090		$	725,388,399
Cost of sales		287,211,769			245,610,146			808,750,009			673,193,512
Gross profit		19,901,005			18,218,053			57,755,081			52,194,887
Selling, general and administrative expenses		15,845,201			13,781,556			47,096,958			40,378,569
Depreciation and amortization		552,888			519,099			1,780,309			1,523,815
		16,398,089			14,300,655			48,877,267			41,902,384
Operating income		3,502,916			3,917,398			8,877,814			10,292,503
Other expense (income):
Interest expense		361,756			372,525			1,105,707			1,020,980
Other (income), net		(47,841		)	(73,878		)	(292,979		)	(141,970		)
		313,915			298,647			812,728			879,010
Income from operations before income tax		3,189,001			3,618,751			8,065,086			9,413,493
Income tax expense		1,343,000			1,791,000			3,316,000			4,169,000
Net income		1,846,001			1,827,751			4,749,086			5,244,493
Preferred stock dividend requirements		(66,907		)	(70,649		)	(201,454		)	(218,755		)
Net income available to common shareholders		$	1,779,094		$	1,757,102		$	4,547,632		$	5,025,738
Basic earnings per share available to common shareholders:		$	2.92		$	2.93		$	7.38		$	8.53
Diluted earnings per share available to common shareholders:		$	2.37		$	2.36		$	6.06		$	6.81
Basic weighted average shares outstanding		608,271			599,281			615,913			589,084
Diluted weighted average shares outstanding		779,106			775,416			783,987			769,870

 

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, 2012 and 2011

 

		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,749,086		$	5,244,493
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,496,868			1,268,397
Amortization		283,441			255,418
Gain on sale of property and equipment		(28,606		)	(37,177		)
Equity-based compensation		930,593			1,740,969
Net excess tax benefit on equity-based awards		—			(125,904		)
Deferred income taxes		1,022,701			1,521,683
Provision (recoveries) for losses on doubtful accounts		75,757			(768,000		)
Provision for losses on inventory obsolescence		98,789			104,871
Other		(6,034		)	(6,033		)
Changes in assets and liabilities:
Accounts receivable		(1,144,999		)	3,044,399
Inventories		(11,031,978		)	(20,191,024		)
Prepaid and other current assets		1,097,241			(3,444,459		)
Other assets		(51,138		)	(186,546		)
Accounts payable		(2,396,748		)	2,598,310
Accrued expenses and accrued wages, salaries and bonuses		(19,827		)	(824,500		)
Income tax payable		(1,796,182		)	(1,729,818		)
Net cash flows from operating activities		(6,721,036		)	(11,534,921		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(914,486		)	(1,641,035		)
Proceeds from sales of property and equipment		48,984			64,375
Acquisition		—			(13,368,057		)
Net cash flows from investing activities		(865,502		)	(14,944,717		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements		9,308,869			28,533,322
Principal payments on long-term debt		(1,018,587		)	(684,108		)
Repurchase of common stock		(918,000		)	—
Net excess tax benefit on equity-based awards		—			125,904
Dividends paid on convertible preferred stock		(201,454		)	(218,755		)
Dividends on common stock		(354,723		)	(325,377		)
Proceeds from exercise of stock options		1,180			22,391
Withholdings on the exercise of equity-based awards		(51,452		)	—
Net cash flows from financing activities		6,765,833			27,453,377
Net change in cash		(820,705		)	973,739
Cash, beginning of period		1,389,665			356,735
Cash, end of period		$	568,960		$	1,330,474

 

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

 

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		2012			2011
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	1,094,086		$	994,280
Cash paid during the period for income taxes		4,089,482			4,377,134
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		28,282			33,233
Issuance of common stock in connection with the vesting and exercise of equity based awards		950,562			—
Conversion by holders of Series B Convertible Preferred Stock to common stock		—			450,000
Business acquisition (see Note 2):
Accounts receivable		—			8,881,428
Inventory		—			4,571,629
Property and equipment		—			1,795,859
Prepaid assets		—			35,000
Fair value of non-competition agreement		—			500,000
Customer relationships intangible assets		—			500,000
Goodwill		—			200,659
Accrued expenses		—			(120,000		)
Note payable		—			(2,552,090		)
Amount due under non-competition agreement		—			(444,428		)

 

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. Additionally, our Wholesale Segment provides programs, services and technology to assist our customers in managing their business and profitability.
·	Our retail health food segment (“Retail Segment”) operates fourteen health food retail stores located throughout the Midwest and Florida.

 

WHOLESALE SEGMENT

 

Our wholesale segment is one of the largest wholesale distributors in the United States serving approximately 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. We also provide consultative services in the areas of marketing, merchandising, inventory optimization, and information systems which are designed to enhance the ability of our customers to compete and maximize their profitability. Convenience stores represent our largest customer category. In October 2011, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

 

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 601,000 square feet of permanent floor space. Our principal suppliers include Philip Morris USA, RJ Reynolds, Commonwealth Brands, Lorillard, Proctor & Gamble, Hershey, Mars, and Kraft. We also market private label lines of snuff, water, candy products, batteries, film, and other products. We do not maintain any long-term purchase contracts with these suppliers.

 

RETAIL SEGMENT

 

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

 

FINANCIAL STATEMENTS

 

The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein, such as adjustments consisting of normal recurring items. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended June 30, 2012 and June 30, 2011 have been referred to throughout this quarterly report as Q3 2012 and Q3 2011, respectively. The fiscal balance sheet dates as of June 30, 2012, June 30, 2011, and September 30, 2011 have been referred to as June 2012, June 2011, and September 2011, respectively.

 

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2. ACQUISITION

 

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

 

The following table summarizes the consideration paid for the acquired assets and their related acquisition date fair values. The fair value of the assets acquired have been measured in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations.” In valuing identifiable intangible assets, the Company has estimated the fair value using the discounted cash flows methodology. The acquired assets are reported as a component of our Wholesale Segment.

 

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

 

Recognized amounts of identifiable assets acquired

 

		Amount (in millions)			Weighted Average Amortization  Period
Accounts receivable		$	8.9		—
Inventory		4.6			—
Property and equipment		1.8			5 years
Identifiable intangible assets:
Non-competition agreement		0.5			5 years
Customer relationships		0.5			8 years
Liabilities		(0.1		)
Total identifiable net assets		16.2
Goodwill		0.2
Total identifiable assets and goodwill		$	16.4

 

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

 

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

 

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		Three months ended						Nine months ended
		June						June
(In millions)		2012			2011			2012			2011
Revenue — Actual results		$	307.1		$	263.8		$	866.5		$	725.4
Revenue — Supplemental pro forma results		$	307.1		$	299.4		$	866.5		$	859.1
Net Income — Actual results		$	1.8		$	1.8		$	4.8		$	5.2
Net Income — Supplemental pro forma results		$	1.8		$	1.9		$	4.8		$	5.1

 

3. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at June 2012 as identified in the following table:

 

		Series A			Series B
Date of issuance:		June 17, 2004			October 8, 2004
Optionally redeemable beginning		June 18, 2006			October 9, 2006
Par value (gross proceeds):		$	2,500,000		$	1,550,000
Number of shares:		100,000			62,000
Liquidation preference per share:		$	25.00		$	25.00
Conversion price per share:		$	30.31		$	24.65
Number of common shares in which to be converted:		82,481			62,880
Dividend rate:		6.785		%	6.37		%

 

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

 

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

 

4. INVENTORIES

 

Inventories consisted of finished goods at June 2012 and September 2011 and are stated at the lower of cost, determined on a First-in, First-out (“FIFO”) basis, or market. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $1.0 million and $0.9 million at June 2012 and September 2011, respectively. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

 

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5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

		June 2012			September 2011
Wholesale Segment		$	4,436,950		$	4,436,950
Retail Segment		1,912,877			1,912,877
		$	6,349,827		$	6,349,827

 

Other intangible assets of the Company consisted of the following:

 

		June 2012			September 2011
Trademarks and tradenames		$	3,373,269		$	3,373,269
Non-competition agreement (less accumulated amortization of $0.1 million at both June 2012 and September 2011)		391,666			466,667
Customer relationships (less accumulated amortization of $0.6 million and $0.4 million at June 2012 and September 2011, respectively)		1,512,290			1,711,042
		$	5,277,225		$	5,550,978

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At June 2012, identifiable intangible assets considered to have finite lives were represented by customer relationships and the value of a non-competition agreement acquired as part of acquisitions. The customer relationships are being amortized over eight years and the value of the non-competition agreement is being amortized over five years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted.  Amortization expense related to these assets was $0.1 million and $0.3 million for the three and nine month periods ended June 2012, and $0.1 million and $0.2 million for the three and nine month periods ended June 2011.

 

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

 

Customer relationships		June 2012
Fiscal 2012 (1)		$	91,247
Fiscal 2013		365,000
Fiscal 2014		365,000
Fiscal 2015		365,000
Fiscal 2016		331,667
Thereafter		386,042
		$	1,903,956

 

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

 

6. DIVIDENDS:

 

The Company paid cash dividends on its common stock and convertible preferred stock issuances totaling $0.2 million and $0.6 million for the three and nine month periods ended June 2012, respectively, and $0.2 million and $0.5 million for the three and nine month periods ended June 2011, respectively.

 

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7. EARNINGS PER SHARE

 

Basic earnings per share available to common shareholders is calculated by dividing net income less preferred stock dividend requirements by the weighted average common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations less preferred stock dividend requirements (when anti-dilutive) by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method.

 

		For the three months ended June
		2012						2011
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		608,271			608,271			599,281			599,281
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			170,835			—			176,135
Weighted average number of shares outstanding		608,271			779,106			599,281			775,416
Income from operations		$	1,846,001		$	1,846,001		$	1,827,751		$	1,827,751
Deduct: convertible preferred stock dividends (2)		(66,907		)	—			(70,649		)	—
Net income available to common shareholders		1,779,094			1,846,001			1,757,102			1,827,751
Net earnings per share available to common shareholders		$	2.92		$	2.37		$	2.93		$	2.36

 

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

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

 

		For the nine months ended June
		2012						2011
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		615,913			615,913			589,084			589,084
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			168,074			—			180,786
Weighted average number of shares outstanding		615,913			783,987			589,084			769,870
Income from operations		$	4,749,086		$	4,749,086		$	5,244,493		$	5,244,493
Deduct: convertible preferred stock dividends (2)		(201,454		)	—			(218,755		)	—
		4,547,632			4,749,086			5,025,738			5,244,493
Net earnings per share available to common shareholders		$	7.38		$	6.06		$	8.53		$	6.81

 

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

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

 

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8. DEBT

 

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

 

The Facility included the following significant terms at June 2012:

 

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

 

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

 

·             A provision providing an additional $5.0 million of credit advances for certain inventory purchases.

 

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

 

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

 

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

 

·             Lending limits subject to accounts receivable and inventory limitations.

 

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

 

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

 

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

 

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

 

Cross Default and Co-Terminus Provisions

 

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

 

Other

 

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

 

Off-Balance Sheet Arrangements

 

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

 

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9. EQUITY-BASED INCENTIVE AWARDS

 

Omnibus Plan

 

The Company has an Omnibus Incentive Plan (“the Omnibus Plan”) which provides for equity incentives to employees. The Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plan permits the issuance of up to 150,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plan is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock.  At June 2012, awards with respect to a total of 109,800 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plan and awards with respect to another 40,200 shares may be awarded under the plan.

 

Stock Options

 

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

 

		Stock Option Pricing Assumptions
Risk-free interest rate		2.39	%
Dividend yield		1.10	%
Expected volatility		27.90	%
Expected life in years		6

 

The stock options issued by the Company expire ten years from the grant date and include graded vesting schedules up to five years in length.  Stock options issued and outstanding at June 2012 are summarized as follows:

 

						Remaining					Exercisable
		Exercise Price		Number Outstanding		Weighted-Average Contractual Life		Weighted-Average Exercise Price			Number Exercisable		Weighted-Average Exercise Price
Fiscal 2003		$28.80		42		0.32 years		$	28.80		42		$	28.80
Fiscal 2007		$18.00		25,000		4.45 years		$	18.00		25,000		$	18.00
Fiscal 2010		$51.50		5,500		7.83 years		$	51.50		2,200		$	51.50
Fiscal 2012		$53.80 - $65.97		6,500		9.33 years		$	54.74		—		$	—
				37,042				$	29.43		27,242		$	20.72

 

The following is a summary of stock options activity for the nine months ended June 2012:

 

		Number of Shares		Weighted Average Exercise Price
Outstanding at September 2011		30,583		$	24.05
Granted		6,500		54.74
Exercised		(41	)	28.80
Forfeited/Expired		—		—
Outstanding at June 2012		37,042		$	29.43

 

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Restricted Stock Units

 

Restricted stock units issued and outstanding at June 2012 are as follows:

 

		Restricted Stock Units (1)			Restricted Stock Units (2)			Restricted Stock Units (3)
Date of award:		November 22, 2010			November 22, 2010			October 26, 2011
Original number of awards issued:		38,400			12,000			15,900
Service period:		24 months			36 months			36 months
Estimated fair value of award at grant date:		$	2,765,000		$	864,000		$	855,000
Awards outstanding at June 2012			12,800			8,000			15,900
Fair value of non-vested awards at June 2012:		$	719,000		$	450,000		$	894,000

 

(1)	25,600 of the restricted stock unit awards were vested as of Q3 2012. The remaining 12,800 restricted stock units will vest on October 26, 2012.
(2)	4,000 of the restricted stock units were vested as of Q3 2012. The remaining 8,000 restricted stock units will vest in equal amounts (4,000 per year) on November 22, 2012 and November 22, 2013.
(3)	The 15,900 restricted stock units will vest in equal amounts (5,300 per year) on October 25, 2012, October 25, 2013 and October 25, 2014.

 

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

 

The restricted stock units provide that the recipients can elect, at their option, to receive either common stock in the Company, or a cash settlement based upon the closing price of the Company’s shares, at the time of vesting.  Based on these award provisions, the compensation expense recorded in the Company’s Condensed Statement of Operations reflects the amortization of these awards over their respective service life.  The awards and their related compensation and amortization expense are also adjusted to fair value at each reporting date until vested.  The following summarizes restricted stock unit activity under the Omnibus Plan for the nine months ended June 2012:

 

		Number of Shares		Weighted Average Fair Value
Nonvested restricted stock units at September 2011		37,600		$	57.00
Granted		15,900		$	53.80
Vested		(16,800	)	$	56.58
Expired		—		$	—
Nonvested restricted stock units at June 2012		36,700		$	64.40

 

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

 

For the three and nine months ended June 2012, net income before income taxes included compensation expense of $0.3 million and $0.9 million, respectively, related to the amortization of all equity-based compensation awards. Total unamortized compensation expense for these awards at June 2012 was approximately $1.4 million.

 

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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 company for both segments. 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 2012:
External revenue:
Cigarettes		$	223,189,406		$	—		$	—		$	223,189,406
Confectionery		20,433,115			—			—			20,433,115
Health food		—			9,499,012			—			9,499,012
Tobacco, food service & other		53,991,241			—			—			53,991,241
Total external revenue		297,613,762			9,499,012			—			307,112,774
Depreciation		363,557			97,142			938			461,637
Amortization		91,251			—			—			91,251
Operating income (loss)		4,073,549			757,482			(1,328,115		)	3,502,916
Interest expense		131,983			67,437			162,336			361,756
Income (loss) from operations before taxes		3,953,942			695,509			(1,460,450		)	3,189,001
Total assets		102,837,606			12,957,856			993,103			116,788,565
Capital expenditures		182,156			24,606			—			206,762
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 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

 

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		Wholesale Segment			Retail Segment			Other			Consolidated
NINE MONTHS ENDED JUNE 2012:
External revenue:
Cigarettes		$	628,218,679		$	—		$	—		$	628,218,679
Confectionery		55,792,444			—			—			55,792,444
Health food		—			28,175,654			—			28,175,654
Tobacco, food service & other		154,318,313			—			—			154,318,313
Total external revenue		838,329,436			28,175,654			—			866,505,090
Depreciation		1,193,834			300,222			2,812			1,496,868
Amortization		283,441			—			—			283,441
Operating income (loss)		10,402,816			2,295,893			(3,820,895		)	8,877,814
Interest expense		401,043			225,849			478,815			1,105,707
Income (loss) from operations before taxes		10,108,749			2,085,526			(4,129,189		)	8,065,086
Total assets		102,837,606			12,957,856			993,103			116,788,565
Capital expenditures		765,508			148,978			—			914,486
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 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

 

11. COMMON STOCK REPURCHASE

 

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

 

12. SUBSEQUENT EVENT

 

On July 17, 2012, the Company refinanced two existing real estate notes payable due to BMO totaling approximately $4.8 million into a single note payable. The new note payable bears a fixed interest rate of 2.99% and requires monthly installments of principal and interest totaling approximately $0.5 million on an annual basis through June 2017, with the remainder due July 2017. The note payable is secured by the Company’s Quincy, IL and Rapid City, SD distribution facilities.

 

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