AMCON DISTRIBUTING CO - Quarter Report: 2012 March (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 March 31, 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 April 16, 2012.

 

 

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, 2012 (unaudited) and September 30, 2011	3
Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2012 and 2011	4
Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 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	25
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	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Mine Safety Disclosures	26
Item 5. Other Information	26
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, 2012 and September 30, 2011

 

		March 2012			September 2011
		(Unaudited)
ASSETS
Current assets:
Cash		$	851,114		$	1,389,665
Accounts receivable, less allowance for doubtful accounts of $1.3 million and $1.2 million at March 2012 and September 2011, respectively		31,985,614			32,963,693
Inventories, net		34,794,458			38,447,982
Deferred income taxes		1,603,345			1,707,889
Prepaid and other current assets		7,382,190			6,073,536
Total current assets		76,616,721			80,582,765
Property and equipment, net		13,361,627			13,713,238
Goodwill		6,349,827			6,349,827
Other intangible assets, net		5,368,476			5,550,978
Other assets		1,287,249			1,238,825
		$	102,983,900		$	107,435,633
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,371,894		$	18,439,446
Accrued expenses		5,951,438			7,153,672
Accrued wages, salaries and bonuses		1,867,615			2,460,558
Income taxes payable		831,785			2,100,180
Current maturities of long-term debt		1,917,753			1,384,625
Total current liabilities		26,940,485			31,538,481
Credit facility		19,306,967			20,771,613
Deferred income taxes		3,092,683			2,743,238
Long-term debt, less current maturities		4,928,627			6,194,195
Other long-term liabilities		425,490			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 March 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 March 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 March 2012 and 609,320 shares outstanding at September 2011		6,252			6,093
Additional paid-in capital		10,900,041			9,981,055
Retained earnings		34,251,355			31,721,445
Treasury stock, 17,000 shares at cost		(918,000		)	—
Total shareholders’ equity		44,239,648			41,708,593
		$	102,983,900		$	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 six months ended March 31, 2012 and 2011

 

		For the three months ended March						For the six months ended March
		2012			2011			2012			2011
Sales (including excise taxes of $86.1 million and $70.8 million, and $176.6 million and $152.1 million, respectively)		$	275,829,266		$	216,603,039		$	559,392,316		$	461,560,200
Cost of sales		256,612,867			200,233,927			521,538,240			427,583,366
Gross profit		19,216,399			16,369,112			37,854,076			33,976,834
Selling, general and administrative expenses		15,901,755			12,909,642			31,251,757			26,597,013
Depreciation and amortization		613,927			507,133			1,227,421			1,004,716
		16,515,682			13,416,775			32,479,178			27,601,729
Operating income		2,700,717			2,952,337			5,374,898			6,375,105
Other expense (income):
Interest expense		319,841			263,872			743,951			648,455
Other (income), net		(93,874		)	(45,211		)	(245,138		)	(68,092		)
		225,967			218,661			498,813			580,363
Income from operations before income tax		2,474,750			2,733,676			4,876,085			5,794,742
Income tax expense		1,010,000			1,149,000			1,973,000			2,378,000
Net income		1,464,750			1,584,676			2,903,085			3,416,742
Preferred stock dividend requirements		(66,906		)	(73,239		)	(134,547		)	(148,106		)
Net income available to common shareholders		$	1,397,844		$	1,511,437		$	2,768,538		$	3,268,636
Basic earnings per share available to common shareholders:		$	2.26		$	2.56		$	4.47		$	5.60
Diluted earnings per share available to common shareholders:		$	1.87		$	2.05		$	3.70		$	4.47
Basic weighted average shares outstanding		619,480			589,454			619,705			583,986
Diluted weighted average shares outstanding		784,429			771,738			785,281			765,067

 

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, 2012 and 2011

 

		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,903,085		$	3,416,742
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,035,231			845,120
Amortization		192,190			159,596
Gain on sale of property and equipment		(22,216		)	(8,722		)
Equity-based compensation		674,180			1,514,567
Net excess tax benefit on equity-based awards		—			(125,904		)
Deferred income taxes		453,989			456,871
Provision (recoveries) for losses on doubtful accounts		164,757			(843,000		)
Provision for losses on inventory obsolescence		7,827			26,538
Other		(4,023		)	(4,022		)
Changes in assets and liabilities:
Accounts receivable		813,322			3,945,809
Inventories		3,645,697			1,039,737
Prepaid and other current assets		(1,308,654		)	(1,141,257		)
Other assets		(48,424		)	(108,564		)
Accounts payable		(2,062,052		)	(319,457		)
Accrued expenses and accrued wages, salaries and bonuses		(1,509,628		)	(1,625,822		)
Income tax payable		(1,268,395		)	(1,708,879		)
Net cash flows from operating activities		3,666,886			5,519,353
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(707,724		)	(957,254		)
Proceeds from sales of property and equipment		40,820			27,475
Net cash flows from investing activities		(666,904		)	(929,779		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on bank credit agreements		(1,464,646		)	(3,836,212		)
Principal payments on long-term debt		(732,440		)	(471,968		)
Repurchase of common stock		(918,000		)	—
Net excess tax benefit on equity-based awards		—			125,904
Dividends paid on convertible preferred stock		(134,547		)	(148,106		)
Dividends on common stock		(238,628		)	(216,945		)
Proceeds from exercise of stock options		1,180			—
Withholdings on the exercise of equity-based awards		(51,452		)	—
Net cash flows from financing activities		(3,538,533		)	(4,547,327		)
Net change in cash		(538,551		)	42,247
Cash, beginning of period		1,389,665			356,735
Cash, end of period		$	851,114		$	398,982

 

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		$	770,110		$	668,389
Cash paid during the period for income taxes		2,787,407			3,630,007
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		5,185			8,953
Issuance of common stock in connection with the vesting and exercise of equity-based awards		950,562			—

 

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 foodservice 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, Quaker, and Nabisco. 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 March 31, 2012 and March 31, 2011 have been referred to throughout this quarterly report as Q2 2012 and Q2 2011, respectively. The fiscal balance sheet dates as of March 31, 2012, March 31, 2011, and September 30, 2011 have been referred to as March 2012, March 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 expected to be deductible for tax purposes.  No significant measurement adjustments related to this transaction were recorded during Q2 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						Six months ended
		March						March
(In millions)		2012			2011			2012			2011
Revenue — Actual results		$	275.8		$	216.6		$	559.4		$	461.6
Revenue — Supplemental pro forma results		$	275.8		$	267.1		$	559.4		$	559.7
Net Income — Actual results		$	1.5		$	1.6		$	2.9		$	3.4
Net Income — Supplemental pro forma results		$	1.5		$	1.5		$	2.9		$	3.2

 

3. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at March 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 March 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 $0.9 million at both March 2012 and September 2011, respectively. These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable 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:

 

		March 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:

 

		March 2012			September 2011
Trademarks and tradenames		$	3,373,269		$	3,373,269
Non-competition agreement (less accumulated amortization of $0.1 million at both March 2012 and September 2011)		416,666			466,667
Customer relationships (less accumulated amortization of $0.5 million and $0.4 million at March 2012 and September 2011, respectively)		1,578,541			1,711,042
		$	5,368,476		$	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 March 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 $0.2 million for the three and six month periods ended March 2012, and $0.1 million for both the three and six month periods ended March 2011.

 

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

 

Customer relationships		March 2012
Fiscal 2012 (1)		$	182,498
Fiscal 2013		365,000
Fiscal 2014		365,000
Fiscal 2015		365,000
Fiscal 2016		331,667
Thereafter		386,042
		$	1,995,207

 

(1)     Represents amortization for the remaining six 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 $0.4 million for the three and six month periods, respectively, in both March 2012 and March 2011.

 

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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 March
		2012						2011
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		619,480			619,480			589,454			589,454
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			164,949			—			182,284
Weighted average number of shares outstanding		619,480			784,429			589,454			771,738
Income from operations		$	1,464,750		$	1,464,750		$	1,584,676		$	1,584,676
Deduct: convertible preferred stock dividends (2)		(66,906		)	—			(73,239		)	—
Net income available to common shareholders		1,397,844			1,464,750			1,511,437			1,584,676
Net earnings per share available to common shareholders		$	2.26		$	1.87		$	2.56		$	2.05

 

(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 six months ended March
		2012						2011
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		619,705			619,705			583,986			583,986
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			165,576			—			181,081
Weighted average number of shares outstanding		619,705			785,281			583,986			765,067
Income from operations		$	2,903,085		$	2,903,085		$	3,416,742		$	3,416,742
Deduct: convertible preferred stock dividends (2)		(134,547		)	—			(148,106		)	—
		2,768,538			2, 903,085			3,268,636			3,416,742
Net earnings per share available to common shareholders		$	4.47		$	3.70		$	5.60		$	4.47

 

(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 March 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 March 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 March 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 six month period ended March 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 March 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		0.57 years		$	28.80		42		$	28.80
Fiscal 2007		$18.00		25,000		4.70 years		$	18.00		25,000		$	18.00
Fiscal 2010		$51.50		5,500		8.08 years		$	51.50		1,100		$	51.50
Fiscal 2012		$53.80 - $65.97		6,500		9.60 years		$	54.74		—		$	—
				37,042				$	29.43		26,142		$	19.43

 

The following is a summary of stock options activity for the six months ended March 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 March 2012		37,042		$	29.43

 

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Restricted Stock Units

 

During the first fiscal quarter of 2012, the Company issued 15,900 restricted stock unit awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plan.  Restricted stock units issued and outstanding at March 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
Fair value of non-vested awards at March 2012:		$	813,000		$	508,000		$	1,010,000

 

(1)	25,600 of the restricted stock unit awards were vested as of Q2 2012. The remaining 12,800 restricted stock units will vest on October 26, 2012.
(2)	4,000 of the restricted stock units were vested at Q2 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 six months ended March 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 March 2012		36,700		$	64.40

 

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

 

For the three and six months ended March 2012, net income before income taxes included compensation expense of $0.4 million and $0.7 million, respectively, related to the amortization of all equity-based compensation awards.  Total unamortized compensation expense for these awards at March 2012 was approximately $1.9 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 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 2012:
External revenue:
Cigarettes		$	198,856,415		$	—		$	—		$	198,856,415
Confectionery		17,860,388			—			—			17,860,388
Health food		—			10,143,215			—			10,143,215
Tobacco, foodservice & other		48,969,248			—			—			48,969,248
Total external revenue		265,686,051			10,143,215			—			275,829,266
Depreciation		419,695			102,044			937			522,676
Amortization		91,251			—			—			91,251
Operating income (loss)		2,961,121			1,125,248			(1,385,652		)	2,700,717
Interest expense		133,993			75,418			110,430			319,841
Income (loss) from operations before taxes		2,873,713			1,055,015			(1,453,978		)	2,474,750
Total assets		89,010,587			12,809,831			1,163,482			102,983,900
Capital expenditures		355,961			90,046			—			446,007
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, foodservice & 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 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

 

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		Wholesale Segment			Retail Segment			Other			Consolidated
SIX MONTHS ENDED MARCH 2012:
External revenue:
Cigarettes		$	405,029,273		$	—		$	—		$	405,029,273
Confectionery		35,359,329			—			—			35,359,329
Health food		—			18,676,642			—			18,676,642
Tobacco, foodservice & other		100,327,072			—			—			100,327,072
Total external revenue		540,715,674			18,676,642			—			559,392,316
Depreciation		830,277			203,080			1,874			1,035,231
Amortization		192,190			—			—			192,190
Operating income (loss)		6,329,267			1,538,411			(2,492,780		)	5,374,898
Interest expense		269,060			158,412			316,479			743,951
Income (loss) from operations before taxes		6,154,807			1,390,017			(2,668,739		)	4,876,085
Total assets		89,010,587			12,809,831			1,163,482			102,983,900
Capital expenditures		583,352			124,372			—			707,724
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, foodservice & 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 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

 

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 Q2 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 the revolving credit facility.  All repurchased shares were recorded in treasury stock at cost.

 

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