AMCON DISTRIBUTING CO - Quarter Report: 2013 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, 2013

 

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 623,115 shares of its $.01 par value common stock outstanding as of July 15, 2013.

 

 

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, 2013 (unaudited) and September 30, 2012	3
Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2013 and 2012	4
Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2013 and 2012	5
Notes to condensed consolidated unaudited financial statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Mine Safety Disclosures	25
Item 5. Other Information	25
Item 6. Exhibits	25

 

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PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2013 and September 30, 2012

 

		June  2013			September  2012
		(Unaudited)
ASSETS
Current assets:
Cash		$	177,452		$	491,387
Accounts receivable, less allowance for doubtful accounts of $1.2 million at both June 2013 and September 2012		35,454,486			32,681,835
Inventories, net		48,138,310			38,364,621
Deferred income taxes		1,730,126			1,916,619
Prepaid and other current assets		8,098,720			6,476,702
Total current assets		93,599,094			79,931,164
Property and equipment, net		13,311,648			13,083,912
Goodwill		6,349,827			6,349,827
Other intangible assets, net		4,912,228			5,185,978
Other assets		442,361			1,258,985
		$	118,615,158		$	105,809,866
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,128,607		$	17,189,208
Accrued expenses		6,663,762			6,931,859
Accrued wages, salaries and bonuses		2,830,924			2,503,361
Income taxes payable		1,098,354			2,194,966
Current maturities of long-term debt		1,214,256			1,182,829
Total current liabilities		27,935,903			30,002,223
Credit facility		28,051,389			14,353,732
Deferred income taxes		3,896,085			3,633,390
Long-term debt, less current maturities		4,160,330			5,075,680
Other long-term liabilities		330,152			336,186
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 2013 and September 2012		2,500,000			2,500,000
Series B cumulative, convertible preferred stock, $.01 par value 80,000 shares authorized, 16,000 shares issued and outstanding at June 30, 2013 and 58,000 shares issued and outstanding at September 30, 2012, and a total liquidation preference of $0.4 million and $1.5 million at June 2013 and September 2012, respectively		400,000			1,450,000
Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 116,000 and 158,000 shares outstanding and issued in Series A and B referred to above		—			—
Common stock, $.01 par value, 3,000,000 shares authorized, 623,115 shares outstanding at June 2013 and 612,327 shares outstanding at September 2012		6,543			6,293
Additional paid-in capital		12,485,773			11,021,109
Retained earnings		42,149,939			38,349,253
Treasury stock at cost		(3,300,956		)	(918,000		)
Total shareholders’ equity		51,341,299			48,458,655
		$	118,615,158		$	105,809,866

 

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, 2013 and 2012

 

		For the three months  ended June						For the nine months  ended June
		2013			2012			2013			2012
Sales (including excise taxes of $100.2 million and $96.1 million, and $285.4 million and $272.7 million, respectively)		$	316,031,197		$	307,112,774		$	892,817,669		$	866,505,090
Cost of sales		296,220,406			287,211,769			835,480,069			808,750,009
Gross profit		19,810,791			19,901,005			57,337,600			57,755,081
Selling, general and administrative expenses		16,065,285			15,845,201			47,351,952			47,096,958
Depreciation and amortization		598,061			552,888			1,791,708			1,780,309
		16,663,346			16,398,089			49,143,660			48,877,267
Operating income		3,147,445			3,502,916			8,193,940			8,877,814
Other expense (income):
Interest expense		309,445			361,756			874,489			1,105,707
Other (income), net		(49,487		)	(47,841		)	(225,682		)	(292,979		)
		259,958			313,915			648,807			812,728
Income from operations before income tax expense		2,887,487			3,189,001			7,545,133			8,065,086
Income tax expense		1,255,000			1,343,000			3,236,000			3,316,000
Net income		1,632,487			1,846,001			4,309,133			4,749,086
Preferred stock dividend requirements		(48,642		)	(66,907		)	(156,041		)	(201,454		)
Net income available to common shareholders		$	1,583,845		$	1,779,094		$	4,153,092		$	4,547,632
Basic earnings per share available to common shareholders		$	2.54		$	2.92		$	6.67		$	7.38
Diluted earnings per share available to common shareholders		$	2.19		$	2.37		$	5.73		$	6.06
Basic weighted average shares outstanding		623,115			608,271			622,833			615,913
Diluted weighted average shares outstanding		744,732			779,106			751,946			783,987

 

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, 2013 and 2012

 

		2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,309,133		$	4,749,086
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,517,958			1,496,868
Amortization		273,750			283,441
Gain on sale of property and equipment		(72,318		)	(28,606		)
Equity-based compensation		971,954			930,593
Deferred income taxes		449,188			1,022,701
Provision for losses on doubtful accounts		80,000			75,757
Provision for losses on inventory obsolescence		54,028			98,789
Other		(6,034		)	(6,034		)
Changes in assets and liabilities:
Accounts receivable		(2,852,651		)	(1,144,999		)
Inventories		(9,827,717		)	(11,031,978		)
Prepaid and other current assets		(1,622,018		)	1,097,241
Other assets		55,753			(51,138		)
Accounts payable		(1,070,612		)	(2,396,748		)
Accrued expenses and accrued wages, salaries and bonuses		525,856			(19,827		)
Income tax payable		(1,096,612		)	(1,796,182		)
Net cash flows from operating activities		(8,310,342		)	(6,721,036		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,808,206		)	(914,486		)
Proceeds from sales of property and equipment		144,841			48,984
Net cash flows from investing activities		(1,663,365		)	(865,502		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements		13,697,657			9,308,869
Principal payments on long-term debt		(883,923		)	(1,018,587		)
Repurchase of Series B Convertible Preferred Stock and common stock		(2,572,085		)	(918,000		)
Dividends paid on convertible preferred stock		(156,041		)	(201,454		)
Dividends on common stock		(352,406		)	(354,723		)
Proceeds from exercise of stock options		1,180			1,180
Withholdings on the exercise of equity-based awards		(74,610		)	(51,452		)
Net cash flows from financing activities		9,659,772			6,765,833
Net change in cash		(313,935		)	(820,705		)
Cash, beginning of period		491,387			1,389,665
Cash, end of period		$	177,452		$	568,960

 

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

 

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		2013			2012
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	851,665		$	1,094,086
Cash paid during the period for income taxes		3,883,424			4,089,482
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		21,248			28,282
Issuance of common stock in connection with the vesting and exercise of equity-based awards		1,389,258			950,562
Conversion by holder of Series B Convertible Preferred Stock to common stock		100,000			—
Common stock acquired with other consideration		760,871			—

 

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 and services to assist our customers in managing their business and profitability.

 

·              Our retail health food segment (“Retail Segment”) operates sixteen health food retail stores located throughout the Midwest and Florida.

 

WHOLESALE SEGMENT

 

Our Wholesale Segment is one of the largest wholesale convenience store distributors in the United States serving approximately 5,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We 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 a full range of consultative services to our customers in the areas of marketing, merchandising, inventory optimization, and information systems to assist our customers in maximizing profitability. Convenience stores represent our largest customer category.  In October 2012, Convenience Store News ranked us as the ninth (9th) 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 floor space. Our principal suppliers include Altria, RJ Reynolds, Commonwealth Brands, Lorillard, Hershey, Kelloggs, Kraft and Mars. We also market private label lines of water, candy products, batteries, film, and other products. We do not maintain any long-term purchase contracts with our suppliers.

 

RETAIL SEGMENT

 

Our Retail Segment is a specialty retailer of natural and organic groceries and dietary supplements, which is a subset of the larger U.S. grocery industry.  We operate sixteen retail health food stores doing business as Chamberlin’s Market & Café (“Chamberlin’s”) and Akin’s Natural Foods Market (“Akin’s”).  Chamberlin’s, which was established in 1935, operates six stores in and around Orlando, Florida.  Akin’s, which was also established in 1935, has a total of ten locations in Arkansas, Kansas, Missouri, Nebraska, and Oklahoma.

 

Our 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. We compete against a wide range retailers including, conventional, natural, gourmet, and discount retailers, as well as warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order, online retailers, and multi-level marketers.

 

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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, 2012, 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, 2013 and June 30, 2012 have been referred to throughout this quarterly report as Q3 2013 and Q3 2012, respectively. The fiscal balance sheet dates as of June 30, 2013, June 30, 2012, and September 30, 2012 have been referred to as June 2013, June 2012, and September 2012, respectively.

 

2. CONVERTIBLE PREFERRED STOCK:

 

The Company has two series of convertible preferred stock outstanding at June 2013 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		$	400,000
Number of shares:		100,000			16,000
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			16,227
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 would be 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 and 8,000 shares of the Series B Preferred Stock are owned by Mr. Christopher Atayan, AMCON’s Chief Executive Officer and Chairman of the Board.  The Series B Preferred Stock holders have the right to elect one member of our Board of Directors, pursuant to the voting rights in the Certificate of Designation creating the Series B.  Mr. Atayan was first nominated and elected to this seat in 2004.

 

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3. INVENTORIES

 

Inventories consist of finished goods at June 2013 and September 2012 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 2013 and September 2012, 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.

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

		June  2013			September  2012
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  2013			September  2012
Trademarks and tradenames		$	3,373,269		$	3,373,269
Non-competition agreement (less accumulated amortization of $0.2 million at June 2013 and $0.1 million at September 2012)		291,667			366,667
Customer relationships (less accumulated amortization of $0.9 million and $0.7 million at June 2013 and September 2012, respectively)		1,247,292			1,446,042
		$	4,912,228		$	5,185,978

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At June 2013, 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 2013, respectively, and $0.1 million and $0.3 million for the three and nine month periods ended June 2012, respectively.

 

Estimated future amortization expense related to identifiable intangible assets with finite lives is as follows at June 2013:

 

Customer relationships		June  2013
Fiscal 2013 /1/		$	91,250
Fiscal 2014		365,000
Fiscal 2015		365,000
Fiscal 2016		331,667
Fiscal 2017		265,000
Thereafter		121,042
		$	1,538,959

 

/1/  Represents amortization for the remaining three months of Fiscal 2013.

 

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5. DIVIDENDS:

 

The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million and $0.5 million for the three and nine month periods ended June 2013, respectively, and $0.2 million and $0.6 million for the three and nine month periods ended June 2012, respectively.

 

6. 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 net income 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
		2013						2012
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		623,115			623,115			608,271			608,271
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock /1/		—			121,617			—			170,835
Weighted average number of shares outstanding		623,115			744,732			608,271			779,106
Net income		$	1,632,487		$	1,632,487		$	1,846,001		$	1,846,001
Deduct: convertible preferred stock dividends /2/		(48,642		)	—			(66,907		)	—
Net income available to common shareholders		1,583,845			1,632,487			1,779,094			1,846,001
Net earnings per share available to common shareholders		$	2.54		$	2.19		$	2.92		$	2.37

 

/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 nine months ended June
		2013						2012
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		622,833			622,833			615,913			615,913
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock /1/		—			129,113			—			168,074
Weighted average number of shares outstanding		622,833			751,946			615,913			783,987
Net income		$	4,309,133		$	4,309,133		$	4,749,086		$	4,749,086
Deduct: convertible preferred stock dividends /2/		(156,041		)	—			(201,454		)	—
Net income available to common shareholders		4,153,092			4,309,133			4,547,632			4,749,086
Net earnings per share available to common shareholders		$	6.67		$	5.73		$	7.38		$	6.06

 

/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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7. DEBT

 

The Company primarily finances its operations with cash generated from operating activities and credit facility borrowings provided under an agreement with Bank of America (the “Facility”).  On July 16, 2013, the Company renewed and extended its credit facility with Bank of America though July 2018.  The existing Facility in place at June 2013 included the following significant terms:

 

·             An April 2014 maturity date.

 

·             $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 any original or renewal term of the agreement.

 

·             Prepayment penalty equal to 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, is financed through a term loan with BMO Harris, NA (“BMO”) which is also a participant lender on the Company’s revolving line of credit. The BMO loan contains cross default provisions which cause the loan with BMO to be considered in default if the loans where BMO is the lender, including the revolving credit facility, is in default. There were no such cross defaults at June 2013. In addition, the BMO loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

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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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.  At June 2013, awards with respect to a total of 131,195 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plan and awards with respect to another 18,805 shares may be awarded under the plan.

 

Stock Options

 

The stock options issued by the Company expire ten years from the grant date and include graded vesting schedules ranging between three and five years. Stock options issued and outstanding at June 2013 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 2007		$18.00		25,000		3.45 years		$	18.00		25,000		$	18.00
Fiscal 2010		$51.50		5,500		6.83 years		$	51.50		3,300		$	51.50
Fiscal 2012		$53.80 - $65.97		6,500		8.33 years		$	54.74		1,300		$	54.74
Fiscal 2013		$62.33		8,000		9.32 years		$	62.33		—		$	—
				45,000				$	35.28		29,600		$	23.35

 

The following is a summary of stock option activity for the nine month period ended June 2013:

 

		Number of Shares		Weighted Average Exercise Price
Outstanding at September 2012		37,042		$	29.43
Granted		8,000		62.33
Exercised		(42	)	28.80
Forfeited/Expired		—		—
Outstanding at June 2013		45,000		$	35.28

 

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Restricted Stock Units

 

A summary of restricted stock unit awards at June 2013 is as follows:

 

		Restricted Stock Units(1)		Restricted Stock Units(2)		Restricted Stock Units(3)
Date of award:		November 22, 2010		October 26, 2011		October 23, 2012
Original number of awards issued:		12,000		15,900		15,000
Service period:		36 months		36 months		36 months
Estimated fair value of award at grant date		$864,000		$855,000		$935,000
Awards outstanding at June 2013		4,000		10,600		15,000
Fair value of non-vested awards at June 2013:		$319,000		$845,000		$1,196,000

(1)           8,000 of the restricted stock units were vested at June 2013. The remaining 4,000 restricted stock units will vest on November 22, 2013.

 

(2)           5,300 of the restricted stock units were vested as of June 2013.  The remaining 10,600 restricted stock units will vest in equal amounts on October 25, 2013 and October 25, 2014.

 

(3)           The 15,000 restricted stock units will vest in equal amounts on October 23, 2013, October 23, 2014, and October 23, 2015.

 

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 Consolidated Unaudited Statement of Operations reflects the straight-line amortized fair value based on the period end closing price.

 

		Number of Shares		Weighted Average Fair Value
Nonvested restricted stock units at September 2012		36,700		$	65.00
Granted		15,000		62.33
Vested		(22,100	)	62.86
Expired		—		—
Nonvested restricted stock units at June 2013		29,600		$	79.75

 

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

 

Net income before income taxes included compensation expense related to the amortization of all equity-based compensation awards of $0.3 million and $1.0 million for the three and nine months ended June 2013, respectively, and $0.3 million and $0.9 million for the three and nine months ended June 2012, respectively.  Total unamortized compensation expense related to these awards at June 2013 was approximately $1.7 million.

 

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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 JUNE 2013:
External revenue:
Cigarettes		$	228,861,228		$	—		$	—		$	228,861,228
Confectionery		20,658,502			—			—			20,658,502
Health food		—			9,331,747			—			9,331,747
Tobacco, food service & other		57,179,720			—			—			57,179,720
Total external revenue		306,699,450			9,331,747			—			316,031,197
Depreciation		387,683			118,191			937			506,811
Amortization		91,250			—			—			91,250
Operating income (loss)		3,951,778			364,126			(1,168,459		)	3,147,445
Interest expense		49,754			55,187			204,504			309,445
Income (loss) from operations before taxes		3,900,589			314,153			(1,327,255		)	2,887,487
Total assets		103,780,433			14,602,570			232,155			118,615,158
Capital expenditures		235,470			468,507			—			703,977
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

 

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		Wholesale Segment			Retail Segment			Other			Consolidated
NINE MONTHS ENDED JUNE 2013:
External revenue:
Cigarettes		$	648,295,732		$	—		$	—		$	648,295,732
Confectionery		55,461,844			—			—			55,461,844
Health food		—			27,904,440			—			27,904,440
Tobacco, food service & other		161,155,653			—			—			161,155,653
Total external revenue		864,913,229			27,904,440			—			892,817,669
Depreciation		1,209,733			305,414			2,811			1,517,958
Amortization		273,750			—			—			273,750
Operating income (loss)		10,285,106			1,803,736			(3,894,902		)	8,193,940
Interest expense		156,650			168,735			549,104			874,489
Income (loss) from operations before taxes		10,147,828			1,650,327			(4,253,022		)	7,545,133
Total assets		103,780,433			14,602,570			232,155			118,615,158
Capital expenditures		738,809			1,069,397			—			1,808,206
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

 

10. SUBSEQUENT EVENTS

 

On July 16, 2013, the Company renewed and extended its credit facility through July 2018.  The significant provisions of the new credit agreement include the following:

 

·    A July 2018 maturity date without penalty for prepayment.

 

·             $70.0 million revolving credit limit.

 

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

 

·             A provision providing an additional $10.0 million of credit advances for certain inventory purchases.

 

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

 

·             The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 175 basis points depending on certain credit facility utilization measures, at the election of the Company.

 

·             Lending limits subject to accounts receivable and inventory limitations.

 

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

 

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

 

·             A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement.

 

·    Provides that the Company may not pay dividends on its common stock in excess of $1.00 per share on an annual basis.  There is no limit on dividend payments if certain excess availability measurements are achieved as defined in the credit facility agreement.

 

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Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect,” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:

 

·             increases in state and federal excise taxes on cigarette and tobacco products,

 

·             integration risk related to acquisitions or other efforts to expand,

 

·             higher commodity prices which could impact food ingredient costs for many of the products we sell,

 

·             regulation of cigarette and tobacco products by the FDA, in addition to existing state and federal regulations by other agencies,

 

·             potential bans or restrictions imposed by the FDA on the manufacture, distribution, and sale of certain cigarette and tobacco products,

 

·             increases in manufacturer prices,

 

·             increases in inventory carrying costs and customer credit risk,

 

·             changes in promotional and incentive programs offered by manufacturers,

 

·             decreased availability of capital resources,

 

·             demand for the Company’s products, particularly cigarette and tobacco products,

 

·             new business ventures or acquisitions,

 

·             domestic regulatory and legislative risks,

 

·             competition,

 

·             poor weather conditions,

 

·             increases in fuel prices,

 

·             consolidation trends within the convenience store and wholesale distribution industries,

 

·            natural disasters and domestic unrest,

 

·            increasing health care costs, as well as changes in laws and regulations and ongoing compliance with the Patient Protection and Affordable Care Act,

 

·             other risks over which the Company has little or no control, and any other factors not identified herein.

 

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