AMCON DISTRIBUTING CO - Quarter Report: 2014 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, 2014

 

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 602,602 shares of its $.01 par value common stock outstanding as of July 14, 2014.

 

 

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, 2014 (unaudited) and September 30, 2013	3
Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2014 and 2013	4
Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2014 and 2013	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, 2014 and September 30, 2013

 

		June 2014			September 2013
		(Unaudited)
ASSETS
Current assets:
Cash		$	333,751		$	275,036
Accounts receivable, less allowance for doubtful accounts of $1.2 million and $1.1 million at June 2014 and September 2013, respectively		29,699,236			28,383,205
Inventories, net		48,639,828			46,125,187
Deferred income taxes		1,652,702			1,831,933
Prepaid and other current assets		7,050,381			5,001,992
Total current assets		87,375,898			81,617,353
Property and equipment, net		13,944,111			13,088,859
Goodwill		6,349,827			6,349,827
Other intangible assets, net		4,547,228			4,820,978
Other assets		465,990			497,882
		$	112,683,054		$	106,374,899
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,447,785		$	15,859,636
Accrued expenses		7,114,393			6,714,444
Accrued wages, salaries and bonuses		3,105,187			2,754,136
Income taxes payable		332,604			1,922,351
Current maturities of long-term debt		338,595			998,788
Total current liabilities		27,338,564			28,249,355
Credit facility		21,164,401			14,841,712
Deferred income taxes		3,569,713			3,327,010
Long-term debt, less current maturities		3,821,735			4,076,892
Other long-term liabilities		141,014			239,396
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 2014 and September 2013		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 both June 2014 and September 2013, and a total liquidation preference of $0.4 million at both June 2014 and September 2013		400,000			400,000
Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 116,000 shares outstanding and issued in Series A and B referred to above		—			—
Common stock, $.01 par value, 3,000,000 shares authorized, 602,602 shares outstanding at June 2014 and 623,115 shares outstanding at September 2013		6,677			6,543
Additional paid-in capital		13,577,433			12,502,135
Retained earnings		46,112,791			43,532,812
Treasury stock at cost		(5,949,274		)	(3,300,956		)
Total shareholders’ equity		53,747,627			52,740,534
		$	112,683,054		$	106,374,899

 

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, 2014 and 2013

 

		For the three months  ended June						For the nine months  ended June
		2014			2013			2014			2013
Sales (including excise taxes of $100.4 million and $100.2 million, and $283.5 million and $285.4 million, respectively)		$	322,647,624		$	316,031,197		$	900,694,969		$	892,817,669
Cost of sales		303,353,020			296,220,406			844,139,340			835,480,069
Gross profit		19,294,604			19,810,791			56,555,629			57,337,600
Selling, general and administrative expenses		16,295,082			16,065,285			48,599,519			47,351,952
Depreciation and amortization		557,736			598,061			1,810,610			1,791,708
		16,852,818			16,663,346			50,410,129			49,143,660
Operating income		2,441,786			3,147,445			6,145,500			8,193,940
Other expense (income):
Interest expense		228,827			309,445			753,446			874,489
Other (income), net		(37,473		)	(49,487		)	(106,659		)	(225,682		)
		191,354			259,958			646,787			648,807
Income from operations before income tax expense		2,250,432			2,887,487			5,498,713			7,545,133
Income tax expense		990,000			1,255,000			2,419,000			3,236,000
Net income		1,260,432			1,632,487			3,079,713			4,309,133
Preferred stock dividend requirements		(48,643		)	(48,642		)	(145,928		)	(156,041		)
Net income available to common shareholders		$	1,211,789		$	1,583,845		$	2,933,785		$	4,153,092
Basic earnings per share available to common shareholders		$	2.00		$	2.54		$	4.79		$	6.67
Diluted earnings per share available to common shareholders		$	1.73		$	2.19		$	4.18		$	5.73
Basic weighted average shares outstanding		605,319			623,115			613,032			622,833
Diluted weighted average shares outstanding		729,978			744,732			736,531			751,946

 

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, 2014 and 2013

 

		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,079,713		$	4,309,133
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,536,860			1,517,958
Amortization		273,750			273,750
Gain on sale of property and equipment		(42,745		)	(72,318		)
Equity-based compensation		1,025,694			971,954
Deferred income taxes		421,934			449,188
Provision for losses on doubtful accounts		63,000			80,000
Provision for losses on inventory obsolescence		15,878			54,028
Other		(6,034		)	(6,034		)
Changes in assets and liabilities:
Accounts receivable		(1,379,031		)	(2,852,651		)
Inventories		(1,572,589		)	(9,827,717		)
Prepaid and other current assets		(2,048,389		)	(1,622,018		)
Other assets		31,892			55,753
Accounts payable		598,939			(1,070,612		)
Accrued expenses and accrued wages, salaries and bonuses		805,286			525,856
Income tax payable		(1,589,747		)	(1,096,612		)
Net cash flows from operating activities		1,214,411			(8,310,342		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,337,626		)	(1,808,206		)
Proceeds from sales of property and equipment		47,969			144,841
Acquisition		(996,803		)	—
Net cash flows from investing activities		(3,286,460		)	(1,663,365		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements		6,322,689			13,697,657
Principal payments on long-term debt		(915,350		)	(883,923		)
Repurchase of Series B Convertible Preferred Stock and common stock		(2,648,318		)	(2,572,085		)
Dividends paid on convertible preferred stock		(145,928		)	(156,041		)
Dividends on common stock		(353,806		)	(352,406		)
Proceeds from exercise of stock options		—			1,180
Withholdings on the exercise of equity-based awards		(128,523		)	(74,610		)
Net cash flows from financing activities		2,130,764			9,659,772
Net change in cash		58,715			(313,935		)
Cash, beginning of period		275,036			491,387
Cash, end of period		$	333,751		$	177,452

 

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

 

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		2014			2013
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	751,909		$	851,665
Cash paid during the period for income taxes		3,586,813			3,883,424
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		62,414			21,248
Issuance of common stock in connection with the vesting and exercise of equity-based awards		1,154,869			1,389,258
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 a full range of 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 distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 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 that allow our customers to compete and maximize their profitability. Convenience stores represent our largest customer category.  In October 2013, Convenience Store News ranked us as the seventh (7th) 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 602,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, Commonwealth Brands, Lorillard, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. The Company does not maintain long term purchase contracts with its suppliers.

 

RETAIL SEGMENT

 

Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.

 

We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers. According to The Natural Foods Merchandiser, a leading industry trade publication, retail sales in the natural foods industry exceeded $89 billion during the 2013 calendar year.

 

Our Retail Segment operates sixteen retail health food stores as Chamberlin’s Market & Café and Akin’s Natural Foods Market. These stores carry over 32,000 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 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.

 

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

 

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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, 2013, 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, 2014 and June 30, 2013 have been referred to throughout this quarterly report as Q3 2014 and Q3 2013, respectively. The fiscal balance sheet dates as of June 30, 2014, June 30, 2013, and September 30, 2013 have been referred to as June 2014, June 2013, and September 2013, respectively.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which states that entities should present the unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss (“NOL”) or similar tax loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law. The Company will be required to adopt this new standard on a prospective basis in the first interim reporting period of fiscal 2015, however, early adoption is permitted as is a retrospective application. We do not anticipate that the adoption of this standard will have a material effect on the Company’s financial position, results of operations, or cash flow.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU supersedes the revenue recognition requirements in “Accounting Standard Codification 605 - Revenue Recognition” and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations, and cash flow.

 

2. ACQUISITIONS

 

During the first nine months of fiscal 2014, the Company began serving customers of two small convenience store distributors (“Distributors”) located in North Dakota.  As part of our agreement with these Distributors, the Company acquired inventory totaling approximately $1.0 million.  No material intangible assets or liabilities were assumed in connection with these transactions. These businesses will be included in our Wholesale Distribution Segment and are not considered material to the Company’s consolidated financial statements.

 

3. CONVERTIBLE PREFERRED STOCK

 

The Company has two series of convertible preferred stock outstanding at June 2014 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.

 

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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 Stockholders 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.

 

4. INVENTORIES

 

At June 2014 and September 2013, inventories consisted of finished goods 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 $0.8 million at both June 2014 and September 2013. 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.

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

		June 2014			September 2013
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 2014			September 2013
Trademarks and tradenames		$	3,373,269		$	3,373,269
Non-competition agreement (less accumulated amortization of $0.3 million and $0.2 million at June 2014 and September 2013, respectively)		191,667			266,667
Customer relationships (less accumulated amortization of $1.1 million and $0.9 million at June 2014 and September 2013, respectively)		982,292			1,181,042
		$	4,547,228		$	4,820,978

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At June 2014, 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 2014, respectively, and $0.1 million and $0.3 million for the three and nine month periods ended June 2013, respectively.

 

Estimated future amortization expense related to identifiable intangible assets with finite lives is as follows at June 2014:

 

Customer relationships		June 2014
Fiscal 2014 (1)		$	91,250
Fiscal 2015		365,000
Fiscal 2016		331,667
Fiscal 2017		265,000
Fiscal 2018		79,375
Thereafter		41,667
		$	1,173,959

 

(1) Represents amortization for the remaining three months of Fiscal 2014.

 

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6. 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 2014, respectively, and $0.2 million and $0.5 million for the three and nine month periods ended June 2013, respectively.

 

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 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
		2014						2013
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		605,319			605,319			623,115			623,115
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			124,659			—			121,617
Weighted average number of shares outstanding		605,319			729,978			623,115			744,732
Net income		$	1,260,432		$	1,260,432		$	1,632,487		$	1,632,487
Deduct: convertible preferred stock dividends (2)		(48,643		)	—			(48,642		)	—
Net income available to common shareholders		$	1,211,789		$	1,260,432		$	1,583,845		$	1,632,487
Net earnings per share available to common shareholders		$	2.00		$	1.73		$	2.54		$	2.19

 

(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
		2014						2013
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		613,032			613,032			622,833			622,833
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			123,499			—			129,113
Weighted average number of shares outstanding		613,032			736,531			622,833			751,946
Net income		$	3,079,713		$	3,079,713		$	4,309,133		$	4,309,133
Deduct: convertible preferred stock dividends (2)		(145,928		)	—			(156,041		)	—
Net income available to common shareholders		$	2,933,785		$	3,079,713		$	4,153,092		$	4,309,133
Net earnings per share available to common shareholders		$	4.79		$	4.18		$	6.67		$	5.73

 

(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 with cash generated from operating activities and through a credit facility provided under an agreement with Bank of America (the “Facility”).  The Facility included the following significant terms at June 2014:

 

·                  A July 2018 maturity date without a 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, however, no limit on common stock dividends if certain excess availability measurements have been maintained for the thirty day period immediately prior to the payment of any such dividends or distributions and if immediately after giving effect to any such dividend or distribution payments the Company has a fixed charge coverage ratio of at least 1.10 to 1.0 as defined in the credit facility 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 2014. 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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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 2014, awards with respect to a total of 146,600 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plan and awards with respect to another 3,400 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 2014 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		2.45 years		$	18.00		25,000		$	18.00
Fiscal 2010		$51.50		4,400		5.83 years		$	51.50		3,400		$	51.50
Fiscal 2012		$53.80 - $65.97		5,600		7.35 years		$	54.89		2,000		$	55.02
Fiscal 2013		$62.33		7,300		8.32 years		$	62.33		1,300		$	62.33
				42,300				$	34.02		31,700		$	25.75

 

Restricted Stock Units

 

At June 2014, nonvested restricted stock units awarded pursuant to the Company’s Omnibus Plan were as follows:

 

		Restricted Stock Units(1)		Restricted Stock Units(2)		Restricted Stock Units(3)
Date of award:		October 26, 2011		October 23, 2012		October 22, 2013
Original number of awards issued:		15,900		15,000		17,900
Service period:		36 months		36 months		36-60 months
Estimated fair value of award at grant date		$855,000		$935,000		$1,486,000
Awards outstanding at June 2014		5,300		10,000		17,600
Fair value of non-vested awards at June 2014:		$433,000		$818,000		$1,439,000

(1)                                 10,600 of the restricted stock units were vested as of June 2014. The remaining 5,300 restricted stock units will vest on October 25, 2014.

 

(2)                                 5,000 of the restricted stock units were vested as of June 2014.  The remaining 10,000 restricted stock units will vest in equal amounts on October 23, 2014 and October 23, 2015.

 

(3)                                 14,000 restricted stock units will vest in equal amounts on October 22, 2014, October 22, 2015, and October 22, 2016.  The remaining 3,600 restricted stock units will vest in equal amounts on October 22, 2014, October 22, 2015, October 22, 2016, October 22, 2017, and October 22, 2018.

 

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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 2013		29,600		$	81.89
Granted		17,900		83.03
Vested		(14,300	)	80.68
Forfeited/Expired		(300	)	81.75
Nonvested restricted stock units at June 2014		32,900		$	81.75

 

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 2014, respectively, and $0.3 million and $1.0 million for the three and nine months ended June 2013, respectively.  Total unamortized compensation expense related to these awards at June 2014 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 JUNE 2014:
External revenue:
Cigarettes		$	231,814,363		$	—		$	—		$	231,814,363
Confectionery		21,214,377			—			—			21,214,377
Health food		—			8,509,813			—			8,509,813
Tobacco, food service & other		61,109,071			—			—			61,109,071
Total external revenue		314,137,811			8,509,813			—			322,647,624
Depreciation		340,287			125,262			937			466,486
Amortization		91,250			—			—			91,250
Operating income (loss)		3,657,657			138,969			(1,354,840		)	2,441,786
Interest expense		36,657			51,284			140,886			228,827
Income (loss) from operations before taxes		3,627,311			93,097			(1,469,976		)	2,250,432
Total assets		98,799,569			13,602,639			280,846			112,683,054
Capital expenditures		949,732			25,062			—			974,794
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

 

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		Wholesale Segment			Retail Segment			Other			Consolidated
NINE MONTHS ENDED JUNE 2014:
External revenue:
Cigarettes		$	647,770,840		$	—		$	—		$	647,770,840
Confectionery		55,921,920			—			—			55,921,920
Health food		—			26,221,759			—			26,221,759
Tobacco, food service & other		170,780,450			—			—			170,780,450
Total external revenue		874,473,210			26,221,759			—			900,694,969
Depreciation		1,154,830			379,218			2,812			1,536,860
Amortization		273,750			—			—			273,750
Operating income (loss)		9,548,781			681,990			(4,085,271		)	6,145,500
Interest expense		119,310			168,062			466,074			753,446
Income (loss) from operations before taxes		9,463,125			528,267			(4,492,679		)	5,498,713
Total assets		98,799,569			13,602,639			280,846			112,683,054
Capital expenditures		2,242,733			94,893			—			2,337,626
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

 

11. COMMON STOCK REPURCHASE

 

During the nine months ended June 2014, the Company repurchased 33,887 shares of its common stock from independent third parties for cash totaling approximately $2.6 million.  All repurchased shares are recorded in treasury stock at cost.

 

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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,

 

·                  the increasing demand and sale of electronic cigarettes and vapors through specialty shops and over the internet,

 

·                  increasing health care costs and the potential impact on discretionary consumer spending,

 

·                  changes in laws and regulations and ongoing compliance with the Patient Protection and Affordable Care Act,

 

·                  increased competition in our retail health food segment,

 

·                  the expansion of large and well capitalized national and regional health food retail store chains,

 

·                  risks associated with opening new retail stores,

 

·                  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 cigarettes, tobacco, electronic cigarettes, and vaping 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,

 

·                  increasing competition in our wholesale segment,

 

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·                  poor weather conditions,

 

·                  increases in fuel prices,

 

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

 

·                  natural disasters and domestic unrest,

 

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

 

Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.

 

CRITICAL ACCOUNTING ESTIMATES

 

Certain accounting estimates used in the preparation of the Company’s financial statements require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2013, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the nine months ended June 2014.

 

THIRD FISCAL QUARTER 2014 (Q3 2014)

 

The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2014 and June 2013.

 

Wholesale Segment

 

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,500 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,000 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 that allow our customers to compete and maximize their profitability. Convenience stores represent our largest customer category. In October 2013, Convenience Store News ranked us as the seventh (7th) 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 602,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, Commonwealth Brands, Lorillard, Hershey, Kellogg’s, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products.  The Company does not maintain long term purchase contracts with its suppliers.

 

Retail Segment

 

Our Retail Segment is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.

 

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