AMCON DISTRIBUTING CO - Quarter Report: 2014 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended March 31, 2014

 

OR

 

 

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 611,432 shares of its $.01 par value common stock outstanding as of April 14, 2014.

 

 

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, 2014 (unaudited) and September 30, 2013		3
Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2014 and 2013		4
Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 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

 

2

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.                       Financial Statements

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2014 and September 30, 2013

 

		March  2014			September  2013
		(Unaudited)
ASSETS
Current assets:
Cash		$	396,560		$	275,036
Accounts receivable, less allowance for doubtful accounts of $1.2 million and $1.1 million at March 2014 and September 2013, respectively		26,894,796			28,383,205
Inventories, net		49,075,457			46,125,187
Deferred income taxes		1,502,474			1,831,933
Prepaid and other current assets		4,996,292			5,001,992
Total current assets		82,865,579			81,617,353
Property and equipment, net		13,525,701			13,088,859
Goodwill		6,349,827			6,349,827
Other intangible assets, net		4,638,478			4,820,978
Other assets		484,828			497,882
		$	107,864,413		$	106,374,899
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	15,904,672		$	15,859,636
Accrued expenses		5,472,356			6,714,444
Accrued wages, salaries and bonuses		1,992,439			2,754,136
Income taxes payable		303,759			1,922,351
Current maturities of long-term debt		560,647			998,788
Total current liabilities		24,233,873			28,249,355
Credit facility		19,768,331			14,841,712
Deferred income taxes		3,459,998			3,327,010
Long-term debt, less current maturities		3,907,110			4,076,892
Other long-term liabilities		235,373			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 March 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 March 2014 and September 2013, and a total liquidation preference of $0.4 million at both March 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, 611,432 shares outstanding at March 2014 and 623,115 shares outstanding at September 2013		6,677			6,543
Additional paid-in capital		13,580,479			12,502,135
Retained earnings		45,015,446			43,532,812
Treasury stock at cost		(5,242,874		)	(3,300,956		)
Total shareholders’ equity		53,359,728			52,740,534
		$	107,864,413		$	106,374,899

 

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

 

3

Table of Contents

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three and six months ended March 31, 2014 and 2013

 

		For the three months  ended March						For the six months  ended March
		2014			2013			2014			2013
Sales (including excise taxes of $85.7 million and $87.2 million, and $183.1 million and $185.2 million, respectively)		$	272,421,788		$	274,568,151		$	578,047,345		$	576,786,472
Cost of sales		254,801,826			256,271,131			540,786,320			539,259,663
Gross profit		17,619,962			18,297,020			37,261,025			37,526,809
Selling, general and administrative expenses		15,812,174			15,438,195			32,304,437			31,286,667
Depreciation and amortization		628,834			599,785			1,252,874			1,193,647
		16,441,008			16,037,980			33,557,311			32,480,314
Operating income		1,178,954			2,259,040			3,703,714			5,046,495
Other expense (income):
Interest expense		222,624			248,992			524,619			565,044
Other (income), net		(38,955		)	(114,846		)	(69,186		)	(176,195		)
		183,669			134,146			455,433			388,849
Income from operations before income tax expense		995,285			2,124,894			3,248,281			4,657,646
Income tax expense		464,000			911,000			1,429,000			1,981,000
Net income		531,285			1,213,894			1,819,281			2,676,646
Preferred stock dividend requirements		(48,108		)	(48,108		)	(97,285		)	(107,399		)
Net income available to common shareholders		$	483,177		$	1,165,786		$	1,721,996		$	2,569,247
Basic earnings per share available to common shareholders		$	0.79		$	1.87		$	2.79		$	4.13
Diluted earnings per share available to common shareholders		$	0.72		$	1.63		$	2.46		$	3.55
Basic weighted average shares outstanding		611,432			623,115			616,888			622,692
Diluted weighted average shares outstanding		737,461			743,195			739,223			754,881

 

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

 

4

Table of Contents

 

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the six months ended March 31, 2014 and 2013

 

		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,819,281		$	2,676,646
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation		1,070,374			1,011,147
Amortization		182,500			182,500
Gain on sale of property and equipment		(24,746		)	(71,131		)
Equity-based compensation		717,821			652,421
Deferred income taxes		462,447			457,525
Provision for losses on doubtful accounts		132,000			39,000
Provision for losses (recoveries) on inventory obsolescence		(1,121		)	49,179
Other		(4,023		)	(4,023		)
Changes in assets and liabilities:
Accounts receivable		1,356,409			1,686,669
Inventories		(2,474,084		)	(780,967		)
Prepaid and other current assets		5,700			152,987
Other assets		13,054			36,724
Accounts payable		(34,071		)	(1,802,183		)
Accrued expenses and accrued wages, salaries and bonuses		(1,565,640		)	(1,123,486		)
Income tax payable		(1,618,592		)	(2,060,080		)
Net cash flows from operating activities		37,309			1,102,928
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,362,832		)	(1,104,229		)
Proceeds from sales of property and equipment		29,969			139,540
Acquisition		(513,938		)	—
Net cash flows from investing activities		(1,846,801		)	(964,689		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on bank credit agreements		4,926,619			3,378,417
Principal payments on long-term debt		(607,923		)	(587,355		)
Repurchase of Series B Convertible Preferred Stock and common stock		(1,941,918		)	(2,572,085		)
Dividends paid on convertible preferred stock		(97,285		)	(107,399		)
Dividends on common stock		(239,362		)	(234,917		)
Proceeds from exercise of stock options		—			1,180
Withholdings on the exercise of equity-based awards		(109,115		)	(74,610		)
Net cash flows from financing activities		1,931,016			(196,769		)
Net change in cash		121,524			(58,530		)
Cash, beginning of period		275,036			491,387
Cash, end of period		$	396,560		$	432,857

 

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

 

5

Table of Contents

 

		2014			2013
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	523,081		$	564,422
Cash paid during the period for income taxes		2,585,145			3,583,555
Supplemental disclosure of non-cash information:
Equipment acquisitions classified as accounts payable		152,311			57,412
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.

 

6

Table of Contents

 

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, film, 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 $80 billion during the 2012 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.

 

7

Table of Contents

 

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, 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 March 31, 2014 and March 31, 2013 have been referred to throughout this quarterly report as Q2 2014 and Q2 2013, respectively. The fiscal balance sheet dates as of March 31, 2014, March 31, 2013, and September 30, 2013 have been referred to as March 2014, March 2013, and September 2013, respectively.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

The Company is currently evaluating the impact of implementing the following new accounting standard:

 

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 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.

 

2. ACQUISITIONS

 

During Q2 2014, the Company began serving customers of a small convenience store distributor (“Distributor”) located in North Dakota.  As part of the agreement with the Distributor, the Company acquired inventory totaling approximately $0.5 million. No material intangible assets or liabilities were assumed in connection with the transaction. This business will be included in our Wholesale Distribution Segment and is 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 March 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.

 

8

Table of Contents

 

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 March 2014, 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 March 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:

 

		March 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:

 

		March  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 March 2014 and September 2013, respectively)		216,667			266,667
Customer relationships (less accumulated amortization of $1.1 million and $0.9 million at March 2014 and September 2013, respectively)		1,048,542			1,181,042
		$	4,638,478		$	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 March 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 $0.2 million for the three and six month periods ended March 2014, respectively, and $0.1 million and $0.2 million for the three and six month periods ended March 2013, respectively.

 

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

 

Customer relationships		March  2014
Fiscal 2014 (1)		$	182,500
Fiscal 2015		365,000
Fiscal 2016		331,667
Fiscal 2017		265,000
Fiscal 2018		79,375
Thereafter		41,667
		$	1,265,209

 

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

 

9

Table of Contents

 

6. DIVIDENDS

 

The Company paid cash dividends on its common stock and convertible preferred stock totaling $0.2 million and $0.3 million for the three and six month periods ended March 2014, respectively, and $0.2 million and $0.3 million for the three and six month periods ended March 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 March
		2014						2013
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		611,432			611,432			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)		—			126,029			—			120,080
Weighted average number of shares outstanding		611,432			737,461			623,115			743,195
Net income		$	531,285		$	531,285		$	1,213,894		$	1,213,894
Deduct: convertible preferred stock dividends (2)		(48,108		)	—			(48,108		)	—
Net income available to common shareholders		$	483,177		$	531,285		$	1,165,786		$	1,213,894
Net earnings per share available to common shareholders		$	0.79		$	0.72		$	1.87		$	1.63

 

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

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

 

		For the six months ended March
		2014						2013
		Basic			Diluted			Basic			Diluted
Weighted average common shares outstanding		616,888			616,888			622,692			622,692
Weighted average of net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—			122,335			—			132,189
Weighted average number of shares outstanding		616,888			739,223			622,692			754,881
Net income		$	1,819,281		$	1,819,281		$	2,676,646		$	2,676,646
Deduct: convertible preferred stock dividends (2)		(97,285		)	—			(107,399		)	—
Net income available to common shareholders		$	1,721,996		$	1,819,281		$	2,569,247		$	2,676,646
Net earnings per share available to common shareholders		$	2.79		$	2.46		$	4.13		$	3.55

 

(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.

 

10

Table of Contents

 

8. DEBT

 

The Company primarily finances its operations through a credit facility provided under an agreement with Bank of America (the “Facility”).  The Facility included the following significant terms at March 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 March 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.

 

11

Table of Contents

 

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 2014, awards with respect to a total of 147,700 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plan and awards with respect to another 2,300 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 March 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		2.70 years		$	18.00		25,000		$	18.00
Fiscal 2010		$51.50		4,900		6.08 years		$	51.50		2,700		$	51.50
Fiscal 2012		$53.80 - $65.97		6,100		7.60 years		$	54.80		2,200		$	54.91
Fiscal 2013		$62.33		7,800		8.57 years		$	62.33		1,400		$	62.33
				43,800				$	34.77		31,300		$	25.47

 

Restricted Stock Units

 

At March 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 March 2014		5,300		10,000		17,900
Fair value of non-vested awards at March 2014:		$454,000		$856,000		$1,532,000

(1)                                 10,600 of the restricted stock units were vested as of March 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 March 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 3,900 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.

 

12

Table of Contents

 

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
Expired		—		—
Nonvested restricted stock units at March 2014		33,200		$	85.60

 

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 $0.4 million and $0.7 million for the three and six months ended March 2014, respectively, and $0.3 million and $0.7 million for the three and six months ended March 2013, respectively.  Total unamortized compensation expense related to these awards at March 2014 was approximately $2.3 million.

 

13

Table of Contents

 

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 2014:
External revenue:
Cigarettes		$	194,804,666		$	—		$	—		$	194,804,666
Confectionery		16,504,352			—			—			16,504,352
Health food		—			9,188,668			—			9,188,668
Tobacco, food service & other		51,924,102			—			—			51,924,102
Total external revenue		263,233,120			9,188,668			—			272,421,788
Depreciation		411,201			125,446			937			537,584
Amortization		91,250			—			—			91,250
Operating income (loss)		2,095,162			490,831			(1,407,039		)	1,178,954
Interest expense		38,856			56,002			127,766			222,624
Income (loss) from operations before taxes		2,076,291			438,798			(1,519,804		)	995,285
Total assets		94,011,377			13,534,327			318,709			107,864,413
Capital expenditures		374,459			2,695			—			377,154
THREE MONTHS ENDED MARCH 2013:
External revenue:
Cigarettes		$	197,704,322		$	—		$	—		$	197,704,322
Confectionery		16,847,270			—			—			16,847,270
Health food		—			9,868,050			—			9,868,050
Tobacco, food service & other		50,148,509			—			—			50,148,509
Total external revenue		264,700,101			9,868,050			—			274,568,151
Depreciation		413,307			94,291			937			508,535
Amortization		91,250			—			—			91,250
Operating income (loss)		2,530,591			1,067,812			(1,339,363		)	2,259,040
Interest expense		51,764			54,580			142,648			248,992
Income (loss) from operations before taxes		2,493,782			1,018,404			(1,387,292		)	2,124,894
Total assets		89,426,229			13,719,780			287,165			103,433,174
Capital expenditures		209,689			564,312			—			774,001

 

14

Table of Contents

 

		Wholesale  Segment			Retail  Segment			Other			Consolidated
SIX MONTHS ENDED MARCH 2014:
External revenue:
Cigarettes		$	415,956,477		$	—		$	—		$	415,956,477
Confectionery		34,707,543			—			—			34,707,543
Health food		—			17,711,946			—			17,711,946
Tobacco, food service & other		109,671,379			—			—			109,671,379
Total external revenue		560,335,399			17,711,946			—			578,047,345
Depreciation		814,543			253,956			1,875			1,070,374
Amortization		182,500			—			—			182,500
Operating income (loss)		5,891,124			543,021			(2,730,431		)	3,703,714
Interest expense		82,653			116,778			325,188			524,619
Income (loss) from operations before taxes		5,835,814			435,170			(3,022,703		)	3,248,281
Total assets		94,011,377			13,534,327			318,709			107,864,413
Capital expenditures		1,293,001			69,831			—			1,362,832
SIX MONTHS ENDED MARCH 2013:
External revenue:
Cigarettes		$	419,434,504		$	—		$	—		$	419,434,504
Confectionery		34,803,342			—			—			34,803,342
Health food		—			18,572,693			—			18,572,693
Tobacco, food service & other		103,975,933			—			—			103,975,933
Total external revenue		558,213,779			18,572,693			—			576,786,472
Depreciation		822,050			187,223			1,874			1,011,147
Amortization		182,500			—			—			182,500
Operating income (loss)		6,333,328			1,439,610			(2,726,443		)	5,046,495
Interest expense		106,896			113,548			344,600			565,044
Income (loss) from operations before taxes		6,247,239			1,336,174			(2,925,767		)	4,657,646
Total assets		89,426,229			13,719,780			287,165			103,433,174
Capital expenditures		503,339			600,890			—			1,104,229

 

15

Table of Contents

 

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 sales of electronic cigarettes 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,

 

·                  increasing competition in our retail health food segment,

 

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

 

·                  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,

 

·                  the opening of new health food retail stores,

 

·                  domestic regulatory and legislative risks,

 

·                  increasing competition in our wholesale segment,

 

16