UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: April 30, 2005
--------------
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transaction period from__________to__________
COMMISSION FILE NUMBER 0-20664
BOOKS-A-MILLION, INC.
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 63-0798460
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
402 INDUSTRIAL LANE, BIRMINGHAM, ALABAMA 35211
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(205) 942-3737
--------------
(Registrant's phone number including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last period)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practicable date: Shares of common stock, par value $.01 per
share, outstanding as of June 7, 2005 were 16,225,143 shares.
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (UNAUDITED)
Condensed Consolidated Balance Sheets ......................... 3
Condensed Consolidated Statements of Operations ............... 4
Condensed Consolidated Statements of Cash Flows ............... 5
Notes to Condensed Consolidated Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures ................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities ........................... 20
Item 4. Submission of Matters of Vote of Security-Holders ......... 20
Item 5. Other Information ......................................... 20
Item 6. Exhibits .................................................. 20
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
AS OF APRIL 30, 2005 AS OF JANUARY 29, 2005
-------------------------- --------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 6,389 $ 16,559
Accounts receivable, net ............................. 8,760 6,543
Related party accounts receivable, net ............... 125 73
Inventories .......................................... 221,270 210,270
Prepayments and other ................................ 7,155 6,911
Deferred income taxes ................................ 2,848 1,704
---------- ----------
TOTAL CURRENT ASSETS ............................. 246,547 242,060
---------- ----------
PROPERTY AND EQUIPMENT:
Gross property and equipment ......................... 196,697 195,964
Less accumulated depreciation and amortization ....... 143,298 140,018
---------- ----------
NET PROPERTY AND EQUIPMENT ......................... 53,399 55,946
---------- ----------
OTHER ASSETS ............................................ 2,814 2,806
---------- ----------
TOTAL ASSETS ..................................... $ 302,760 $ 300,812
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................... $ 100,086 $ 97,185
Related party accounts payable ....................... 5,133 9,591
Accrued expenses ..................................... 29,547 38,360
Accrued income taxes ................................. 979 1,542
Current portion of long-term debt .................... 11,840 --
---------- ----------
TOTAL CURRENT LIABILITIES ........................ 147,585 146,678
---------- ----------
LONG-TERM DEBT .......................................... 7,500 7,500
DEFERRED INCOME TAXES ................................... 738 1,415
OTHER LONG-TERM LIABILITIES ............................. 12,732 10,360
---------- ----------
TOTAL NON-CURRENT LIABILITIES .................... 20,970 19,275
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares outstanding..................... -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 19,143,741 and 19,067,960 shares issued at
April 30, 2005 and January 29, 2005, respectively..... 191 191
Additional paid-in capital ........................... 74,868 74,505
Less treasury stock, at cost (2,936,440 and 2,792,869
shares at April 30, 2005 and January 29, 2005,
respectively)......................................... (12,990) (11,630)
Deferred compensation ................................ (441) (481)
Accumulated other comprehensive loss, net of tax ..... (143) (195)
Retained earnings .................................... 72,720 72,469
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ....................... 134,205 134,859
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 302,760 $ 300,812
========== ==========
SEE ACCOMPANYING NOTES
3
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------
APRIL 30, 2005 MAY 1, 2004
-------------- -----------
NET SALES .............................................. $ 113,004 $ 107,913
Cost of products sold (including warehouse
distribution and store occupancy costs) ............. 81,342 77,725
--------- ---------
GROSS PROFIT ........................................... 31,662 30,188
Operating, selling and administrative expenses ...... 25,596 23,070
Depreciation and amortization ....................... 3,938 4,623
--------- ---------
OPERATING INCOME ....................................... 2,128 2,495
Interest expense, net ............................... 384 518
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .. 1,744 1,977
Income taxes provision .............................. 663 752
--------- ---------
INCOME FROM CONTINUING OPERATIONS ...................... 1,081 1,225
DISCONTINUED OPERATIONS (NOTE 10)
Income (Loss) from discontinued operations before
income taxes ........................................ (34) 4
Income tax benefit (provision) ...................... 13 (1)
--------- ---------
LOSS FROM DISCONTINUED OPERATIONS ................. (21) 3
--------- ---------
NET INCOME ............................................. $ 1,060 $ 1,228
========= =========
NET INCOME PER COMMON SHARE:
BASIC:
INCOME FROM CONTINUING OPERATIONS .................. $ 0.07 $ 0.07
LOSS FROM DISCONTINUED OPERATIONS .................. -- --
--------- ---------
NET INCOME .......................................... $ 0.07 $ 0.07
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,201 16,445
========= =========
DILUTED:
INCOME FROM CONTINUING OPERATIONS .................. $ 0.06 $ 0.07
LOSS FROM DISCONTINUED OPERATIONS .................. -- --
--------- ---------
NET INCOME .......................................... $ 0.06 $ 0.07
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 16,922 17,213
========= =========
DIVIDENDS DECLARED PER SHARE ........................ $ 0.05 $ --
========= =========
SEE ACCOMPANYING NOTES
4
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------
APRIL 30, 2005 MAY 1, 2004
-------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 1,060 $ 1,228
---------- ---------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ....................... 3,948 4,642
Deferred compensation amortization .................. 40 24
Gain on disposal of property ........................ -- (9)
Change in deferred income taxes ..................... (1,821) (338)
Increase in inventories ........................... (11,000) (6,706)
Decrease in accounts payable ...................... (1,557) (849)
Changes in certain other assets and liabilities ... (9,066) (7,211)
---------- ---------
Total adjustments ................................ (19,456) (10,447)
---------- ---------
Net cash used in operating activities ............ (18,396) (9,219)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (1,694) (2,800)
Proceeds from sale of equipment ....................... -- 13
---------- ---------
Net cash used in investing activities ............ (1,694) (2,787)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities .................... 59,270 56,260
Repayments under credit facilities .................... (47,430) (44,260)
Purchase of treasury stock ............................ (1,360) (548)
Proceeds from sale of common stock, net ............... 249 270
Payment of dividends .................................. (809) --
---------- ---------
Net cash provided by financing activities ........ 9,920 11,722
---------- ---------
Net decrease in cash and cash equivalents ................ (10,170) (284)
Cash and cash equivalents at beginning of period ......... 16,559 5,348
---------- ---------
Cash and cash equivalents at end of period ............... $ 6,389 $ 5,064
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the thirteen week period for:
Interest ..................................... $ 378 $ 503
Income taxes, net of refunds ................. $ 2,958 $ 2,609
SEE ACCOMPANYING NOTES
5
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of
Books-A-Million, Inc. and its subsidiaries (the "Company") for the thirteen week
periods ended April 30, 2005 and May 1, 2004 have been prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") for
interim financial information and are presented in accordance with the
requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, for the fiscal
year ended January 29, 2005, included in our Fiscal 2005 Annual Report on Form
10-K. In the opinion of management, the financial statements included herein
contain all adjustments considered necessary for a fair presentation of our
financial position as of April 30, 2005, and the results of its operations and
cash flows for the thirteen week periods ended April 30, 2005 and May 1, 2004.
Certain prior year amounts have been reclassified to conform to current year
presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates and assumptions.
We have also experienced, and expect to continue to experience, significant
variability in sales and net income from quarter to quarter. Therefore, the
results of the interim periods presented herein are not necessarily indicative
of the results to be expected for any other interim period or the full year.
Stock-Based Compensation
At April 30, 2005 and January 29, 2005, the Company had one stock option
plan that provided for the issuance of options to employees and members of the
board of directors. The Company accounts for the plan under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost for this plan is reflected in net income,
as all options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and net income per common share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation--Transaction and Disclosure--an Amendment of FASB Statement No.
123," to stock-based employee compensation (in thousands except per share
amounts):
For the Thirteen Weeks Ended
----------------------------
In thousands April 30, 2005 May 1, 2004
-------------- -----------
Net income, as reported ........... $ 1,060 $ 1,228
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax
effects....................... 139 341
--------- --------
Pro forma net income .............. $ 921 $ 887
Net income per common share:
Basic--as reported ................ $ 0.07 $ 0.07
Basic--pro forma .................. $ 0.06 $ 0.05
Diluted--as reported .............. $ 0.06 $ 0.07
Diluted--pro forma ................ $ 0.05 $ 0.05
========= ========
On June 1, 2005, the stockholders of the Company approved the adoption of
the Books-A-Million, Inc. 2005 Incentive Award Plan. The Company's board of
directors had previously approved this plan subject to stockholder approval. No
grants have been made to date under this new plan.
There were no new grants of stock options in fiscal 2006. Stock-based
compensation expense for fiscal 2006 relates to options granted in prior years
that would be expensed over their vesting period. The fair value of the options
granted under the Company's stock option plan for fiscal 2005 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: $0.03 per quarter dividend yield;
expected stock price volatility rate of .44; risk-free interest rates of 3.45%
to 4.31%; and expected lives of six or ten years.
6
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share ("EPS") is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock are
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted EPS has been
computed based on the weighted average number of shares outstanding including
the effect of outstanding stock options and restricted stock, if dilutive, in
each respective thirteen week period. A reconciliation of the weighted average
shares for basic and diluted EPS is as follows:
For the Thirteen Weeks Ended
(in thousands)
----------------------------
April 30, 2005 May 1, 2004
-------------- -----------
Weighted average shares outstanding:
Basic ............................... 16,201 16,445
Dilutive effect of stock options and
restricted stock outstanding......... 721 768
------ ------
Diluted ............................. 16,922 17,213
====== ======
Options outstanding to purchase 155,000 and 1,060,000 shares of common
stock as of April 30, 2005 and May 1, 2004, respectively, were not included in
the table above as they were anti-dilutive under the treasury stock method.
3. RELATED PARTY TRANSACTIONS
Charles C. Anderson, a former director of the Company, Terry C. Anderson, a
director of the Company, and Clyde B. Anderson, a director and officer of the
Company, have controlling ownership interests in other entities with which the
Company conducts business. Significant transactions between the Company and
these various other entities ("related parties") are summarized in the following
paragraphs.
The Company purchases a substantial portion of its magazines as well as
certain of their seasonal music and newspapers from Anderson Media Corporation
("Anderson Media"), an affiliate through common ownership. During the thirteen
weeks ended April 30, 2005 and May 1, 2004, purchases of these items from
Anderson Media totaled $6,734,000 and $7,006,000, respectively. The Company
purchases certain of its collectibles and books from Anderson Press, Inc.
("Anderson Press"), an affiliate through common ownership. During the thirteen
weeks ended April 30, 2005 and May 1, 2004, such purchases from Anderson Press
totaled $313,000 and $420,000, respectively. The Company purchases certain of
its greeting cards and gift products from C.R. Gibson, Inc., an affiliate
through common ownership. The purchases of these products during the thirteen
weeks ended April 30, 2005 and May 1, 2004 were $24,000 and $142,000,
respectively. The Company purchases certain magazine subscriptions from
Magazines.com, an affiliate through common ownership. During the thirteen weeks
ended April 30, 2005 and May 1, 2004, purchases of these items were $17,000 and
$24,000, respectively. The Company purchases content for publication from
Publication Marketing Corporation, an affiliate through common ownership. During
the thirteen weeks ended April 30, 2005 and May 1, 2004, purchases of these
items were $17,000 and $18,000, respectively. The Company utilizes import
sourcing and consolidation services from Anco Far East Importers, LTD ("Anco Far
East"), an affiliate through common ownership. The total paid to Anco Far East
was $477,000 and $95,000 during the thirteen weeks ended April 30, 2005 and May
1, 2004, respectively. These amounts paid to Anco Far East primarily included
the actual cost of the product as well as fees for sourcing and consolidation
services. All costs other than the sourcing and consolidation service fees were
passed through from other vendors. Anco Far East fees, net of the passed-through
costs, were $33,000 and $7,000 during the thirteen weeks ended April 30, 2005
and May 1, 2004, respectively.
The Company sold books to Anderson Media in the amounts of $1,000 and
$53,000 during the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. During the thirteen weeks ended April 30, 2005 and May 1, 2004,
the Company provided $4,000 and $47,000, respectively, of internet services to
Magazines.com. The Company provided internet services to American Promotional
Events, an affiliate through common ownership, of $20,000 and $17,000 during the
thirteen weeks ended April 30, 2005 and May 1, 2004, respectively.
7
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company leases its principal executive offices from a trust,
beneficiaries of which are the grandchildren of Mr. Charles C. Anderson, a
former member of the Board of Directors. The lease extends to January 31, 2006.
During the thirteen weeks ended April 30, 2005 and May 1, 2004, the Company paid
rent of $34,000 in each period to the trust under this lease. Anderson &
Anderson LLC ("A&A"), an affiliate through common ownership, also leases three
buildings to the Company. During the thirteen weeks ended April 30, 2005 and May
1, 2004, the Company paid A&A a total of $111,000 and $110,000, respectively, in
connection with such leases. Total minimum future rental payments under all of
these leases are $103,000 at April 30, 2005. The Company subleases certain
property to Hibbett Sporting Goods, Inc. ("Hibbett"), a sporting goods retailer
in the southeastern United States. The Company's Executive Chairman, Clyde B.
Anderson, is a member of Hibbett's board of directors. During each of the
thirteen weeks ended April 30, 2005 and May 1, 2004, the Company received
$48,000 in rent payments from Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operation of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all of the variable cost, and
a portion of the fixed cost of the plane. The total amounts received from
affiliated companies for use of the plane during the thirteen weeks ended April
30, 2005 and May 1, 2004, was $72,000 and $63,000, respectively. The Company
also occasionally rents a plane from A&A as well. The amounts paid to A&A for
plane rental were $15,000 and $11,000 for the thirteen weeks ended April 30,
2005 and May 1, 2004, respectively.
4. DERIVATIVE AND HEDGING ACTIVITIES
The Company is subject to interest rate fluctuations involving its credit
facilities and debt related to an industrial development revenue bond (the
"Bond"). However, the Company uses fixed interest rate hedges to manage this
exposure. The Company entered into two separate $10 million swaps on July 24,
2002. Both expire in August 2005 and effectively fix the interest rate on $20
million of variable credit facility debt at 5.13%. In addition, the Company
entered into a $7.5 million interest rate swap in May 1996 that expires in June
2006 and effectively fixes the interest rate on the Bond at 8.73%. The counter
parties to the interest rate swaps are two primary banks in the Company's credit
facility. The Company believes the credit and liquidity risks of the counter
parties failing to meet their obligation are remote as the Company settles its
interest position with the banks on a quarterly basis.
The Company's hedges are designated as cash flow hedges because they are
interest rate swaps that convert variable payments to fixed payments. Cash flow
hedges protect against the variability in future cash outflows of current or
forecasted debt and related interest expense. The changes in the fair value of
these hedges are reported on the balance sheet with a corresponding adjustment
to accumulated other comprehensive income (loss) or in earnings, depending on
the type of hedging relationship. Over time, amounts held in accumulated other
comprehensive income (loss) will be reclassified to earnings if the hedge
transaction becomes ineffective.
The Company's interest rate swaps described above are reported as a
liability classified in other long-term liabilities in the accompanying
condensed consolidated balance sheets at their fair value of $367,000 and
$543,000 as of April 30, 2005 and January 29, 2005, respectively. For the
thirteen weeks ended April 30, 2005 and May 1, 2004, respectively, adjustment
gains of $51,000 (net of tax provision of $38,000) and $93,000 (net of tax
provision of $57,000) were recorded as unrealized gains in accumulated other
comprehensive income (loss) and are detailed in Note 5. During the fourth
quarter of fiscal 2005, one interest rate swap no longer qualified for hedge
accounting under SFAS No. 133; as a result, the Company de-designated the hedge.
In addition, in the fourth quarter of fiscal 2004, the other $10 million
interest rate swap no longer qualified for hedge accounting under SFAS No. 133
and the Company de-designated that hedge at that time. For the thirteen weeks
ended April 30, 2005 and May 1, 2004 a pre-tax gain of $85,000 and $70,000,
respectively, was recorded in earnings related to the de-designated hedges.
8
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
Comprehensive income is net income plus certain other items that are
recorded directly to stockholders' equity. The only such items currently
applicable to the Company are the unrealized gains (losses) on the hedges
explained in Note 4, as follows:
COMPREHENSIVE INCOME (LOSS) Thirteen Weeks Ended
(in thousands)
--------------------
April 30, 2005 May 1, 2004
-------------- -----------
Net income .................... $1,060 $1,228
Unrealized gains (losses) on
hedges, net of deferred tax
provision (benefit) for the
thirteen-week periods of $38
and $57, respectively ......... 51 93
------ ------
Total comprehensive income .... $1,111 $1,321
====== ======
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. In the opinion of management, after consultation with legal counsel,
the ultimate liability, if any, with respect to those proceedings is not
presently expected to materially affect the financial position, results of
operations or cash flows of the Company.
From time to time, the Company enters into certain types of agreements that
require the Company to indemnify parties against third party claims under
certain circumstances. Generally these agreements relate to: (a) agreements with
vendors and suppliers under which the Company may provide customary
indemnification to its vendors and suppliers in respect of actions they take at
the Company's request or otherwise on its behalf, (b) agreements with vendors
who publish books or manufacture merchandise specifically for the Company to
indemnify vendors against trademark and copyright infringement claims concerning
the books published or merchandise manufactured on behalf of the Company, (c)
real estate leases, under which the Company may agree to indemnify the lessors
from claims arising from the Company's use of the property, and (d) agreements
with the Company's directors, officers and employees, under which the Company
may agree to indemnify such persons for liabilities arising out of their
relationship with the Company. The Company has Directors and Officers Liability
Insurance, which, subject to the policy's conditions, provides coverage for
indemnification amounts payable by the Company with respect to its directors and
officers up to specified limits and subject to certain deductibles.
The nature and terms of these types of indemnities vary. The events or
circumstances that would require the Company to perform under these indemnities
are transaction and circumstance specific. Generally, the Company's maximum
liability under such indemnities is not explicitly stated, and, therefore, the
overall maximum amount of the Company's obligations cannot be reasonably
estimated. Historically, the Company has not incurred significant costs related
to performance under these types of indemnities. No liabilities have been
recorded for these obligations on the Company's balance sheet at April 30, 2005
and January 29, 2005 as such liabilities are considered de minimis.
7. INVENTORIES
Inventories were:
(In thousands) April 30, 2005 January 29, 2005
-------------- ----------------
Inventories (at FIFO) $ 222,512 $ 211,375
LIFO reserve (1,242) (1,105)
----------- ----------
Net inventories $ 221,270 $ 210,270
=========== ==========
9
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. BUSINESS SEGMENTS
The Company has two reportable segments, retail trade and electronic
commerce trade. The retail trade segment is a strategic business segment that is
engaged in the retail trade of mostly book merchandise and includes the
Company's distribution center operations, which predominantly supplies
merchandise to the Company's retail stores. The electronic commerce trade
segment is a strategic business segment that transacts business over the
internet and is managed separately due to divergent technology and marketing
requirements.
The accounting policies of the segments are substantially the same as those
described in the Company's Fiscal 2005 Annual Report on Form 10-K. The Company
evaluates performance of the segments based on net income from operations before
interest and income taxes. Certain intersegment cost allocations have been made
based upon consolidated and segment revenues.
SEGMENT INFORMATION (IN THOUSANDS) Thirteen Weeks Ended
----------------------
April 30, 2005 May 1, 2004
-------------- -----------
NET SALES
Retail Trade ........................................ $ 111,812 $ 105,999
Electronic Commerce Trade ........................... 6,519 6,298
Intersegment Sales Elimination ...................... (5,327) (4,384)
---------- ----------
Net Sales .................................... $ 113,004 $ 107,913
========== ==========
OPERATING INCOME
Retail Trade ........................................ $ 2,074 $ 2,277
Electronic Commerce Trade ........................... (8) 85
Intersegment Elimination of Certain Costs ........... 62 133
---------- ----------
Total Operating Income ....................... $ 2,128 $ 2,495
========== ==========
ASSETS As of As of
April 30, 2005 January 29, 2005
-------------- ----------------
Retail Trade ........................................ $ 301,347 $ 299,703
Electronic Commerce Trade ........................... 1,618 1,372
Intersegment Asset Elimination ...................... (205) (263)
---------- ----------
Total Assets ................................. $ 302,760 $ 300,812
========== ==========
10
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004, "Share-Based Payment") SFAS No. 123R is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes ABP
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R
requires all share-based payments to employees and directors, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values. SFAS No. 123R is effective at the beginning of the first
annual period beginning after June 15, 2005 (as modified by the SEC on April 14,
2005). Under ABP Opinion No. 25, no stock-based compensation cost had been
reflected in the net income of the Company for grants of stock options to
employees. Beginning in fiscal 2007, the Company will recognize compensation
expense in its financial statements based on the fair value of all share-based
payments to employees. The impact of adopting this new accounting standard on
the Company's financial position, results of operations or cash flows has not
yet been determined.
In November 2004, the Emerging Issues Task Force ("EITF") issued EITF No.
03-13 "Applying the Conditions in Paragraph 42 of FASB No. 144 in Determining
Whether to Report Discontinued Operations." EITF No. 03-13 addresses how an
ongoing entity should evaluate whether the operations and cash flows of a
disposed component have been or will be eliminated from the ongoing operations
of the entity and the types of continuing involvement that constitute
significant continuing involvement in the operations of the disposed component.
EITF No. 03-13 is effective with the fiscal year beginning January 30, 2005. The
adoption of this EITF did not have a material effect on the Company's
financial position, results of operations or cash flows.
FASB Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46") was issued in January 2003. This interpretation requires
consolidation of variable interest entities ("VIE"), also formerly referred to
as "special purpose entities," if certain, conditions are met. The
interpretation applied immediately to VIE's created after January 31, 2003, and
to interests obtained in VIE's after January 31, 2003. Beginning after June 15,
2003, the interpretation applied also to VIE's created or interest obtained in
VIE's before January 31, 2003. In December 2003, the FASB issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities - An
Interpretation of ARB 51," (revised December 2003) ("FIN 46R), which includes
significant amendments to previously issued FIN No. 46. Among other provisions,
FIN 46R includes revised transition dates for public entities. The Company
adopted the provisions of FIN 46R in the first quarter of fiscal 2005. The
adoption of this interpretation did not have a material effect on the Company's
financial position, results of operations or cash flows.
10. DISCONTINUED OPERATIONS
Discontinued operations represent the fiscal 2005 closure of two retail
stores in markets in Florida and Mississippi and the fiscal 2006 closure of one
retail store in a Tennessee market where the Company does not expect another of
its existing stores to absorb the closed store's customers. For the thirteen
week periods ended April 30, 2005 and May 1, 2004, these stores had net sales of
$109,000 and $602,000, respectively, and pretax operating income (losses) of
($34,000) and $4,000, respectively. Also included in the loss on discontinued
operations are store closing costs of $16,000 for the thirteen weeks ended April
30, 2005. Expenses relating to store closings when the store is not classified
as a discontinued operation are reported in operating, selling and
administrative expenses. If the store is closed and another store is in the same
market and the cash flows are expected to be materially recovered, the store is
not considered a discontinued operation.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the book retail industry
in general and in the Company's specific market areas; inflation; economic
conditions in general and in the Company's specific market areas; the number of
store openings and closings; the profitability of certain product lines, capital
expenditures and future liquidity; liability and other claims asserted against
the Company; uncertainties related to the Internet and the Company's Internet
initiatives; and other factors referenced herein. In addition, such
forward-looking statements are necessarily dependent upon the assumptions,
estimates and dates that may be incorrect or imprecise and involve known and
unknown risks, uncertainties and other factors. Accordingly, any forward-looking
statements included herein do not purport to be predictions of future events or
circumstances and may not be realized. Given these uncertainties, stockholders
and prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
GENERAL
We were founded in 1917 and currently operate 207 retail bookstores,
including 172 superstores, concentrated in the southeastern United States.
Our growth strategy is focused on opening superstores in new and existing
market areas, particularly in the Southeast. In addition to opening new stores,
management intends to continue its practice of reviewing the profitability
trends and prospects of existing stores and closing or relocating
under-performing stores or converting stores to different formats.
Comparable store sales are determined each fiscal quarter during the year
based on all stores that have been open at least 12 full months as of the first
day of the fiscal quarter. Any stores closed during a fiscal quarter are
excluded from comparable store sales as of the first day of the quarter in which
they close.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as a
percentage of net sales for the periods presented.
Thirteen Weeks Ended
--------------------
April 30, 2005 May 1, 2004
-------------- -----------
Net sales ........................... 100.0% 100.0%
Gross profit ........................ 28.0% 28.0%
Operating, selling and administrative
expenses ............................ 22.6% 21.4%
Depreciation and amortization ....... 3.5% 4.3%
----- -----
Operating income .................... 1.9% 2.3%
Interest expense, net ............... 0.4% 0.5%
----- -----
Income from continuing operations
before income taxes ................. 1.5% 1.8%
Income taxes provision .............. 0.6% 0.7%
----- -----
Income from continuing operations ... 0.9% 1.1%
----- -----
Net income .......................... 0.9% 1.1%
===== =====
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales increased $5.1 million, or 4.7%, to $113.0 million in the
thirteen weeks ended April 30, 2005, from $107.9 million in the thirteen weeks
ended May 1, 2004. Comparable store sales in the thirteen weeks ended April 30,
2005 increased 3.6% when compared with the same thirteen week period for the
prior year. The increase in comparable store sales for the thirteen weeks was
primarily due to higher sales in the book department. The book sales increase
was primarily driven by sales in categories such as Inspirational, Fiction,
Children's, Cooking and Humor. Bestselling titles included Nicholas Spark's True
Believer, Rick Warren's The Purpose Driven Life, Joel Osteen's Your Best Life
Now and James Patterson's Honeymoon. During the thirteen weeks ended April 30,
2005, the Company opened four superstores, relocated one superstore and closed
two traditional stores and one newsstand.
Net sales for the retail trade segment increased $5.8 million, or 5.5%, to
$111.8 million in the thirteen weeks ended April 30, 2005 from $106.0 million in
the same period last year. The increase in sales was primarily due to higher
comparable store sales, which increased 3.6% for the thirteen weeks. Net sales
for the electronic commerce segment increased $0.2 million or 3.5 %, to $6.5
million in the thirteen weeks ended April 30, 2005, related primarily to higher
business to business and bestseller title order volume.
Gross profit increased $1.5 million, or 4.9%, to $31.7 million in the
thirteen weeks ended April 30, 2005 when compared with $30.2 million in the same
thirteen week period for the prior year. Gross profit as a percentage of net
sales for the thirteen weeks ended April 30, 2005 and May 1, 2004 was 28.0%.
Operating, selling and administrative expenses were $25.6 million in the
thirteen week period ended April 30, 2005 compared to $23.1 million in the same
period last year. Operating, selling and administrative expenses as a percentage
of net sales for the thirteen weeks ended April 30, 2005 increased to 22.6 %
from 21.4% in the same period last year. The increase in operating, selling and
administrative expenses stated as a percent to sales was primarily due to higher
store selling costs due to increased staffing to improve customer service,
permanently shifting the costs of taking physical inventories for some stores to
the first quarter from later quarters and new store costs incurred for four
stores opened in this quarter compared to no new stores opened in the first
quarter of fiscal 2005.
Depreciation and amortization was $3.9 million and $4.6 million
respectively in the thirteen week periods ended April 30, 2005 and May 1, 2004.
Decrease in depreciation and amortization expense was due to the impact of
certain assets becoming fully depreciated during the prior year.
Consolidated operating income was $2.1 million for the thirteen weeks ended
April 30, 2005, compared to $2.5 million in the same period last year. Operating
income for the retail trade segment decreased $0.2 million for the thirteen
weeks ended April 30, 2005. The decrease in operating income for the quarter was
due to higher operating, selling and administrative expenses, primarily due to
higher store selling costs due to increased staffing to improve customer
service, permanently shifting the costs of taking physical inventories for some
stores to the first quarter from later quarters and new store costs incurred for
four stores opened in this quarter compared to no new stores opened in the first
quarter of fiscal 2005. The operating profit for the electronic commerce segment
decreased $0.1 million for the thirteen weeks ended April 30, 2005 compared to
the same period last year. The decrease in profit was due to higher freight and
handling costs as a percentage of sales.
Interest expense was $0.4 million in the thirteen weeks ended April 30,
2005 versus $0.5 million in the same period last year. The decrease was
primarily due to lower average debt balances compared with the prior year.
Discontinued operations represent the fiscal 2005 closure of two retail
stores in markets in Florida and Mississippi and the fiscal 2006 closure of one
retail store in a Tennessee market where the Company does not expect another of
its existing stores to absorb the closed store's customers. For the thirteen
week periods ended April 30, 2005 and May 1, 2004, these stores had net sales of
$109,000 and $602,000, respectively, and pretax operating income (losses) of
($34,000) and $4,000, respectively. Also included in the loss on discontinued
operations are store closing costs of $16,000 for the thirteen weeks ended April
30, 2005. Expenses relating to store closings when the store is not classified
as a discontinued operation are reported in operating, selling and
administrative expenses. If the store is closed and another store is in the same
market and the cash flows are expected to be materially recovered, the store is
not considered a discontinued operation.
.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flows from operations,
including credit terms from vendors, and borrowings under its credit facility.
The Company has an unsecured revolving credit facility that allows borrowings up
to $100 million, for which no principal repayments are due until the facility
expires in July 2007. The credit facility has certain financial and
non-financial covenants, the most restrictive of which is the maintenance of a
minimum fixed charge coverage ratio. As of April 30, 2005 and January 29, 2005,
$11.8 million and $0 respectively, were outstanding under this credit facility.
The maximum and average outstanding balances during the thirteen weeks ended
April 30, 2005 were $19.3 million and $9.3 million, respectively, compared to
$33.2 million and $25.8 million, respectively for the same period in the prior
year. The decrease in the maximum and average outstanding balances from the
prior year was due to the pay down of debt during fiscal 2005 with cash provided
by operating activities. The outstanding borrowings as of April 30, 2005 had
interest rates ranging from 3.89% to 4.70%.
Additionally, as of April 30, 2005 and January 29, 2005, the Company has
outstanding borrowings under an industrial revenue bond totaling $7.5 million,
which is secured by certain property.
Financial Position
Inventory balances at April 30, 2005 compared to January 29, 2005 increased
due to seasonal fluctuation in inventory. Inventory levels are lowest at January
29, 2005 due to large post holiday returns to vendors. Accrued expenses at April
30, 2005 compared to January 29, 2005 decreased due to lower capital
expenditures and payment of fiscal 2005 management bonuses in the first quarter
of fiscal 2006.
Future Commitments
The following table lists the aggregate maturities of various classes of
obligations and expiration amounts of various classes of commitments related to
Books-A-Million, Inc. at April 30, 2005 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Thereafter
----- ------- ------- ------- ------- ------- ----------
Long-term debt-revolving
credit facility......... $ 11,840 - - $ 11,840 - - -
Long-term debt
-industrial
revenue bond............ 7,500 - 7,500 - - - -
------- ------ ------ ------ ------ ----- ------
Subtotal of debt........ 19,340 - 7,500 11,840 - - -
Operating leases........ 110,106 21,158 22,918 19,167 14,502 9,495 22,866
------- ------ ------ ------ ------ ----- ------
Total of obligations.... $ 129,446 $ 21,158 $ 30,418 $ 31,007 $ 14,502 $ 9,495 $ 22,866
========= ======== ======== ======== ======== ======= ========
Guarantees
From time to time, the Company enters into certain types of agreements that
contingently require the Company to indemnify parties against third party
claims. Generally these agreements relate to: (a) agreements with vendors and
suppliers, under which the Company may provide customary indemnification to its
vendors and suppliers in respect of actions they take at the Company's request
or otherwise on its behalf, (b) agreements with vendors who publish books or
manufacture merchandise specifically for the Company to indemnify the vendors
against trademark and copyright infringement claims concerning the books
published or merchandise manufactured on behalf of the Company, (c) real estate
leases, under which the Company may agree to indemnify the lessors from claims
arising from the Company's use of the property, and (d) agreements with the
Company's directors, officers and employees, under which the Company may agree
to indemnify such persons for liabilities arising out of their relationship with
the Company. The Company has Directors and Officers Liability Insurance, which,
subject to the policy's conditions, provides coverage for indemnification
amounts payable by the Company with respect to its directors and officers up to
specified limits and subject to certain deductibles.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The nature and terms of these types of indemnities vary. The events or
circumstances that would require the Company to perform under these indemnities
are transaction and circumstance specific. Generally, the Company's maximum
liability under such indemnities is not explicitly stated, and therefore the
overall maximum amount of the Company's obligations cannot be reasonably
estimated. Historically, the Company has not incurred significant costs related
to performance under these types of indemnities. No liabilities have been
recorded for these obligations on the Company's balance sheet at April 30, 2005
and January 29, 2005 as such liabilities are considered de minimis.
Cash Flows
Operating activities used cash of $18.4 million and $9.2 million in the
thirteen week periods ended April 30, 2005 and May 1, 2004, respectively, and
included the following effects:
o Cash used for inventories in the thirteen week periods ended April 30,
2005 and May 1, 2004 was $11.0 million and $6.7 million, respectively.
The higher usage was primarily due to opening four new stores during
the current period.
o Cash used for accounts payable in the thirteen week periods ended
April 30, 2005 and May 1, 2004 was $1.6 million and $0.8 million,
respectively. This change was due to improved leveraging of accounts
payable with vendors in the first quarter of fiscal 2005.
o Depreciation and amortization expenses were $3.9 million and $4.6
million, respectively in the thirteen week periods ended April 30, 2005
and May 1, 2004. Decrease in depreciation and amortization expense was
due to the impact of certain assets becoming fully depreciated during
the prior year.
Cash flows used in investing activities reflected a $1.7 million and $2.8
million net use of cash for the thirteen week periods ended April 30, 2005 and
May 1, 2004, respectively. Cash was used primarily to fund capital expenditures
for new stores, store relocations, renovation and improvements to existing
stores, and investments in management information systems.
Financing activities provided cash of $9.9 million and $11.7 million in the
thirteen week periods ended April 30, 2005 and May 1, 2004, respectively,
principally from net borrowings under the revolving credit facility.
OUTLOOK
During the thirteen weeks ended April 30, 2005, the Company opened four
stores, relocated one store, remodeled two stores and closed three stores. For
the remainder of fiscal 2006, the Company expects to open four to six stores,
complete remodels on approximately fifteen to twenty stores, and close one to
two stores. The Company's capital expenditures totaled $1.7 million in the
thirteen week period ended April 30, 2005. Management estimates that capital
expenditures for the remainder of fiscal 2006 will be approximately $14.3
million and that such amounts will be used primarily for opening new stores,
making relocations, renovation and improvements to existing stores, upgrading
and expanding warehouse distribution facilities, and investing in management
information systems. Management believes that existing cash on hand and net cash
from operating activities, together with borrowings under the Company's credit
facilities, will be adequate to finance the Company's planned capital
expenditures and to meet the Company's working capital requirements for the
remainder of fiscal 2006.
RELATED PARTY ACTIVITIES
Charles C. Anderson, a former director of the Company, Terry C. Anderson, a
director of the Company, and Clyde B. Anderson, a director and officer of the
Company, have controlling ownership interests in other entities with which the
Company conducts business. Significant transactions between the Company and
these various other entities ("related parties") are summarized in the following
paragraphs.
The Company purchases a substantial portion of its magazines as well as
certain of their seasonal music and newspapers from Anderson Media Corporation
("Anderson Media"), an affiliate through common ownership. During the thirteen
weeks ended April 30, 2005 and May 1, 2004, purchases of these items from
Anderson Media totaled $6,734,000 and $7,006,000, respectively. The Company
purchases certain of its collectibles and books from Anderson Press, Inc.
("Anderson Press"), an affiliate through common ownership. During the thirteen
weeks ended April 30, 2005 and May 1, 2004, such purchases from Anderson Press
totaled $313,000 and $420,000,
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
respectively. The Company purchases certain of its greeting cards and gift
products from C.R. Gibson, Inc., an affiliate through common ownership. The
purchases of these products during the thirteen weeks ended April 30, 2005 and
May 1, 2004 were $24,000 and $142,000, respectively. The Company purchases
certain magazine subscriptions from Magazines.com, an affiliate through common
ownership. During the thirteen weeks ended April 30, 2005 and May 1, 2004,
purchases of these items were $17,000 and $24,000, respectively. The Company
purchases content for publication from Publication Marketing Corporation, an
affiliate through common ownership. During the thirteen weeks ended April 30,
2005 and May 1, 2004, purchases of these items were $17,000 and $18,000,
respectively. The Company utilizes import sourcing and consolidation services
from Anco Far East Importers, LTD ("Anco Far East"), an affiliate through common
ownership. The total paid to Anco Far East was $477,000 and $95,000 during the
thirteen weeks ended April 30, 2005 and May 1, 2004, respectively. These amounts
paid to Anco Far East primarily included the actual cost of the product as well
as fees for sourcing and consolidation services. All costs other than the
sourcing and consolidation service fees were passed through from other vendors.
Anco Far East fees, net of the passed-through costs, were $33,000 and $7,000
during the thirteen weeks ended April 30, 2005 and May 1, 2004, respectively.
The Company sold books to Anderson Media in the amounts of $1,000 and
$53,000 during the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. During the thirteen weeks ended April 30, 2005 and May 1, 2004,
the Company provided $4,000 and $47,000, respectively, of internet services to
Magazines.com. The Company provided internet services to American Promotional
Events, and affiliate through common ownership, of $20,000 and $17,000 during
the thirteen weeks ended April 30, 2005 and May 1, 2004, respectively.
The Company leases its principal executive offices from a trust,
beneficiaries of which are the grandchildren of Mr. Charles C. Anderson, a
former member of the Board of Directors. The lease extends to January 31, 2006.
During the thirteen weeks ended April 30, 2005 and May 1, 2004, the Company paid
rent of $34,000 in each period to the trust under this lease. Anderson &
Anderson LLC ("A&A"), an affiliate through common ownership, also leases three
buildings to the Company. During the thirteen weeks ended April 30, 2005 and May
1, 2004, the Company paid A&A a total of $111,000 and $110,000, respectively, in
connection with such leases. Total minimum future rental payments under all of
these leases are $103,000 at April 30, 2005. The Company subleases certain
property to Hibbett Sporting Goods, Inc. ("Hibbett"), a sporting goods retailer
in the southeastern United States. The Company's Executive Chairman, Clyde B.
Anderson, is a member of Hibbett's board of directors. During each of the
thirteen weeks ended April 30, 2005 and May 1, 2004, the Company received
$48,000 in rent payments from Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operation of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all of the variable cost, and
a portion of the fixed cost of the plane. The total amounts received from
affiliated companies for use of the plane during the thirteen weeks ended April
30, 2005 and May 1, 2004, was $72,000 and $63,000, respectively. The Company
also occasionally rents a plane from A&A as well. The amounts paid to A&A for
plane rental were $15,000 and $11,000 for the thirteen weeks ended April 30,
2005 and May 1, 2004, respectively.
16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate fluctuations involving its credit
facilities. The average amount of debt outstanding under the Company's credit
facilities was $21.6 million during fiscal 2005. However, the Company utilizes
both fixed and variable debt to manage this exposure. The Company entered into
two separate $10 million swaps on July 24, 2002. Both expire in August 2005 and,
prior to the payoff of the related debt in prior years, effectively fixed the
interest rate on $20 million of variable debt at 5.13%. Also, on May 14, 1996,
the Company entered into an interest rate swap agreement, with a ten- year term,
which carries a notional principal amount of $7.5 million. The swap effectively
fixes the interest rate on $7.5 million of variable rate debt at 8.73%. The swap
agreement expires on June 7, 2006. The counter parties to the interest rate
swaps are parties to the Company's revolving credit facilities. The Company
believes the credit and liquidity risk of the counter parties failing to meet
their obligations is remote as the Company settles its interest position with
the banks on a quarterly basis.
To illustrate the sensitivity of the results of operations to changes in
interest rates on its debt, the Company estimates that a 66% increase in LIBOR
rates would have increased interest expense by approximately $16,000 for the
thirteen weeks ended April 30, 2005. Likewise, a 66% decrease in LIBOR rates
would have decreased interest expense by $16,000 for the thirteen weeks ended
May 1, 2004. This hypothetical change in LIBOR rates was calculated based on the
fluctuation in LIBOR in 2002, which was the maximum LIBOR fluctuation in the
last ten years. The estimates do not consider the effect of the potential
termination of the interest rate swaps associated with the debt will have on
interest expense.
17
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), management carried out an evaluation,
our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the fiscal quarter covered by this report. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level as of the end of the fiscal quarter covered by this report.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. In performing this evaluation, in light of the pronouncement on
February 7, 2005 by the Office of the Chief Accountant of the SEC in a letter to
the AICPA, management focused on our lease accounting practices. Specifically,
we determined that: (i) our practice of depreciating leasehold improvements over
a period of ten years was incorrect, which we corrected by changing the
depreciable life for leasehold improvements to the lesser of the economic useful
life of the asset or the term of the lease; (ii) our practice of using the store
opening date as the starting date for the rent expense calculation was
incorrect, which we corrected by changing the calculation of leasehold expense
so that straight-line rent expense begins on the date we take possession and
have the right to control use of the leased premises; and (iii) our practice of
classifying landlord allowances as a reduction of property and equipment on our
balance sheet and as a reduction in capital expenditures in our statements of
cash flows was incorrect, which we corrected by changing our method of
classification so that landlord allowances are classified as a deferred rent
credit on our balance sheet and as an operating activity in our statement of
cash flows. Funds received from the landlord intended to reimburse the Company
for the cost of leasehold improvements will be recorded as a deferred rent
credit resulting from a lease incentive and amortized over the lease term as a
reduction to rent expense.
Further, after consulting with the Audit Committee and our independent
certified public accountants we determined to restate our financial statements
for the period ended January 31, 2004 and for the first three quarters of fiscal
2005 and to file a Form 10-K/A amending our Annual Report on Form 10-K for our
fiscal year ended January 31, 2004 with restated consolidated financial
statements and Forms 10-Q/A amending our interim condensed consolidated
financial statements for the first three quarters of fiscal 2005. We did not
consider the impact of correcting the previously issued financial statements to
be material with respect to any individual reporting period. In most cases, our
initial lease term and initial leasehold depreciation matched a 10 year time
period and resulted in no material depreciation increase or decrease.
Additionally, we did reclassify landlord construction allowances out of
leasehold improvements and into the deferred rent credit account. This
reclassification did not result in material expense increase or decrease because
in most cases the time period of both the straight-line rent expense and
leasehold depreciation were matched at 10 years. Management therefore determined
the control deficiency in the company's internal control over financial
reporting was a significant deficiency and not a material weakness.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
quarterly report (Form 10-Q), the Company's disclosure controls and procedures
were effective at the reasonable assurance level. In concluding that our
disclosure controls and procedures were effective as of April 30, 2005, our
management considered, the company's depreciable life for leasehold
improvements, the calculation to start straight-line rent expense, and our
method of classification of landlord allowances, the circumstances that resulted
in the restatement of our previously issued financial statements. We also,
described above, determined that the amount of the restatement adjustments had
no material effect on our consolidated balance sheet and statement of
operations for each annual and quarterly period presented, and that these
non-cash adjustments had no effect on historical or future cash flows or the
timing of payments under our operating leases.
During the first quarter of fiscal 2006 we made changes in internal control
over financial reporting to implement additional review processes relating to
our leasing arrangements which were designed to ensure the collection and
communication of information necessary for the proper accounting for each lease
in accordance with generally accepted accounting principles. The Company also
implemented the following accounting changes: (i) we changed the depreciable
life for leasehold improvements to the lesser of the economic useful life of the
asset or the term of the lease, (ii) we changed the calculation to start
straight-line rent expense on the date when the Company takes possession and has
the right to control use of the leased premises, and (iii) we changed our method
of classification of landlord allowances. As explained above, the Company will
now classify landlord allowances as a deferred rent credit on the balance sheet
and as an operating activity in the statement of cash flows. Funds received
18
from the landlord intended to reimburse the Company for the cost of leasehold
improvements will be recorded as a deferred rent credit resulting from a lease
incentive and amortized over the lease term as a reduction to rent expense.
Management believes that these changes to our internal control over financial
reporting as well as our accounting policies have fully remediated the
significant deficiency described above.
19
II - OTHER INFORMATION
ITEM 1: Legal Proceedings
The Company is a party to various legal proceedings incidental to its
business. In the opinion of management, after consultation with legal counsel,
the ultimate liability, if any, with respect to those proceedings is not
presently expected to materially affect the financial position, results of
operations or cash flows of the Company.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Securities
In March 2004, the Board of Directors authorized a new common stock
repurchase program for up to 10% of the outstanding stock, or 1,646,624 shares.
The following table shows common stock repurchases under the program:
Maximum Number of
Total Number of Shares that May Yet
Total Number Shares Purchased as Be Purchased Under
of Shares Average Price Paid Part of Publicly the Program at End
Period Purchased per Share Announced Program of Period
------ --------- --------- ----------------- ---------
1/30/2005 to 2/26/2005 74,001 $9.4833 74,001 789,805
2/27/2005 to 3/2/2005 17,040 $9.0282 17,040 772,765
3/3/2005 to 3/30/2005 52,530 $9.4552 52,530 720,235
------ ------- ------ -------
Total 143,571 $9.4193 143,571 720,235
======= ======= ======= =======
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters of Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit 3i Certificate of Incorporation of Books-A-Million, Inc.
(incorporated herein by reference to Exhibit 3.1 in the
Company's Registration Statement on Form S-1
(Capital Registration No. 33-52256)
Exhibit 3ii By-Laws of Books-A-Million, Inc. (incorporated
herein by reference to Exhibit 3.2 in the Company's Registration
Statement on Form S-1 (Capital Registration No. 33-52256))
Exhibit 31.1 Certification of Clyde B. Anderson, Executive
Chairman of the Board of Books-A-Million, Inc., pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, filed under
Exhibit 31 of Item 601 of Regulation S-K.
Exhibit 31.2 Certification of Sandra B. Cochran, President and
Chief Executive Officer of Books-A-Million, Inc., pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, filed
under Exhibit 31 of Item 601 of Regulation S-K.
Exhibit 31.3 Certification of Richard S. Wallington, Chief
Financial Officer of Books-A-Million, Inc., pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, filed under
Exhibit 31 of Item 601 of Regulation S-K.
20
Exhibit 32.1 Certification of Clyde B. Anderson, Executive
Chairman of the Board of Books-A-Million, Inc.,pursuant to 18
U.S.C. Section 1350, filed under Exhibit 32 of Item 601
of Regulation S-K.
Exhibit 32.2 Certification of Sandra B. Cochran, President and
Chief Executive Officer of Books-A-Million, Inc., pursuant to 18
U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of
Regulation S-K.
Exhibit 32.3 Certification of Richard S. Wallington, Chief
Financial Officer of Books-A-Million, Inc., pursuant to 18
U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of
Regulation S-K.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
BOOKS-A-MILLION, INC.
Date: June 14, 2005 by:/s/ Clyde B. Anderson
---------------------
Clyde B. Anderson
Executive Chairman of the Board
Date: June 14, 2005 by:/s/ Sandra B. Cochran
---------------------
Sandra B. Cochran
President and Chief Executive Officer
Date: June 14, 2005 by:/s/ Richard S. Wallington
-------------------------
Richard S. Wallington
Chief Financial Officer
22
Exhibit 31.1
CERTIFICATIONS
I, Clyde B. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Books-A-Million, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 14, 2005
_/s/ Clyde B. Anderson
-----------------------
Clyde B. Anderson
Executive Chairman of the Board
23
Exhibit 31.2
CERTIFICATIONS
I, Sandra B. Cochran, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Books-A-Million, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 14, 2005
_/s/ Sandra B. Cochran
----------------------
Sandra B. Cochran
President and Chief Executive Officer
24
Exhibit 31.3
CERTIFICATIONS
I, Richard S. Wallington, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Books-A-Million, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 14, 2005
_/s/ Richard S. Wallington
--------------------------
Richard S. Wallington
Chief Financial Officer
25
Exhibit 32.1
CERTIFICATION OF EXECUTIVE CHAIRMAN OF THE BOARD
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc.
(the "Company") hereby certifies, to the best of such officer's knowledge, that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company
for the quarterly period ended April 30, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: June 14, 2005 /s/ Clyde B. Anderson
----------------------------------
Clyde B. Anderson
Executive Chairman of the Board
26
Exhibit 32.2
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc.
(the "Company") hereby certifies, to the best of such officer's knowledge, that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company
for the quarterly period ended April 30, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: June 14, 2005 /s/ Sandra B. Cochran
-----------------------------------
Sandra B. Cochran
President and Chief Executive Officer
27
Exhibit 32.3
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc.
(the "Company") hereby certifies, to the best of such officer's knowledge, that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company
for the quarterly period ended April 30, 2005 (the "Report") fully
complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: June 14, 2005 /s/ Richard S. Wallington
-------------------------------
Richard S. Wallington
Chief Financial Officer
28