UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: July 31, 2004
- 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 (IRS Employer Identification No.)
of 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 September 8, 2004 were 16,743,084 shares.
EXPLANATORY NOTE:
As previously disclosed in a Form 8-K filed on March 22, 2005, following a
review detailed of its lease-related accounting policies, Books-A-Million, Inc.
(the "Company") determined to restate its prior financial statements (the
"Restatement") to certain errors in those financial statements relating to the
computation of depreciation, rent holiday, straight-line rent expense and the
related deferred liability.
Historically, the Company depreciated leasehold improvements over a
period of ten years, regardless of the term of the lease for the store. The
Company has corrected its depreciable life for leasehold improvements to the
lesser of the economic useful life of the asset or the term of the lease. When
calculating the straight-line rent expense per store, the Company previously
used the store opening date as the starting date for the rent expense
calculation. The Company has corrected this 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. Also, the Company has corrected its method
of classification of landlord allowances. For certain new stores, the Company
receives funding from landlords for the construction of leasehold improvements.
Historically, landlord allowances were classified as a reduction of leasehold
improvements on the Company's balance sheet and as a reduction in capital
expenditures in the Company's statement of cash flows. However, the Company has
restated the balance sheet by increasing other long-term liabilities and
increasing leasehold improvements (asset). In addition, in the statement of cash
flows, the Company has classified landlord allowances as an operating activity
and not as a reduction in capital expenditures.
As a result, the accompanying consolidated financial statements have been
restated from the amounts previously reported to incorporate the effects of
these corrections. See Note 13 to the condensed consolidated financial
statements.
This amendment No. 1 on Form 10-Q/A to the Company's quarterly report on
Form 10-Q for the fiscal quarter ended July 31, 2004, initially filed with the
Securities and Exchange Commission ("SEC") on September 14, 2004 ("Original
Filing"), is being filed to reflect restatements of the Company's consolidated
balance sheets at July 31, 2004 and the Company's consolidated statements of
operations, and consolidated cash flows for the thirteen weeks ended July 31,
2004 and August 2, 2003 and the twenty six weeks ended July 31, 2004 and August
2, 2003 and the notes related thereto. For a more detailed description of these
restatements, see Note 13, "Restatement of Financial Statements" to the
accompanying condensed consolidated financial statements.
For the convenience of the reader, this Form 10-Q/A includes the Original
Filing in its entirety. However, this Form 10-Q/A only amends and restates Items
1, 2, and 4 of Part I of the Original Filing and no other material information
in the Original Filing is amended hereby. The foregoing items have not been
updated to reflect other events occurring after the Original Filing or to modify
or update those disclosures affected by subsequent events. In addition, pursuant
to the rules of the SEC, Item 6 of Part II of the Original Filing has been
amended to contain currently-dated certifications from our Chief Executive
Officer and Chief Financial Officer , as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. The certifications of our Executive Chairman of the
Board, Chief Executive Officer and Chief Financial Officer are attached to this
Form 10-Q/A as Exhibits 31.1, 31.2, 31.3, 32.1, 32.2 and 32.3, respectively.
Except for the foregoing amended information, this Form 10-Q/A continues
to describe conditions as of the date of the Original Filing, and does not
update disclosures contained herein to reflect events that occurred at a later
date.
Concurrently with the filing of this Form 10-Q/A, we are filing an
amendment on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year
ended January 31, 2004 ("2004 10-K") to provide restatements of the financial
statements or financial data as of and for the periods included in the 2004 10-K
and amended quarterly reports on Form 10-Q/A for the quarters ended May 1, 2004
and October 30, 2004. We have not amended and do not intend to amend our
previously filed Annual Reports on Form 10-K other than the 2004 10-K or our
Quarterly Reports on Form 10-Q for the periods affected by the Restatement that
ended prior to January 30, 2004. For this reason, the consolidated financial
statements, auditors' reports and related financial information for all affected
periods contained in any prior reports should no longer be relied upon.
2
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (UNAUDITED AND AS RESTATED):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated 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 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters of Vote of Security-Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
AS OF JULY 31, 2004 AS OF JANUARY 31, 2004
------------------- ----------------------
(as restated) (as restated)
(see Note 13) (see Note 13)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,441 $ 5,348
Accounts receivable, net 7,477 7,271
Related party accounts receivable, net 193 351
Inventories 210,860 211,591
Prepayments and other 5,899 5,890
Deferred income taxes 4,696 4,450
---------- ----------
TOTAL CURRENT ASSETS 234,566 234,901
---------- ----------
PROPERTY AND EQUIPMENT:
Gross property and equipment 191,094 189,961
Less accumulated depreciation and amortization 134,717 130,069
---------- ----------
NET PROPERTY AND EQUIPMENT 56,377 59,892
---------- ----------
OTHER ASSETS 1,633 1,605
---------- ----------
TOTAL ASSETS $ 292,576 $ 296,398
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 88,445 $ 87,984
Related party accounts payable 7,656 8,777
Accrued expenses 30,380 30,191
Accrued income taxes 192 3,226
---------- ----------
TOTAL CURRENT LIABILITIES 126,673 130,178
---------- ----------
LONG-TERM DEBT 18,700 20,640
DEFERRED INCOME TAXES 2,000 1,957
OTHER LONG-TERM LIABILITIES 11,833 12,622
---------- ----------
TOTAL NON-CURRENT LIABILITIES 32,533 35,219
---------- ----------
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, 18,664,901 and 18,465,387 shares issued at 187 185
July 31, 2004 and January 31, 2004, respectively
Additional paid-in capital 72,452 71,799
Less treasury stock, at cost (2,094,750 and 2,010,050
shares at July 31, 2004 and January 31, 2004, (5,819) (5,271)
respectively)
Deferred compensation (461) (284)
Accumulated other comprehensive loss, net of tax (485) (707)
Retained earnings 67,496 65,279
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 133,370 131,001
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 292,576 $ 296,398
========== ==========
SEE ACCOMPANYING NOTES
4
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
------------- -------------- ------------- --------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(SEE NOTE 13) (SEE NOTE 13) (SEE NOTE 13) (SEE NOTE 13)
NET SALES $ 114,065 $ 113,081 $ 222,580 $ 211,586
Cost of products sold (including warehouse,
distribution and store occupancy costs) (1) 82,970 81,689 161,161 154,682
----------- ------------ ------------ -----------
GROSS PROFIT 31,095 31,392 61,419 56,904
Operating, selling and administrative expenses 24,736 23,661 47,919 45,237
Depreciation and amortization 4,333 4,520 8,975 9,144
----------- ------------ ------------ -----------
OPERATING INCOME 2,026 3,211 4,525 2,523
Interest expense, net 487 848 1,005 1,717
----------- ------------ ------------ -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,539 2,363 3,520 806
Income tax provision 550 896 1,303 304
----------- ------------ ------------ -----------
INCOME FROM CONTINUING OPERATIONS 989 1,467 2,217 502
DISCONTINUED OPERATIONS (NOTE 10):
Loss from discontinued operations before income
taxes - (191) - (329)
Income tax benefit - 70 - 122
----------- ------------ ------------ -----------
LOSS FROM DISCONTINUED OPERATIONS - (121) - (207)
----------- ------------ ------------ -----------
NET INCOME $ 989 $ 1,346 $ 2,217 $ 295
=========== ============ ============ ===========
NET INCOME PER COMMON SHARE:
BASIC:
INCOME FROM CONTINUING OPERATIONS $ 0.06 $ 0.09 $ 0.13 $ 0.03
LOSS FROM DISCONTINUED OPERATIONS (0.00) (0.01) (0.00) (0.01)
----------- ------------ ------------ -----------
NET INCOME $ 0.06 $ 0.08 $ 0.13 $ 0.02
=========== ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,497 16,248 16,471 16,234
DILUTED:
=========== ============ ============ ===========
INCOME FROM CONTINUING OPERATIONS $ 0.06 $ 0.09 $ 0.13 $ 0.03
LOSS FROM DISCONTINUED OPERATIONS (0.00) (0.01) (0.00) (0.01)
----------- ------------ ------------ -----------
NET INCOME $ 0.06 $ 0.08 $ 0.13 $ 0.02
=========== ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -
DILUTED 17,225 16,518 17,220 16,435
=========== ============ ============ ===========
(1) Inventory purchases from related parties were $5,517, $6,563, $16,778 and
$18,327, respectively, for each of the periods presented above.
SEE ACCOMPANYING NOTES
5
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 31, 2004 AUGUST 2, 2003
------------- --------------
(as restated) (as restated)
(see Note 13) (see Note 13)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,217 $ 295
--------- ---------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,975 9,248
Deferred compensation amortization 63 -
Loss on impairment of assets 3 420
(Gain)/Loss on disposal of property (12) 50
Change in deferred income taxes (233) 117
(Increase)/Decrease in inventories 731 (3,471)
Decrease in accounts payable (660) (15,196)
Changes in certain other assets and liabilities (3,544) (234)
--------- ---------
Total adjustments 5,323 (9,066)
--------- ---------
Net cash provided by (used in) operating activities 7,540 (8,771)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,387) (3,928)
Proceeds from sale of equipment 13 19
--------- ---------
Net cash used in investing activities (5,374) (3,909)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 95,120 108,220
Repayments under credit facilities (97,060) (95,442)
Purchase of treasury stock (548) -
Proceeds from exercise of stock options and issuance of
common stock under the employee stock option plan
415 95
--------- ---------
Net cash provided by (used in) financing activities (2,073) 12,873
--------- ---------
Net increase in cash and cash equivalents 93 193
Cash and cash equivalents at beginning of period 5,348 4,977
--------- ---------
Cash and cash equivalents at end of period $ 5,441 $ 5,170
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the thirteen week period for:
Interest $ 1,013 $ 1,770
Income taxes, net of refunds $ 4,241 $ 1,704
SEE ACCOMPANYING NOTES
6
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
and twenty-six week periods ended July 31, 2004 and August 2, 2003, 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 31, 2004,
included in our Fiscal 2004 Annual Report on Form 10-K/A. 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
July 31, 2004, and the results of its operations and cash flows for the
thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003.
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 July 31, 2004 and January 31, 2004, we had one stock option plan. We
account for the plan under the recognition and measurement principles of
Accounting Pronouncements Bulletin (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 (loss) and net income (loss) 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 -- Transition 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 For the Twenty-Six Weeks Ended
---------------------------- ------------------------------
In thousands July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
------------ ------------- -------------- ------------- --------------
Net income (loss), as reported $ 989 $ 1,346 $ 2,217 $ 295
Deduct: Total stock-based employee
compensation expense determined
under fair value based method 341 328 682 656
for all awards, net of tax effects
---------- ---------- --------- ----------
Pro forma net income (loss) $ 648 $ 1,018 $ 1,535 $ (361)
Net income (loss) per common share:
Basic -- as reported $ 0.06 $ 0.08 $ 0.13 $ 0.02
Basic -- pro forma $ 0.04 $ 0.06 $ 0.09 $ (0.02)
Diluted -- as reported $ 0.06 $ 0.08 $ 0.13 $ 0.02
Diluted -- pro forma $ 0.04 $ 0.06 $ 0.09 $ (0.02)
The fair value of the options granted under our stock option plan was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for fiscal 2005 and 2004: no
dividend yield; expected stock price volatility rate of 1.06 and 1.01,
respectively; risk-free interest rates of 3.87% to 4.90% and 3.63% to 5.10%,
respectively; and expected lives of six or ten years.
7
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. NET INCOME PER SHARE
Basic net income per share ("EPS") is computed by dividing net income
available to common shareholders 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 and twenty-six week period. A
reconciliation of the weighted average shares for basic and diluted EPS is as
follows:
For the Thirteen Weeks Ended
(in thousands)
July 31, 2004 August 2, 2003
------------- --------------
Weighted average shares outstanding:
Basic 16,497 16,248
Dilutive effect of stock options and 728 270
restricted stock outstanding
------ ------
Diluted 17,225 16,518
====== ======
For the Twenty-Six Weeks Ended
(in thousands)
July 31, 2004 August 2, 2003
------------- --------------
Weighted average shares outstanding:
Basic 16,471 16,234
Dilutive effect of stock options and 749 201
restricted stock outstanding
------ ------
Diluted 17,220 16,435
====== ======
Options outstanding to purchase 796,000 and 1,132,000 shares of common
stock as of July 31, 2004 and August 2, 2003, respectively, were included in
the table above as they were not anti-dilutive under the treasury stock
method.
3. RELATED PARTY TRANSACTIONS
Charles C. Anderson and Terry C. Anderson, both directors of the Company
during the quarter, and Clyde B. Anderson, a director and officer of the Company
have controlling ownership interests in other entities with which we conduct
business. Significant transactions between us and these various other entities
("related parties") are summarized in the following paragraphs.
We purchase a substantial portion of our magazines as well as certain of
our seasonal music and newspapers from Anderson Media Corporation ("Anderson
Media"), an affiliate through common ownership. During the twenty-six weeks
ended July 31, 2004 and August 2, 2003, purchases of these items from Anderson
Media totaled $15,937,000 and $17,288,000, respectively. We purchase certain of
our collectibles and books from Anderson Press, Inc. ("Anderson Press"), an
affiliate through common ownership. During the twenty-six weeks ended July 31,
2004 and August 2, 2003, such purchases from Anderson Press totaled $224,000 and
$425,000, respectively. We purchase certain of our greeting cards and gift
products from C.R. Gibson, Inc., an affiliate through common ownership. The
purchases of these products during the twenty-six weeks ended July 31, 2004 and
August 2, 2003 were $230,000 and $87,000, respectively. We purchase certain
magazine subscriptions from Magazines.com, an affiliate through common
ownership. During the twenty-six weeks ended July 31, 2004 and August 2, 2003,
purchases of these items were $37,000 and $42,000, respectively. We purchase
content for publication from Publication Marketing Corporation, an affiliate
through common ownership. During the twenty-six weeks ended July 31, 2004 and
August 2, 2003, purchases of these items were $24,000 and $36,000, respectively.
We utilize 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 $322,000 and $449,000 during the twenty-six
weeks ended July 31, 2004 and August 2, 2003, respectively. These amounts paid
to Anco Far East primarily included the actual cost of the product, as well as
duty, freight and fees for sourcing and
8
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $23,000 and $31,000, respectively.
We sold books to (received returns from) Anderson Media in the amounts of
($32,000) and $153,000 during the twenty-six weeks ended July 31, 2004 and
August 2, 2003, respectively. During the twenty-six weeks ended July 31, 2004
and August 2, 2003, we provided $47,000 and $129,000, respectively, of internet
services to Magazines.com. During the twenty-six weeks ended July 31, 2004 and
August 2, 2003, we provided $54,000 and $35,000, respectively, of internet
services to American Promotional Events.
We lease our principal executive offices from a trust, which was
established for the benefit of the grandchildren of Mr. Charles C. Anderson, a
member of the Board of Directors. The lease extends to January 31, 2006. During
the twenty-six weeks ended July 31, 2004 and August 2, 2003, we paid rent of
$69,000 in each period to the trust under this lease. Anderson & Anderson LLC
("A&A"), which is an affiliate through common ownership, also leases three
buildings to us. During the twenty-six weeks ended July 31, 2004 and August 2,
2003, we paid A&A a total of $220,000 and $231,000, respectively, in connection
with such leases. Total minimum future rental payments under all of these leases
are $206,000 at July 31, 2004. We sublease certain property to Hibbett Sporting
Goods, Inc. ("Hibbett"), a sporting goods retailer in the southeastern United
States. Our Executive Chairman, Clyde B. Anderson, is a member of Hibbett's
board of directors. During the twenty-six weeks ended July 31, 2004 and August
2, 2003, we received $95,000 in rent payments from Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operations of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all the variable cost and a
portion of the fixed cost. The total amounts received from affiliated companies
for use of the plane during the twenty-six weeks ended July 31, 2004 and August
2, 2003, was $130,000 and $335,000, respectively.
4. DERIVATIVE AND HEDGING ACTIVITIES
We are subject to interest rate fluctuations involving our credit
facilities and debt related to an Industrial Development Revenue Bond (the
"Bond"). However, we use fixed interest rate hedges to manage this
exposure. We entered into two separate $10 million swaps on July 24, 2002.
Both expire in August 2005 and effectively fix the interest rate on an
aggregate of $20 million of variable credit facility debt at 5.13% per
year. In addition, we 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 7.98% per year. The counter parties to the interest rate
swaps are two primary banks in our credit facility. We believe the credit
and liquidity risks of the counter parties failing to meet their
obligation are remote as we settle our interest position with the banks on
a quarterly basis.
Our hedges are generally 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 or in
earnings, depending on the type of hedging relationship. Over time,
amounts held in accumulated other comprehensive income will be
reclassified to earnings if the hedge transaction becomes ineffective.
Our 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 $969,000 and $1.5
million as of July 31, 2004 and January 31, 2004, respectively. For the
thirteen weeks ended July 31, 2004 and August 2, 2003, adjustment gains of
$131,000 (net of tax provision of $77,000) and $225,000 (net of tax
provision of $138,000), respectively, and in the twenty-six weeks ended
July 31, 2004 and August 2, 2003, adjustment gains of $226,000 (net of tax
provision of $133,000) and $288,000 (net of tax provision of $176,000),
respectively, were recorded in accumulated other comprehensive income and
are detailed in Note 5. During the fourth quarter of fiscal 2004, one
interest rate swap no longer qualified for hedge accounting under SFAS No.
133; as a result, we de-designated the hedge. A pre-tax gain of $179,000
was recorded in earnings during the first twenty-six weeks of fiscal 2005
related to the de-designated hedge.
9
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
Comprehensive income is net income or loss, plus certain other items
that are recorded directly to stockholders' equity. The only such items
currently applicable to us are the unrealized gains (losses) on the hedges
explained in Note 4, as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) (in thousands)
-------------- --------------
COMPREHENSIVE INCOME July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
-------------------- ------------- -------------- ------------- --------------
Net income $ 989 $ 1,346 $2,217 $295
Unrealized gains on hedges, net of deferred tax
provision for the thirteen-week periods of $77 and $138,
respectively, and the twenty-six week periods of $133
and $176, respectively. 131 225 226 288
------ ------- ------ ----
Total comprehensive income $1,120 $ 1,571 $2,443 $583
====== ======= ====== ====
6. COMMITMENTS AND CONTINGENCIES
We are a party to various legal proceedings incidental to our
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 our financial position,
results of operations or cash flows.
From time to time, we enter into certain types of agreements that
require us to indemnify parties against third party claims under certain
circumstances. Generally these agreements relate to: (a) agreements with
vendors and suppliers under which we may provide customary indemnification
to our vendors and suppliers in respect of actions they take at our
request or otherwise on our behalf, (b) agreements with vendors who
publish books or manufacture merchandise specifically for us to indemnify
the vendors against trademark and copyright infringement claims concerning
the books published or merchandise manufactured on behalf of us, (c) real
estate leases, under which we may agree to indemnify the lessors from
claims arising from our use of the property, and (d) agreements with our
directors, officers and employees, under which we may agree to indemnify
such persons for liabilities arising out of their relationship with us. We
have Directors and Officers Liability Insurance, which, subject to the
policy's conditions, provides coverage for indemnification amounts payable
by us with respect to our 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 us to perform under these indemnities are
transaction and circumstance specific. Generally, our maximum liability
under such indemnities is not explicitly stated, and therefore the overall
maximum amount of our obligations cannot be reasonably estimated.
Historically, we have not incurred significant costs related to
performance under these types of indemnities. No liabilities have been
recorded for these obligations on our balance sheet at July 31, 2004 and
January 31, 2004 as such liabilities are considered de minimis.
7. INVENTORIES
Inventories were:
(In thousands) July 31, 2004 January 31, 2004
-------------- ------------- ----------------
Inventories (at FIFO) $ 211,819 $ 212,251
LIFO reserve (959) (660)
----------- -----------
Net inventories $ 210,860 $ 211,591
=========== ===========
10
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. BUSINESS SEGMENTS
We have 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 our distribution center operations, which predominately supplies
merchandise to our 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 our Fiscal 2004 Annual Report on Form 10-K/A. We
evaluate performance of the segments based on profit and loss from
operations before interest and income taxes. Certain intersegment cost
allocations have been made based upon consolidated and segment revenues.
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
------------- -------------- ------------- --------------
NET SALES
Retail Trade $ 112,076 $ 111,556 $ 218,677 $ 208,755
Electronic Commerce Trade 6,377 6,289 12,675 11,496
Intersegment Sales Elimination (4,388) (4,764) (8,772) (8,665)
--------- ------------ --------- ---------
Net Sales $ 114,065 $ 113,081 $ 222,580 $ 211,586
========= ============ ========= =========
OPERATING INCOME
Retail Trade $ 1,684 $ 3,219 $ 3,965 $ 2,373
Electronic Commerce Trade 167 (31) 252 -
Intersegment Elimination 175 23 308 150
--------- ------------ --------- ---------
Total Operating Income $ 2,026 $ 3,211 $ 4,525 $ 2,523
========= ============ ========= =========
As of As of
July 31, 2004 January 31, 2004
------------- ----------------
ASSETS
Retail Trade $ 291,328 $ 295,437
Electronic Commerce Trade 1,648 1,527
Intersegment Elimination (400) (566)
--------- ---------
Total Assets $ 292,576 $ 296,398
========= =========
11
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB No. 123" ("SFAS
148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The disclosure provisions
of this statement are effective for financial statements for fiscal years ending
after December 15, 2002, and are included herein. We have not adopted the fair
value method of recording stock options under SFAS No. 123. The FASB has now
determined that stock-based compensation should be recognized as a cost in the
financial statements and that such cost be measured according to the fair value
of the stock options. The FASB has not as yet determined the methodology for
calculating fair value and plans to issue an accounting standard. We will
continue to monitor communications on this subject from the FASB in order to
determine the impact on our financial position, results of operations or cash
flows.
FASB Interpretation 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
applies 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 also applies to VIE's created or interests 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. We adopted the provisions of FIN
46R effective in the first quarter of fiscal 2005. The adoption of this
interpretation did not have an effect on our financial position, results of
operations or cash flows.
10. DISCONTINUED OPERATIONS
Discontinued operations represent the closure in fiscal 2004 of four
retail stores in markets located in Georgia (two stores), Louisiana and North
Carolina where we do not expect another of our existing stores to absorb the
closed store's customers. Expenses relating to store closings when the store is
not classified as a discontinued operation are reported in Other 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. Information regarding discontinued operations is as
follows (in thousands):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
------------- -------------- ------------- --------------
Sales $ - $ 808 $ - $ 1,736
Pretax operating losses - 191 - 329
Impairment losses (included - 106 - 118
above in pretax operating
loss amounts)
Store closing costs (included - 3 - 25
above in pretax operating
loss amounts)
11. DEBT AND LINES OF CREDIT
We have an unsecured revolving credit facility that allows borrowings up
to $100 million. Our current credit facility was extended two years to July
2007 by our bank group during the second quarter of fiscal 2005. No principal
repayments are due until the facility expires in July 2007.
12
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. STOCKHOLDERS' EQUITY
In March 2004, the Board of Directors authorized a common stock repurchase
program for up to $1.6 million shares, or 10% of the outstanding stock.
During the twenty-six weeks ended July 31, 2004, 84,700 shares have been
repurchased under this program.
Subsequent to the end of the current fiscal quarter, the Board of
Directors approved a one-time dividend of $0.12 per share and the initiation
of a quarterly dividend of $0.03 per share. The quarterly dividend will be
paid beginning with the quarter ended July 31, 2004. Both the one-time
dividend of $0.12 per share and the quarterly dividend of $0.03 per share are
payable on September 14, 2004, to stockholders of record at the close of
business on August 31, 2004. The Company will pay quarterly cash dividends in
the future subject to Board approval.
13. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's interim condensed consolidated
financial statements for the period ended July 31, 2004, and following a
review of its lease-related accounting policies, the Company's management
determined that it was appropriate to adjust its prior financial statements
to correct certain errors contained in those financial statements relating to
the computation of depreciation, rent holidays, straight-line rent expense
and the related deferred rent liability.
Historically, the Company depreciated leasehold improvements over a period of
ten years, regardless of the term of the lease for the store. When
calculating the straight-line rent expense per store, the Company previously
used the store opening date as the starting date for the rent expense
calculation. For certain new stores, the Company receives funding from
landlords for the construction of leasehold improvements. Historically, these
landlord allowances were classified as a reduction of property and equipment
on the Company's balance sheet and as a reduction in capital expenditures in
the Company's statements of cash flows.
The Company has corrected its depreciable life for leasehold improvements to
the lesser of the economic useful life of the asset or the term of the lease.
The Company has corrected 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. Also, the Company has corrected its method of
classification of landlord allowances. 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 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. As a result,
the accompanying condensed consolidated financial statements have been
restated from the amounts previously reported to incorporate the effects of
these policies.
The following is a summary of the impact of the Restatement on the
consolidated balance sheets at January 31, 2004 and July 31, 2004, and the
consolidated statements of operations and the consolidated statements of cash
flows for the thirteen week periods ended July 31, 2004 and August 2, 2003
and the twenty six week periods ended July 31, 2004 and August 2, 2003.
13
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of July 31, 2004 As of January 31, 2004
------------------- ----------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED BALANCE SHEET
Gross property and equipment 166,564 24,530 191,094 166,466 23,495 189,961
Accumulated depreciation 120,611 14,106 134,717 117,289 12,780 130,069
Deferred income taxes (asset) 4,696 - 4,696 4,446 4 4,450
Total assets 282,152 10,424 292,576 285,679 10,719 296,398
Accrued expenses 30,380 - 30,380 30,189 2 30,191
Accrued income taxes 525 (333) 192 3,527 (301) 3,226
Total current liabilities 127,006 (333) 126,673 130,477 (299) 130,178
Deferred income taxes
(liability) 1,834 166 2,000 1,805 152 1,957
Other Long-Term Liabilities 969 10,864 11,833 1,507 11,115 12,622
Total Non-Current Liabilities 21,503 11,030 32,533 23,952 11,267 35,219
Retained earnings 67,769 (273) 67,496 65,528 (249) 65,279
Total shareholders equity 133,643 (273) 133,370 131,250 (249) 131,001
Total shareholders equity &
liabilities 282,152 10,424 292,576 285,679 10,719 296,398
Thirteen Weeks Ended July 31, 2004 Thirteen Weeks Ended August 2, 2003
---------------------------------- -----------------------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED STATEMENTS OF
OPERATIONS
Cost of products sold 83,618 (648) 82,970 82,269 (580) 81,689
Gross profit 30,447 648 31,095 30,812 580 31,392
Depreciation and amortization 3,658 675 4,333 3,916 604 4,520
Operating income 2,053 (27) 2,026 3,235 (24) 3,211
Income taxes 560 (10) 550 905 (9) 896
Net income 1,006 (17) 989 1,361 (15) 1,346
Basic earnings per share $ 0.06 $ 0.00 $ 0.06 0.08 0.00 0.08
Diluted earnings per share $ 0.06 $ 0.00 $ 0.06 0.08 0.00 0.08
14
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Twenty-Six Weeks Ended July 31, 2004 Twenty-Six Weeks Ended August 2, 2003
------------------------------------ -------------------------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED STATEMENTS OF
OPERATIONS
Cost of products sold 162,449 (1,288) 161,161 155,837 (1,155) 154,682
Gross profit 60,131 1,288 61,419 55,749 1,155 56,904
Depreciation and amortization 7,649 1,326 8,975 7,951 1,193 9,144
Operating income 4,563 (38) 4,525 2,561 (38) 2,523
Income taxes 1,317 (14) 1,303 318 (14) 304
Net income 2,241 (24) 2,217 319 (24) 295
Basic earnings per share $ 0.14 ($ 0.01) $ 0.13 $ 0.02 $ 0.00 $ 0.02
Diluted earnings per share $ 0.13 $ 0.00 $ 0.13 $ 0.02 $ 0.00 $ 0.02
Twenty-Six Weeks Ended July 31, 2004 Twenty-Six Weeks Ended August 2, 2003
------------------------------------ -------------------------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED STATEMENTS CASH
FLOWS
Net Income 2,241 (24) 2,217 319 (24) 295
Depreciation and amortization 7,649 1,326 8,975 8,055 1,193 9,248
Changes in certain other assets
and liabilities (3,289) (255) (3,544) 393 (627) (234)
Net cash used in operating
activities 6,505 1,035 7,540 (9,192) 421 (8,771)
Capital expenditures (4,352) (1,035) (5,387) (3,507) (421) (3,928)
Net cash used in investing
activities (4,339) (1,035) (5,374) (3,488) (421) (3,909)
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion & Analysis gives effect to the restatement
discussed in Note 13 to the Condensed Consolidated Financial Statements.
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 our actual
results, performance or achievements, 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 our specific market areas; inflation; economic conditions in general and
in our 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 us; uncertainties related
to the Internet and the our 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, shareholders and prospective investors are cautioned not to place
undue reliance on such forward-looking statements. We disclaim any obligation 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 202 retail bookstores,
including 164 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.
RESTATEMENT OF FINANCIAL STATEMENTS
Following a review of its lease-related accounting policies, the Company's
management has determined that it was appropriate to adjust its prior financial
statements to correct certain errors contained in those financial statements
relating to the computation of depreciation, rent holidays, straight-line rent
expense and the related deferred rent liability.
Historically, the Company had depreciated leasehold improvements over a
period of ten years, regardless of the term of the lease for the store. When
calculating the straight-line rent expense per store, the Company had previously
used the store opening date as the starting date for the rent expense
calculation. For certain new stores, the Company receives funding from landlords
for the construction of leasehold improvements. Historically, these landlord
allowances have been classified as a reduction of property and equipment on the
Company's balance sheet and as a reduction in capital expenditures in the
Company's statements of cash flows.
The Company corrected its depreciable life for leasehold improvements to
the lesser of the economic useful life of the asset or the term of the lease.
The Company has corrected 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. Also, the Company corrected its method of classification of
landlord allowances. 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 from the landlord intended to reimburse
the Company for the cost of leasehold improvements were recorded as a deferred
rent credit resulting from a lease incentive and amortized over the lease term
as a reduction to rent expense. As a result, the accompanying condensed
consolidated financial statements have been restated from the amounts previously
reported to incorporate the effects of these policies.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The effects of the restatement discussed in Note 13 in the notes to the
condensed consolidated financial statements. The following Management's
Discussion & Analysis has been updated to give effect to the restatement.
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 Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
(as restated) (as restated) (as restated) (as restated)
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 27.3% 27.8% 27.6% 26.9%
Operating, selling and administrative
expenses 21.7% 20.9% 21.6% 21.4%
Depreciation and amortization 3.8% 4.0% 4.0% 4.3%
----- ----- ----- -----
Operating income 1.8% 2.9% 2.0% 1.2%
Interest expense, net 0.4% 0.8% 0.4% 0.8%
----- ----- ----- -----
Income from continuing operations 1.4% 2.1% 1.6% 0.4%
before income taxes
Income tax provision 0.5% 0.8% 0.6% 0.2%
----- ----- ----- -----
Income from continuing operations 0.9% 1.3% 1.0% 0.2%
Loss from discontinued operations - (0.1)% - (0.1)%
----- ----- ----- -----
Net income 0.9% 1.2% 1.0% 0.1%
===== ===== ===== =====
Net sales increased $1.0 million, or 0.9%, to $114.1 million in the
thirteen weeks ended July 31, 2004, from $113.1 million in the thirteen weeks
ended August 2, 2003. Net sales increased $11.0 million, or 5.2%, to $222.6
million in the twenty-six weeks ended July 31, 2004, from $211.6 million in the
twenty-six weeks ended August 2, 2003. Comparable store sales in the thirteen
weeks ended July 31, 2004 were flat when compared with the same thirteen week
period for the prior year. Comparable store sales increased 3.3% for the
twenty-six weeks ended July 31, 2004 due to higher sales in the book and cafe
departments. The book sales increase was primarily driven by the improving
economy, as well as strong sales in categories such as Fiction, Inspirational,
Biography and Social Science. The cafe department sales increase was led by our
new cold beverage product line of frappes as well as increased store traffic.
During the thirteen weeks ended July 31, 2004, we opened one superstore and
closed one traditional store.
Net sales for the retail trade segment increased $0.5 million, or 0.5%, to
$112.1 million in the thirteen weeks ended July 31, 2004 from $111.6 million in
the same period last year. Net sales for the retail trade segment increased $9.9
million, or 4.7%, to $218.7 million in the twenty-six weeks ended July 31, 2004
due to higher comparable store sales. Net sales for the electronic commerce
segment increased $88,000, or 1.4%, to $6.4 million in the thirteen weeks ended
July 31, 2004. For the twenty-six weeks ended July 31, 2004, net sales for the
electronic commerce segment increased $1.2 million, or 10.4%, to $12.7 million
from $11.5 million in the same period last year, related primarily to higher
business to business order volume and increased search engine marketing which
increased traffic on our website.
Gross profit decreased $0.3 million, or 0.9%, to $31.1 million in the
thirteen weeks ended July 31, 2004 when compared with $31.4 million in the same
thirteen week period for the prior year. For the twenty-six weeks ended July 31,
2004, gross profit increased $4.5 million, or 7.9%, to $61.4 million from $56.9
million in the same period last year. Gross profit as a percentage of net sales
for the thirteen weeks ended July 31, 2004 was 27.3% versus 27.8% in the same
period last year. The decrease in gross profit as a percent of net sales for the
thirteen week period was primarily due to additional promotional activity,
including a one day sale and increased summer promotions. Gross profit as a
percentage of sales for the twenty-six weeks ended July 31, 2004 was 27.6%
versus 26.9% in the same period last year. The increase in gross profit stated
as a percent of net sales for the twenty-six week period was due to improved
sales mix to higher margin departments, including cafes, and lower occupancy and
warehouse distribution costs as a percentage of sales due to higher sales.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating, selling and administrative expenses were $24.7 million in the
thirteen week period ended July 31, 2004 compared to $23.7 million in the same
period last year. For the twenty-six weeks ended July 31, 2004, operating,
selling and administrative expenses were $47.9 million compared to $45.2 million
in the same period last year. Operating, selling and administrative expenses as
a percentage of net sales for the thirteen weeks ended July 31, 2004 increased
to 21.7% from 20.9% in the same period last year. Operating, selling and
administrative expenses as a percentage of net sales for the twenty-six weeks
ended July 31, 2004 increased to 21.6% from 21.4% in the same period last year.
The increase as a percentage of sales for the thirteen week period was primarily
due to advertising costs incurred for the "one day sale" this year and higher
store selling costs as a percentage of sales due to the flat comparable store
sales.
Depreciation and amortization was $4.3 million in the thirteen week period
ended July 31, 2004 compared to $4.5 million in the same period last year. In
the twenty-six week period ended July 31, 2004 depreciation and amortization
decreased 1.8% to $9.0 million from $9.1 million in the same period last year.
Consolidated operating income was $2.0 million for the thirteen weeks
ended July 31, 2004, compared to $3.2 million in the same period last year. For
the twenty-six weeks ended July 31, 2004, consolidated operating income was $4.5
million compared to $2.5 million in the same period last year. Operating income
for the retail trade segment decreased $1.5 million for the thirteen weeks ended
July 31, 2004, and operating income increased $1.6 million for the twenty-six
weeks ended July 31, 2004. The decrease in operating income for the thirteen
week period was due to reduced profits as a result of flat comparable store
sales and increased promotional activity. The increase in operating income for
the twenty-six week period was due to strong profit growth driven by stronger
comparable store sales. The operating profit for the electronic commerce segment
increased $0.2 million and $0.3 million for the thirteen and twenty-six week
periods ended July 31, 2004, respectively, compared to the same period last
year. The increase in profit was due to higher sales in the business to business
category and improved sales due to increased search engine marketing which
increased traffic on our website.
Interest expense was $487,000 in the thirteen weeks ended July 31, 2004
versus $848,000 in the same period last year and $1.0 million in the twenty-six
weeks ended July 31, 2004 versus $1.7 million in the same period last year. The
decrease was primarily due to lower average debt balances compared with the
prior year due to higher earnings, improved inventory management and better
accounts payable leveraging.
Discontinued operations represent the closure in fiscal 2004 of four
retail stores in markets located in Georgia (two stores), Louisiana and North
Carolina where we do not expect another of our existing stores to absorb the
closed store's customers. Information regarding discontinued operations is as
follows (in thousands):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
7/31/04 8/2/03 7/31/04 8/2/03
------- ------ ------- ------
Sales $ - $ 808 $ - $ 1,736
Pretax operating losses - 191 - 329
Impairment losses (included - 106 - 118
above in pretax operating
loss amounts)
Store closing costs (included - 3 - 25
above in pretax operating
loss amounts)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations, including
credit terms from vendors, and borrowings under our credit facility. We have an
unsecured revolving credit facility that allows borrowings up to $100 million.
Our current credit facility was extended two years to July 2007 by our bank
group during the second quarter of fiscal 2005. 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 July 31, 2004 and
January 31, 2004, $11.2 million and $13.1 million, respectively, were
outstanding under this credit facility. The maximum and average outstanding
balances during the thirteen weeks ended July 31, 2004 were $34.4 million and
$24.8 million, respectively, compared to $77.6 million and $68.7 million,
respectively for the same period in the prior year. The maximum and average
outstanding balances during the twenty-six weeks ended July 31, 2004 were $34.4
million and $25.3 million, respectively, compared to $77.6 million and $66.5
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 higher
earnings, improved inventory management and better accounts payable leveraging.
The outstanding borrowings as of July 31, 2004 had interest rates ranging from
1.86% per year to 2.88% per year. Additionally, as of July 31, 2004 and January
31, 2004, we have outstanding borrowings under an industrial revenue bond
totaling $7.5 million, which is secured by certain property.
Future Commitments
The following table lists the aggregate maturities of various classes of
obligations and expiration amounts of our various classes of commitments at July
31, 2004 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Thereafter
--------- -------- -------- -------- -------- -------- ----------
Long-term debt- $ 11,200 $ - $ - $ - $ 11,200 $ - $ -
revolving
credit facility
Long-term debt - 7,500 - - 7,500 - - -
industrial
revenue bond
Subtotal of debt 18,700 - - 7,500 11,200 - -
--------- -------- -------- -------- -------- -------- ---------
Operating leases 112,584 14,690 26,720 21,040 17,409 12,745 19,980
--------- -------- -------- -------- -------- -------- ---------
Total of obligations $ 131,284 $ 14,690 $ 26,720 $ 28,540 $ 28,609 $ 12,745 $ 19,980
========= ======== ======== ======== ======== ======== =========
Indemnification
From time to time, we enter into certain types of agreements that require
us to indemnify parties against third party claims under certain circumstances.
Generally these agreements relate to: (a) agreements with vendors and suppliers
under which we may provide customary indemnification to our vendors and
suppliers in respect of actions they take at our request or otherwise on our
behalf, (b) agreements with vendors who publish books or manufacture merchandise
specifically for us to indemnify the vendors against trademark and copyright
infringement claims concerning the books published or merchandise manufactured
on behalf of us, (c) real estate leases, under which we may agree to indemnify
the lessors from claims arising from our use of the property, and (d) agreements
with our directors, officers and employees, under which we may agree to
indemnify such persons for liabilities arising out of their relationship with
us. We have Directors and Officers Liability Insurance, which, subject to the
policy's conditions, provides coverage for indemnification amounts payable by us
with respect to our 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 us to perform under these indemnities are
transaction and circumstance specific. Generally, our maximum liability under
such indemnities is not explicitly stated, and therefore the overall maximum
amount of our obligations cannot be reasonably estimated. Historically, we have
not incurred significant costs related to performance under these types of
indemnities. No liabilities have been recorded for these obligations on our
balance sheet at July 31, 2004 and January 31, 2004 as such liabilities are
considered de minimis.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash Flows
Operating activities provided (used) cash of $7.5 million and ($8.8)
million in the twenty-six week periods ended July 31, 2004 and August 2, 2003,
respectively, and included the following effects:
- Cash provided (used) for inventories in the twenty-six week periods ended
July 31, 2004 and August 2, 2003 was $0.7 million and ($3.5) million,
respectively. The smaller usage in the current period was primarily due to
higher sales and improved inventory management versus last year.
- Cash used for accounts payable in the twenty-six week periods ended July
31, 2004 and August 2, 2003 was $0.7 million and $15.2 million,
respectively. This change was due to improved leveraging of accounts
payable with vendors in the first twenty-six weeks of fiscal 2005.
- Depreciation and amortization expenses were $9.0 million and $9.2 million
in the twenty-six week periods ended July 31, 2004 and August 2, 2003,
respectively.
Cash flows used in investing activities reflected a $5.4 million and $3.9
million net use of cash for the twenty-six week periods ended July 31, 2004 and
August 2, 2003, respectively. Cash was used primarily to fund capital
expenditures for new store openings, store relocations, renovation and
improvements to existing stores, and investments in management information
systems.
Financing activities provided (used) cash of ($2.1) million and $12.9
million in the twenty-six week periods ended July 31, 2004 and August 2, 2003,
respectively, principally from net borrowings (repayments) under the revolving
credit facility. The reduced borrowings under the credit facility during fiscal
2005 were due to the improved cash flows from operating activities.
OUTLOOK
For the twenty-six weeks ended July 31, 2004, we have opened one store,
closed one store, relocated two stores and remodeled sixteen stores. For the
remainder of fiscal 2005, we expect to open five to seven stores, complete
remodels on approximately ten to fifteen stores, and close one to three stores.
Our capital expenditures totaled $5.4 million in the twenty-six week period
ended July 31, 2004. Management estimates that capital expenditures for the
remainder of fiscal 2005 will be approximately $10.4 million and that such
amounts will be used primarily for new stores and relocations, renovation and
improvements to existing stores, upgrades and expansion of warehouse
distribution facilities, and investments in management information systems.
Management believes that existing cash balances and net cash from operating
activities, together with borrowings under our credit facilities, will be
adequate to finance our planned capital expenditures and to meet our working
capital requirements for the remainder of fiscal 2005.
RELATED PARTY ACTIVITIES
Charles C. Anderson and Terry C. Anderson, both directors of the Company
during the quarter, and Clyde B. Anderson, a director and officer of the Company
have controlling ownership interests in other entities with which we conduct
business. Significant transactions between us and these various other entities
("related parties") are summarized in the following paragraphs.
We purchase a substantial portion of our magazines as well as certain of
our seasonal music and newspapers from Anderson Media Corporation ("Anderson
Media"), an affiliate through common ownership. During the twenty-six weeks
ended July 31, 2004 and August 2, 2003, purchases of these items from Anderson
Media totaled $15,937,000 and $17,288,000, respectively. We purchase certain of
our collectibles and books from Anderson Press, Inc. ("Anderson Press"), an
affiliate through common ownership. During the twenty-six weeks ended July 31,
2004 and August 2, 2003, such purchases from Anderson Press totaled $224,000 and
$425,000, respectively. We purchase certain of our greeting cards and gift
products from C.R. Gibson, Inc., an affiliate through common ownership. The
purchases of these products during the twenty-six weeks ended July 31, 2004 and
August 2, 2003 were $230,000 and $87,000, respectively. We purchase certain
magazine subscriptions from Magazines.com, an affiliate through common
ownership. During the twenty-six weeks ended July 31, 2004 and August 2, 2003,
purchases of these items were $37,000 and $42,000, respectively. We purchase
content for publication from Publication Marketing Corporation, an affiliate
through common ownership. During the twenty-six weeks ended July 31, 2004 and
August 2, 2003, purchases of these items were $24,000 and $36,000,
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
respectively. We utilize 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 $322,000 and $449,000 during the
twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. These
amounts paid to Anco Far East primarily included the actual cost of the product,
as well as duty, freight and 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
$23,000 and $31,000, respectively.
We sold books to (received returns from) Anderson Media in the amounts of
($32,000) and $153,000 during the twenty-six weeks ended July 31, 2004 and
August 2, 2003, respectively. During the twenty-six weeks ended July 31, 2004
and August 2, 2003, we provided $47,000 and $129,000, respectively, of internet
services to Magazines.com. During the twenty-six weeks ended July 31, 2004 and
August 2, 2003, we provided $54,000 and $35,000, respectively, of internet
services to American Promotional Events.
We lease our principal executive offices from a trust, which was established
for the benefit of the grandchildren of Mr. Charles C. Anderson, a member of the
Board of Directors. The lease extends to January 31, 2006. During the twenty-six
weeks ended July 31, 2004 and August 2, 2003, we paid rent of $69,000 in each
period to the trust under this lease. Anderson & Anderson LLC ("A&A"), which is
an affiliate through common ownership, also leases three buildings to us. During
the twenty-six weeks ended July 31, 2004 and August 2, 2003, we paid A&A a total
of $220,000 and $231,000, respectively, in connection with such leases. Total
minimum future rental payments under all of these leases are $206,000 at July
31, 2004. We sublease certain property to Hibbett Sporting Goods, Inc.
("Hibbett"), a sporting goods retailer in the southeastern United States. Our
Executive Chairman, Clyde B. Anderson, is a member of Hibbett's board of
directors. During the twenty-six weeks ended July 31, 2004 and August 2, 2003,
we received $95,000 in rent payments from Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operations of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all the variable cost and a
portion of the fixed cost. The total amounts received from affiliated companies
for use of the plane during the twenty-six weeks ended July 31, 2004 and August
2, 2003, was $130,000 and $335,000, respectively.
21
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate fluctuations involving our credit
facilities and debt related to the Bond. The average amount of debt outstanding
under our credit facilities was $57.5 million during fiscal 2004. However, we
utilize both fixed and variable debt to manage this exposure. We entered into
two separate $10 million swaps on July 24, 2002. Both expire August 2005 and
effectively fix the interest rate on an aggregate of $20 million of variable
rate debt at 5.13% per year. Also, on May 14, 1996, we 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 the Bond
at 7.98% per year. The swap agreement expires on June 7, 2006. The counter
parties to the interest rate swaps are parties to our revolving credit
facilities. We believe the credit and liquidity risk of the counter parties
failing to meet their obligations is remote as we settle our 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, we estimate that a 66% increase in LIBOR rates would
increase interest expense by approximately $11,000 for the thirteen weeks ended
July 31, 2004. Likewise, a 66% decrease in LIBOR rates would decrease interest
expense by $11,000 for the thirteen weeks ended July 31, 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.
22
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), the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the fiscal quarter
covered by this amended report. In performing this evaluation, in light of the
pronouncement of 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
policies. Specifically, as further discussed in Note 13 to the accompanying
condensed consolidated financial statements, 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 each of the three years in 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. The restatement is further discussed in "Explanatory Note" in the
forepart of this Form 10-Q/A and in Note 13, "Restatement of Financial
Statements," to the accompanying condensed consolidated financial statements. We
do not consider the impact of correcting the previously issued financial
statements to be material with respect to any individual reporting period.
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, 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 July 31, 2004, our management
considered, among other things, the circumstances that resulted in the
restatement of our previously issued financial statements. We also considered
the materiality of the restatement adjustments on our consolidated balance sheet
and statement of operations (as more fully set forth in Note 11, "Restatement of
Financial Statements," to the accompanying condensed consolidated financial
statements) and that these non-cash adjustments have no effect on historical or
future cash flows or the timing of payments under our operating leases.
There was no change in the Company's internal controls over financial
reporting during the Company's fiscal quarter covered by this amended report
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting. However, as a result of
the review of our lease accounting policies described above, during the first
quarter of fiscal 2006 we made changes in internal controls over financial
reporting to implement additional review processes over our leasing arrangements
to ensure the collection and
23
communication of information necessary for the proper accounting for each lease
in accordance with generally accepted accounting principles. The Company
implemented the following accounting changes: (i) we changed 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 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 control changes have fully remediated the issues
described above.
24
II - OTHER INFORMATION
ITEM 1: Legal Proceedings
We are a party to various legal proceedings incidental to our
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 our
financial position, results of operations or cash flows.
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
Shares Purchased as Be Purchased Under
Total Number of Average Price Paid Part of Publicly the Program at End
Period Shares Purchased per Share Announced Program of Period
--------------------- ---------------- ------------------ ------------------- -------------------
3/17/2004 to 4/3/2004 54,400 $6.3416 54,400 1,592,224
4/4/2004 to 5/1/2004 30,300 $6.5535 30,300 1,561,924
5/2/2004 to 7/31/2004 - - - 1,561,924
------ ------- ------
Total 84,700 $6.4174 84,700
====== ======= ======
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
Exhibits
Exhibit 3(i) 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 (Registration No. 33-52256)
Exhibit 3(ii) 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 (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, as amended.
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, as amended.
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, as amended.
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, as amended.
25
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, as amended.
Exhibit 32.3 Certification of Richard S. Wallington, Chief Financial
Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section
1350, as amended.
26
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: April 28, 2005 by: /s/ Clyde B. Anderson
-----------------------------------------
Clyde B. Anderson
Executive Chairman of the Board
Date: April 28, 2005 by: /s/ Richard S. Wallington
-----------------------------------------
Richard S. Wallington
Chief Financial Officer
Date: April 28, 2005 by: /s/ Sandra B. Cochran
-----------------------------------------
Sandra B. Cochran
President and Chief Executive Officer
27