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: May 1, 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 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 8, 2004 were 16,531,304 shares.
EXPLANATORY NOTE:
As previously disclosed in a Form 8-K filed on March 22, 2005, following a
detailed review of its lease-related accounting policies, Books-A-Million, Inc.
(the "Company") determined to restate its prior financial statements (the
"Restatement") to correct 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 11 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 May 1, 2004, initially filed with the
Securities and Exchange Commission ("SEC") on June 15, 2004 ("Original Filing"),
is being filed to reflect restatements of the Company's consolidated balance
sheets at May 1, 2004 and the Company's consolidated statements of operations,
and consolidated cash flows for the three months ended May 1, 2004 and May 3,
2003 and the notes related thereto. For a more detailed description of these
restatements, see Note 11, "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 July 31,
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 31, 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 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters of Vote of Security-Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
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 MAY 1, 2004 AS OF JANUARY 31, 2004
(AS RESTATED) (AS RESTATED)
(SEE NOTE 11) (SEE NOTE 11)
----------------- ----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,064 $ 5,348
Accounts receivable, net 8,046 7,271
Related party accounts receivable, net 349 351
Inventories 218,297 211,591
Prepayments and other 6,314 5,890
Deferred income taxes 4,510 4,450
----------------- ----------------------
TOTAL CURRENT ASSETS 242,580 234,901
----------------- ----------------------
PROPERTY AND EQUIPMENT:
Gross property and equipment 192,612 189,961
Less accumulated depreciation and amortization 134,524 130,069
----------------- ----------------------
NET PROPERTY AND EQUIPMENT 58,088 59,892
----------------- ----------------------
OTHER ASSETS 1,562 1,605
----------------- ----------------------
TOTAL ASSETS $ 302,230 $ 296,398
================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 89,162 $ 87,984
Related party accounts payable 6,750 8,777
Accrued expenses 25,814 30,191
Accrued income taxes 1,172 3,226
Current portion of long-term debt 9,612 --
----------------- ----------------------
TOTAL CURRENT LIABILITIES 132,510 130,178
----------------- ----------------------
LONG-TERM DEBT 23,028 20,640
DEFERRED INCOME TAXES 1,843 1,957
OTHER LONG-TERM LIABILITIES 12,781 12,622
----------------- ----------------------
TOTAL NON-CURRENT LIABILITIES 37,652 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, 18,620,069 and 18,465,387 shares issued at
May 1, 2004 and January 31, 2004, respectively 186 185
Additional paid-in capital 72,068 71,799
Less treasury stock, at cost (2,094,750 and 2,010,050
shares at May 1, 2004 and January 31, 2004,
respectively) (5,819) (5,271)
Deferred compensation (260) (284)
Accumulated other comprehensive loss, net of tax (614) (707)
Retained earnings 66,507 65,279
----------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY 132,068 131,001
----------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 302,230 $ 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
---------------------------------------------
MAY 1, 2004 MAY 3, 2003
(AS RESTATED) (AS RESTATED)
(SEE NOTE 11) (SEE NOTE 11)
------------------ ------------------
NET SALES $ 108,515 $ 98,505
Cost of products sold (including warehouse
distribution and store occupancy costs) (1) 78,191 72,993
------------------ ------------------
GROSS PROFIT 30,324 25,512
Operating, selling and administrative expenses 23,183 21,576
Depreciation and amortization 4,642 4,624
------------------ ------------------
OPERATING INCOME (LOSS) 2,499 (688)
Interest expense, net 518 869
------------------ ------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,981 (1,557)
Income taxes provision (benefit) 753 (592)
------------------ ------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,228 (965)
DISCONTINUED OPERATIONS (NOTE 10)
Loss from discontinued operations before income taxes -- (138)
Income tax benefit -- (52)
------------------ ------------------
LOSS FROM DISCONTINUED OPERATIONS -- (86)
------------------ ------------------
NET INCOME (LOSS) $ 1,228 $ (1,051)
================== ==================
NET INCOME (LOSS) PER COMMON SHARE:
BASIC:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 0.07 $ (0.06)
LOSS FROM DISCONTINUED OPERATIONS -- --
------------------ ------------------
NET INCOME (LOSS) $ 0.07 $ (0.06)
================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,445 16,220
================== ==================
DILUTED:
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 0.07 $ (0.06)
LOSS FROM DISCONTINUED OPERATIONS -- --
------------------ ------------------
NET INCOME (LOSS) $ 0.07 $ (0.06)
================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 17,213 16,220
================== ==================
(1) Inventory purchases from related parties were $11,261 and $11,764,
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)
THIRTEEN WEEKS ENDED
----------------------------------
MAY 1, 2004 MAY 3, 2003
(AS RESTATED) (AS RESTATED)
(SEE NOTE 11) (SEE NOTE 11)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,228 $ (1,051)
------------- -------------
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 4,642 4,676
Deferred compensation amortization 24 -
Loss on impairment of assets - 12
Gain on disposal of property (9) -
Change in deferred income taxes (338) (733)
Increase in inventories (6,706) (15,435)
Decrease in accounts payable (849) (7,365)
Changes in certain other assets and liabilities (7,211) (5,198)
------------- -------------
Total adjustments (10,447) (24,043)
------------- -------------
Net cash used in operating activities (9,219) (25,094)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,800) (1,694)
Proceeds from sale of equipment 13 -
------------- -------------
Net cash used in investing activities (2,787) (1,694)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 56,260 69,870
Repayments under credit facilities (44,260) (43,810)
Purchase of treasury stock (548) -
Proceeds from sale of common stock, net 270 84
------------- -------------
Net cash provided by financing activities 11,722 26,144
------------- -------------
Net decrease in cash and cash equivalents (284) (644)
Cash and cash equivalents at beginning of period 5,348 4,977
------------- -------------
Cash and cash equivalents at end of period $ 5,064 $ 4,333
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the thirteen week period for:
Interest $ 503 $ 1,030
Income taxes, net of refunds $ 2,609 $ 1,701
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 week periods ended May 1, 2004 and May 3, 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 May 1, 2004, and the results of its operations
and cash flows for the thirteen week periods ended May 1, 2004 and May 3,
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 May 1, 2004 and January 31, 2004, the Company had one stock
option plan. The Company accounts 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 -- 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 May 1, 2004 May 3, 2003
----------------------- ---------------- ---------------
Net income (loss), as reported $ 1,228 $ (1,051)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax effects 341 328
---------------- ---------------
Pro forma net income (loss) $ 887 $ (1,379)
Net income (loss) per common share:
Basic -- as reported $ 0.07 $ (0.06)
Basic -- pro forma $ 0.05 $ (0.09)
Diluted -- as reported $ 0.07 $ (0.06)
Diluted -- pro forma $ 0.05 $ (0.09)
The fair value of the options granted under the Company's 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 (LOSS) PER SHARE
Basic net income (loss) per share ("EPS") is computed by dividing
income (loss) 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 week period. A reconciliation of the weighted average shares for
basic and diluted EPS is as follows:
For the Thirteen Weeks Ended
(in thousands)
May 1, 2004 May 3, 2003
----------- -----------
Weighted average shares outstanding:
Basic 16,445 16,220
Dilutive effect of stock options and restricted
stock outstanding 768 -
------ ------
Diluted 17,213 16,220
====== ======
Options outstanding to purchase 2,555,000 shares of common stock as
of May 3, 2003 were not included in the table above as they were
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 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 May 1, 2004 and May 3, 2003, purchases of these items
from Anderson Media totaled $10,561,000 and $11,172,000, 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 May 1, 2004 and May 3, 2003, such purchases from Anderson
Press totaled $420,000 and $300,000, 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 May 1, 2004 and May 3, 2003 were $142,000 and $35,000, respectively.
The Company purchases certain magazine subscriptions from Magazines.com, an
affiliate through common ownership. During the thirteen weeks ended May 1, 2004
and May 3, 2003, purchases of these items were $24,000 and $22,000,
respectively. The Company purchases content for publication from Publication
Marketing Corporation, an affiliate through common ownership. During the
thirteen weeks ended May 1, 2004 and May 3, 2003, purchases of these items were
$18,000 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 $95,000
and $218,000 during the thirteen weeks ended May 1, 2004 and May 3, 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 $7,000 and $15,000, respectively.
The Company sold books to Anderson Media in the amounts of $53,000 and
$81,000 during the thirteen weeks ended May 1, 2004 and May 3, 2003,
respectively. During the thirteen weeks ended May 1, 2004 and May 3, 2003, the
Company provided $47,000 and $57,000, respectively, of internet services to
Magazines.com.
8
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company leases its 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 thirteen weeks ended May 1, 2004 and May 3, 2003, the Company paid rent of
$34,000 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 the Company. During the thirteen weeks ended May 1, 2004 and May 3,
2003, the Company paid A&A a total of $110,000 and $119,000, respectively, in
connection with such leases. Total minimum future rental payments under all of
these leases are $240,000 at May 1, 2004. 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 the thirteen weeks ended May
1, 2004 and May 3, 2003, the Company received $48,000 and $40,000, respectively,
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 thirteen weeks ended May 1, 2004 and May 3,
2003, was $63,000 and $119,000, 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 7.98%. 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 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 (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 $1.3 million
and $1.5 million as of May 1, 2004 and January 31, 2004, respectively. For
the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively,
adjustment gains of $93,000 (net of tax provision of $57,000) and $63,000
(net of tax provision of $39,000) were recorded as unrealized gains in
accumulated other comprehensive income loss 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, the
Company de-designated the hedge. A pre-tax gain of $70,000 was recorded in
earnings during the first quarter 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 (LOSS)
Comprehensive income (loss) is net income or loss, 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:
Thirteen Weeks Ended
(in thousands)
-------------------------
COMPREHENSIVE INCOME (LOSS) May 1, 2004 May 3, 2003
-------------------------------------- ----------- -----------
Net income (loss) $ 1,228 ($ 1,051)
Unrealized gains (losses) on
hedges, net of deferred tax
provision (benefit) for the
thirteen-week periods of $57
and $39, respectively 93 63
----------- -----------
Total comprehensive income loss $ 1,321 ($ 988)
=========== ===========
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 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.
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 May 1, 2004 and January 31, 2004 as such
liabilities are considered de minimis.
7. INVENTORIES
Inventories were:
(In thousands) May 1, 2004 January 31, 2004
--------------------- -------------- ----------------
Inventories (at FIFO) $ 219,101 $ 212,251
LIFO reserve (804) (660)
-------------- ----------------
Net inventories $ 218,297 $ 211,591
============== ================
10
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 predominately
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 2004 Annual Report on Form
10-K/A. The Company evaluates 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
-----------------------------
SEGMENT INFORMATION (IN THOUSANDS) May 1, 2004 May 3, 2003
---------------------------------- ------------- -------------
NET SALES
Retail Trade $ 106,601 $ 97,199
Electronic Commerce Trade 6,298 5,207
Intersegment Sales Elimination (4,384) (3,901)
------------- -------------
Net Sales $ 108,515 $ 98,505
============= =============
OPERATING INCOME (LOSS)
Retail Trade $ 2,281 $ (846)
Electronic Commerce Trade 85 31
Intersegment Elimination of
Certain Costs 133 127
------------- -------------
Total Operating Income (Loss) $ 2,499 $ (688)
============= =============
As of As of
May 1, 2004 January 31, 2004
------------- ----------------
(as restated) (as restated)
ASSETS
Retail Trade $ 301,127 $ 295,437
Electronic Commerce Trade 1,583 1,527
Intersegment Asset Elimination (480) (566)
------------- ----------------
Total Assets $ 302,230 $ 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 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB No. 123." 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. The Company has 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. The Company will continue to monitor
communications on this subject from the FASB in order to determine the impact on
the Company's 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. The Company 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 the Company's 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 the Company does not expect another of its existing stores to
absorb the closed store's customers. These stores had sales of $928,000 and
pretax operating losses of $138,000 for the thirteen weeks ended May 3, 2003.
Included in the loss on discontinued operations are impairment losses of $12,000
for the thirteen weeks ended May 3, 2003. Also included in the loss on
discontinued operations are store closing costs of $22,000 for the thirteen
weeks May 3, 2003. 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.
11. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's interim condensed
consolidated financial statements for the period ended May 1, 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.
12
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 May 1, 2004, and the
consolidated statements of operations and the consolidated statements of cash
flows for the thirteen week periods ended May 1, 2004 and May 3, 2003.
As of May 1, 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 168,095 24,517 192,612 166,466 23,495 189,961
Accumulated depreciation 121,093 13,431 134,524 117,289 12,780 130,069
Deferred income taxes (asset) 4,509 1 4,510 4,446 4 4,450
Total assets 291,143 11,087 302,230 285,679 10,719 296,398
Accrued expenses 25,814 - 25,814 30,189 2 30,191
Accrued income taxes 1,485 (313) 1,172 3,527 (301) 3,226
Total current liabilities 132,823 (313) 132,510 130,477 (299) 130,178
Deferred income taxes
(liability) 1,686 157 1,843 1,805 152 1,957
Other Long-Term Liabilities 1,282 11,499 12,781 1,507 11,115 12,622
Total Non-Current Liabilities 25,996 11,656 37,652 23,952 11,267 35,219
Retained earnings 66,763 (256) 66,507 65,528 (249) 65,279
Total shareholders equity 132,324 (256) 132,068 131,250 (249) 131,001
Total shareholders equity &
liabilities 291,143 11,087 302,230 285,679 10,719 296,398
Thirteen Weeks Ended May 1, 2004 Thirteen Weeks Ended May 3, 2003
----------------------------------------- -------------------------------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED STATEMENTS OF OPERATIONS
Cost of products sold 78,831 (640) 78,191 73,568 (575) 72,993
Gross profit 29,684 640 30,324 24,937 575 25,512
Depreciation and amortization 3,991 651 4,642 4,035 589 4,624
Operating income 2,510 (11) 2,499 (674) (14) (688)
Income taxes 757 (4) 753 (587) (5) (592)
Net income 1,235 (7) 1,228 (1,042) (9) (1,051)
Basic earnings per share $ 0.08 ($ 0.01) $ 0.07 ($ 0.06) ($ 0.00) ($ 0.06)
Diluted earnings per share $ 0.07 $ 0.00 $ 0.07 $ 0.06 $ 0.00 $ 0.06
13
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen Weeks Ended May 1, 2004 Thirteen Weeks Ended May 3, 2003
----------------------------------------- -----------------------------------------
As Previously As Previously
Reported Adjustment As Restated Reported Adjustment As Restated
-------- ---------- ----------- -------- ---------- -----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net Income 1,235 (7) 1,228 (1,042) (9) (1,051)
Depreciation and amortization 3,991 651 4,642 4,087 589 4,676
Changes in certain other
assets and liabilities (7,745) 534 (7,211) (4,778) (420) (5,198)
Net cash used in operating
activities (10,241) 1,022 (9,219) (25,142) 48 (25,094)
Capital expenditures (1,778) (1,022) (2,800) (1,646) (48) (1,694)
Net cash used in investing
activities (1,765) (1,022) (2,787) (1,646) (48) (1,694)
14
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 11 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 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, shareholders
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 202 retail bookstores,
including 163 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 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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The effects of the restatement discussed in Note 11 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
-----------------------------
(as restated)
-----------------------------
May 1, 2004 May 3, 2003
----------- -----------
Net sales 100.0% 100.0%
Gross profit 27.9% 25.9%
Operating, selling and administrative expenses 21.3% 21.9%
Depreciation and amortization 4.3% 4.7%
----- -----
Operating income (loss) 2.3% (0.7)%
Interest expense, net 0.5% 0.9%
----- -----
Income (Loss) from continuing operations before income taxes 1.8% (1.6)%
Income taxes provision (benefit) 0.7% (0.6)%
----- -----
Income (Loss) from continuing operations 1.1% (1.0)%
Loss from discontinued operations - (0.1)%
----- -----
Net income (loss) 1.1% (1.1)%
===== =====
Net sales increased $10.0 million, or 10.2%, to $108.5 million in
the thirteen weeks ended May 1, 2004, from $98.5 million in the thirteen weeks
ended May 3, 2003. Comparable store sales in the thirteen weeks ended May 1,
2004 increased 7.1% 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 and cafe departments. The book sales
increase was primarily driven by the improving economy, as well as strong sales
in categories such as Fiction, Children's and Inspirational. The cafe department
sales increase was led by the Company's new cold beverage product line of
frappes as well as increased store traffic. During the thirteen weeks ended May
1, 2004, the Company relocated two superstores.
Net sales for the retail trade segment increased $9.4 million, or
9.7%, to $106.6 million in the thirteen weeks ended May 1, 2004 from $97.2
million in the same period last year. The increase in sales was primarily due to
higher comparable store sales, which increased 7.1% for the thirteen weeks. Net
sales for the electronic commerce segment increased $1.1 million, or 21.0%, to
$6.3 million in the thirteen weeks ended May 1, 2004, related primarily to
higher business to business order volume.
Gross profit increased $4.8 million, or 18.9%, to $30.3 million in
the thirteen weeks ended May 1, 2004 when compared with $25.5 million in the
same thirteen week period for the prior year. Gross profit as a percentage of
net sales for the thirteen weeks ended May 1, 2004 was 27.9% versus 25.9% in the
same period last year. The increase in gross profit stated as a percent of net
sales for the thirteen week period was due to less promotional activity,
improved sales mix to higher margin departments, including cafes, and lower
occupancy and warehouse distribution costs as a percentage of sales.
Operating, selling and administrative expenses were $23.2 million in
the thirteen week period ended May 1, 2004 compared to $21.6 million in the same
period last year. Operating, selling and administrative expenses as a percentage
of net sales for the thirteen weeks ended May 1, 2004 decreased to 21.3% from
21.9% in the same period last year. The decrease in operating, selling and
administrative expenses stated as a percent to sales was primarily due to higher
comparable store sales which improved leveraging of operating costs.
Depreciation and amortization was $4.6 million in each of the
thirteen week periods ended May 1, 2004 and May 3, 2003.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated operating income was $2.5 million for the thirteen
weeks ended May 1, 2004, compared to an operating loss of $0.7 million in the
same period last year. Operating income for the retail trade segment increased
$3.1 million for the thirteen weeks ended May 1, 2004. The increase in operating
income for the quarter was due to strong profit growth driven by stronger
comparable store sales. The operating profit for the electronic commerce segment
increased $54,000 for the thirteen weeks ended May 1, 2004 compared to the same
period last year. The increase in profit was due to higher order volume in the
business to business category.
Interest expense was $518,000 in the thirteen weeks ended May 1,
2004 versus $869,000 in the same period last year. The decrease was primarily
due to lower average debt balances compared with prior year.
Discontinued operations represent the closure in fiscal 2004 of four
retail stores in markets located in Georgia (two stores), Louisiana and North
Carolina where the Company does not expect another of its existing stores to
absorb the closed store's customers. These stores had sales of $928,000 and
pretax operating losses of $138,000 for the thirteen weeks ended May 3, 2003.
Included in the loss on discontinued operations are impairment losses of $12,000
for the thirteen weeks ended May 3, 2003. Also included in the loss on
discontinued operations are store closing costs of $22,000 for the thirteen
weeks May 3, 2003.
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 2005. 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 May 1, 2004 and January 31, 2004,
$25.1 million and $13.1 million, respectively, were outstanding under this
credit facility. The maximum and average outstanding balances during the
thirteen weeks ended May 1, 2004 were $33.2 million and $25.8 million,
respectively, compared to $73.9 million and $64.4 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, lower
capital expenditures and improved inventory management. The outstanding
borrowings as of May 1, 2004 had interest rates ranging from 1.86% to 2.75%.
Additionally, as of May 1, 2004 and January 31, 2004, 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 May 1, 2004 compared to January 31, 2004
increased due to seasonal fluctuation in inventory. Inventory levels are lowest
at January 31, 2004 due to large post holiday returns to vendors. Accrued
expenses at May 1, 2004 compared to January 31, 2004 decreased due to payment of
fiscal 2004 management bonuses in the first quarter of fiscal 2005.
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 May 1, 2004 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Long-term debt-revolving
credit facility $ 25,140 $ 9,612 $ 15,528 - - - -
Long-term debt-industrial
revenue bond 7,500 - 7,500 - - - -
-------- -------- -------- -------- -------- -------- --------
Subtotal of debt 32,640 9,612 23,028 - - - -
Operating leases 115,398 21,317 25,844 20,216 16,654 12,184 19,183
-------- -------- -------- -------- -------- -------- --------
Total of obligations $148,038 $ 30,929 $ 48,872 $ 20,216 $ 16,654 $ 12,184 $ 19,183
======== ======== ======== ======== ======== ======== ========
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
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 May 1, 2004 and
January 31, 2004 as such liabilities are considered de minimis.
Cash Flows
Operating activities used cash of $9.2 million and $25.1 million in
the thirteen week periods ended May 1, 2004 and May 3, 2003, respectively, and
included the following effects:
- Cash used for inventories in the thirteen week periods ended May 1,
2004 and May 3, 2003 was $6.7 million and $15.4 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 thirteen week periods ended
May 1, 2004 and May 3, 2003 was $0.8 million and $7.4 million,
respectively. This change was due to improved leveraging of accounts
payable with vendors in the first quarter of fiscal 2005.
- Depreciation and amortization expenses were $4.6 million and $4.7
million, respectively in the thirteen week periods ended May 1, 2004
and May 3, 2003.
Cash flows used in investing activities reflected a $2.8 million and
$1.7 million net use of cash for the thirteen week periods ended May 1, 2004 and
May 3, 2003, respectively. Cash was used primarily to fund capital expenditures
for store relocations, renovation and improvements to existing stores, and
investments in management information systems.
Financing activities provided cash of $11.7 million and $26.1
million in the thirteen week periods ended May 1, 2004 and May 3, 2003,
respectively, principally from net borrowings under the revolving credit
facility.
OUTLOOK
For the thirteen weeks ended May 1, 2004, the Company has relocated
two stores and remodeled ten stores. For the remainder of fiscal 2005, the
Company expects to open eight to ten stores, complete remodels on approximately
fifteen to twenty stores, and close two to four stores. The Company's capital
expenditures totaled $2.8 million in the thirteen week period ended May 1, 2004.
Management estimates that capital expenditures for the remainder of fiscal 2005
will be approximately $13.0 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 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 2005.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 May 1, 2004 and May 3, 2003, purchases of these items
from Anderson Media totaled $10,561,000 and $11,172,000, 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 May 1, 2004 and May 3, 2003, such purchases from Anderson
Press totaled $420,000 and $300,000, 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 May 1, 2004 and May 3, 2003 were $142,000 and $35,000, respectively.
The Company purchases certain magazine subscriptions from Magazines.com, an
affiliate through common ownership. During the thirteen weeks ended May 1, 2004
and May 3, 2003, purchases of these items were $24,000 and $22,000,
respectively. The Company purchases content for publication from Publication
Marketing Corporation, an affiliate through common ownership. During the
thirteen weeks ended May 1, 2004 and May 3, 2003, purchases of these items were
$18,000 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 $95,000
and $218,000 during the thirteen weeks ended May 1, 2004 and May 3, 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 $7,000 and $15,000, respectively.
The Company sold books to Anderson Media in the amounts of $53,000 and
$81,000 during the thirteen weeks ended May 1, 2004 and May 3, 2003,
respectively. During the thirteen weeks ended May 1, 2004 and May 3, 2003, the
Company provided $47,000 and $57,000, respectively, of internet services to
Magazines.com.
The Company leases its 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 thirteen weeks ended May 1, 2004 and May 3, 2003, the Company paid rent of
$34,000 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 the Company. During the thirteen weeks ended May 1, 2004 and May 3,
2003, the Company paid A&A a total of $110,000 and $119,000, respectively, in
connection with such leases. Total minimum future rental payments under all of
these leases are $240,000 at May 1, 2004. 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 the thirteen weeks ended May
1, 2004 and May 3, 2003, the Company received $48,000 and $40,000, respectively,
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 thirteen weeks ended May 1, 2004 and May 3,
2003, was $63,000 and $119,000, respectively. The cost of operating the plane
during these periods was approximately the same as the revenue received.
19
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 $57.5 million during fiscal 2004. 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 August
2005 and effectively fix 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 7.98%. 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 increase interest expense by approximately $10,000 for the
thirteen weeks ended May 1, 2004. Likewise, a 66% decrease in LIBOR rates would
decrease interest expense by $10,000 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.
20
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 11 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 11, "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 May 1, 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
21
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.
22
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: Changes in Securities, Use of Proceeds and Issuer Purchases of
Securities
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 1,592,225
4/4/2004 to 5/1/2004 30,300 $6.5535 30,300 1,561,925
------ ------- ------
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
(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.
23
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.
(B) Reports on Form 8-K
On March 19, 2004, the Company furnished a report on Form 8-K
pursuant to Items 7, 9 and 12 of such form announcing (1) its
earnings results for the fiscal quarter and year ended January
31, 2004 and (2) the authorization from the Company's Board of
Directors to repurchase up to 10% of the Company's outstanding
stock.
Subsequent to the end of the first quarter of fiscal 2005, on
May 24, 2004, the Company furnished a report on Form 8-K
pursuant to Items 7 and 12 of such form announcing first
quarter fiscal 2005 earnings results.
24
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
25