10-Q 1 bam10qqtr1fy04.txt BAM 1ST QUARTER 10Q FY2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended: May 3, 2003 ------------- - 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 [X] No [ ] 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 10, 2003 were 16,243,186 shares. BOOKS-A-MILLION, INC. AND SUBSIDIARIES INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (UNAUDITED) Condensed Consolidated Balance Sheets ................................ 3 Condensed Consolidated Statements of Operations ...................... 4 Condensed Consolidated Statements of Cash Flows ...................... 5 Notes to Condensed Consolidated Financial Statements ................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 16 Item 4. Controls and Procedures .......................................... 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................ 18 Item 2. Changes in Securities ............................................ 18 Item 3. Defaults Upon Senior Securities .................................. 18 Item 4. Submission of Matters of Vote of Security-Holders ................ 18 Item 5. Other Information ................................................ 18 Item 6. Exhibits and Reports on Form 8-K ................................. 18
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BOOKS-A-MILLION, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
AS OF MAY 3, 2003 AS OF FEBRUARY 1, 2003 ------------------- ---------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents .................................. $ 4,333 $ 4,977 Accounts receivable, net .................................. 8,409 7,799 Related party accounts receivable, net .................... 308 437 Inventories ............................................... 239,453 224,019 Prepayments and other ..................................... 5,345 5,380 Deferred income taxes ..................................... 5,826 6,130 --------- --------- TOTAL CURRENT ASSETS .................................. 263,674 248,742 --------- --------- PROPERTY AND EQUIPMENT: Gross property and equipment .............................. 161,013 159,368 Less accumulated depreciation and amortization ............ 106,230 102,222 --------- --------- NET PROPERTY AND EQUIPMENT .............................. 54,783 57,146 --------- --------- OTHER ASSETS ................................................. 1,744 1,830 --------- --------- TOTAL ASSETS .......................................... $ 320,201 $ 307,718 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................... $ 94,879 $ 99,585 Related party accounts payable ............................ 6,412 9,071 Accrued expenses .......................................... 22,287 24,790 Accrued income taxes ...................................... 850 2,530 Current portion of long-term debt ......................... 26,232 170 --------- --------- TOTAL CURRENT LIABILITIES ............................. 150,660 136,146 --------- --------- LONG-TERM DEBT ............................................... 44,940 44,942 DEFERRED INCOME TAXES ........................................ 778 1,703 OTHER LONG-TERM LIABILITIES .................................. 1,850 2,059 --------- --------- TOTAL NON-CURRENT LIABILITIES ......................... 47,568 48,704 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 5) 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, 18,253,211 and 18,211,706 shares issued at May 3, 2003 and February 1, 2003, respectively ............................ 183 182 Additional paid-in capital ................................ 70,932 70,849 Less treasury stock, at cost; (2,010,050 shares at May 3, 2003 and February 1, 2003) ................................ (5,271) (5,271 Accumulated other comprehensive loss, net of tax .......... (1,156) (1,219) Retained earnings ......................................... 57,285 58,327 --------- --------- TOTAL STOCKHOLDERS' EQUITY ............................ 121,973 122,868 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 320,201 $ 307,718 ========= =========
SEE ACCOMPANYING NOTES 3 BOOKS-A-MILLION, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THIRTEEN WEEKS ENDED -------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- NET SALES ............................................... $ 99,084 $ 101,007 Cost of products sold (including warehouse distribution and store occupancy costs) (1) .......... 74,018 73,475 --------- --------- GROSS PROFIT ............................................ 25,066 27,532 Operating, selling and administrative expenses ....... 21,721 22,791 Depreciation and amortization ........................ 4,084 3,984 --------- --------- OPERATING INCOME (LOSS) ................................. (739) 757 Interest expense, net ................................ 869 934 --------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ... (1,608) (177) Income taxes benefit ................................. (611) (68) --------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (997) (109) DISCONTINUED OPERATIONS (NOTE 10) Loss from discontinued operations (including loss on disposal of $16) ..................................... (73) (3) Income tax benefit ................................... (28) (1) --------- --------- LOSS FROM DISCONTINUED OPERATIONS ....................... (45) (2) --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ............................................... (1,042) (111) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF DEFERRED INCOME TAX BENEFIT OF $736 ................................................. -- (1,201) --------- --------- NET LOSS ................................................ $ (1,042) $ (1,312) ========= ========= NET LOSS PER COMMON SHARE: BASIC: LOSS FROM CONTINUING OPERATIONS BEFORE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ..................... $ (0.06) $ (0.01) LOSS FROM DISCONTINUED OPERATIONS ................... -- -- --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ................................ (0.06) (0.01) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (0.07) --------- --------- NET LOSS ............................................. $ (0.06) $ (0.08) ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,220 16,162 ========= ========= DILUTED: LOSS FROM CONTINUING OPERATIONS BEFORE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ..................... $ (0.06) $ (0.01) LOSS FROM DISCONTINUED OPERATIONS .................. -- -- --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ................................ (0.06) (0.01) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (0.07) --------- --------- NET LOSS ............................................. $ (0.06) $ (0.08) ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED............................................... 16,220 16,162 ========= =========
(1) Inventory purchases from related parties were $11,506 and $10,525, respectively, for each of the periods presented above. SEE ACCOMPANYING NOTES 4 BOOKS-A-MILLION, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THIRTEEN WEEKS ENDED -------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ............................................ $ (1,042) $ (1,312) -------- -------- Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of change in accounting principle -- 1,201 Depreciation and amortization ..................... 4,087 3,998 Change in deferred income taxes ................... (660) (117) Increase in inventories ........................... (15,435) (17,604) Decrease in accounts payable ...................... (7,365) (4,926) Changes in certain other assets and liabilities ... (4,727) (4,565) -------- -------- Total adjustments .............................. (24,100) (22,013) -------- -------- Net cash used in operating activities .......... (25,142) (23,325) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................ (1,646) (1,067) Proceeds from sale of equipment ..................... - 1 -------- -------- Net cash used in investing activities .......... (1,646) (1,066) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facilities .................. 69,870 60,879 Repayments under credit facilities .................. (43,810) (36,532) Proceeds from sale of common stock, net ............. 84 126 -------- -------- Net cash provided by financing activities ...... 26,144 24,473 -------- -------- Net increase (decrease) in cash and cash equivalents ... (644) 82 Cash and cash equivalents at beginning of period ....... 4,977 5,212 -------- -------- Cash and cash equivalents at end of period ............. $ 4,333 $ 5,294 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the thirteen week period for: Interest ....................................... $ 1,030 $ 860 Income taxes, net of refunds ................... $ 1,701 $ 1,884
SEE ACCOMPANYING NOTES 5 BOOKS-A-MILLION, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Books-A-Million, Inc. and its subsidiaries (the "Company") for the thirteen week periods ended May 3, 2003 and May 4, 2002, 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 February 1, 2003, included in the Company's Fiscal 2003 Annual Report on Form 10-K. In the opinion of management, the financial statements included herein contain all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position as of May 3, 2003, and the results of its operations and cash flows for the thirteen week periods ended May 3, 2003 and May 4, 2002. 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. The Company has also experienced, and expects 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 3, 2003 and February 1, 2003, 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 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 loss and net 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 3, 2003 May 4, 2002 ----------- ----------- Net loss, as reported ......................................... $ (1,042) $ (1,312) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects.................................................... 328 283 ---------- --------- Pro forma net loss.. .......................................... $ (1,370) $ (1,595) Net loss per common share: Basic--as reported ............................................ $ (0.06) $ (0.08) Basic--pro forma .............................................. $ (0.08) $ (0.10) Diluted--as reported .......................................... $ (0.06) $ (0.08) Diluted--pro forma ............................................ $ (0.08) $ (0.10) ========== =========
The fair value of the options granted under the Company's stock option plan was estimated on their date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 1.01% and 1.21%, respectively; risk-free interest rates of 3.63% to 5.10% and 3.76% to 5.71%, respectively; and expected lives of six or ten years. 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 6 in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS has been computed based on the average number of shares outstanding including the effect of outstanding stock options, 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 3, 2003 May 4, 2002 ----------- ----------- Weighted average shares outstanding: Basic ......................................... 16,220 16,162 Dilutive effect of stock options outstanding... -- -- ------ ------ Diluted ....................................... 16,220 16,162 ====== ======
Options outstanding of 2,555,000 and 2,418,000 for the thirteen weeks ended May 3, 2003 and May 4, 2002 were not included in the table above as they were anti-dilutive. 3. 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 both fixed and variable debt to manage this exposure. On February 9, 1998, the Company entered into an interest rate swap agreement with a five-year term that carried a notional principal amount of $30 million. The swap effectively fixed the interest rate on $30.0 million of variable rate debt at 7.41% and expired February 2003. 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%. In addition, the Company entered into a $7.5 million interest rate swap in May 1996 that effectively fixes the interest rate on the Bond at 7.98%, and expires in June 2006. The counter parties to the interest rate swaps are two of the Company's primary banks. The Company believes the credit and liquidity risk of the counter parties failing to meet their obligation is remote as the Company settles its interest position with the banks on a quarterly basis. The Company's hedges are designated as cash flow hedges. Cash flow hedges protect against the variability in future cash outflows of current or forecasted debt. Interest rate swaps that convert variable payments to fixed payments are cash flow hedges. 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). Over time, the unrealized gains and losses held in accumulated other comprehensive income (loss) may be realized and reflected in the Company's Statements of Operations. The derivative instruments are classified as Other Long-Term Liabilities in the accompanying condensed consolidated balance sheets at their fair value of $1.9 million and $2.1 million as of May 3, 2003 and February 1, 2003, respectively. For the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively, adjustments of $63,000 (net of tax of $39,000) and $120,000 (net of tax of $73,000) were recorded as unrealized gains in accumulated other comprehensive loss and are detailed in Note 4 below. 4. 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 derivative instruments explained in Note 3, as follows:
COMPREHENSIVE LOSS Thirteen Weeks Ended (in thousands) -------------------- May 3, 2003 May 4, 2002 ----------- ----------- Net loss ......................................... ($1,042) ($1,312) Unrealized gains on derivative instruments, net of deferred tax provision of $39 and $73, respectively ..................................... 63 120 ----------- ----------- Total comprehensive loss ......................... ($ 979) ($1,192) =========== ===========
7 BOOKS-A-MILLION, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. 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 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, a maximum obligation is not explicitly stated and and therefore the overall maximum amount of the 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 3, 2003. 6. INVENTORY Inventories and the method of determining cost were: (In thousands) May 3, 2003 February 1, 2003 ------------- ------------- Inventories (at FIFO) $ 239,617 $ 224,019 LIFO reserve 164 - ------------- ------------- Net inventories $ 239,453 $ 224,019 ============= ============= As of February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change is preferable in that it achieves a more appropriate matching of revenues and expenses. The impact of this accounting change was to increase "Costs of Products Sold" in the consolidated statements of operations by $0.2 million for the thirteen weeks ended May 3, 2003. This resulted in an after-tax increase to net loss of $0.1 million or an increase in net loss per diluted share of $0.01, for the thirteen weeks ended May 3, 2003. The cumulative effect of a change in accounting principle from the FIFO method to LIFO method is not determinable. Accordingly, such change has been accounted for prospectively. In addition, pro forma amounts of retroactively applying the change cannot be reasonably estimated and have not been disclosed. 7. CHANGE IN ACCOUNTING PRINCIPLE The Company receives allowances from its vendors from a variety of programs and arrangements, including merchandise placement and cooperative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in cost of products sold upon the sale of related inventory. The impact of the adoption of EITF No. 02-16 is reflected as a cumulative effect of a change in accounting principle as of February 3, 2002 of approximately $1.2 million (net of income tax benefit of $736,000), or $0.07 per diluted share increase to net loss. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. 8 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 2003 Annual Report on Form 10-K. 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. 9 BOOKS-A-MILLION, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEGMENT INFORMATION (IN THOUSANDS) Thirteen Weeks Ended -------------------- May 3, 2003 May 4, 2002 ----------- ----------- NET SALES Retail Trade ................. $ 97,778 $ 99,423 Electronic Commerce Trade .... 5,207 5,870 Intersegment Sales Elimination (3,901) (4,286) --------- --------- Net Sales ................. $ 99,084 $ 101,007 ========= ========= OPERATING INCOME (LOSS) Retail Trade ................. $ (551) $ 972 Electronic Commerce Trade .... (236) (243) Intersegment Elimination of Certain Costs ................ 48 28 --------- --------- Total Operating Income (Loss) $ (739) $ 757 ========= =========
As of May 3, As of February 1, 2003 2003 ASSETS Retail Trade ................. $ 319,042 $ 306,542 Electronic Commerce Trade .... 1,691 1,752 Intersegment Asset Elimination (532) (576) --------- --------- Total Assets ............. $ 320,201 $ 307,718 ========= =========
10 BOOKS-A-MILLION, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003, and the adoption of this standard did not have a material impact on financial condition, results of operations or cash flows. In December 2002, the 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", 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. The disclosures required by this statement are included herein. The Company is currently assessing the alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation included in this statement. FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", was issued in November 2002. This interpretation requires guarantors to account at fair value for and disclose certain types of guarantees. The interpretation's disclosure requirements became effective for the Company February 1, 2003 and are reflected in Note 5; the interpretation's accounting requirements are effective for guarantees issued or modified after December 31, 2002. FIN No. 46, "Consolidation of Variable Interest Entities", 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 applies also to VIE's created or interests obtained in VIE's before Janaury 31, 2003. The Company believes this interpretation will have no effect on its financial position, results of operations or cash flows. 10. DISCONTINUED OPERATIONS Discontinued operations represent the closure of the Company's only store in a North Carolina market. This store had sales of $349,000 and $304,000 and pretax operating losses of $57,000 and $3,000 for the thirteen-week periods ended May 3, 2003 and May 4, 2002, respectively. Included in the loss on discontinued operations are closing costs of $16,000 for the thirteen weeks ended May 3, 2003. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market areas; inflation; economic conditions in general and in the Company's specific market areas; the number of store openings and closings; the profitability of certain product lines, capital expenditures and future liquidity; liability and other claims asserted against the Company; uncertainties related to the Internet and the Company's Internet initiatives; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon the assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, 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 The Company was founded in 1917 and currently operates 207 retail bookstores, including 164 superstores, concentrated in the southeastern United States. The Company's growth strategy is focused on opening superstores in new and existing market areas, particularly in the Southeast. In addition to opening new stores, management intends to continue its practice of reviewing the profitability trends and prospects of existing stores and closing or relocating under-performing stores or converting stores to different formats. Comparable store sales are determined each fiscal quarter during the year based on all stores that have been open at least 12 full months as of the first day of the fiscal quarter. Any stores closed during a fiscal quarter are excluded from comparable store sales as of the first day of the quarter in which they close. RESULTS OF OPERATIONS The following table sets forth statement of operations data expressed as a percentage of net sales for the periods presented.
Thirteen Weeks Ended -------------------- May 3, 2003 May 4, 2002 ----------- ----------- Net sales ............................................................... 100.0% 100.0% Gross profit ............................................................ 25.3% 27.3% Operating, selling and administrative expenses .......................... 21.9% 22.6% Depreciation and amortization ........................................... 4.1% 3.9% ----- ----- Operating income (loss) ................................................. (0.7)% 0.7% Interest expense, net ................................................... 0.9% 0.9% ----- ----- Loss from continuing operations before income taxes and cumulative effect of a change in accounting principle ................................ (1.6)% (0.2)% Income taxes benefit .................................................... (0.6)% (0.1)% ----- ----- Loss from continuing operations before cumulative effect of a change in accounting principle ............................................... (1.0)% (0.1)% Loss from discontinued operations ....................................... (0.1)% -- ----- ----- Loss before cumulative effect of a change in accounting principle ....... (1.1)% (0.1)% Cumulative effect of change in accounting principle ..................... -- (1.2)% ----- ----- Net loss ................................................................ (1.1)% (1.3)% ===== =====
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales decreased 1.9% to $99.1 million in the thirteen weeks ended May 3, 2003, from $101.0 million in the thirteen weeks ended May 4, 2002. Comparable store sales in the first quarter decreased 2.9% when compared with the same 13-week period for the prior year. Gross profit decreased 9.0% to $25.1 million in the thirteen weeks ended May 3, 2003 when compared with the same thirteen week period for the prior year. Gross profit as a percentage of net sales for the thirteen weeks ended May 3, 2003 was 25.3% versus 27.3% in the same period last year. The decrease in gross profit stated as a percent to sales was primarily due to higher occupancy costs as a percentage of sales and increased promotional sales activity. Additionally, as of February 2, 2003, the Company changed from the first-in first-out (FIFO) method of accounting for inventories to the last-in last-out (LIFO) method. The impact of this accounting change was to decrease gross profit in the consolidated statements of operations by $0.2 million for the thirteen weeks ended May 3, 2003. Refer to Note 6 in the notes to the condensed consolidated financial statements for additional information related to this change. Operating, selling and administrative expenses decreased 4.7% to $21.7 million from $22.8 million in the thirteen week period ended May 3, 2003 compared to the same period last year. Operating, selling and administrative expenses as a percentage of net sales for the thirteen weeks ended May 3, 2003 decreased to 21.9% from 22.6% in the same period last year. The decrease in operating, selling and administrative expenses stated as a percent to sales was primarily due to strong expense controls in both corporate and store selling expenses. Depreciation and amortization increased 2.5% to $4.1 million in the thirteen weeks ended May 3, 2003, from $4.0 million in the thirteen weeks ended May 4, 2002. The increase in depreciation and amortization was due to the increased number of superstores operated by the Company combined with capital improvements made to existing stores during fiscal 2003. Interest expense was $869,000 in the thirteen weeks ended May 3, 2003 versus $934,000 in the same period last year. The decrease was due to lower average interest rates versus last year. Discontinued operations represent the closure of the Company's only store in a North Carolina market. This store had sales of $349,000 and $304,000 and pretax operating losses of $57,000 and $3,000 for the thirteen-week periods ended May 3, 2003 and May 4, 2002, respectively. Included in the loss on discontinued operations are closing costs of $16,000 for the thirteen weeks ended May 3, 2003. Effective February 3, 2002, the Company adopted Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. The adoption of this accounting principle resulted in a cumulative after-tax increase to net loss of $1.2 million, or $0.07 per diluted share for the thirteen weeks ended May 4, 2002. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flows from operations, including credit terms from vendors, and borrowings under its credit facility. The Company has an unsecured revolving credit facility that allows borrowings up to $100 million, for which no principal repayments are due until the facility expires in July 2005. The credit facility has certain financial and non-financial covenants. The most restrictive financial covenant is the maintenance of a minimum fixed charge ratio. As of May 3, 2003 and February 1, 2003, $63.6 million and $37.4 million, respectively, were outstanding under this credit facility. The maximum and average outstanding balances during the thirteen weeks ended May 3, 2003 were $73.9 million and $64.4 million, respectively, compared to $64.3 million and $58.7 million, respectively for the same period in the prior year. The outstanding borrowings as of May 3, 2003 had interest rates ranging from 2.06% to 4.25%. Additionally, as of May 3, 2003 and February 1, 2003, the Company has outstanding borrowings under an industrial revenue bond totaling $7.5 million, which is secured by certain property. Financial Position During the thirteen weeks ended May 3, 2003, the Company opened two superstores, closed one superstore and closed one newsstand. The store openings, combined with seasonal fluctuation in inventory, resulted in increased inventory balances at May 3, 2003, as compared to February 1, 2003. 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 3, 2003 (in thousands): PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 Thereafter -------- -------- -------- -------- -------- -------- ---------- Notes payable ...... $ 72 $ 72 $ -- $ -- $ -- $ -- $ -- Short-term debt - revolving credit facility .... 26,160 26,160 -- -- -- -- -- Long-term debt - revolving credit facility ........... 37,440 -- -- 37,440 -- -- -- Long-term debt -industrial revenue bond ....... 7,500 -- -- 7,500 -- -- -- -------- -------- -------- -------- -------- -------- -------- Subtotal of debt ... 71,172 26,232 -- 44,940 -- -- -- -------- -------- -------- -------- -------- -------- -------- Operating leases ... 128,041 20,728 25,546 22,819 17,767 14,270 26,911 Total of obligations $199,213 $ 46,960 $ 25,546 $ 67,759 $ 17,767 $ 14,270 $ 26,911 ======== ======== ======== ======== ======== ======== ========
Guarantees From time to time, the Company enters into certain types of agreements that contingently require the Company to indemnify parties against third party claims. Generally these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company's request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors from claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. 14 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, a maximum obligation is not explicitly stated and and therefore the overall maximum amount of the 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 3, 2003. Cash Flows Operating activities used cash of $25.1 million and $23.3 million in the first thirteen weeks of fiscal 2004 and 2003, respectively, and included the following effects: o Cash used for inventories in the first thirteen weeks of fiscal 2004 and 2003 was $15.4 million and $17.6 million, respectively, due to seasonal fluctuations in inventory. o Cash used by accounts payable in the first thirteen weeks of fiscal 2004 and 2003 was $7.4 million and $4.9 million, respectively. o Depreciation and amortization expenses were $4.1 million and $4.0 million in the first thirteen weeks of fiscal 2004 and 2003, respectively. Cash flows used in investing activities reflected a $1.6 million and $1.1 million net use of cash for the first thirteen weeks of fiscal 2004 and 2003, respectively. Cash was used primarily to fund capital expenditures for new store openings, renovation and improvements to existing stores, warehouse distribution purposes and investments in management information systems. Financing activities provided cash of $26.1 million and $24.5 million in the first thirteen weeks of fiscal 2004 and 2003, respectively, principally from net borrowings under the revolving credit facility. OUTLOOK For fiscal 2004, the Company currently expects to open approximately six to eight new stores, relocate or remodel approximately 20 to 25 stores and close approximately two to four stores. The Company's capital expenditures totaled $1.6 million in the first thirteen weeks of fiscal 2004. These expenditures were primarily used for new store openings, renovation and improvements to existing stores and investment in management information systems. Management estimates that capital expenditures for the remainder of fiscal 2004 will be approximately $10.8 million and that such amounts will be used primarily for new stores, renovation and improvements to existing stores, 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 2004. RELATED PARTY ACTIVITIES Certain stockholders and directors (including certain officers) 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 paragraph. The Company purchases a portion of its inventories for resale from related parties; such purchases were $11.5 million in the thirteen weeks ended May 3, 2003, versus $10.5 million in the thirteen weeks ended May 4, 2002. The Company sells a portion of its inventories to related parties; such sales amounted to $0.2 million and $0.1 million in the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively. Management believes the terms of these related party transactions are substantially equivalent to those available from unrelated parties and, therefore, have no significant impact on gross profit. The Company also leases certain office, warehouse and retail store space from related parties. Rental expense under these leases was approximately $153,400 And $150,500 In the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively. Total minimum future rental payments under these leases are $394,000 at May 3, 2003. 15 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 $65.9 million during fiscal 2003. 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 $97,000 for the thirteen weeks ended May 3, 2003. Likewise, a 66% decrease in LIBOR rates would decrease interest expense by $97,000 for the thirteen weeks ended May 3, 2003. 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. 16 CONTROLS AND PROCEDURES The Company maintains 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 the Company's management, including its 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. Within 90 days prior to the date of this report, 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. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 17 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 None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matters of Vote of Security-Holders a. The Company held its Annual Meeting of stockholders on June 5, 2003. b. Not applicable. c. At the Company's Annual Meeting, the stockholders voted on the election of directors and on one stockholder proposal regarding the use of Company profits. Set forth below are the results of each matter voted on by the stockholders.
Number of Votes Number of Votes Number of Votes Election of Cast For Cast Against Abstaining ----------- -------- ------------ ---------- Clyde B. Anderson 14,961,838 441,495 0 Ronald G. Bruno 15,233,003 170,330 0 Stockholder Proposal 271,584 9,916,007 18,940
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 23.01. Preferability Letter to Books-A-Million, Inc. from Deloitte & Touche LLP (B) Reports on Form 8-K None 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. BOOKS-A-MILLION, INC. Date: June 16, 2003 by:/s/ Clyde B. Anderson ---------------------- Clyde B. Anderson Chief Executive Officer Date: June 16, 2003 by:/s/ Richard S. Wallington -------------------------- Richard S. Wallington Chief Financial Officer 19 CERTIFICATIONS I, Clyde B. Anderson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Books-A-Million, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 16, 2003 _/s/ Clyde B. Anderson ---------------------- Clyde B. Anderson Chief Executive Officer I, Richard S. Wallington, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Books-A-Million, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 20 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 16, 2003 _/s/ Richard S. Wallington -------------------------- Richard S. Wallington Chief Financial Officer 21 EXHIBIT 23.01 June 13, 2003 Books-A-Million, Inc. 402 Industrial Lane Birmingham, Alabama 35211 Dear Sirs/Madams: At your request, we have read the description included in your Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarter ended May 3, 2003, of the facts relating to the change in accounting for inventories to the Last-in, First-out ("LIFO") method. We believe, on the basis of the facts so set forth and other information furnished to us by appropriate officials of the Company, that the accounting change described in your Form 10-Q is to an alternative accounting principle that is preferable under the circumstances. We have not audited any consolidated financial statements of Books-A-Million, Inc. (the "Company") and its subsidiaries as of any date or for any period subsequent to February 1, 2003. Therefore, we are unable to express, and we do not express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on the related information furnished to us by officials of the Company, or on the financial position, results of operations, or cash flows of Books-A-Million, Inc. and its subsidiaries as of any date or for any period subsequent to February 1, 2003. Yours truly, DELOITTE & TOUCHE LLP Birmingham, Alabama 22