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: November 2, 2002
- 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 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 November 29, 2002 were 16,200,073 shares.
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. 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 ...................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 15
Item 4. Controls and Procedures ........................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 17
Item 2. Changes in Securities .......................................... 17
Item 3. Defaults Upon Senior Securities ................................ 17
Item 4. Submission of Matters of Vote of Security-Holders .............. 17
Item 5. Other Information .............................................. 17
Item 6. Exhibits and Reports on Form 8-K ............................... 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOVEMBER 2, 2002 FEBRUARY 2, 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 4,969 $ 5,539
Accounts receivable, net ................................................. 8,221 7,713
Related party accounts receivable, net ................................... 265 967
Inventories .............................................................. 247,731 210,853
Prepayments and other .................................................... 5,111 5,680
Deferred income taxes .................................................... 6,854 5,093
--------- ---------
TOTAL CURRENT ASSETS ................................................. 273,151 235,845
--------- ---------
PROPERTY AND EQUIPMENT:
Gross property and equipment ............................................. 157,359 145,428
Less accumulated depreciation and amortization ........................... 100,494 88,712
--------- ---------
NET PROPERTY AND EQUIPMENT ............................................. 56,865 56,716
--------- ---------
OTHER ASSETS:
Goodwill, net ............................................................ 1,368 1,368
Other .................................................................... 330 492
--------- ---------
TOTAL OTHER ASSETS ..................................................... 1,698 1,860
--------- ---------
TOTAL ASSETS ......................................................... $ 331,714 $ 294,421
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 107,897 $ 97,523
Related parties accounts payable ......................................... 3,800 5,661
Accrued expenses ......................................................... 23,415 24,801
Accrued income taxes ..................................................... 844 2,674
Current portion of long-term debt ........................................ 35,280 499
--------- ---------
TOTAL CURRENT LIABILITIES ............................................. 171,236 131,158
--------- ---------
LONG TERM DEBT .............................................................. 39,580 38,846
--------- ---------
DEFERRED INCOME TAXES ....................................................... 1,681 2,042
--------- ---------
STOCKHOLDERS' INVESTMENT:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares outstanding......................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 18,210,123 and
18,138,963 shares issued at November 2, 2002
and February 2, 2002, respectively ....................................... 182 181
Additional paid-in capital ............................................... 70,846 70,719
Less treasury stock at cost (2,010,050 shares at November 2,
2002 and February 2, 2002)............................................... (5,271) (5,271)
Accumulated other comprehensive loss, net of tax ......................... (1,047) (1,217)
Retained earnings ........................................................ 54,507 57,963
--------- ---------
TOTAL STOCKHOLDERS' INVESTMENT ....................................... 119,217 122,375
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT ....................... $ 331,714 $ 294,421
========= =========
SEE ACCOMPANYING NOTES
3
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
NOVEMBER 2, 2002 NOVEMBER 3, 2001 NOVEMBER 2, 2002 NOVEMBER 3, 2001
---------------- ---------------- ---------------- ----------------
NET SALES .................................... $ 97,194 $ 97,812 $ 303,039 $ 299,313
Cost of products sold (including warehouse
distribution and store occupancy costs) (1) 74,566 73,605 227,445 222,778
-------- -------- --------- ---------
GROSS PROFIT ................................. 22,628 24,207 75,594 76,535
Operating, selling and administrative
expenses................................... 21,148 22,177 65,876 66,082
Depreciation and amortization ............. 4,114 3,908 12,084 11,681
-------- -------- --------- ---------
OPERATING LOSS ............................... (2,634) (1,878) (2,366) (1,228)
Interest expense, net ..................... 1,274 1,133 3,208 3,542
-------- -------- --------- ---------
LOSS BEFORE INCOME TAXES ..................... (3,908) (3,011) (5,574) (4,770)
Income taxes benefit ...................... (1,485) (1,145) (2,118) (1,813)
-------- -------- --------- ---------
NET LOSS ..................................... $ (2,423) $ (1,866) $ (3,456) $ (2,957)
======== ======== ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC ................... 16,200 16,417 16,187 16,837
======== ======== ========= =========
NET LOSS PER SHARE - BASIC ................... $ (0.15) $ (0.11) $ (0.21) $ (0.18)
======== ======== ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED ................. 16,200 16,417 16,187 16,837
======== ======== ========= =========
NET LOSS PER SHARE - DILUTED ................. $ (0.15) $ (0.11) $ (0.21) $ (0.18)
======== ======== ========= =========
(1) Inventory purchases from related parties were $11,777, $11,673, $25,297 and
$28,870, 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)
THIRTY-NINE WEEKS ENDED
-----------------------
NOVEMBER 2, 2002 NOVEMBER 3, 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .................................................................. $ (3,456) $ (2,957)
--------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 12,084 11,681
Loss on disposal of property and equipment .............................. 1 246
Increase in deferred income taxes ....................................... (2,226) (1,876)
Increase in inventories ............................................... (36,878) (32,800)
Increase in accounts payable .......................................... 8,513 17,267
Changes in certain other assets and liabilities ....................... (2,228) (1,855)
--------- ---------
Total adjustments .................................................... (20,734) (7,337)
--------- ---------
Net cash used in operating activities ................................ (24,190) (10,294)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (12,038) (7,149)
Acquisition of certain assets ............................................. -- (6,532)
Proceeds from sale of equipment ........................................... 16 23
--------- ---------
Net cash used in investing activities ................................ (12,022) (13,658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities ........................................ 152,556 146,551
Repayments under credit facilities ........................................ (117,041) (118,342)
Proceeds from sale of common stock, net ................................... 127 83
Purchase of treasury stock ................................................ -- (3,389)
--------- ---------
Net cash provided by financing activities ............................ 35,642 24,903
--------- ---------
Net increase (decrease) in cash and cash equivalents ......................... (570) 951
Cash and cash equivalents at beginning of period ............................. 5,539 5,282
--------- ---------
Cash and cash equivalents at end of period ................................... $ 4,969 $ 6,233
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the thirty-nine week period for:
Interest ......................................................... $ 2,893 $ 3,180
Income taxes, net of refunds ..................................... $ 1,644 $ 1,019
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 and thirty-nine week periods ended November 2, 2002 and November
3, 2001, 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 2, 2002, included in the Company's 2002 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 November 2, 2002, and the results of its
operations and cash flows for the thirteen and thirty-nine week periods
ended November 2, 2002 and November 3, 2001. 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.
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share ("EPS") excludes dilution and 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
average number of shares outstanding including the effect of outstanding
stock options, if dilutive, in each respective thirteen and thirty-nine
week period. A reconciliation of the weighted average shares for basic and
diluted EPS is as follows:
For the Thirteen Weeks Ended
(in thousands)
November 2, 2002 November 3, 2001
---------------- ----------------
Weighted average shares outstanding:
Basic 16,200 16,417
Dilutive effect of stock options outstanding 0 0
------ ------
Diluted 16,200 16,417
====== ======
For the Thirty-Nine Weeks Ended
(in thousands)
November 2, 2002 November 3, 2001
---------------- ----------------
Weighted average shares outstanding:
Basic 16,187 16,837
Dilutive effect of stock options outstanding 0 0
------ ------
Diluted 16,187 16,837
====== ======
Options outstanding of 2,374,108 and 2,167,020 for the thirteen and
thirty-nine weeks ended November 2, 2002 and November 3, 2001 were not
included in the table above as they were anti-dilutive.
6
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 carries a notional
principal amount of $30.0 million. The swap effectively fixes the interest
rate on $30.0 million of variable rate debt at 7.41%, and expires February
2003. The Company became party to 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
either accumulated other comprehensive income (loss) or in earnings,
depending on the type of hedging relationship. Over time, the unrealized
gains and losses held in accumulated other comprehensive income (loss) may
be realized and reclassified to earnings.
The derivative instruments were reported as a liability classified in
Accrued Expenses in the accompanying condensed consolidated balance sheets
at their fair value of $1.7 million and $2.0 million as of November 2, 2002
and February 2, 2002, respectively. For the thirteen weeks ended November
2, 2002 and November 3, 2001, respectively, adjustments of ($279,000) (net
of tax provision of $171,000) and $545,000 (net of tax benefit of $334,000)
and in the thirty-nine weeks ended November 2, 2002 and November 3, 2001,
respectively, adjustments of ($170,000) (net of tax provision of $104,000)
and $1,451,000 (net of tax benefit of $889,000) were recorded as unrealized
gains or losses in accumulated other comprehensive income (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' investment. 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 INCOME (LOSS) Thirteen Weeks Ended Thirty-Nine Weeks Ended
(in thousands) (in thousands)
-------------------- -----------------------
11/02/2002 11/03/2001 11/02/2002 11/03/2001
---------- ---------- ---------- ----------
Net income (loss) ($2,423) ($1,866) ($3,456) ($2,957)
------- ------- ------- -------
Cumulative effect of accounting change for derivatives
instruments, net of deferred tax provision (benefit)
of ($285) -- -- -- (465)
------- ------- ------- -------
Unrealized gains (losses) on derivative instruments,
net of deferred tax provision (benefit) for the
thirteen week periods of $171 and ($334), respectively,
and the thirty-nine week periods of $104 and ($604),
respectively 279 (545) 170 (986)
------- ------- ------- -------
Total comprehensive income (loss) ($2,144) ($2,411) ($3,286) ($4,408)
======= ======= ======= =======
7
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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.
6. GOODWILL
During fiscal 2002, goodwill was amortized on a straight-line basis
over its estimated periods to be benefited. On February 3, 2002, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", in its entirety. Pursuant to
such adoption, the Company did not amortize any goodwill during fiscal
2003. The Company has recorded amortization expense on goodwill of
approximately $43,000 for fiscal 2000, 2001 and 2002. The amount of
amortization expense that would have been recorded in future years if SFAS
No. 142 was not adopted on February 3, 2002 would be approximately $43,000
per year through fiscal 2034.
The Company is required to assess goodwill for impairment annually, or
more frequently if circumstances indicate impairment may have occurred. The
Company reviewed the carrying value of its goodwill by comparing such
amount to its estimated fair value utilizing a discounted cash flow model
and determined that the carrying amount of such asset did not exceed its
fair value. Accordingly, the initial implementation of this statement did
not impact the Company's consolidated financial statements.
7. ACQUISITION OF CERTAIN ASSETS
During March 2001, the Company acquired inventory and lease-rights of
eighteen stores from Crown Books Corporation for $6.5 million. The stores
are located in the Chicago, Illinois and Washington, D.C. metropolitan
areas. The results of operations for these stores were reflected in the
consolidated financial statements beginning in the first quarter of fiscal
2002.
8. BUSINESS SEGMENTS
The Company has two reportable segments: electronic commerce trade and
retail trade. 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 retail trade
segment is a strategic business segment that is engaged in the retail trade
of mostly book merchandise, fulfillment services and other related book
merchandise services.
The accounting policies of the segments are substantially the same as
those described in the critical accounting policies section of Management's
Discussion and Analysis found later in this report and in the Company's
fiscal year 2002 10-K filing. 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.
8
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEGMENT INFORMATION (IN THOUSANDS) Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
November 2, 2002 November 3, 2001 November 2, 2002 November 3, 2001
------------------- ------------------- -------------------- -------------------
NET SALES
Electronic Commerce Trade .... $ 5,968 $ 5,449 $ 17,110 $ 14,964
Retail Trade ................. 95,942 96,086 299,052 294,633
Intersegment Sales Elimination (4,716) (3,723) (13,123) (10,284)
--------- --------- --------- ---------
Net Sales .................. $ 97,194 $ 97,812 $ 303,039 $ 299,313
========= ========= ========= =========
OPERATING LOSS
Electronic Commerce Trade .... $ (224) $ (356) $ (621) $ (1,155)
Retail Trade ................. (2,436) (1,565) (1,808) (134)
Intersegment Elimination of .. 26 43 63 61
Certain Costs --------- --------- --------- ---------
Total Operating Loss ......... $ (2,634) $ (1,878) $ (2,366) $ (1,228)
========= ========= ========= =========
November 2, 2002 February 2, 2002
------------------- -------------------
ASSETS
Electronic Commerce Trade .... 1,927 1,939
Retail Trade ................. 330,372 293,130
Intersegment Asset Elimination (585) (648)
--------- ---------
Total Assets .............. $ 331,714 $ 294,421
========= =========
9
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations and Transactions"--"Reporting the
Effects of Disposal of a Segment of a Business", and "Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for the disposal of a segment of
a business. SFAS No. 144 also amended Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company
adopted SFAS No. 144 on February 3, 2002, which did not have a material impact
on financial condition, results of operations or cash flows.
In June of 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. Management is in the
process of analyzing this statement for the impact on future transactions.
10
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 209 retail
bookstores, including 163 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.
CRITICAL ACCOUNTING POLICIES
Inventories
Cost is assigned to store and warehouse inventories using the retail
inventory method. The valuation of store and warehouse inventories is determined
by applying a calculated cost-to-retail ratio to the retail value of
inventories. The retail method is an averaging method that is widely used within
the retail industry. Such valuations require certain significant management
estimates and judgments involving markdowns and shrinkage of inventories. These
practices affect ending inventories at cost as well as the resulting gross
margins and inventory turnover ratios.
Physical inventories are taken throughout the course of the fiscal
period. Store inventory counts are performed by an independent inventory service
while warehouse inventory counts are performed internally. All physical
inventory counts are taken and reconciled to the general ledger. The Company's
accrual for inventory shortages is based upon historical inventory shortage
results that are subject to certain estimates and averages.
Accrued Expenses
On a monthly basis, certain material expenses are estimated and accrued
to properly record those expenses in the period incurred. Such estimates are
made for payroll and employee benefits costs, occupancy costs and advertising
expenses among other items. These estimates are made based upon current and
historical results.
Differences in management's estimates and assumptions could result in
accruals that are materially different from the actual result.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales decreased 0.6% to $97.2 million in the thirteen weeks ended
November 2, 2002, from $97.8 million in the thirteen weeks ended November 3,
2001. Net sales increased 1.2% to $303.0 million in the thirty-nine weeks ended
November 2, 2002, from $299.3 million in the thirty-nine weeks ended November 3,
2001. The increase in net sales for the thirty-nine weeks resulted from six
superstores opened in the first three quarters of fiscal 2003. In addition, the
Company opened eighteen new stores, acquired from Crown Books Company, that
started operations in the middle part of the first quarter of fiscal 2002.
Comparable store sales in the third quarter decreased 2.6% when
compared with the same 13-week period for the prior year. Comparable store sales
for all book categories increased 1.6 % for the quarter. In the thirty-nine week
period ended November 2, 2002, comparable store sales decreased 1.5% when
compared with the same period last year. Comparable store sales for all book
categories, however, increased 1.6%. The decrease in non-book sales was driven
by lower music sales (a discontinued line of merchandise) combined with lower
magazine and gift sales versus last year's strong sales of products related to
September 11.
Gross profit decreased 6.5% to $22.6 million in the thirteen weeks
ended November 2, 2002 when compared with the same thirteen week period for the
prior year. For the thirty-nine weeks ended November 2, 2002, gross profit
decreased 1.2% to $75.6 million from $76.5 million in the same period last year.
Gross profit as a percentage of net sales for the thirteen weeks ended November
2, 2002 was 23.3% versus 24.7% in the same period last year. Gross profit as a
percentage of net sales for the thirty-nine weeks ended November 2, 2002 was
24.9% versus 25.6% 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.
Operating, selling and administrative expenses decreased 4.6% to $21.1
million from $22.2 million in the thirteen week period ended November 2, 2002
compared to the same period last year, and in the thirty-nine weeks ended
November 2, 2002, operating, selling and administrative expenses decreased 0.3%
to $65.9 million from $66.1 million in the same period last year. Operating,
selling and administrative expenses as a percentage of net sales for the
thirteen weeks ended November 2, 2002 decreased to 21.8% from 22.7% in the same
period last year. For the thirty-nine week period, operating, selling and
administrative expenses as a percentage of net sales decreased to 21.7% from
22.1% 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 5.3% to $4.1 million in the
thirteen weeks ended November 2, 2002, from $3.9 million in the thirteen weeks
ended November 3, 2001, and in the thirty-nine week period depreciation and
amortization increased 3.5% to $12.1 million from $11.7 million in the same
period last year. The increase in depreciation and amortization is primarily the
result of the increased number of superstores operated by the Company.
Interest expense was $1.3 million in the thirteen weeks ended November
2, 2002 versus $1.1 million in the same period last year. The increase is due to
higher average debt versus last year. In the thirty-nine weeks ended November 2,
2002, interest expense was $3.2 million versus $3.5 million in the same period
last year. The decrease is due to lower interest rates versus last year.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
During the first thirty-nine weeks of fiscal 2003, the Company's cash
requirements have been funded with cash from operations and with borrowings
under the Company's credit facilities. Similar to many retailers, the Company's
business is seasonal, with its highest retail sales, gross profits and net
income traditionally occurring during the fourth fiscal quarter, reflecting the
increased demand for books and gifts during the year-end, holiday selling
season. Working capital requirements are generally highest during the third
fiscal quarter and the early part of the fourth fiscal quarter due to the
seasonality of the Company's business.
In July 2002, the Company entered into a revolving credit facility that
allows borrowings up to $100.0 million, for which no principal repayments are
due until the facility expires on July 1, 2005. As of November 2, 2002, $67.0
million was outstanding under these facilities combined. Additionally, as of
November 2, 2002, the Company has outstanding borrowings associated with the
issuance of an industrial revenue bond totaling $7.5 million.
The Company's capital expenditures totaled $12.0 million in the first
thirty-nine weeks of fiscal 2003. 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 2003 will be approximately $4.5 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 2003.
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 November 2, 2002 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----- ------- ------- ------- ------- -------
Notes payable ...... $ 320 $ 233 $ 87 $ 0 $ 0 $ 0
Long-term debt -
revolving
credit facility ... 67,040 -- -- -- 67,040 --
Long-term debt
- -industrial
revenue bond ..... 7,500 -- -- 7,500 -- --
-------- -------- -------- -------- -------- --------
Subtotal of debt ... 74,860 233 87 7,500 67,040 0
Operating leases ... 101,116 7,512 27,781 25,500 22,752 17,571
-------- -------- -------- -------- -------- --------
Total of obligations $175,976 $ 7,745 $ 27,868 $ 33,000 $ 89,792 $ 17,571
======== ======== ======== ======== ======== ========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RELATED PARTY ACTIVITIES
Certain principal stockholders 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 $25.3 million in the thirty-nine weeks
ended November 2, 2002, versus $28.9 million in the thirty-nine weeks ended
November 3, 2001. The decrease in related party purchases is primarily due to
lower purchases of music merchandise. The Company sells a portion of its
inventories to related parties; such sales amounted to $0 and $1.7 million in
the thirty-nine weeks ended November 2, 2002 and November 3, 2001, respectively.
This decrease in related party sales is mostly due to the decision to
significantly reduce bargain books commerce with related parties. 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.
FINANCIAL POSITION
During the thirty-nine weeks ended November 2, 2002, the Company opened
six superstores and closed one Bookland store. Inventory and debt balances at
November 2, 2002 increased as compared to February 2, 2002 due to seasonal
fluctuations in inventory levels.
14
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 $63.4 million during fiscal 2002. However, the Company
utilizes 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, which carries a notional principal amount of $30.0 million. The swap
effectively fixes the interest rate on $30.0 million of variable rate debt at
7.41%. The swap agreement expires on February 11, 2003. The Company became party
to 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.
15
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.
16
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
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))
(B) Reports on Form 8-K
None
17
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: December 17, 2002 by:/s/ Clyde B. Anderson
------------------------
Clyde B. Anderson
Chief Executive Officer
Date: December 17, 2002 by:/s/ Richard S. Wallington
----------------------------
Richard S. Wallington
Chief Financial Officer
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
18
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: December 17, 2002
/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.
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: December 17, 2002
/s/ Richard S. Wallington
-------------------------
Richard S. Wallington
Chief Financial Officer
19