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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: August 3, 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 of (IRS Employer Identification No.)
incorporation or organization)
402 INDUSTRIAL LANE, BIRMINGHAM, ALABAMA 35211
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(205) 942-3737
--------------
(Registrant's phone number including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last period)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practicable date: Shares of common stock, par value $.01 per
share, outstanding as of September 13, 2002 were 16,199,574 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 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters of Vote of Security-Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AUGUST 3, 2002 FEBRUARY 2, 2002
-------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,827 $ 5,539
Accounts receivable, net 7,278 8,680
Inventories 223,270 210,853
Prepayments and other 4,805 5,680
Deferred income taxes 5,655 5,093
--------- ---------
TOTAL CURRENT ASSETS 246,835 235,845
--------- ---------
PROPERTY AND EQUIPMENT:
Gross property and equipment 150,031 145,428
Less accumulated depreciation and amortization 96,456 88,712
--------- ---------
NET PROPERTY AND EQUIPMENT 53,575 56,716
--------- ---------
OTHER ASSETS:
Goodwill, net 1,368 1,368
Other 366 492
--------- ---------
TOTAL OTHER ASSETS 1,734 1,860
--------- ---------
TOTAL ASSETS $ 302,144 $ 294,421
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 90,545 $ 103,184
Accrued expenses 24,603 24,801
Accrued income taxes 592 2,674
Current portion of long-term debt 23,662 499
--------- ---------
TOTAL CURRENT LIABILITIES 139,402 131,158
--------- ---------
LONG TERM DEBT 39,580 38,846
--------- ---------
DEFERRED INCOME TAXES 1,802 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, 18,209,624 and
18,138,963 shares issued at
August 3, 2002 and February 2, 2002, respectively 182 181
Additional paid-in capital 70,845 70,719
Less treasury stock at cost 2,010,050 shares at August 3,
2002 and February 2, 2002 (5,271) (5,271)
Accumulated other comprehensive income (loss) (1,326) (1,217)
Retained earnings 56,930 57,963
--------- ---------
TOTAL STOCKHOLDERS' INVESTMENT 121,360 122,375
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 302,144 $ 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 TWENTY-SIX WEEKS ENDED
---------------------------------- ----------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
NET SALES $ 104,669 $ 104,011 $ 205,845 $ 201,501
Cost of products sold (including warehouse
distribution and store occupancy costs) (1) 77,872 77,169 152,879 149,173
--------- --------- --------- ---------
GROSS PROFIT 26,797 26,842 52,966 52,328
Operating, selling and administrative 22,901 22,894 44,728 43,905
expenses
Depreciation and amortization 3,972 3,896 7,970 7,773
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (76) 52 268 650
Interest expense, net 1,000 1,142 1,934 2,409
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (1,076) (1,090) (1,666) (1,759)
Income taxes provision (benefit) (409) (414) (633) (668)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (667) $ (676) $ (1,033) $ (1,091)
========== ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 16,199 16,773 16,181 17,047
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.04) $ (0.04) $ (0.06) $ (0.06)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 16,199 16,773 16,181 17,047
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.04) $ (0.04) $ (0.06) $ (0.06)
========= ========= ========= =========
(1) Inventory purchases from related parties were $2,995, $4,801, $13,520
and $17,197, 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)
TWENTY-SIX WEEKS ENDED
---------------------------------
AUGUST 3, 2002 AUGUST 4, 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,033) $ (1,091)
--------- --------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 7,970 7,773
Loss on disposal of property and equipment 1 41
Change in deferred income taxes (735) (733)
Change in inventories (12,417) (2,076)
Change in accounts payable (12,639) (6,009)
Changes in certain other assets and liabilities (189) (5,345)
--------- --------
Total adjustments (18,009) (6,349)
--------- --------
Net cash used in operating activities (19,042) (7,440)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,710) (3,617)
Acquisition of certain assets -- (6,532)
Proceeds from sale of equipment 16 12
--------- --------
Net cash used in investing activities (4,694) (10,137)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 102,176 96,706
Repayments under credit facilities (78,278) (78,112)
Proceeds from sale of common stock, net 126 83
Purchase of treasury stock -- (2,258)
--------- --------
Net cash provided by financing activities 24,024 16,419
--------- --------
Net increase (decrease) in cash and cash equivalents 288 (1,158)
Cash and cash equivalents at beginning of period 5,539 5,282
--------- --------
Cash and cash equivalents at end of period $ 5,827 $ 4,124
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the twenty-six week period for:
Interest $ 1,787 $ 1,909
Income taxes, net of refunds $ 1,890 $ 1,069
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 twenty-six week periods ended August 3, 2002 and August 4, 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 August 3, 2002, and the results of its
operations and cash flows for the thirteen and twenty-six week periods ended
August 3, 2002 and August 4, 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 twenty-six week period. A
reconciliation of the weighted average shares for basic and diluted EPS is as
follows:
For the Thirteen Weeks Ended
(in thousands)
August 3, August 4,
2002 2001
--------- ---------
Weighted average shares outstanding:
Basic 16,199 16,773
Dilutive effect of stock options outstanding 0 0
------ ------
Diluted 16,199 16,773
====== ======
For the Twenty-Six Weeks Ended
(in thousands)
August 3, August 4,
2002 2001
--------- ---------
Weighted average shares outstanding:
Basic 16,181 17,047
Dilutive effect of stock options outstanding 0 0
------ ------
Diluted 16,181 17,047
====== ======
Options outstanding of 2,399,000 and 2,165,500 for the thirteen and
twenty-six weeks ended August 3, 2002 and August 4, 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 fixes 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 May 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 its 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 $2.2 million and $1.5 million as of August 3, 2002 and
February 2, 2002, respectively. For the thirteen weeks ended August 3, 2002 and
August 4, 2001, respectively, adjustments of $230,000 (net of tax benefit of
$141,000) and $145,000 (net of tax benefit of $90,000) and in the twenty-six
weeks ended August 3, 2002 and August 4, 2001, respectively, adjustments of
$109,000 (net of tax benefit of $68,000) and $906,000 (net of tax benefit of
$555,000) 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:
7
COMPREHENSIVE INCOME (LOSS) Thirteen Weeks Ended Twenty-Six Weeks Ended
(in thousands) (in thousands)
August August August August
3, 2002 4, 2001 3, 2002 4, 2001
------- ------- ------- -------
Net income (loss) $(667) $(676) $(1,033) $(1,091)
----- ----- ------- -------
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 ($141) and ($90),
respectively, and the twenty-six week periods of
($68) and ($270), respectively (230) (145) (109) (441)
----- ----- ------- -------
Total comprehensive income (loss) $(897) $(821) $(1,142) $(1,997)
===== ===== ======= =======
8
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 the second quarter of 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 the second
quarter of 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.
9
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEGMENT INFORMATION (IN THOUSANDS) Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- ---------------------------------
SALES August 3, 2002 August 4, 2001 August 3, 2002 August 4, 2001
-------------- -------------- -------------- --------------
Electronic Commerce Trade $ 5,272 $ 4,585 $ 11,142 $ 9,516
Retail Trade 103,518 102,489 203,110 198,546
Intersegment Sales Elimination (4,121) (3,063) (8,407) (6,561)
--------- --------- --------- ---------
Total Sales $ 104,669 $ 104,011 $ 205,845 $ 201,501
========= ========= ========= =========
OPERATING INCOME (LOSS) August 3, 2002 August 4, 2001 August 3, 2002 August 4, 2001
-------------- -------------- -------------- --------------
Electronic Commerce Trade $ (153) $ (340) $ (396) $ (800)
Retail Trade 69 346 628 1,432
Intersegment Elimination of
Certain Costs 8 46 36 18
--------- --------- --------- ---------
Total Operating Income (Loss) $ (76) $ 52 $ 268 $ 650
========= ========= ========= =========
ASSETS AS OF THE
TWENTY-SIX WEEKS AS OF THE YEAR
ENDED ENDED
AUGUST 3, 2002 FEBRUARY 2, 2002
---------------- ----------------
Electronic Commerce Trade 1,836 1,939
Retail Trade 300,880 293,130
Intersegment Asset
Elimination (572) (648)
--------- ---------
Total Assets $ 302,144 $ 294,421
========= =========
10
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. 143 and 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.
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 205 retail
bookstores, including 159 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales increased 0.6% to $104.7 million in the thirteen weeks ended
August 3, 2002, from $104.0 million in the thirteen weeks ended August 4, 2001.
Net sales increased 2.2% to $205.8 million in the twenty-six weeks ended August
3, 2002, from $201.5 million in the twenty-six weeks ended August 4, 2001. The
increase in net sales resulted from three superstores and two newsstands opened
after the second quarter of fiscal 2002 combined with one superstore opened in
each of the first and second 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 second quarter decreased 1.2 % when
compared with the same 13-week period for the prior year. Comparable store sales
for all book categories increased 0.3 % for the quarter. In the twenty-six week
period ended August 3, 2002, comparable store sales decreased 1.0% when compared
with the same period last year. Comparable store sales for all book merchandise,
however, increased 1.6%. The decrease in non-book sales, driven by the decision
to discontinue the sale of music in all stores which contributed to the overall
decrease in total comparable store sales for the quarter.
Gross profit decreased 0.2 % to $26.8 million in the thirteen weeks
ended August 3, 2002 when compared with the same thirteen week period for the
prior year. For the twenty-six weeks ended August 3, 2002, gross profit
increased 1.2% to $53.0 million from $52.3 million in the same period last year.
Gross profit as a percentage of net sales for the thirteen weeks ended August 3,
2002 was 25.6 % versus 25.8% in the same period last year. Gross profit as a
percentage of net sales for the twenty-six weeks ended August 3, 2002 was 25.7%
versus 26.0% 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 were $22.9 million in
the thirteen week periods ended August 3, 2002 and August 4, 2001, and in the
twenty-six weeks ended August 3, 2002, operating, selling and administrative
expenses increased 1.9% to $44.7 million from $43.9 million in the same period
last year. Operating, selling and administrative expenses as a percentage of net
sales for the thirteen weeks ended August 3, 2002 decreased to 21.9% from 22.0%
in the same period last year. For the twenty-six week period, operating, selling
and administrative expenses as a percentage of net sales decreased to 21.7% from
21.8% in the same period last year.
Depreciation and amortization increased 1.9% to $4.0 million in the
thirteen weeks ended August 3, 2002, from $3.9 million in the thirteen weeks
ended August 4, 2001, and in the twenty-six week period depreciation and
amortization increased 2.5% to $8.0 million from $7.8 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 $1.0 million in the thirteen weeks ended August 3,
2002 versus $1.1 million in the same period last year and $1.9 million in the
twenty-six weeks ended August 3, 2002 versus $2.4 million in the same period
last year. The decrease is due to lower interest rates versus last year.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
During the first twenty-six 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 August 3, 2002, $55.3
million was outstanding under these facilities combined. Additionally, as of
August 3, 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 $4.7 million in the first
twenty-six 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 $13.6 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.
When necessary, the Company establishes certain reserves for the
closing of under-performing stores. Management feels that this year's activity
will not significantly vary from the number of closings in the prior year.
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 August 3, 2002 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----- ------- ------- ------- ------- -------
Notes payable $ 442 $ 355 $ 87 $ 0 $ 0 $ 0
Long-term debt - 55,300 -- -- -- 55,300 --
revolving
credit facility
Long-term debt - 7,500 -- -- 7,500 -- --
industrial
revenue bond
-------- ------- ------- ------- ------- -------
Subtotal of debt 63,242 355 87 7,500 55,300 0
Operating leases 105,814 14,927 27,185 24,741 21,988 16,973
-------- ------- ------- ------- ------- -------
Total of obligations $169,056 $15,282 $27,272 $32,241 $77,288 $16,973
======== ======= ======= ======= ======= =======
14
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 $13.5 million in the twenty-six weeks ended
August 3, 2002, versus $17.2 million in the twenty-six weeks ended August 4,
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 $(0.1) million and $1.6 million in
the twenty-six weeks ended August 3, 2002 and August 4, 2001, respectively. This
decrease in related party sales is mostly due to the decision to significantly
reduce bargain books commerce with related parties. The Company also purchases
logistics services from a related party; such services amounted to $8,000 and
$58,000 in the twenty-six weeks ended August 3, 2002 and August 4, 2001,
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.
FINANCIAL POSITION
During the twenty-six weeks ended August 3, 2002, the Company opened
two superstores and closed one Bookland store. Inventory and debt balances at
August 3, 2002 increased as compared to February 2, 2002 due to seasonal
fluctuations in inventory levels.
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 fixes 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 its obligation is remote as the Company
settles its interest position with the bank on a quarterly basis.
15
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))
Exhibit 10.20 Revolving Loan Agreement, dated as of July 1,
2002, among Books-A-Million, Inc., Bank of America, as Agent,
and the banks party thereto
(B) Reports on Form 8-K
The Company filed two current reports on Form 8-K during the
first and second quarters of fiscal 2003 as follows:
Current report on 8-K, filed with the Securities and Exchange
Commission on June 4, 2002, with respect to the engagement of
Deloitte & Touche LLP as its independent accountants for
fiscal 2003
Current report on Form 8-K, filed with the Securities and
Exchange Commission on May 3, 2002, with respect to the
dismissal of Arthur Andersen LLP as its independent
accountants
16
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: September 17, 2002 by:/s/ Clyde B. Anderson
---------------------
Clyde B. Anderson
Chief Executive Officer
Date: September 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; and
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.
Date: September 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; and
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.
Date: September 17, 2002
/s/ Richard S. Wallington
-------------------------
Richard S. Wallington
Chief Financial Officer
17