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: April 29, 2006
-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
incorporation or organization) Identification No.)
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practicable date: Shares of common stock, par value $.01 per
share, outstanding as of May 31, 2006 were 16,684,748 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 Income 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security-Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
AS OF APRIL 29, 2006 AS OF JANUARY 28, 2006
-------------------- ----------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,463 $ 37,519
Accounts receivable, net 8,973 9,668
Related party accounts receivable, net 783 1,134
Inventories 213,438 204,789
Prepayments and other 4,911 4,340
--------- ---------
TOTAL CURRENT ASSETS 244,568 257,450
--------- ---------
PROPERTY AND EQUIPMENT:
Gross property and equipment 204,849 203,538
Less accumulated depreciation and amortization (155,898) (152,537)
--------- ---------
NET PROPERTY AND EQUIPMENT 48,951 51,001
--------- ---------
DEFERRED INCOME TAXES 1,458 1,662
--------- ---------
OTHER ASSETS 1,515 1,546
--------- ---------
TOTAL ASSETS $ 296,492 $ 311,659
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 93,285 $ 98,171
Related party accounts payable 3,159 2,691
Accrued expenses 35,952 45,459
Accrued income taxes 1,709 1,838
Deferred income taxes 1,370 2,654
--------- ---------
TOTAL CURRENT LIABILITIES 135,475 150,813
--------- ---------
LONG-TERM DEBT 7,200 7,200
OTHER LONG-TERM LIABILITIES 9,197 8,637
--------- ---------
TOTAL NON-CURRENT LIABILITIES 16,397 15,837
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares outstanding -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 19,997,370 and 19,764,223 shares
issued at April 29, 2006 and January 28,
2006, respectively 200 198
Additional paid-in capital 80,413 79,509
Less treasury stock, at cost (3,418,356 and
3,287,317 shares at April 29, 2006 and January
28, 2006, respectively) (18,448) (16,954)
Accumulated other comprehensive loss, net of tax (7) (7)
Retained earnings 82,462 82,263
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 144,620 145,009
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 296,492 $ 311,659
========= =========
SEE ACCOMPANYING NOTES
3
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------
APRIL 29, APRIL 30,
2006 2005
--------- ---------
NET SALES $113,748 $112,625
Cost of products sold (including warehouse
distribution and store occupancy costs) 81,148 81,058
-------- --------
GROSS PROFIT 32,600 31,567
Operating, selling and administrative expenses 26,565 25,514
Depreciation and amortization 3,426 3,927
-------- --------
OPERATING INCOME 2,609 2,126
Interest expense, net 56 384
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,553 1,742
Income tax provision 1,031 662
-------- --------
INCOME FROM CONTINUING OPERATIONS 1,522 1,080
DISCONTINUED OPERATIONS (NOTE 10)
Loss from discontinued operations before income taxes (17) (32)
Income tax benefit 7 12
-------- --------
LOSS FROM DISCONTINUED OPERATIONS (10) (20)
-------- --------
NET INCOME $ 1,512 $ 1,060
======== ========
NET INCOME PER COMMON SHARE:
BASIC:
INCOME FROM CONTINUING OPERATIONS $ 0.09 $ 0.07
LOSS FROM DISCONTINUED OPERATIONS -- --
-------- --------
NET INCOME $ 0.09 $ 0.07
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,471 16,201
======== ========
DILUTED:
INCOME FROM CONTINUING OPERATIONS $ 0.09 $ 0.06
LOSS FROM DISCONTINUED OPERATIONS -- --
-------- --------
NET INCOME $ 0.09 $ 0.06
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -
DILUTED 17,001 16,922
======== ========
DIVIDENDS DECLARED PER SHARE $ 0.08 $ 0.05
======== ========
SEE ACCOMPANYING NOTES
4
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Accumulated
Common Stock Additional Treasury Stock Other Total
--------------- Paid-In ----------------- Retained Comprehensive Stockholders'
(in thousands) Shares Amount Capital Shares Amount Earnings Income (Loss) Equity
------ ------ ---------- ------ -------- -------- ------------- -------------
BALANCE JANUARY 28, 2006 19,764 $198 $79,509 3,287 $(16,954) $82,263 $(7) $145,009
Net income 1,512 1,512
Purchase of treasury
stock 131 (1,494) (1,494)
Dividends paid (1,313) (1,313)
Stock-based compensation 157 1 406 407
Issuance of stock for
employee stock
purchase plan 9 -- 87 87
Exercise of stock
options 67 1 195 196
Tax benefit from
exercise of stock
options 216 216
BALANCE APRIL 29, 2006 19,997 $200 $80,413 3,418 $(18,448) $82,462 $(7) $144,620
SEE ACCOMPANYING NOTES
5
BOOKS-A-MILLION, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------
APRIL 29, APRIL 30,
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,512 $ 1,060
-------- --------
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 3,428 3,948
Stock-based compensation 407 40
Excess tax benefit from exercise of stock options (216) --
Gain on disposal of property (3) --
Change in deferred income taxes (1,080) (1,821)
Increase in inventories (8,649) (11,000)
Decrease in accounts payable (4,418) (1,544)
Changes in certain other assets and liabilities (8,378) (9,079)
-------- --------
Total adjustments (18,909) (19,456)
-------- --------
Net cash used in operating activities (17,397) (18,396)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,357) (1,694)
Proceeds from sale of equipment 6 --
-------- --------
Net cash used in investing activities (1,351) (1,694)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities 1,700 59,270
Repayments under credit facilities (1,700) (47,430)
Purchase of treasury stock (1,494) (1,360)
Proceeds from exercise of stock options and employee
stock purchase plan, net 283 249
Excess tax benefit from exercise of stock options 216 --
Payment of dividends (1,313) (809)
-------- --------
Net cash provided by (used in) financing activities (2,308) 9,920
-------- --------
Net decrease in cash and cash equivalents (21,056) (10,170)
Cash and cash equivalents at beginning of period 37,519 16,559
-------- --------
Cash and cash equivalents at end of period $ 16,463 $ 6,389
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the thirteen week period for:
Interest $ 192 $ 378
Income taxes, net of refunds $ 2,013 $ 2,958
SEE ACCOMPANYING NOTES
6
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and include all adjustments that, in the opinion of management,
are necessary for a fair presentation of the results of the periods presented.
All such adjustments are considered of a normal recurring nature. Quarterly
results of operations are not necessarily indicative of annual results.
Certain financial information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These unaudited condensed financial statements should be
read in conjunction with the Company's audited financial statements for the year
ended January 28, 2006 and the notes thereto contained in our Annual Report on
Form 10-K for the year ended January 28, 2006.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates and assumptions.
We have also experienced, and expect to continue to experience,
significant variability in sales and net income from quarter to quarter.
Therefore, the results of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim
period or the full year.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Stock-Based Compensation
On January 29, 2006, we adopted the provisions of SFAS No. 123(R),
"Share-Based Payment," which revises SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) requires us to recognize expense related to the fair
value of our stock-based compensation awards, including employee stock options.
Prior to the adoption of SFAS No. 123(R), we accounted for stock-based
compensation awards using the intrinsic value method of APB Opinion 25.
Accordingly, we did not recognize compensation expense in our statement of
income for options we granted that had an exercise price equal to the market
value of the underlying common stock on the date of grant. However, we did
record compensation expense related to restricted stock units based on the
market value of our stock at the date of grant. As required by SFAS No. 123, we
also provided certain pro forma disclosures for stock-based awards as if the
fair-value-based approach of SFAS No. 123 had been applied.
We have elected to use the modified prospective transition method as
permitted by SFAS No. 123(R) and, therefore, have not restated our financial
results for prior periods. Under this transition method, we will apply the
provisions of SFAS No. 123(R) to new awards and to awards modified, repurchased
or cancelled after January 29, 2006. In addition, we will recognize compensation
cost for the portion of awards for which the requisite service has not been
rendered (unvested awards) that are outstanding as of January 29, 2006, as the
remaining service is rendered. The compensation cost we record for these awards
will be based on their grant-date fair value as calculated for the pro forma
disclosures required by SFAS No. 123.
Our pre-tax compensation cost for stock-based employee compensation
was $407,000 ($243,000 net of taxes) and $40,000 ($25,000 net of taxes) for the
thirteen weeks ended April 29, 2006 and April 30, 2005, respectively. As a
result of the adoption of SFAS No. 123(R), our financial results were lower than
under our previous accounting method for share-based compensation by the
following amounts:
Thirteen Weeks
Ended
April 29, 2006
--------------
Income from continuing operations before income taxes $148,000
Income from continuing operations $ 88,000
Net income $ 88,000
Basic and diluted net earnings per common share $ 0.01
7
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to the adoption of SFAS No. 123(R), we presented all tax
benefits resulting from the exercise of stock options as operating cash flows in
the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that cash
flows from the exercise of stock options resulting from tax benefits in excess
of recognized cumulative compensation cost (excess tax benefits) be classified
as financing cash flows. For the thirteen weeks ended April 29, 2006, $216,000
of such excess tax benefits was classified as financing cash flows.
The following table illustrates the effect on net income and net
income per common share as if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation for the thirteen week
period ended April 30, 2005:
Thirteen Weeks
Ended
April 30, 2005
--------------
Net income:
Net income, as reported $1,060,000
Add: Stock-based employee compensation expense previously
included in reported net income, net of tax 25,000
Deduct: Stock-based employee compensation expense
determined under fair value-based
method for all awards, net of tax (164,000)
----------
Pro forma net income $ 921,000
----------
Basic earnings per common share:
As reported $ 0.07
Pro forma $ 0.06
Diluted earnings per common share:
As reported $ 0.06
Pro forma $ 0.05
The fair value of the options granted under the Company's stock option
plan during fiscal 2005 and 2004 was estimated on their date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: $0.03 per quarter dividend yield for fiscal 2005 only; expected
stock price volatility rate of 44% and 106%, respectively; risk free interest
rates of 3.45% to 4.31% and 3.87% to 4.90%, respectively; and expected lives of
six or ten years. No options were granted in fiscal year 2006. The additional
stock-based compensation expense reflected in the above table for the first
quarter of fiscal 2006 relates to the fair value of options granted in prior
years that would be expensed over their vesting period.
Stock Option Plan
In April 1999, the Company adopted the Stock Option Plan which
provided for option grants to executive officers, directors, and key employees.
Upon the approval of the 2005 Incentive Award Plan by the Company's stockholders
at the Company's annual meeting held in June 2005, the board determined that no
more awards would be made under the Stock Option Plan. Options previously issued
under the Stock Option Plan remain valid. All options granted prior to January
9, 2001 vested over a five year period and expired on the sixth anniversary of
the date of grant, and all options granted on and after January 9, 2001 vest
over a three year period and expire on the tenth anniversary of the date of
grant. All options have exercise prices equal to the fair market value of the
8
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
common stock on the date of grant. A summary of the status of the Stock Option
Plan is as follows (shares and amounts in thousands):
Thirteen Weeks
Ended April 29,
2006
-----------------
Weighted
Average
Exercise
Shares Price
------ --------
Options Outstanding at beginning of period 814 $3.77
Options Granted 0 N/A
Options Exercised (67) 2.96
Options Forfeited (1) 6.73
--- -----
Outstanding at end of period 746 3.84
--- -----
Exercisable at end of period 668 3.54
-----
Weighted average fair value of options granted N/A
=====
The total intrinsic value of stock options exercised during the first thirteen
weeks of fiscal 2007 was $575,000.
The following table summarizes information about stock options granted pursuant
to the Stock Option Plan that are outstanding and exercisable under the Stock
Option Plan at April 29, 2006 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------------------------
Weighted Weighted
Options Average Options Average
Outstanding Remaining Weighted Exercisable at Remaining Weighted
Range of at April 29, Contractual Average April 29, Exercisable Average
Exercise Price 2006 Life (Years) Exercise Price 2006 Life (Years) Exercise Price
------------------------- ----------- ------------ -------------- -------------- ------------ --------------
$1.69 - $2.16 132 4.70 $1.69 132 4.70 $1.69
$2.17 - $5.85 375 6.17 $2.72 370 6.15 $2.68
$5.86 - $9.62 239 7.84 $6.79 166 7.88 $6.92
--- ---
Totals 746 6.45 $3.84 668 6.29 $3.54
=== === ====
The aggregate intrinsic values of outstanding options and exercisable options
under the Stock Option Plan at April 29, 2006 were $7,169,000 and $6,620,000
respectively.
2005 Incentive Award Plan
On June 1, 2005, the stockholders of the Company approved the adoption
of the Books-A-Million, Inc. 2005 Incentive Award Plan (the "2005 Plan"). An
aggregate of 300,000 shares of common stock may be awarded under the 2005 Plan.
From June 1, 2005 through April 29, 2006, awards under the 2005 Plan consisted
solely of awards of restricted stock. There are two types of restricted stock
awards. The first type of restricted stock award is "career based shares."
Career based shares are completely unvested until the last day of the fifth
fiscal year after the date of the grant whereupon such career based shares vest
in full if the employee who received the grant is then employed by the Company.
The compensation expense for these shares is recognized ratably over the
five-year requisite service period.
The second type of restricted stock award is "performance based
shares." Performance based shares are earned based on performance goals for the
fiscal year in which they are granted. If the performance goals are met, the
performance based shares vest in 50% increments at the end of the first and
second fiscal years after the fiscal year in which they were earned if the
employee who received the grant is then employed by the Company. Compensation
expense for these shares is recognized ratably over the period beginning on the
date the Company determines that it is probable the performance goals will be
achieved and ending on the last day of the vesting period.
9
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of the changes in non-vested shares under
the 2005 Plan for the thirteen weeks ended April 29, 2006:
Weighted Average Grant
Shares Date Fair Value
------- ----------------------
Non-vested shares at January 29, 2006 78,933 $10.05
Shares granted 137,300 $11.49
Shares vested -- --
Shares forfeited -- --
Non-vested shares at April 29, 2006 216,233 $10.96
Executive Incentive Plan
The Company maintains an Executive Incentive Plan (the "Incentive
Plan"); however, no new grants after the fiscal 2006 performance period are
being awarded under the Incentive Plan. The Incentive Plan provides for awards
to certain executive officers of either cash or shares of restricted stock. The
Company has always issued awards in the form of restricted stock. Issuance of
awards under the Incentive Plan is based on the Company achieving
pre-established performance goals during a three consecutive fiscal year
performance period. Awards issued under the Incentive Plan for a particular
performance period vest on the third anniversary of the last day of such
performance period if the recipient remains employed by the Company on such
vesting date. Awards under the Incentive Plan are expensed ratably over the
period from the date that the issuance of such awards becomes probable through
the end of the restriction period.
Other Information
As of April 29, 2006, we have $3,262,000 of total unrecognized
compensation cost related to non-vested awards granted under our various
share-based plans, which we expect to recognize over the following fiscal years:
Stock-based
Compensation
Fiscal year Expense
----------- ------------
2007 1,216,000
2008 972,000
2009 682,000
2010 234,000
2011 158,000
---------
Total 3,262,000
=========
We received cash from options exercised during the first thirteen
weeks of fiscal years 2007 and 2006 of $196,000 and $249,000, respectively. The
impact of these cash receipts is included in financing activities in the
accompanying Consolidated Statements of Cash Flows.
The number of shares of common stock currently reserved under the 2005
Plan for stock-based compensation programs as of April 29, 2006 is 49,000
shares. The Company has included a proposal in the proxy statement for the
annual meeting of shareholders to increase the shares of common stock available
under the 2005 Plan by 300,000 shares.
10
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share ("EPS") is computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
are exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. Diluted EPS has
been computed based on the weighted average number of shares outstanding,
including the effect of outstanding stock options and restricted stock, if
dilutive, in each respective thirteen week period. A reconciliation of the
weighted average shares for basic and diluted EPS is as follows:
For the Thirteen Weeks Ended
(in thousands)
-------------------------------
April 29, 2006 April 30, 2005
-------------- --------------
Weighted average shares outstanding:
Basic 16,471 16,201
Dilutive effect of stock options and restricted
stock outstanding 530 721
------ ------
Diluted 17,001 16,922
====== ======
Options outstanding to purchase 0 and 155,000 shares of common stock
as of April 29, 2006 and April 30, 2005, respectively, were not included in the
table above as they were anti-dilutive under the treasury stock method.
3. RELATED PARTY TRANSACTIONS
Charles C. Anderson, a former director of the Company, Terry C.
Anderson, a director of the Company, and Clyde B. Anderson, a director and
officer of the Company, have controlling ownership interests in other entities
with which the Company conducts business. Significant transactions between the
Company and these various other entities ("related parties") are summarized in
the following paragraphs.
The Company purchases a substantial portion of its magazines as well
as certain of its seasonal music and newspapers from Anderson Media Corporation
("Anderson Media"), an affiliate through common ownership. During the thirteen
weeks ended April 29, 2006 and April 30, 2005, purchases of these items from
Anderson Media totaled $7,016,000 and $6,734,000, respectively. The Company
purchases certain of its collectibles and books from Anderson Press, Inc.
("Anderson Press"), an affiliate through common ownership. During the thirteen
weeks ended April 29, 2006 and April 30, 2005, such purchases from Anderson
Press totaled $266,000 and $313,000, respectively. The Company purchases certain
of its greeting cards and gift products from C.R. Gibson, Inc., an affiliate
through common ownership. The purchases of these products during the thirteen
weeks ended April 29, 2006 and April 30, 2005 were $170,000 and $24,000,
respectively. The Company purchases certain magazine subscriptions from
Magazines.com, an affiliate through common ownership. During the thirteen weeks
ended April 29, 2006 and April 30, 2005, purchases of these items were $11,000
and $17,000, respectively. The Company purchases content for publication from
Publication Marketing Corporation, an affiliate through common ownership. During
the thirteen weeks ended April 29, 2006 and April 30, 2005, purchases of these
items were $14,000 and $17,000, respectively. The Company utilizes import
sourcing and consolidation services from Anco Far East Importers, LTD ("Anco Far
East"), an affiliate through common ownership. The total paid to Anco Far East
was $829,000 and $477,000 during the thirteen weeks ended April 29, 2006 and
April 30, 2005, respectively. These amounts paid to Anco Far East primarily
included the actual cost of the product as well as fees for sourcing and
consolidation services. All costs other than the sourcing and consolidation
service fees were passed through from other vendors. Anco Far East fees, net of
the passed-through costs, were $58,000 and $33,000 during the thirteen weeks
ended April 29, 2006 and April 30, 2005, respectively.
The Company sold books to Anderson Media in the amounts of $1,000 and
$1,000 during the thirteen weeks ended April 29, 2006 and April 30, 2005,
respectively. During the thirteen weeks ended April 29, 2006 and April 30, 2005,
the Company provided $0 and $4,000, respectively, of internet services to
Magazines.com. The Company provided internet services to American Promotional
Events, an affiliate through common ownership, of $9,000 and $20,000 during the
thirteen weeks ended April 29, 2006 and April 30, 2005, respectively.
11
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company leases its principal executive offices from a trust, which
was established for the benefit of the grandchildren of Mr. Charles C. Anderson,
a former member of the Board of Directors. The Company leases the building on a
month-to-month basis. During the thirteen weeks ended April 29, 2006 and April
30, 2005, the Company paid rent of $34,000 in each period to the trust under
this lease. Anderson & Anderson LLC ("A&A"), an affiliate through common
ownership, also leases three buildings to the Company on a month-to-month basis.
During the thirteen weeks ended April 29, 2006 and April 30, 2005, the Company
paid A&A a total of $112,000 and $111,000, respectively, in connection with such
leases. Total minimum future rental payments under all of these leases are $0 at
April 29, 2006. The Company subleases certain property to Hibbett Sporting
Goods, Inc. ("Hibbett"), a sporting goods retailer in the southeastern United
States. The Company's Executive Chairman, Clyde B. Anderson, is a member of
Hibbett's board of directors. During each of the thirteen weeks ended April 29,
2006 and April 30, 2005, the Company received $48,000 in rent payments from
Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operation of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all of the variable cost, and
a portion of the fixed cost of the plane. The total amounts received from
affiliated companies for use of the plane during the thirteen weeks ended April
29, 2006 and April 30, 2005, was $103,000 and $72,000, respectively. The Company
also occasionally rents a plane from A&A as well. The amounts paid to A&A for
plane rental were $5,000 and $15,000 for the thirteen weeks ended April 29, 2006
and April 30, 2005, respectively.
Clyde B. Anderson, a director and an officer of the Company, and
Sandra B. Cochran, an officer of the Company, have controlling ownership
interests in K&A Crylics. During the thirteen weeks ended April 29, 2006 and
April 30, 2005 the Company purchased certain store fixtures from K&A Crylics in
the amount of $9,000 and $0, respectively.
4. DERIVATIVE AND HEDGING ACTIVITIES
The Company is subject to interest rate fluctuations involving its
credit facilities and debt related to an industrial development revenue bond
(the "Bond"). However, the Company uses fixed interest rate hedges to manage a
portion of this exposure. The Company entered into a $7.5 million interest rate
swap in May 1996 that expires on June 7, 2006 and effectively fixes the interest
rate on the Bond at 8.73% (the "Bond Hedge"). The Company does not plan to
replace the Bond Hedge when it expires. The counterparty to the Bond Hedge is a
primary bank in the Company's credit facility. The Company believes the credit
and liquidity risk of the counterparty failing to meet its obligation under the
Bond Hedge is remote.
The Bond Hedge is a cash flow hedge. Cash flow hedges protect against
the variability in future cash outflows of current or forecasted debt and
related interest expense. The changes in the fair value of the Bond Hedge are
reported on the balance sheet with a corresponding adjustment to accumulated
other comprehensive income (loss) or to earnings. Over time, amounts held in
accumulated other comprehensive income (loss) will be reclassified to earnings
if the Bond Hedge becomes ineffective.
The Bond Hedge is reported as a liability in the accompanying
condensed consolidated balance sheets at a fair value of $61,000 and $61,000 as
of April 29, 2006 and January 28, 2006, respectively. For the thirteen weeks
ended April 29, 2006 and April 30, 2005, respectively, adjustment gains of $0
and $51,000 (net of tax provision of $38,000) were recorded as unrealized gains
in accumulated other comprehensive income (loss) and are detailed in Note 5.
12
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
Comprehensive income is net income plus certain other items that are
recorded directly to stockholders' equity. The only such items currently
applicable to the Company are the unrealized gains (losses) on the hedges
explained in Note 4, as follows:
Thirteen Weeks Ended
(in thousands)
-------------------------------
COMPREHENSIVE INCOME (LOSS) April 29, 2006 April 30, 2005
--------------------------- -------------- --------------
Net income $1,512 $1,060
Unrealized gains (losses) on hedges, net of
deferred tax provision (benefit) for the
thirteen-week periods of $0 and $38,
respectively -- 51
------ ------
Total comprehensive income $1,512 $1,111
====== ======
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. In the opinion of management, after consultation with legal counsel,
the ultimate liability, if any, with respect to those proceedings is not
presently expected to materially affect the financial position, results of
operations or cash flows of the Company.
From time to time, the Company enters into agreements that require the
Company to indemnify parties against third party claims under certain
circumstances. Generally these agreements relate to: (a) agreements with vendors
and suppliers under which the Company may provide customary indemnification to
its vendors and suppliers in respect of actions they take at the Company's
request or otherwise on its behalf; (b) agreements with vendors who publish
books or manufacture merchandise specifically for the Company to indemnify
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 indemnities vary. The events or
circumstances that would require the Company to perform under these indemnities
are transaction and circumstance specific. Generally, the Company's maximum
liability under such indemnities is not explicitly stated, and, therefore, the
overall maximum amount of the Company's obligations cannot be reasonably
estimated. Historically, the Company has not incurred significant costs related
to performance under these types of indemnities. No liabilities have been
recorded for these obligations on the Company's balance sheet at April 29, 2006
and January 28, 2006 as such liabilities are considered de minimis.
The Company is subject to potential ongoing sales and use tax audits,
income tax audits and other tax issues for both its retail and internet
segments. It is the policy of the Company to estimate any potential tax
contingency liabilities based on various factors such as ongoing state and
federal tax audits, historical results of audits at the state or federal level
and specific tax issues. Accruals for potential tax contingencies are recorded
by the Company when it is deemed to be probable that a liability will be
incurred and the liability can be reasonably estimated.
7. INVENTORIES
Inventory balances at April 29, 2006 and January 28, 2006 were (in
thousands):
April 29, 2006 January 28, 2006
-------------- ----------------
Inventories (at FIFO) $215,110 $206,314
LIFO reserve (1,672) (1,525)
-------- --------
Net inventories $213,438 $204,789
======== ========
13
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. BUSINESS SEGMENTS
The Company has two reportable segments, retail trade and electronic
commerce trade. The retail trade segment is a strategic business segment that is
engaged in the retail trade of primarily book merchandise and includes the
Company's distribution center operations, which predominantly 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 2006 Annual Report on Form 10-K. The
Company evaluates performance of the segments based on net income from
operations before interest and income taxes. Certain intersegment cost
allocations have been made based upon consolidated and segment revenues.
SEGMENT INFORMATION (IN THOUSANDS)
Thirteen Weeks Ended
-------------------------------
April 29, 2006 April 30, 2005
-------------- --------------
NET SALES
Retail Trade $112,096 $111,433
Electronic Commerce Trade 6,468 6,519
Intersegment Sales Elimination (4,816) (5,327)
-------- --------
Net Sales $113,748 $112,625
======== ========
OPERATING INCOME
Retail Trade $ 2,469 $ 2,072
Electronic Commerce Trade 233 (8)
Intersegment Elimination of Certain Costs (93) 62
-------- --------
Total Operating Income $ 2,609 $ 2,126
======== ========
As of As of
April 29, 2006 January 28, 2006
-------------- ----------------
ASSETS
Retail Trade $295,454 $310,447
Electronic Commerce Trade 1,080 1,286
Intersegment Asset Elimination (42) (74)
-------- --------
Total Assets $296,492 $311,659
======== ========
14
BOOKS-A-MILLION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R (revised 2004, "Share-Based Payment"). SFAS No. 123(R) is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees and directors, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. SFAS No. 123(R) is effective at the beginning of the
first annual period beginning after June 15, 2005. Under APB Opinion No. 25, no
stock-based compensation cost had been reflected in the net income of the
Company for grants of stock options to employees. Beginning in the first quarter
of fiscal 2007, the Company recognized compensation expense in its financial
statements based on the fair value of all share-based payments to employees and
directors, including grants of stock options. The impact of adopting this new
accounting standard on the Company's financial results for the first quarter of
fiscal 2007 was to reduce net income by $88,000, or $0.01 per diluted share.
In November 2004 FASB issued SFAS No. 151, "Inventory Costs," which
amends ARB No. 43, Chapter 4 "Inventory Pricing." SFAS No. 151 clarifies the
accounting for inventory costs related to abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This Statement requires
that those items be recognized as current period charges regardless of whether
they meet the criteria of "so abnormal." SFAS No. 151 is effective with fiscal
years beginning after June 15, 2005. The adoption of this new accounting
standard did not have a material effect on the Company's financial position,
results of operations or cash flows.
In December 2004 FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting For Nonmonetary
Transactions," to eliminate the exception for nonmonetary exchanges of similar
productive assets and replace it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective in
the first fiscal year beginning after June 15, 2005. The adoption of this new
accounting standard did not have a material effect on the Company's financial
position, results of operations or cash flows.
In May 2005 FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaced APB Opinion No. 20, "Accounting Changes" and SFAS
No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS No.
154 changes the requirements for the accounting for, and the reporting of, a
change in accounting principle. APB Opinion No. 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 now requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective with fiscal years
beginning after December 15, 2005. The adoption of this new accounting standard
did not have a material effect on the Company's financial position, results of
operations or cash flows.
FASB Staff Position No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("FSP 115-1"), was issued
in November 2005, which amends SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," SFAS No. 124, "Accounting for Certain
Investments Held by Not-for-Profit Organizations," and APB Opinion No. 18 "The
Equity Method of Accounting for Investments in Common Stock." FSP No. 115-1
addresses the determination as to when an investment is considered impaired,
whether that impairment is other than temporary and the measurement of an
impairment loss. FSP No. 115-1 is effective with fiscal periods beginning after
December 15, 2005. The adoption of this new staff position did not have a
material effect on the Company's financial position, results of operations or
cash flows.
10. DISCONTINUED OPERATIONS
Discontinued operations represent the fiscal 2007 closure of one
retail store in a Georgia market and the fiscal 2006 closure of two retail
stores in markets located in Tennessee and West Virginia where the Company does
not expect another of its existing stores to absorb the closed stores'
customers. For the thirteen week periods ended April 29, 2006 and April 30,
2005, these stores had net sales of $139,000 and $489,000, respectively, and
pretax operating losses of $17,000 and $32,000, respectively. Also included in
the loss on discontinued operations are store closing costs of $5,000 and
$16,000 for the thirteen weeks ended April 29, 2006 and April 30, 2005,
respectively. Expenses relating to store closings when the store is not
classified as a discontinued operation are reported in operating, selling and
administrative expenses. If the store is closed and another store is in the same
market and the cash flows are expected to be materially recovered, the store is
not considered a discontinued operation.
15
ITEM 2. 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, stockholders
and prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
GENERAL
We were founded in 1917 and currently operate 205 retail bookstores,
including 174 superstores, concentrated in the southeastern United States.
Our growth strategy is focused on opening superstores in new and
existing market areas, particularly in the Southeast. In addition to opening new
stores, management intends to continue its practice of reviewing the
profitability trends and prospects of existing stores and closing or relocating
under-performing stores or converting stores to different formats.
Comparable store sales are determined each fiscal quarter during the
year based on all stores that have been open at least 12 full months as of the
first day of the fiscal quarter. Any stores closed during a fiscal quarter are
excluded from comparable store sales as of the first day of the quarter in which
they close.
RESULTS OF OPERATIONS
The following table sets forth statement of income data expressed as a
percentage of net sales for the periods presented.
Thirteen Weeks Ended
-------------------------------
April 29, 2006 April 30, 2005
-------------- --------------
Net sales 100.0% 100.0%
Gross profit 28.7% 28.1%
Operating, selling and administrative
expenses 23.4% 22.7%
Depreciation and amortization 3.0% 3.5%
Operating income 2.3% 1.9%
Interest expense, net 0.1% 0.4%
Income from continuing operations before
income taxes 2.2% 1.5%
Income tax provision 0.9% 0.6%
Income from continuing operations 1.3% 0.9%
Net income 1.3% 0.9%
16
The following table sets forth net sales data by segment for the
thirteen weeks ended April 29, 2006 and April 30, 2005:
NET SALES BY SEGMENT (IN THOUSANDS)
Thirteen Weeks Ended
-----------------------------------------------------
April 29, 2006 April 30, 2005 $ Change % Change
-------------- -------------- -------- --------
Retail Trade $112,096 $111,433 $ 663 0.6%
Electronic Commerce Trade 6,468 6,519 (51) (0.8%)
Intersegment Sales Elimination (4,816) (5,327) 511 (9.6%)
Net Sales $113,748 $112,625 $1,123 1.0%
The increase in net sales for the retail trade segment was primarily
due to new stores opened during the current quarter. Comparable store sales in
the thirteen weeks ended April 29, 2006 decreased 0.3% when compared with the
same thirteen week period for the prior year. The decrease in comparable store
sales for the thirteen weeks was primarily due to lower sales in the book
department. The book sales decrease was primarily due to lower sales in the
children's books, cooking, diet and health and inspirational categories. During
the thirteen weeks ended April 29, 2006, the Company opened two superstores and
closed two traditional stores. The decrease in net sales for the electronic
commerce segment was primarily due to lower bestseller title order volume, which
resulted in less customer traffic on the internet site.
Gross profit increased $1.0 million, or 3.3%, to $32.6 million in the
thirteen weeks ended April 29, 2006 when compared with $31.6 million in the same
thirteen week period for the prior year. Gross profit as a percentage of net
sales for the thirteen weeks ended April 29, 2006 and April 30, 2005 was 28.7%
and 28.1%, respectively. The increase in gross profit as a percentage of sales
was primarily due to fewer promotional markdowns in the current period versus
the same thirteen week period for the prior year.
Operating, selling and administrative expenses were $26.6 million in
the thirteen week period ended April 29, 2006 compared to $25.5 million in the
same period last year. Operating, selling and administrative expenses as a
percentage of net sales for the thirteen weeks ended April 29, 2006 increased to
23.4% from 22.7% in the same period last year. The increase in operating,
selling and administrative expenses stated as a percent of sales was primarily
due to increased expense related to the adoption of SFAS No. 123(R) for stock
based compensation, as well as the impact of lower comparable store sales.
Depreciation and amortization was $3.4 million and $3.9 million
respectively in the thirteen week periods ended April 29, 2006 and April 30,
2005. Decrease in depreciation and amortization expense was due to lower capital
expenditures in the current period and to capital expenditures made several
years ago becoming fully depreciated in the current period. The higher capital
expenditures in previous years was due to more new store openings and a more
aggressive remodel program in the prior years.
The following table sets forth operating income data by segment for
the thirteen weeks ended April 29, 2006 and April 30, 2005:
OPERATING INCOME (LOSS) BY SEGMENT (IN THOUSANDS)
Thirteen Weeks Ended
-----------------------------------------------------
April 29, 2006 April 30, 2005 $ Change % Change
-------------- -------------- -------- --------
Retail Trade $2,469 $2,072 $ 397 19.2%
Electronic Commerce Trade 233 (8) 241 N/A
Intersegment Elimination of
Certain Costs (93) 62 (155) (250.0%)
Total Operating Income (Loss) $2,609 $2,126 $ 483 22.7%
17
The improvement in operating results for the retail trade segment for
the thirteen week period was partially due to improved gross profit as a
percentage of sales due to fewer promotional markdowns in the current period
versus the same thirteen week period for the prior year, as well as to lower
depreciation expense due to lower capital expenditures in the current period and
to capital expenditures made several years ago becoming fully depreciated in the
current period. The higher capital expenditures in previous years was due to
more new store openings and a more aggressive remodel program in the prior
years. Even though net sales for the electronic commerce segment for the
thirteen weeks ended April 29, 2006 decreased slightly, operating income for the
electronic commerce segment increased compared with the same period last year
due to lower costs incurred for shipping and warehouse handling.
Interest expense was $0.1 million in the thirteen weeks ended April
29, 2006 versus $0.4 million in the same period last year. The decrease was
primarily due to lower average debt balances compared with the prior year.
Discontinued operations represent the fiscal 2007 closure of one
retail store in a Georgia market and the fiscal 2006 closure of two retail
stores in markets located in Tennessee and West Virginia where the Company does
not expect another of its existing stores to absorb the closed stores'
customers. For the thirteen week periods ended April 29, 2006 and April 30,
2005, these stores had net sales of $139,000 and $489,000, respectively, and
pretax operating losses of $17,000 and $32,000, respectively. Also included in
the loss on discontinued operations are store closing costs of $5,000 and
$16,000 for the thirteen weeks ended April 29, 2006 and April 30, 2005,
respectively. Expenses relating to store closings when the store is not
classified as a discontinued operation are reported in operating, selling and
administrative expenses. If the store is closed and another store is in the same
market and the cash flows are expected to be materially recovered, the store is
not considered a discontinued operation.
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 2007. The credit facility has certain financial and
non-financial covenants, the most restrictive of which is the maintenance of a
minimum fixed charge coverage ratio. The Company is in compliance with all of
the covenants, including the minimum fixed charge coverage ratio, as of April
29, 2006. As of April 29, 2006 and January 28, 2006, there was no outstanding
debt under this credit facility. The maximum and average outstanding balances
during the thirteen weeks ended April 29, 2006 were $1.7 million and $57,000,
respectively, compared to $19.3 million and $9.3 million, respectively for the
same period in the prior year. The decrease in the maximum and average
outstanding balances from the prior year was due to the pay down of debt during
fiscal 2006 with cash provided by operating activities.
Additionally, as of April 29, 2006 and January 28, 2006, the Company
has outstanding borrowings under an industrial revenue bond totaling $7.2
million, which is secured by certain property. The Bond has a maturity date of
December 1, 2019, with a purchase provision obligating the Company to repurchase
the Bond on May 30, 2007, unless extended by the bondholder. Such an extension
may be renewed annually by the bondholder, at the Company's request, to a date
not more than five years from the renewal date.
Financial Position
Inventory balances were $213.4 million as of April 29, 2006 compared
to $204.8 million as of January 28, 2006. The inventory increase was due to
seasonal fluctuations in inventory. Inventory levels generally are lowest at the
end of the fiscal year due to large post holiday returns to vendors. Accrued
expenses were $36.0 million as of April 29, 2006 compared to $45.5 million as of
January 28, 2006. Accrued expenses decreased primarily due to payment of fiscal
2006 management bonuses in the first quarter of fiscal 2007, redemption of gift
cards sold to customers during the fourth quarter and lower capital expenditure
accruals.
18
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 April 29, 2006 (in thousands):
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS
Total FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Thereafter
-------- ------- ------- ------- ------- ------- ----------
Long-term debt-revolving
credit facility -- -- -- -- -- -- --
Long-term debt-industrial
revenue bond 7,200 -- 7,200 -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Subtotal of debt 7,200 -- 7,200 -- -- -- --
Operating leases 141,695 24,386 29,046 23,699 18,304 14,586 31,674
-------- ------- ------- ------- ------- ------- -------
Total of obligations $148,895 $24,386 $36,246 $23,699 $18,304 $14,586 $31,674
======== ======= ======= ======= ======= ======= =======
Guarantees
From time to time, the Company enters into agreements that require the
Company to indemnify parties against third party claims under certain
circumstances. Generally these agreements relate to: (a) agreements with vendors
and suppliers under which the Company may provide customary indemnification to
its vendors and suppliers in respect of actions they take at the Company's
request or otherwise on its behalf; (b) agreements with vendors who publish
books or manufacture merchandise specifically for the Company to indemnify
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 indemnities vary. The events or
circumstances that would require the Company to perform under these indemnities
are transaction and circumstance specific. Generally, the Company's maximum
liability under such indemnities is not explicitly stated, and, therefore, the
overall maximum amount of the Company's obligations cannot be reasonably
estimated. Historically, the Company has not incurred significant costs related
to performance under these types of indemnities. No liabilities have been
recorded for these obligations on the Company's balance sheet at April 29, 2006
and January 28, 2006 as such liabilities are considered de minimis.
The Company is subject to potential ongoing sales and use tax audits,
income tax audits and other tax issues for both its retail and internet
segments. It is the policy of the Company to estimate any potential tax
contingency liabilities based on various factors such as ongoing state and
federal tax audits, historical results of audits at the state or federal level
and specific tax issues. Accruals for potential tax contingencies are recorded
by the Company when it is deemed to be probable that a liability will be
incurred.
Off Balance Sheet Arrangements
The Company does not have off balance sheet transactions that have or
are reasonably likely to have a current or future material effect on the
Company's financial condition, changes in financial conditions, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
Cash Flows
Operating activities used cash of $17.4 million and $18.4 million in
the thirteen week periods ended April 29, 2006 and April 30, 2005, respectively,
and included the following effects:
- Cash used for inventories in the thirteen week periods ended April 29,
2006 and April 30, 2005 was $8.6 million and $11.0 million,
respectively. The lower usage was primarily due to improved inventory
management, which was the result of improved information systems for
managing inventory levels at the item level.
- Cash used for accounts payable in the thirteen week periods ended
April 29, 2006 and April 30, 2005 was $4.4 million and $1.5 million,
respectively. The change versus the prior year was due to the timing
of payments for merchandise purchases from vendors.
19
- Depreciation and amortization expenses were $3.4 million and $3.9
million, respectively in the thirteen week periods ended April 29,
2006 and April 30, 2005. Decrease in depreciation and amortization
expense was due to lower capital expenditures and the impact of
certain assets becoming fully depreciated during the prior year.
Cash flows used in investing activities reflected a $1.4 million and
$1.7 million net use of cash for the thirteen week periods ended April 29, 2006
and April 30, 2005, respectively. Cash was used primarily to fund capital
expenditures for new stores, store relocations, renovation and improvements to
existing stores, and investments in management information systems.
Financing activities provided (used) cash of ($2.3 million) and $9.9
million in the thirteen week periods ended April 29, 2006 and April 30, 2005,
respectively. Financing activities used cash in fiscal 2007 primarily to
purchase stock ($1.5 million) and for dividend payments ($1.3 million).
Financing activities provided cash in fiscal 2006 primarily from borrowings
under the revolving credit facility ($11.8 million), partially offset by stock
repurchases ($1.4 million) and dividend payments ($0.8 million).
OUTLOOK
During the thirteen weeks ended April 29, 2006, the Company opened two
stores, remodeled one store and closed two stores. During the remainder of
fiscal 2007, the Company expects to open six to eight stores, complete remodels
on approximately ten to fifteen stores, and close one to two stores. The
Company's capital expenditures totaled $1.4 million in the thirteen week period
ended April 29, 2006. Management estimates that capital expenditures for the
remainder of fiscal 2007 will be approximately $21.9 million, and that such
amounts will be used primarily for opening new stores, relocating existing
stores, renovating and improving existing stores, upgrading and expanding
warehouse distribution facilities, and investing in management information
systems. Management believes that existing cash on hand 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 2007.
RELATED PARTY ACTIVITIES
Charles C. Anderson, a former director of the Company, Terry C.
Anderson, a director of the Company, and Clyde B. Anderson, a director and
officer of the Company, have controlling ownership interests in other entities
with which the Company conducts business. Significant transactions between the
Company and these various other entities ("related parties") are summarized in
the following paragraphs.
The Company purchases a substantial portion of its magazines as well
as certain of its seasonal music and newspapers from Anderson Media Corporation
("Anderson Media"), an affiliate through common ownership. During the thirteen
weeks ended April 29, 2006 and April 30, 2005, purchases of these items from
Anderson Media totaled $7,016,000 and $6,734,000, respectively. The Company
purchases certain of its collectibles and books from Anderson Press, Inc.
("Anderson Press"), an affiliate through common ownership. During the thirteen
weeks ended April 29, 2006 and April 30, 2005, such purchases from Anderson
Press totaled $266,000 and $313,000, respectively. The Company purchases certain
of its greeting cards and gift products from C.R. Gibson, Inc., an affiliate
through common ownership. The purchases of these products during the thirteen
weeks ended April 29, 2006 and April 30, 2005 were $170,000 and $24,000,
respectively. The Company purchases certain magazine subscriptions from
Magazines.com, an affiliate through common ownership. During the thirteen weeks
ended April 29, 2006 and April 30, 2005, purchases of these items were $11,000
and $17,000, respectively. The Company purchases content for publication from
Publication Marketing Corporation, an affiliate through common ownership. During
the thirteen weeks ended April 29, 2006 and April 30, 2005, purchases of these
items were $14,000 and $17,000, respectively. The Company utilizes import
sourcing and consolidation services from Anco Far East Importers, LTD ("Anco Far
East"), an affiliate through common ownership. The total paid to Anco Far East
was $829,000 and $477,000 during the thirteen weeks ended April 29, 2006 and
April 30, 2005, respectively. These amounts paid to Anco Far East primarily
included the actual cost of the product as well as fees for sourcing and
consolidation services. All costs other than the sourcing and consolidation
service fees were passed through from other vendors. Anco Far East fees, net of
the passed-through costs, were $58,000 and $33,000 during the thirteen weeks
ended April 29, 2006 and April 30, 2005, respectively.
The Company sold books to Anderson Media in the amounts of $1,000 and
$1,000 during the thirteen weeks ended April 29, 2006 and April 30, 2005,
respectively. During the thirteen weeks ended April 29, 2006 and April 30, 2005,
the Company provided $0 and $4,000, respectively, of internet services to
Magazines.com. The
20
Company provided internet services to American Promotional Events, an affiliate
through common ownership, of $9,000 and $20,000 during the thirteen weeks ended
April 29, 2006 and April 30, 2005, respectively.
The Company leases its principal executive offices from a trust, which
was established for the benefit of the grandchildren of Mr. Charles C. Anderson,
a former member of the Board of Directors. The Company leases the building on a
month-to-month basis. During the thirteen weeks ended April 29, 2006 and April
30, 2005, the Company paid rent of $34,000 in each period to the trust under
this lease. Anderson & Anderson LLC ("A&A"), an affiliate through common
ownership, also leases three buildings to the Company on a month-to-month basis.
During the thirteen weeks ended April 29, 2006 and April 30, 2005, the Company
paid A&A a total of $112,000 and $111,000, respectively, in connection with such
leases. Total minimum future rental payments under all of these leases are $0 at
April 29, 2006. The Company subleases certain property to Hibbett Sporting
Goods, Inc. ("Hibbett"), a sporting goods retailer in the southeastern United
States. The Company's Executive Chairman, Clyde B. Anderson, is a member of
Hibbett's board of directors. During each of the thirteen weeks ended April 29,
2006 and April 30, 2005, the Company received $48,000 in rent payments from
Hibbett.
The Company shares ownership of a plane, which the Company uses in the
operation of its business, with an affiliated company. The Company rents the
plane to affiliated companies at rates that cover all of the variable cost, and
a portion of the fixed cost of the plane. The total amounts received from
affiliated companies for use of the plane during the thirteen weeks ended April
29, 2006 and April 30, 2005, was $103,000 and $72,000, respectively. The Company
also occasionally rents a plane from A&A as well. The amounts paid to A&A for
plane rental were $5,000 and $15,000 for the thirteen weeks ended April 29, 2006
and April 30, 2005, respectively.
Clyde B. Anderson, a director and an officer of the Company, and
Sandra B. Cochran, an officer of the Company, have controlling ownership
interests in K&A Crylics. During the thirteen weeks ended April 29, 2006 and
April 30, 2005 the Company purchased certain store fixtures from K&A Crylics in
the amount of $9,000 and $0, respectively.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate fluctuations involving its
credit facilities and debt related to an industrial development revenue bond
(the "Bond"). However, the Company uses fixed interest rate hedges to manage a
portion of this exposure. The Company entered into a $7.5 million interest rate
swap in May 1996 that expires on June 7, 2006 and effectively fixes the interest
rate on the Bond at 8.73% (the "Bond Hedge"). The Company does not plan to
replace the Bond Hedge when it expires. The counterparty to the Bond Hedge is a
primary bank in the Company's credit facility. The Company believes the credit
and liquidity risk of the counterparty failing to meet its obligation under the
Bond Hedge is remote.
To illustrate the sensitivity of the results of operations to changes
in interest rates on its debt, the Company estimates that a 66% increase or
decrease in LIBOR rates would have no effect on interest expense for the
thirteen weeks ended April 29, 2006 due to average debt of $57,000. 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
Bond Hedge associated with the Bond would have on interest expense.
22
ITEM 4. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We are committed to maintaining disclosure controls and procedures
designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer, Chief
Financial Officer and the Board of Directors, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating
disclosure controls and procedures, management recognizes 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 is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures and implementing controls and
procedures based on the application of management's judgment.
As required by Rule 13a-15 under the Exchange Act, management, with
the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon their evaluation and
subject to the foregoing, the Chief Executive Officer and the Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective at the reasonable
assurance level.
(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We regularly review our system of internal control over financial
reporting and make changes to our processes and systems to improve controls and
increase efficiency, while ensuring that we maintain an effective internal
control environment. Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating processes.
There were no changes in our internal control over financial reporting
that occurred during the period covered by this Quarterly Report on Form 10-Q
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
23
PART 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 1A: Risk Factors
There have been no material changes from the risk factors disclosed in
our Form 10-K/A for the fiscal year ended January 29, 2006.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Securities
In March 2004, the Board of Directors authorized a new common stock
repurchase program for up to 10% of the outstanding stock, or 1,646,624 shares.
The following table shows common stock repurchases under the program in fiscal
2006 and fiscal 2007:
Total Number of Shares Maximum Number of Shares that
Total Number of Average Price Purchased as Part of Publicly May Yet Be Purchased Under
Period Shares Purchased Paid per Share Announced Program the Program at End of Period
------ ---------------- -------------- ----------------------------- -----------------------------
Fiscal 2006 438,042 $ 9.77 438,042 328,764
Fiscal 2007 131,039 $11.35 131,039 197,725
------- ------ ------- -------
Total 569,081 $10.13 569,081 197,725
======= ====== ======= =======
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security-Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits
(A) Exhibits
Exhibit 3i Certificate of Incorporation of Books-A-Million, Inc.
(incorporated herein by reference to Exhibit 3.1 in the Company's
Registration Statement on Form S-1 (Capital Registration No.
33-52256)
Exhibit 3ii By-Laws of Books-A-Million, Inc. (incorporated herein
by reference to Exhibit 3.2 in the Company's Registration
Statement on Form S-1 (Capital Registration No. 33-52256))
Exhibit 31.1 Certification of Clyde B. Anderson, Executive
Chairman of the Board of Books-A-Million, Inc., pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 31.2 Certification of Sandra B. Cochran, President and
Chief Executive Officer of Books-A-Million, Inc., pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
Exhibit 31.3 Certification of Richard S. Wallington, Chief
Financial Officer of Books-A-Million, Inc., pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
24
Exhibit 32.1 Certification of Clyde B. Anderson, Executive
Chairman of the Board of Books-A-Million, Inc., pursuant to 18
U.S.C. Section 1350.
Exhibit 32.2 Certification of Sandra B. Cochran, President and
Chief Executive Officer of Books-A-Million, Inc., pursuant to 18
U.S.C. Section 1350.
Exhibit 32.3 Certification of Richard S. Wallington, Chief
Financial Officer of Books-A-Million, Inc., pursuant to 18 U.S.C.
Section 1350.
25
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 7, 2006 by: /s/ Clyde B. Anderson
------------------------------------
Clyde B. Anderson
Executive Chairman of the Board
Date: June 7, 2006 by: /s/ Sandra B. Cochran
------------------------------------
Sandra B. Cochran
President and Chief
Executive Officer
Date: June 7, 2006 by: /s/ Richard S. Wallington
------------------------------------
Richard S. Wallington
Chief Financial Officer
26