-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOd+Y8Lco/zBuPy96MtH/dlKI6O8AcIez8FLOKr3vzPtWtE21VAl5t8RIAxyM8D5 L+g3bwV9yGGaAQ57gGcOYg== 0000950144-05-004467.txt : 20050428 0000950144-05-004467.hdr.sgml : 20050428 20050427194804 ACCESSION NUMBER: 0000950144-05-004467 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20050129 FILED AS OF DATE: 20050428 DATE AS OF CHANGE: 20050427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOKS A MILLION INC CENTRAL INDEX KEY: 0000891919 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 630798460 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20664 FILM NUMBER: 05777878 BUSINESS ADDRESS: STREET 1: 402 INDUSTRIAL LN CITY: BIRMINGHAM STATE: AL ZIP: 35211 BUSINESS PHONE: 2059423737 MAIL ADDRESS: STREET 1: 402 INDUSTRIAL LANE CITY: BIRMINGHAM STATE: AL ZIP: 35211 10-K 1 g94771e10vk.txt BOOKS-A-MILLION, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 29, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from___________to______________ Commission File No. 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) Registrant's telephone number, including area code: (205) 942-3737 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) 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 [ ] CONTINUED Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the Registrant) as of July 30, 2004 (based on the closing sale price as reported on the NASDAQ National Market on such date), was $65,568,068. The number of shares outstanding of the Registrant's Common Stock as of April 4, 2005 was 16,191,375. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended January 29, 2005 are incorporated by reference into Part II of this report. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 1, 2005 are incorporated by reference into Part III of this report. 2 PART I 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 initiative ; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon 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. ITEM 1. BUSINESS GENERAL Books-A-Million, Inc. is a leading book retailer in the southeastern United States. The Company was founded in 1917 and operates both superstores and traditional bookstores. Superstores, the first of which was opened in 1987, range in size from 8,000 to 36,000 square feet and operate under the names "Books-A-Million" and "Books and Co." Traditional bookstores are smaller stores operated under the names "Bookland" and "Books-A-Million". These stores range in size from 2,000 to 7,000 square feet and are located primarily in enclosed malls. We also operate newsstands under the name "Joe Muggs Newsstands". Newsstands range in size from 1,000 to 5,000 square feet and are located in high traffic areas. All store formats, excluding newsstands, offer an extensive selection of best sellers and other hardcover and paperback books, magazines, and newspapers. In addition to the retail store formats, we offer our products over the Internet at Booksamillion.com and Joemuggs.com. We were founded in 1917, originally incorporated under the laws of the State of Alabama in 1964 and reincorporated in Delaware in September 1992. Our principal executive offices are located at 402 Industrial Lane, Birmingham, Alabama 35211, and our telephone number is (205) 942-3737. Unless the context otherwise requires, references to "we", "our" or "the Company" include our wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale") and American Internet Service, Inc. ("AIS"). Our periodic and current reports filed with the SEC are made available on our website at www.booksamillioninc.com as soon as reasonably practicable. Our corporate governance guidelines, code of conduct and key committee charters are also available on our website. These reports are available free of charge to stockholders upon written request. Such requests should be directed to Richard S. Wallington, our Chief Financial Officer. BUSINESS SEGMENTS We have two reportable segments: retail trade and electronic commerce trade. In the retail trade segment we are engaged in the retail trade of primarily book merchandise. The retail trade segment includes our distribution center operations which predominantly supplies merchandise to our retail stores. In the electronic commerce trade segment we transact business over the Internet primarily. This segment is managed separately due to divergent technology and marketing requirements. For additional information, see Note 8 "Business Segments" in the Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended January 29, 2005, incorporated herein by reference. 3 RETAIL STORES We opened our first Books-A-Million superstore in 1987. We developed superstores to capitalize on the growing consumer demand for the convenience, selection and value associated with the superstore retailing format. Each superstore is designed to be a receptive and open environment conducive to browsing and reading and includes ample space for promotional events open to the public, including book autograph sessions and children's storytelling. We operated 168 superstores as of January 29, 2005. Our superstores emphasize selection, value and customer service. Each of our superstores offer an extensive selection of best sellers and other hardcover and paperback books, magazines, local newspapers and gifts, and also dedicate space to bargain books that are sold at a discount from publishers' originally suggested retail prices. Each superstore has a service center staffed with associates who are knowledgeable about the store's merchandise and who are trained to answer customers' questions, assist customers in locating books within the store and place special orders. The majority of our superstores also include a Joe Muggs cafe, serving Joe Muggs coffee and assorted pastries. Our superstores are conveniently located on major, high-traffic roads and in enclosed malls or strip shopping centers with adequate parking, and generally operate for extended hours up to 11:00 pm local time. Our traditional stores are tailored to the size, demographics and competitive conditions of the particular market area. Traditional stores are located primarily in enclosed malls and feature a wide selection of books, magazines and gift items. We had 34 traditional stores as of January 29, 2005. Our Joe Muggs newsstands operate in centers with high traffic, are concentrated in business and entertainment districts and are tailored to the demographics of the particular market area. Each newsstand carries an extensive selection of magazines and newspapers, along with hardcover and paperback books. The newsstands also offer Joe Muggs branded coffee drinks and assorted pastries, among other items. We operated four newsstands as of January 29, 2005. MERCHANDISING We employ several value-oriented merchandising strategies. Books on our best-seller list, which is developed exclusively by us based on the sales and customer demand in our stores, are generally sold in the Company's superstores below publishers' suggested retail prices. In addition, customers can join the Millionaire's Club and save 10% on all purchases in any of our stores, including already discounted best-sellers. Our point-of-sale computer system provides the data necessary to enable us to anticipate consumer demand and customize store inventory selection to reflect local customer interest. MARKETING We promote our bookstores principally through the use of direct mail advertising, as well as point-of-sale materials posted and distributed in the stores. In certain markets, television and newspaper advertising is also used on a selective basis. We also arrange for special appearances and book autograph sessions with recognized authors to attract customers and to build and reinforce customer awareness of our stores. A substantial portion of our advertising expenses are reimbursed from publishers through their cooperative advertising programs. STORE OPERATIONS AND SITE SELECTION In choosing specific store sites within a market area, we apply standardized site selection criteria that takes into account numerous factors, including the local demographics, desirability of available leasing arrangements, proximity to our existing operations and overall level of retail activity. In general, stores are located on major high-traffic roads convenient to customers and have adequate parking. We generally negotiate short-term leases with renewal options. We also periodically review the profitability trends and prospects of each of our stores and evaluate whether or not any underperforming stores should be closed, converted to a different format or relocated to more desirable locations. 4 INTERNET OPERATIONS Through our wholly owned subsidiary, AIS, we sell a broad range of products over the Internet under the names Booksamillion.com and Joemuggs.com. On Booksamillion.com we sell a wide selection of books, magazines and gift items similar to those sold in our Books-A-Million superstores. We also operate an online cafe under the name Joemuggs.com where we offer a wide selection of whole bean coffee, confections and related gift items for purchase over the Internet. Internet development efforts are assisted through a wholly owned subsidiary of AIS, NetCentral, Inc., which is based in Nashville, Tennessee. In addition to providing web development and maintenance for all of our internet sites and networking initiatives, NetCentral also serves several outside customers by offering site development, web hosting and technical services. PURCHASING Our purchasing decisions are made by our merchandising department on a centralized basis. Our buyers negotiate terms, discounts and cooperative advertising allowances for all of our bookstores and decide which books to purchase, in what quantity and for which stores. The buyers use current inventory and sales information provided by our in-store point-of-sale computer system to make reorder decisions. We purchase merchandise from over 500 vendors. We purchase the majority of our collectors' supplies from Anderson Press and substantially all of our magazines from Anderson Media, each of which is a related party (see "Certain Relationships & Related Transactions" on pages 14 and 15 of the Proxy). No one vendor accounted for more than 10.0% of our overall merchandise purchases in the fiscal year ended January 29, 2005. In general, in excess of 80% of our inventory may be returned for credit, which substantially reduces our risk of inventory obsolescence. DISTRIBUTION CAPABILITIES American Wholesale receives a substantial portion of its inventory shipments, including substantially all of its books, at its two facilities located in Florence and Tuscumbia, Alabama. Orders from our bookstores are processed by computer and assembled for delivery to the stores on pre-determined weekly schedules. Substantially all deliveries of inventory from American Wholesale's facilities are made by their dedicated transportation fleet. At the time deliveries are made to each of our stores, returns of slow moving or obsolete books are picked up and returned to the American Wholesale returns processing center. American Wholesale then returns these books to publishers for credit. COMPETITION The retail bookstore industry is highly competitive and includes competitors that have substantially greater financial and other resources than we have. We compete directly with national bookstore chains, independent bookstores, booksellers on the Internet and certain mass merchandisers. In recent years, competing bookstore chains have been expanding their businesses, and certain leading regional and national chains have developed and opened superstores and Internet web sites. We also compete indirectly with retail specialty stores that offer books in a particular area of specialty. Management believes that the key competitive factors in the retail book industry are convenience of location, selection, customer service and price. SEASONALITY Similar to many retailers, our business is seasonal, with the highest retail sales, gross profit and net income historically occurring in our fourth fiscal quarter. This seasonal pattern reflects the increased demand for books and gifts during the year-end holiday selling season. Working capital requirements are generally at their highest during the third fiscal quarter and the early part of the fourth fiscal quarter due to the seasonality of our business. As a result, our results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse effect on our results of operations for the full year. In addition to seasonality, our results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. Accordingly, the addition of a large number of new stores in a particular fiscal quarter could adversely affect our results of operations for that quarter. 5 TRADEMARKS "Books-A-Million," "BAM!," "Bookland," "Books & Co.," "Millionaire's Club," "Sweet Water Press," "Thanks-A-Million," "Big Fat Coloring Book," "Up All Night Reader," "Read & Save Rebate", "Readables Accessories for Readers", "Kids-A-Million," "Teachers First," "The Write-Price," "Bambeanos," "Book$mart", "BAMM", "BAMM.com", "BOOKSAMILLION.com", "Chillatte", "Joe Muggs Newsstand," "Page Pets," "JOEMUGGS.com", "Laser Line," FAITHPOINT.com", "Joe Muggs," "Anderson's Bookland," "Snow Joe," "The Testaments Shoppe" and "NetCentral" are the primary registered trademarks of the Company. Management does not believe that these trademarks are materially important to the continuation of our operations. EMPLOYEES As of fiscal year end, we employed approximately 2,700 full-time associates and 2,200 part-time associates. The number of part-time associates employed fluctuates based upon seasonal needs. None of our associates are covered by a collective bargaining agreement. Management believes that relations with our associates are excellent. ITEM 2. PROPERTIES Our bookstores are located either in enclosed malls or strip shopping centers. All of our stores are leased. Generally, these leases have terms ranging from five to ten years and require that we pay a fixed minimum rental fee and/or a rental fee based on a percentage of net sales together with certain customary costs (such as property taxes, common area maintenance and insurance). Our principal executive offices are located in a 20,550 square foot leased building located in Birmingham, Alabama. We also lease a 37,000 square foot building located in Irondale, Alabama for additional corporate office space. Both leases involve related parties (see "Certain Relationships & Related Transactions" on pages 14 and 15 of the Proxy). The Birmingham, Alabama office space lease extends to January 31, 2006, and the Irondale, Alabama office space is leased month-to-month. In addition, we lease approximately 4,025 square feet of office space in Nashville, Tennessee for the offices of NetCentral. This lease extends to January 31, 2006. American Wholesale owns its wholesale distribution center located in an approximately 290,000 square foot facility in Florence, Alabama. During fiscal 1995 and 1996, we financed the acquisition and construction of the wholesale distribution facility through loans obtained from the proceeds of an industrial revenue bond, which are secured by a mortgage interest in this facility. We also lease, from a related party, a second 210,000 square foot warehouse facility located in Tuscumbia, Alabama. In addition we lease all of the tractors that pull the company-owned trailers, which comprise our transportation fleet. ITEM 3. LEGAL PROCEEDINGS We are a party to various legal proceedings incidental to our 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 our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the heading "Market and Dividend Information" on page 30 of the Annual Report to Stockholders for the year ended January 29, 2005 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Selected Consolidated Financial Data" for the years ended February 3, 2001, through January 29, 2005 on page 4 of the Annual Report to Stockholders for the year ended January 29, 2005, is incorporated herein by reference. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the heading "Management's Discussion & Analysis of Financial Condition & Results of Operations" on pages 5 through 12 of the Annual Report to Stockholders for the year ended January 29, 2005, is incorporated herein by reference. ITEM 7.A. MARKET RISK We are subject to interest rate fluctuations involving our credit facilities. The average amount of debt outstanding under our credit facilities was $21.6 million during fiscal 2005. To manage this exposure, the Company utilizes interest rate swaps to fix the interest rate on variable debt. We entered into two separate $10 million swaps on July 24, 2002. Both expire August 2005 and, prior to the payoff of the debt, effectively fix the interest rate on $20 million of variable debt at 5.13%. Also, on May 14, 1996, we entered into a $7.5 million interest rate swap with a ten-year term. The swap effectively fixes the interest rate on $7.5 million of variable rate debt at 7.98% and expires on June 7, 2006. The counter parties to each of these interest rate swaps are parties to our revolving credit facilities. We believe the credit and liquidity risk of the counter parties failing to meet their obligations is remote as we settle our interest position with the banks on a quarterly basis. All of our financial instruments that are sensitive to market risk are entered into for purposes other than trading. To illustrate the sensitivity of the results of operations to changes in interest rates on its debt we estimate that a 66% increase in LIBOR rates would have increased interest expense by approximately $7,000 for the year ending January 29, 2005. Likewise, a 66% decrease in LIBOR rates would have decreased interest expense by $7,000 for the average outstanding balance for the year ending January 29, 2005. This hypothetical change in LIBOR rates was calculated based on the fluctuation in LIBOR in 2003, which was the maximum LIBOR fluctuation in the last ten years. The estimates also assume a level of debt consistent with the average outstanding balance for the year-ended January 29, 2005 level and do not consider the effect of the potential termination of the interest rate swaps associated with the debt will have on interest expense. The information in note 3 "Debt and Lines of Credit" in the Notes to Consolidated Financial Statements on page 22 of the Annual Report to Stockholders for the year ended January 29, 2005 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant and its subsidiaries included in the Annual Report to Stockholders for the year ended January 29, 2005 are incorporated herein by reference: Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004. Consolidated Statements of Operations for the Fiscal Years Ended January 29, 2005, January 31, 2004, and February 1, 2003. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 29, 2005, January 31, 2004, and February 1, 2003. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 29, 2005 January 31, 2004, and February 1, 2003. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm The information under the heading "Summary of Quarterly Results (Unaudited)" on page 28 of the Annual Report to Stockholders for the Fiscal Years Ended January 29, 2005 and January 31, 2004 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the fiscal quarter covered by this report. In performing this evaluation, in light of the pronouncement on February 7, 2005 by the Office of the Chief Accountant of the SEC in a letter to the AICPA, management focused on our lease accounting practices. Specifically, as further discussed in Note 11 to the consolidated financial statements for the year ending January 31, 2004, we determined that: (i) our practice of depreciating leasehold improvements over a period of ten years was incorrect, which we corrected by changing the depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease; (ii) our practice of using the store opening date as the starting date for the rent expense calculation was incorrect, which we corrected by changing the calculation of leasehold expense so that straight-line rent expense begins on the date we take possession and have the right to control use of the leased premises; and (iii) our practice of classifying landlord allowances as a reduction of property and equipment on our balance sheet and as a reduction in capital expenditures in our statements of cash flows was incorrect, which we corrected by changing our method of classification so that landlord allowances are classified as a deferred rent credit on our balance sheet and as an operating activity in our statement of cash flows. Funds received from the landlord intended to reimburse the Company for the cost of leasehold improvements will be recorded as a deferred rent credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. Further, after consulting with the Audit Committee and our independent certified public accountants we determined to restate our financial statements for the period ended January 31, 2004 and for the first three quarters of fiscal 2005 and to file a Form 10-K/A amending our Annual Report on Form 10-K for our fiscal year ended January 31, 2004 with restated consolidated financial statements and Forms 10-Q/A amending our interim condensed consolidated financial statements for the first three quarters of fiscal 2005. The restatement is further discussed in "Explanatory Note" in the forepart of the 2004 Form 10-K/A and in Note 11, "Restatement of Financial Statements," to the accompanying consolidated financial statements for the year ending January 31, 2004. We do not consider the impact of correcting the previously issued financial statements to be material with respect to any individual reporting period. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, the Company's disclosure controls and procedures were effective at the reasonable assurance level. In concluding that our disclosure controls and procedures were effective as of January 29, 2005, our management considered, among other things, the circumstances that resulted in the restatement of our previously issued financial statements. We also considered the materiality of the restatement adjustments on our consolidated balance sheet and statement of operations (as more fully set forth in Note 11, "Restatement of Financial Statements," to the consolidated financial statements for the year ending January 31, 2004, in the 2004 Form 10-K/A) and that these non-cash adjustments have no effect on historical or future cash flows or the timing of payments under our operating leases. There was no change in the Company's internal controls over financial reporting during the Company's fiscal quarter covered by this report, as noted above, that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. However, as a result of the review of our lease accounting policies described above, during the first quarter of fiscal 2006 we made changes in internal controls over financial reporting to implement additional review processes over our leasing arrangements to ensure the collection and communication of information necessary for the proper accounting for each lease in accordance with generally accepted accounting principles. The Company implemented the following accounting changes: (i) we changed the depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease, (ii) we changed the calculation to start straight-line rent expense on the date when the Company takes possession and has the right to control use of the leased premises, and (iii) we changed our method of classification of landlord allowances. As explained above, the Company will now classify landlord allowances as a deferred rent credit on the balance sheet and as an operating activity in the statement of cash flows. Funds received from the landlord intended to reimburse the Company for the cost of leasehold improvements will be recorded as a deferred rent credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. Management believes that these control changes have fully remediated the issues described above. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections under the heading "Proposal I-Election of Directors" entitled "Nominee for Election - Term Expiring 2008", "Incumbent Directors - Term Expiring 2006", and "Incumbent Directors - Term Expiring 2007" on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005, are incorporated herein by reference for information on the directors of the Registrant. The information under the heading "Information Concerning the Board of Directors" on pages 7 through 10 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 is incorporated herein by reference. EXECUTIVE OFFICERS All of our executive officers are elected annually by and serve at the discretion of the Board of Directors. Our current executive officers are listed below:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Clyde B. Anderson 44 Executive Chairman of the Board Sandra B. Cochran 46 President, Chief Executive Officer and Secretary Terrance G. Finley 51 Executive Vice President - Merchandising of Books-A- Million, Inc. and President of American Internet Service, Inc. Richard S. Wallington 46 Chief Financial Officer
Clyde B. Anderson has served as Executive Chairman of the Board since February 2004 and has served as a director of the Company since August 1987. Mr. Anderson served as the Chairman of the Board from January 2000 until February 2004 and also served as the Chief Executive Officer of the Company from July 1992 until February 2004. Mr. Anderson also served as the President of the Company from November 1987 to August 1999. From November 1987 to March 1994, Mr. Anderson also served as the Company's Chief Operating Officer. Mr. Anderson serves on the Board of Directors of Hibbett Sporting Goods, Inc., a sporting goods retailer. Mr. Anderson is the son of Charles C. Anderson and the brother of Terry C. Anderson, both members of the Company's Board of Directors. Sandra B. Cochran was appointed to the position of Chief Executive Officer in February 2004, in addition to her duties as President and Secretary. Ms. Cochran has served as President of the Company since August 1999 and Secretary since June 1998. Ms. Cochran served as the Company's Executive Vice President from February 1996 to August 1999 and as its Chief Financial Officer from September 1993 to August 1999. Ms. Cochran previously served as Vice President and Assistant Secretary of the Company from August 1992 to September 1993. Prior to joining the Company, Ms. Cochran served as a Vice President (as well as in other capacities) of SunTrust Securities, Inc., a subsidiary of SunTrust Banks, Inc. for more than five years. Sandra B. Cochran serves as an officer and a Board member of certain affiliated companies. Terrance G. Finley has served as Executive Vice President - Merchandising of the Company since October 2001 and as the President of American Internet Service, Inc. since December 1998. Mr. Finley served in various other capacities in the merchandising department from April 1994 to December 1998. Mr. Finley served as the General Manager of Book$mart from February 1992 to April 1994. Prior to joining the Company, Mr. Finley served as the Vice President - Sales for Smithmark Publishers. Richard S. Wallington has served as the Chief Financial Officer of the Company since August 1999. Mr. Wallington served as Vice President and Controller of the Company from September 1993 to August 1999. Prior to joining the Company, Mr. Wallington served as the Director of Financial Reporting for Woodward & Lothrop, a retail department store company. The section under the heading "Information Concerning Board of Directors" entitled "Code of Conduct" on page 10 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 is incorporated herein by reference. 9 COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors, executive officers and persons who own beneficially more than 10% of the Company's common stock to file reports of ownership and changes in ownership of such stock with the Securities and Exchange Commission (the "SEC") and the NASDAQ Stock Market, Inc. Directors, executive officers and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all such forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, our directors, executive officers and greater than 10% stockholders complied with all applicable Section 16(a) filing requirements during fiscal 2005, with the exception of one filing by each independent director related to the annual issuance of stock options to them pursuant to the Stock Option Plan. ITEM 11. EXECUTIVE COMPENSATION The sections under the heading "Executive Compensation," other than those entitled "Report on Executive Compensation", "Compensation Committee Interlocks and Insider Participation", "Certain Relationships and Related Transactions" and "Performance Graph", on pages 12 through 18 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section under the heading "Information Concerning the Board of Directors" entitled "Beneficial Ownership of Common Stock" on page 11 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections under the heading "Executive Compensation" entitled "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" on pages 14 and 15 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The section under the heading "Information Concerning Board of Directors" entitled "Auditor Fees and Services" on page 9 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 2005 is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of Books-A-Million, Inc. and its subsidiaries, included in the Registrant's Annual Report to Stockholders for the fiscal year ended January 29, 2005 are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets as of January 29, 2005, and January 31, 2004. Consolidated Statements of Operations for the Fiscal Years Ended January 29, 2005, January 31, 2004 and February 1, 2003. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 29, 2005, January 31, 2004 and February 1, 2003. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 29, 2005, January 31, 2004 and February 1, 2003. 10 Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm. 2. Financial Statement Schedule: The following consolidated financial statement schedule of Books-A-Million, Inc. is attached hereto: Report of Independent Registered Public Accounting Firm on Financial Statement Schedule. Schedule 2 Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. Exhibits Exhibit Number -------------- 3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992 (the "S-1 Registration Statement")). 3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the S-1 Registration Statement). 4.1 -- See Exhibits 3.1 and 3.2 hereto incorporated herein by reference to the Exhibits of the same number to the S-1 Registration Statement. 10.1 -- Lease Agreement between First National Bank of Florence, Alabama, as Trustee, and Bookland Stores, Inc. (which is a predecessor of the Registrant), an Alabama corporation, dated January 30, 1991 (incorporated by reference to Exhibit 10.1 to the S-1 Registration Statement). 10.2 -- Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended January 30, 1999, File No. 0-20664, filed on April 30, 1999). 10.3 -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the S-1 Registration Statement). 10.4 -- Amendment to Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended January 29, 1994, File No. 0-20664, filed on April 29, 1994). 10.5 -- 1999 Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended January 29, 2000, File No. 0-20664, filed on April 28, 2000). 10.6 -- 401(k) Plan adopted September 15, 2003, with Suntrust Bank as Trustee (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended January 31, 2004 File No. 0-20664, filed on April 27, 2004). 10.7 -- Shareholders Agreement dated as of September 1, 1992 (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended January 31, 1993, File No. 0-20664, filed May 3, 1993). 10.8 -- Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended January 28, 1995, File No. 0-20664, filed April 28, 1995). 11 10.19 -- Stock Option Plans for Booksamillion.com, American Internet Service, Inc., Netcentral, Inc. and Faithpoint, Inc. (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended February 3, 2001, File No. 0-20664, filed on May 4, 2001). 10.20 -- Credit agreement dated as of July 1, 2002, between the Company and Bank of America, N.A., SunTrust Bank, N.A., Wells Fargo Bank, N.A., SouthTrust Bank N.A. and Amsouth Bank, N.A. (incorporated by reference to Exhibit 10.20 to Form 10-Q for the quarter ended August 3, 2002). 10.21 -- First amendment of credit agreement dated as of June 14, 2004, between the Company and Bank of America, N.A., SunTrust Bank, N.A., Wells Fargo Bank, N.A., SouthTrust Bank, N.A., and Amsouth Bank, N.A. 13 -- Portions of the Annual Report to Stockholders for the year ended January 29, 2005 that are expressly incorporated by reference into Part II of this Report. 21 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Annual Report on Form 10-K for the fiscal year ended February 3, 2001, File No. 0-20664, filed May 4, 2001). 23 -- Consent of Independent Registered Public Accounting Firm. 31.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 32.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. Reports on Form 8-K None. (c) See Item 15(a)(3), the Exhibit Index and the Exhibits attached hereto. (d) See Item 15(a)(2). 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOOKS-A-MILLION, INC. by: /s/ Clyde B. Anderson ------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: PRINCIPAL EXECUTIVE OFFICER: /s/ Clyde B. Anderson - ---------------------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 28, 2005 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ Richard S. Wallington - ---------------------------------------------- Richard S. Wallington Chief Financial Officer Date: April 28, 2005 DIRECTORS: /s/ Clyde B. Anderson - ---------------------------------------------- Clyde B. Anderson Date: April 28, 2005 /s/ Ronald G. Bruno - ---------------------------------------------- Ronald G. Bruno Date: April 28, 2005 13 DIRECTORS: /s/ J. Barry Mason - ---------------------------------------------- J. Barry Mason Date: April 28, 2005 /s/ Terry C. Anderson - ---------------------------------------------- Terry C. Anderson Date: April 28, 2005 /s/ William H. Rogers, Jr. - ---------------------------------------------- William H. Rogers, Jr. Date: April 28, 2005 14 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Books-A-Million, Inc.: We have audited the consolidated financial statements of Books-A-Million, Inc. and its subsidiaries (the "Company") as of January 29, 2005 and January 31, 2004 and for each of the three fiscal years in the period ended January 29, 2005, and have issued our report thereon dated April 25, 2005 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of new accounting principles as described in Note 1 to the consolidated financial statements); such financial statements and report are included in the Company's 2005 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Books-A-Million, Inc. listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Birmingham, Alabama April 25, 2005 S-1 SCHEDULE 2. BOOKS-A-MILLION, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED FEBRUARY 1, 2003, JANUARY 31, 2004, AND JANUARY 29, 2005
CHARGED/ BALANCE AT (CREDITED) (DEDUCTIONS)/ BEGINNING TO COSTS RECOVERIES BALANCE AT OF YEAR AND EXPENSES NET END OF YEAR ------------ ------------ ------------- ----------- FOR THE YEAR ENDED FEBRUARY 1, 2003: Allowance for doubtful accounts $ 784,892 $ 276,459 $ (349,396) $ 711,955 FOR THE YEAR ENDED JANUARY 31, 2004: Allowance for doubtful accounts $ 711,955 $ 534,300 $ (701,010) $ 545,245 FOR THE YEAR ENDED JANUARY 29, 2005: Allowance for doubtful accounts $ 545,245 $ 241,152 $ (205,845) $ 580,552
S-2 EX-10.21 2 g94771exv10w21.txt EX-10.21 1ST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.21 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("this Amendment") is dated as of June 14, 2004 (the "Effective Date"), by and among BOOKS-A-MILLION, INC., a Delaware corporation ("BAM"), and its wholly-owned subsidiaries AMERICAN WHOLESALE BOOK COMPANY, INC., an Alabama corporation ("AWBC") and AMERICAN INTERNET SERVICE, INC., an Alabama corporation ("AIS") and the wholly-owned subsidiaries of AIS, BOOKSAMILLION.COM, INC., an Alabama corporation ("BAM.COM"), NETCENTRAL, INC., a Tennessee corporation ("NI"), and FAITHPOINT, INC. an Alabama corporation ("FAITHPOINT"); BAM, AWBC, AIS, bam.com, NI and FaithPoint are sometimes together referred to as the "INITIAL PARTICIPATING ENTITIES"; the Initial Participating Entities, together with all Persons that hereafter become Participating Entities, being hereafter sometimes together referred to as the "BORROWERS"), BANK OF AMERICA, N.A., a national banking association ("BOFA"), and the various lenders identified on the signature pages hereto (collectively, the "LENDERS"); and BANK OF AMERICA, N.A., a national banking association, as agent for the Lenders (the "AGENT"). RECITALS A. The Borrowers, the Lenders and the Agent have previously entered into that certain Credit Agreement dated as of July 1, 2002 (together with any and all amendments thereto, the "Credit Agreement"). Capitalized terms not otherwise herein defined shall have the meanings given them in the Credit Agreement. B. The Borrowers, the Lenders and the Agent now desire to amend the definition of "Maturity Date" set forth in the Credit Agreement and to make the other changes set forth in this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and in further consideration of the mutual agreements set forth herein, the Borrowers, the Lenders and the Agent hereby agree as follows, with such agreements to become effective as of the Effective Date: 1. RECITALS. The recitals herein above are hereby incorporated by this reference as if fully set forth herein. 2. RULES OF CONSTRUCTION. This Amendment is subject to the rules of construction set forth in Section 1.2 of the Credit Agreement. 3. REPRESENTATIONS AND WARRANTIES OF BORROWERS. The Borrowers represent and warrant to the Lenders and the Agent as follows: (a) REPRESENTATIONS AND WARRANTIES IN CREDIT DOCUMENTS. All of the representations and warranties set forth in the Credit Documents are true and correct in all material respects on and as of the Effective Date, except to the extent that such representations and warranties expressly relate to an earlier date. (b) NO DEFAULT. As of the Effective Date, the Borrowers are in compliance in all material respects with all the terms and provisions set forth in the Credit Documents on their part to be observed or performed, and, no Event of Default, nor any event that upon notice or lapse of time or both would constitute such an Event of Default, has occurred and is continuing. (c) ORGANIZATIONAL DOCUMENTS. The articles of incorporation and bylaws of the Borrowers have not been modified or amended since July 1, 2002. 4. AMENDMENTS TO CREDIT AGREEMENT. (a) The defined term "Maturity Date" set forth in Section 1.1 of the Credit Agreement is hereby amended to read, in its entirety, as follows: ""MATURITY DATE" means July 1, 2007." (b) Subparagraph (v) of Section 5.11 of the Credit Agreement is hereby amended to read, in its entirely, as follows: "(v) to re-acquire outstanding capital stock of BAM." 5. EXTENSION FEE. Borrowers shall pay to Agent for the account of each Lender in accordance with its Pro Rata Share an extension fee for extending the Revolving Credit Facility in an amount equal to one-tenth of one percent (10 basis points) of the Total Revolving Credit Commitment, including the Peak Usage Tranche notwithstanding Section 2,5.1(g) of the Credit Agreement. The extension fee shall be paid on the Effective Date and is nonrefundable. 6. CREDIT DOCUMENTS TO REMAIN IN EFFECT. Except as expressly amended herein, the Credit Agreement and the other Credit Documents shall remain in full force and effect in accordance with their respective terms. 7. NO NOVATION, ETC. Nothing contained in this Amendment shall be deemed to constitute a novation of the terms of the Credit Documents, nor release any party from liability for any of the Loans, nor affect any of the rights, powers or remedies of the Lenders under the Credit Documents, nor constitute a waiver of any provision thereof, except as specifically set forth in this Amendment. 8. REFERENCES IN CREDIT DOCUMENTS. Effective as of the Effective Date, all references in the Credit Documents to the "Credit Agreement" shall refer to the Credit 2 Agreement as amended by this Amendment, including but not limited to, the extension of the Maturity Date, and as the Credit Agreement may be further amended from time to time. 9. GOVERNING LAW, SUCCESSORS AND ASSIGNS, ETC. This Amendment shall be governed by and construed in accordance with the laws of the State of Georgia and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 10. HEADINGS. The descriptive headings of the sections of this Amendment are for convenient reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 11. ENTIRE AGREEMENT. This Amendment constitutes the entire understanding to date of the parties hereto regarding the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements of the parties thereto with respect to the subject matter hereof. 12. SEVERABILITY. If any provision of this Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 13. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which so executed shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 14. EFFECT OF THIS AMENDMENT. This Amendment amends and supplements the Credit Agreement and shall be construed as if it is a part thereof for all purposes. [Remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, the Borrowers, the Lenders and the Agent have caused this Amendment to be executed and delivered by their duly authorized representatives on the dates set forth below their signature, to be effective as of the Effective Date. BOOKS-A-MILLION, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 NETCENTRAL, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 AMERICAN INTERNET SERVICE, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 AMERICAN WHOLESALE BOOK COMPANY, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 BOOKSAMILLION.COM, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 FAITHPOINT, INC. By: /s/ Richard Wallington ----------------------------- Richard Wallington Its: CFO Dated: June 29, 2004 BANK OF AMERICA, N.A., AS AGENT By: /s/ Michael Brashler ---------------------------- Vice President Dated: June 10, 2004 6 BANK OF AMERICA, N.A., as a Lender By: /s/ William H. Powell ---------------------------- William H. Powell Its: Senior Vice President Dated: June 14, 2004 7 AMSOUTH BANK, AS A LENDER By: /s/ David A. Simmons ----------------------------- David A. Simmons Its: Senior Vice President Dated: June 14, 2004 8 SUNTRUST BANK, AS A LENDER By: /s/ David W. Penter ------------------------------ David W. Penter Its: Managing Director Dated: June 14, 2004 9 SOUTHTRUST BANK, AS A LENDER By: /s/ Kelly Peace ----------------------------- Kelly Peace Its: Assistant Vice President Dated: June 11, 2004 10 WELLS FARGO BANK, N.A., AS A LENDER By: /s/ Robert Louk ------------------------------- Robert Louk Vice President Dated: June 15, 2004 11 EX-13 3 g94771exv13.txt EX-13 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 BOOKS-A-MILLION 2005 Annual Report COMPANY PROFILE Books-A-Million is one of the nation's leading book retailers and sells on the Internet at www.booksamillion.com. The Company presently operates more than 200 stores in 18 states and the District of Columbia. The Company operates three distinct store formats, including large superstores operating under the names Books-A-Million and Books & Co., traditional bookstores operating under the names Books-A-Million and Bookland, and Joe Muggs Newsstands. FIVE-YEAR HIGHLIGHTS
FOR THE FISCAL YEAR ENDED: (In thousands, except per share amounts) 1/29/05 1/31/04 (1) 2/1/03 (2) 2/2/02 2/3/01 - -------------------------------------------------- ---------- ----------- ------------ ---------- ---------- STATEMENT OF OPERATIONS DATA 52 WEEKS 52 weeks 52 weeks 52 weeks 53 weeks Net sales $ 475,226 $ 458,290 $ 436,348 $ 435,832 $ 411,881 Income before cumulative effect of a change in accounting principle (2) 10,199 7,126 2,554 3,944 3,012 Net income 10,199 7,126 1,353 3,944 3,012 Earnings per share - diluted, before cumulative effect of a change in accounting principle (2) 0.59 0.42 0.15 0.23 0.17 Earnings per share - diluted 0.59 0.42 0.08 0.23 0.17 Weighted average shares - diluted 17,178 16,789 16,566 16,945 17,991 Capital investment 14,923 10,402 19,836 12,688 17,065 Dividends per share - declared 0.23 0.00 0.00 0.00 0.00 BALANCE SHEET DATA Property and equipment, net $ 55,946 $ 59,892 $ 68,912 $ 67,941 $ 72,870 Total assets 300,812 296,398 319,484 306,083 304,410 Long-term debt 7,500 20,640 44,942 38,846 41,526 Stockholders' equity 134,859 131,001 122,694 121,212 122,108 OTHER DATA Working capital $ 95,382 $ 104,723 $ 112,810 $ 105,638 $ 103,338 Debt to total capital ratio 0.05 0.14 0.27 0.24 0.26 OPERATIONAL DATA Total number of stores 206 202 207 204 185 Number of superstores 168 163 163 157 145 Number of traditional stores 34 35 37 40 37 Number of Joe Muggs newsstands 4 4 7 7 3
(1) Effective February 2, 2003, the Company changed its method of accounting for inventories to the last-in, first-out method, as discussed in Note 1 to the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 of the Consolidated Financial Statements. 1 BOOKS-A-MILLION 2005 Annual Report TO OUR STOCKHOLDERS: Fiscal year 2005 was challenging and rewarding for our entire team at Books-A-Million. We saw steady progress in all areas of our business, overcoming very strong sales comparisons with the prior year due to the publication of Harry Potter and the Order of the Phoenix and dealt with the ravages of Mother Nature in the form of the devastating hurricanes that struck the south in August and September. Sales in our core book business were excellent. The fiction, inspirational, children's, biography and humor categories--among our largest--all performed well. In addition, we saw emerging categories such as graphic novels, teen fiction, and Christian fiction achieve significant growth. The mass media once again had a considerable impact on book sales. We saw the success of movie tie-ins such as Series of Unfortunate Events and The Polar Express. Television influenced titles such as Jon Stewart's America (The Book) and Joel Osteen's Your Best Life Now, as well as the runaway hit He's Just Not That Into You. In the non-book categories, we were pleased with our initiatives in games and toys and the continued strong performance of calendars, journals, and book accessories. The cafe business was also solid, driven by the strength of the cold-drink category anchored by Frappe, our line of blended frozen drinks. The positive sales results combined with improved operations had a marked impact on our results. Higher margins resulted from increased sales of books related to our proprietary publishing efforts and gift products sourced through our import program, along with less promotional discounting. Our debt decreased substantially and cash balances improved. Enhanced inventory management systems allowed us to achieve better inventory turns and improved leveraging of accounts payable. During the year we opened 6 new stores and remodeled an additional 31 stores. This brings the total number of stores remodeled over the past three years up to 111 stores. 2 BOOKS-A-MILLION 2005 Annual Report Thanks to the efforts of our dedicated associates, we were able to achieve the objectives that we set at the beginning of the year. Our team was focused on specific improvements in sales, margin and inventory. The results of this focus are clear; net income grew by 43% and earnings per share by 40%. We continued a stock repurchase program and initiated a dividend for our shareholders that is now at an annual rate of 20 cents per share. We intend to build on these positive results as we move into the new year. July 16th brings the publication of the next installment of the Harry Potter series, Harry Potter and the Half Blood Prince, and we hope you will join us at a Books-A-Million store to share in the excitement surrounding what will undoubtedly be the biggest publishing event of the year. Thank you for your continued interest and support. /s/ Clyde B. Anderson /s/ Sandra B. Cochran Clyde B. Anderson Sandra B. Cochran Executive Chairman of the Board President, Chief Executive Officer and Secretary FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDED ------------------------- (In thousands, except per share amounts) 1/29/05 1/31/04 (1) - ---------------------------------------- ----------- ----------- Net sales $ 475,226 $ 458,290 Operating profit 18,184 15,158 Net income 10,199 7,126 Net income per share - diluted 0.59 0.42 Dividends per share - declared 0.23 0.00
AS OF ------------------------- (In thousands) 1/29/05 1/31/04 (1) - --------------------- ----------- ----------- Working capital $ 95,382 $ 104,723 Total assets 300,812 296,398 Stockholders' equity 134,859 131,001
(1) Effective February 2, 2003, the Company changed its method of accounting for inventories to the last-in, first-out method, as discussed in Note 1 to the Consolidated Financial Statements. 3 BOOKS-A-MILLION 2005 Annual Report SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended (In thousands, except per share data) 1/29/05 1/31/04(1) 2/1/03(2) 2/2/02 2/3/01 - -------------------------------------------------------------------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: 52 WEEKS 52 weeks 52 weeks 52 weeks 53 weeks Net sales $ 475,226 $ 458,290 $ 436,348 $ 435,832 $ 411,881 Cost of products sold, including warehouse distribution and store occupancy costs 339,851 330,909 317,020 312,140 297,454 --------- ---------- ---------- --------- --------- Gross profit 135,375 127,381 119,328 123,692 114,427 Operating, selling and administrative expenses 99,399 94,155 91,764 95,462 88,588 Depreciation and amortization 17,792 18,068 18,230 17,194 16,130 --------- ---------- ---------- --------- --------- Operating profit 18,184 15,158 9,334 11,036 9,709 Interest expense, net 1,874 2,909 4,171 4,429 4,804 --------- ---------- ---------- --------- --------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 16,310 12,249 5,163 6,607 4,905 Provision for income taxes 6,035 4,656 1,962 2,510 1,863 --------- ---------- ---------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle 10,275 7,593 3,201 4,097 3,042 Discontinued operations: Loss from discontinued operations (including impairment charge) (121) (754) (1,044) (246) (48) Income tax benefit 45 287 397 93 18 --------- ---------- ---------- --------- --------- Loss from discontinued operations (76) (467) (647) (153) (30) --------- ---------- ---------- --------- --------- Income before cumulative effect of change in accounting principle 10,199 7,126 2,554 3,944 3,012 Cumulative effect of change in accounting principle, net of income taxes -- -- (1,201) -- -- --------- ---------- ---------- --------- --------- Net income $ 10,199 $ 7,126 $ 1,353 $ 3,944 $ 3,012 ========= ========== ========== ========= ========= Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.62 $ 0.47 $ 0.20 $ 0.25 $ 0.17 Loss from discontinued operations -- (0.03) (0.04) (0.01) -- --------- ---------- ---------- --------- --------- Income before cumulative effect of change in accounting principle 0.62 0.44 0.16 0.24 0.17 Cumulative effect of change in accounting principle -- -- (0.08) -- -- --------- ---------- ---------- --------- --------- Net income per share $ 0.62 $ 0.44 $ 0.08 $ 0.24 $ 0.17 ========= ========== ========== ========= ========= Weighted average number of shares outstanding - basic 16,453 16,279 16,190 16,667 17,955 ========= ========== ========== ========= ========= DILUTED: Income from continuing operations before cumulative effect of change in accounting principle $ 0.59 $ 0.45 $ 0.19 $ 0.24 $ 0.17 Gain (loss) from discontinued operations -- (0.03) (0.04) (0.01) -- --------- ---------- ---------- --------- --------- Income before cumulative effect of change in accounting principle 0.59 0.42 0.15 0.23 0.17 Cumulative effect of change in accounting principle -- -- (0.07) -- -- --------- ---------- ---------- --------- --------- Net income per share $ 0.59 $ 0.42 $ 0.08 $ 0.23 $ 0.17 ========= ========== ========== ========= ========= Weighted average number of shares outstanding - diluted 17,178 16,789 16,566 16,945 17,991 ========= ========== ========== ========= ========= Dividends per share - declared $ 0.23 -- -- -- -- Pro forma amounts assuming the change in accounting principle was applied retroactively: (1) Net income N/A N/A N/A $ 3,891 $ 2,760 Net income per share - basic N/A N/A N/A 0.23 0.15 Net income per share - diluted N/A N/A N/A 0.23 0.15 BALANCE SHEET DATA: Property and equipment, net $ 55,946 $ 59,892 $ 68,912 $ 67,941 $ 72,870 Total assets 300,812 296,398 319,484 306,083 304,410 Long-term debt 7,500 20,640 44,942 38,846 41,526 Stockholders' investment 134,859 131,001 122,694 121,212 122,108 OTHER DATA: Working capital $ 95,382 $ 104,723 $ 112,810 $ 105,638 $ 103,338
(1) Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method, as discussed in Note 1 of the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 of the Consolidated Financial Statements. 4 BOOKS-A-MILLION 2005 Annual Report MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS GENERAL The Company was founded in 1917 and currently operates 206 retail bookstores concentrated primarily in the southeastern United States. Of the 206 stores, 168 are superstores which operate under the names Books-A-Million and Books & Co., 34 are traditional stores which operate under the Bookland and Books-A-Million names and four are newsstands which operate under the name Joe Muggs Newsstand. In addition to the retail store formats, the Company offers its products over the Internet at www.booksamillion.com and www.joemuggs.com. As of January 29, 2005, the Company employed approximately 4,900 full and part-time employees. 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. During fiscal 2005, the Company opened six stores, closed two stores and relocated three stores. In fiscal 2002, the Company began an extensive remodeling program to bring a consistent look to each store and also to update equipment. Certain stores completed a major remodeling, including new flooring, resetting the fixtures and / or relocating the cafe. Other stores completed a minor remodeling which was limited to resetting fixtures, new signage and paint. Over the past three years, the remodeled stores have outpaced the chain in comparable store sales. During fiscal 2005, the Company remodeled 31 stores. Approximately 58 percent of the Company's stores have been remodeled to date as part of the remodel program. The Company's performance is partially measured based on comparable store sales, which is similar to most retailers. 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. CRITICAL ACCOUNTING POLICIES General Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company believes that the likelihood is remote that materially different amounts will be reported related to actual results for the estimates and judgments described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Other Long-Lived Assets and Impairment of Long-Lived Assets Property and equipment are recorded at cost. Depreciation on equipment and furniture and fixtures is provided on the straight-line method over the estimated service lives, which range from three to seven years. Depreciation of buildings and amortization of leasehold improvements, including remodels, is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from 5 to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs are capitalized to property accounts and depreciated using applicable annual rates. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income. The Company reviews property and equipment and amortizable intangibles when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Circumstances that are considered in determining impairment are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future cash flows, indications that an asset no longer has an economically useful life, or other factors that would indicate a store cannot be profitable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to 5 BOOKS-A-MILLION 2005 Annual Report undiscounted pre-tax future net cash flows at the lowest level of independent cash flows, which is generally at the individual store level. Future events could cause the Company to conclude that impairment indicators exist and those long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. The Company's long-lived assets are principally retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores projected undiscounted cash flows. If impairment is indicated, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 2005, 2004 and 2003, impairment losses of $342,000, $983,000 and $241,000, respectively, were recorded in selling, general and administrative costs. For all years presented, the impairment losses related to the retail trade business segment. Closed Store Expenses Management considers several factors in determining when to close or relocate a store. Some of these factors are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future net cash flows, indications that an asset no longer has an economically useful life, remaining term of an individual store lease, or other factors that would indicate a store in the current location cannot be profitable. When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements, lease termination costs, costs to transfer inventory and usable fixtures, other costs in connection with vacating the leased location, and a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $55,000, $219,000, and $22,000 during fiscal 2005, 2004 and 2003, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations. Inventories Inventories are taken throughout 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 reconciled to the Company's records. The Company's accrual for inventory shortages is based upon historical inventory shortage results. Cost is assigned to store and warehouse inventories using the retail inventory method. Using this method, store and warehouse inventories are valued 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. Inventory costing also requires certain significant management estimates and judgments involving markdowns, the allocation of vendor allowances and shrinkage. These practices affect ending inventories at cost as well as the resulting gross margins and inventory turnover ratios. Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change was preferable in that it achieves a more appropriate matching of revenues and expenses. The impact of this accounting change was to increase "Costs of Products Sold" in the consolidated statements of operations by $0.4 million and $0.7 million for the fiscal years ended January 29, 2005 and January 31, 2004, respectively. This resulted in an after-tax decrease to net income of $0.3 million or $0.01 per diluted share for fiscal 2005 and an after-tax decrease to net income of $0.4 million or $0.02 per diluted share for fiscal 2004. The cumulative effect of a change in accounting principle from the FIFO method to LIFO method is not determinable. Accordingly, such change has been accounted for prospectively. In addition, pro forma amounts retroactively applying the change cannot be reasonably estimated and have not been disclosed. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $1.1 million as of January 29, 2005 and $0.7 million as of January 31, 2004, whereas the fiscal 2005 and fiscal 2004 inventory before LIFO, at FIFO value is $211.3 million and $212.3 million, respectively. The estimated replacement cost of inventory is the current FIFO value of $211.3 million. The LIFO value did not include any layer liquidation in fiscal 2005 or fiscal 2004. Vendor Allowances The Company receives allowances from its vendors from a variety of programs and arrangements, including merchandise placement and cooperative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in cost of products sold upon the sale of the related inventory. The charge for the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.07 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. 6 BOOKS-A-MILLION 2005 Annual Report Accrued Expenses On a monthly basis, certain material expenses are estimated and accrued to properly record those expenses in the period incurred. Such estimates include those made for payroll and employee benefits costs, occupancy costs and advertising expenses among other items. Certain estimates are made based upon analysis of historical results. Differences in management's estimates and assumptions could result in accruals that are materially different from the actual results. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Results of Operations The following table sets forth statement of operations data expressed as a percentage of net sales for the periods presented.
FISCAL YEAR ENDED ---------------------------- 1/29/05 1/31/04 2/1/03 ------- ------- ------ Net sales 100.0% 100.0% 100.0% Gross profit 28.5% 27.8% 27.3% Operating, selling, and administrative expenses 20.9% 20.5% 21.0% Depreciation and amortization 3.8% 4.0% 4.2% Operating profit 3.8% 3.3% 2.1% Interest expense, net 0.4% 0.6% 1.0% Income from continuing operations before income taxes and cumulative effect of 3.4% 2.7% 1.1% change in accounting principle Provision for income taxes 1.2% 1.0% 0.4% Income from continuing operations before cumulative effect of change in 2.2% 1.7% 0.7% accounting principle Loss from discontinued operations (including impairment charge), net of tax 0.0% -0.1% -0.1% Income before cumulative effect of change in accounting principle 2.2% 1.6% 0.6% Cumulative effect of a change in accounting principle 0.0% 0.0% -0.3% Net income 2.2% 1.6% 0.3%
FISCAL 2005 COMPARED TO FISCAL 2004 Consolidated net sales increased $16.9 million, or 3.7%, to $475.2 million in fiscal 2005 from $458.3 million in fiscal 2004. Comparable store sales increased 2.5% when compared to the same 52-week period last year. The increase in comparable store sales was primarily attributable to an increase in book sales and increase in cafe sales. The book sales increase was due to strong sales performance in categories such as: Fiction, which had broad based strength in many titles; Inspirational, with strong sales of The Purpose Driven Life, Biography, with strong sales of Bill Clinton's My Life, and Humor, which was driven by sales of Jon Stewart's America (The Book) and He's Just Not That Into You. The cafe sales increase was driven by the strong performance in the frappe line of cold drinks. The Company opened six new stores during fiscal 2005 resulting in partial year sales of $3.6 million and closed two stores during fiscal 2005 with partial year sales of $1.0 million. One of the closed stores was located in Stewart, Florida and was not reopened after substantial damage due to Hurricane Jean. Additional detail is discussed in the footnotes regarding Impairment of Long-Lived Assets, Closed Store Expenses and Discontinued Operations. Net sales for the retail trade segment increased $14.8 million, or 3.3%, to $466.9 million in fiscal 2005 from $452.1 million in fiscal 2004. The increase in comparable store sales was primarily attributable to an increase in book sales and increase in cafe sales. The book sales increase was due to strong sales performance in categories such as: Fiction, which had broad based strength in many titles; Inspirational, with strong sales of The Purpose Driven Life, Biography, with strong sales of Bill Clinton's My Life, and Humor, which was driven by sales of Jon Stewart's America (The Book) and He's Just Not That Into You. The cafe sales increase was driven by the strong performance in the frappe' line of cold drinks. Net sales for the electronic commerce segment increased $1.2 million, or 4.7%, to $26.7 million in fiscal 2005 from $25.5 million in fiscal 2004. This increase was primarily due to growth in business-to-business sales volume during fiscal 2005. 7 BOOKS-A-MILLION 2005 Annual Report The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing programs, pricing strategies, store operations and competition. Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $8.0 million, or 6.3%, to $135.4 million in fiscal 2005 from $127.4 million in fiscal 2004. Gross profit as a percentage of net sales increased to 28.5% in fiscal 2005 from 27.8% in fiscal 2004, primarily due to less promotional discounting and improved margin due to increased sales of proprietary product. Operating, selling and administrative expenses increased $5.2 million, or 5.6%, to $99.4 million in fiscal 2005, from $94.2 million in fiscal 2004. Operating, selling and administrative expenses as a percentage of net sales increased to 20.9% in fiscal 2005 from 20.5% in fiscal 2004, partially due to the impact of costs incurred for Sarbanes-Oxley compliance, as well as increased general corporate expenses. Depreciation and amortization decreased $0.3 million or 1.5% to $17.8 million in fiscal 2005 from $18.1 million in fiscal 2004. Depreciation and amortization as a percentage of net sales decreased to 3.8% in fiscal 2005 from 4.0% in fiscal 2004, due to lower capital expenditures in fiscal 2005. Consolidated operating profit was $18.2 million for fiscal 2005 compared to $15.2 million in fiscal 2004. Operating profit for the retail trade segment was $17.0 million in fiscal 2005 versus $14.3 million in fiscal 2004. This increase was primarily attributable to the higher comparable store sales during fiscal 2005. The operating profit for the electronic commerce segment was $0.9 million compared to $0.3 million in fiscal 2004. The improvement in operating results was due to improved gross margin as a result of increased sales, as well as improved sales mix. Net interest expense decreased $1.0 million, or 35.6%, to $1.9 million in fiscal 2005 from $2.9 million in fiscal 2004, primarily due to lower average debt levels during fiscal 2005. Income taxes were calculated at an effective rate of 37.0% for fiscal 2005 and 38.0% for fiscal 2004. Loss from discontinued operations was $0.1 million in fiscal 2005 compared to $0.8 million in fiscal 2004. The income tax benefit on the loss from discontinued operations was $0.0 million in fiscal 2005 and $0.3 million in fiscal 2004. Loss from discontinued operations, net of tax, was $0.1 million in fiscal 2005 compared to $0.5 million in fiscal 2004. These losses represent the results of two stores that were closed in fiscal 2005 and four stores that were closed in fiscal 2004 in markets where the Company does not expect to retain the closed stores' customers at another store. FISCAL 2004 COMPARED TO FISCAL 2003 Consolidated net sales increased $22.0 million, or 5.0%, to $458.3 million in fiscal 2004 from $436.3 million in fiscal 2003. Comparable store sales increased 3.3% when compared to the same 52-week period last year. The increase in comparable store sales was primarily attributable to an increase in book sales and an increase in cafe sales. The book sales increase was due to strong sales performance in categories such as: Children's, with strong sales of Harry Potter; Fiction, with strong best sellers such as The DaVinci Code; and Diet & Health, with successful titles in the low-carb diet category. The cafe sales increase was due to strong performance in the frappe line of drinks. The Company opened four new stores during fiscal 2004 resulting in partial year sales of $5.7 million and closed nine stores during fiscal 2004 with partial year sales of $4.7 million. Additional detail is discussed in the footnotes regarding Impairment of Long-Lived Assets, Closed Store Expenses and Discontinued Operations. Net sales for the retail trade segment increased $21.1 million, or 4.9%, to $452.1 million in fiscal 2004 from $431.0 million in fiscal 2003. The increase in comparable store sales was primarily attributable to an increase in book sales and an increase in cafe sales. The book sales increase was due to strong sales performance in categories such as: Children's, with strong sales of Harry Potter; Fiction, with strong best sellers such as The DaVinci Code; and Diet & Health, with successful titles in the low-carb diet category. The cafe sales increase was due to strong performance in the frappe line of drinks. Net sales for the electronic commerce segment increased $2.2 million, or 9.3%, to $25.5 million in fiscal 2004 from $23.3 million in fiscal 2003. This increase was primarily due to growth in business-to-business sales volume during fiscal 2004. The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing programs, pricing strategies, store operations and competition. Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $8.1 million, or 6.8%, to $127.4 million in fiscal 2004 from $119.3 million in fiscal 2003. Gross profit as a percentage of net sales increased to 27.8% in fiscal 2004 from 27.3% in fiscal 2003, primarily due to improved sales mix, less promotional discounting and lower occupancy costs as a percentage of net sales. 8 BOOKS-A-MILLION 2005 Annual Report Operating, selling and administrative expenses increased $2.4 million, or 2.6%, to $94.2 million in fiscal 2004, from $91.8 million in fiscal 2003. Operating, selling and administrative expenses as a percentage of net sales decreased to 20.5% in fiscal 2004 from 21.0% in fiscal 2003, primarily due to the impact of higher comparable store sales as well as strong expense controls. Depreciation and amortization decreased $0.1 million or 0.9% to $18.1 million in fiscal 2004 from $18.2 million in fiscal 2003. Depreciation and amortization as a percentage of net sales decreased to 4.0% in fiscal 2004 from 4.2% in fiscal 2003, due to lower capital expenditures in fiscal 2004. Consolidated operating profit was $15.2 million for fiscal 2004 compared to $9.3 million in fiscal 2003. Operating profit for the retail trade segment was $14.3 million in fiscal 2004 versus $8.8 million in fiscal 2003. This increase was primarily attributable to the higher comparable store sales during fiscal 2004. The operating profit for the electronic commerce segment was $0.3 million compared to the fiscal 2003 loss of $0.5 million. The improvement in operating results was due to improved gross margin as a result of increased sales, as well as lowering operating costs as a percent to sales. Net interest expense decreased $1.3 million, or 30.3%, to $2.9 million in fiscal 2004 from $4.2 million in fiscal 2003, primarily due to lower average debt levels and lower average interest rates during fiscal 2004. Income taxes were calculated at an effective rate of 38.0% for both fiscal 2004 and 2003. Loss from discontinued operations was $0.8 million in fiscal 2004 compared to $1.0 million in fiscal 2003. The income tax benefit on the loss from discontinued operations was $0.3 million in fiscal 2004 and $0.4 million in fiscal 2003. Loss from discontinued operations, net of tax, was $0.5 million in fiscal 2004 compared to $0.6 million in fiscal 2003. These losses represent the results of four stores that were closed in fiscal 2004 in markets where the Company does not expect to retain the closed stores' customers at another store. SEASONALITY AND QUARTERLY RESULTS Similar to many retailers, the Company's business is seasonal, with its highest retail sales, gross profit and net income historically occurring in the fourth fiscal quarter. This seasonal pattern reflects the increased demand for books and gifts experienced 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. The Company's results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse impact on the Company's results of operations for the full year. In addition, the Company's results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. New stores require the Company to incur pre-opening expenses and often require several months of operation before generating acceptable sales volumes. Accordingly, the addition of a large number of new stores in a particular quarter could adversely affect the Company's results of operations for that quarter. 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 facilities. The Company has an unsecured revolving credit facility that allows borrowings up to $100.0 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. As of January 29, 2005 there was no outstanding balance and as of January 31, 2004 there was $13.1 million outstanding under this credit facility. The maximum and average outstanding balances during fiscal 2005 were $34.4 million and $21.6 million, respectively. Additionally, as of January 29, 2005 and January 31, 2004, the Company has outstanding borrowings under an industrial revenue bond totaling $7.5 million, which is secured by certain property. The Company's capital expenditures totaled $14.9 million in fiscal 2005. These expenditures were primarily used for new store openings, renovation and improvements to existing stores, upgrades and expansion of warehouse distribution facilities and investment in management information systems. Management estimates that capital expenditures for fiscal 2006 will be approximately $16.0 million and that such amounts will be used for purposes similar to fiscal 2005. 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 fiscal 2006. 9 BOOKS-A-MILLION 2005 Annual Report Financial Position During fiscal 2005, the Company opened six new stores and closed two stores. Strong inventory management resulted in decreased inventory balances at January 29, 2005, as compared to January 31, 2004. Net property and equipment decreased due to lower capital expenditures in fiscal 2005. Additionally, long-term debt balances decreased as of January 29, 2005 compared to January 31, 2004 due to improved earnings, lower inventory balances, increased accounts payable leveraging and lower capital expenditures. 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 January 29, 2005:
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS ---------------------------------------------------------------------------- (in thousands) TOTAL FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 THEREAFTER - --------------------------------- --------- --------- --------- --------- --------- --------- ---------- Long-term debt - revolving credit $ -- $ -- $ -- $ -- $ -- $ -- $ -- facility Long-term debt - industrial 7,500 -- 7,500 -- -- -- -- revenue bond Operating leases 106,685 27,521 21,853 18,133 13,468 8,461 17,249 --------- --------- --------- --------- --------- --------- ---------- Total of obligations $ 114,185 $ 27,521 $ 29,353 $ 18,133 $ 13,468 $ 8,461 $ 17,249 ========= ========= ========= ========= ========= ========= ==========
Guarantees From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company's request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not incurred significant costs related to performance under these types of indemnities. No liabilities have been recorded for these obligations on the Company's balance sheet at January 29, 2005; as such liabilities are considered de minimis. Cash Flows Operating activities provided cash of $47,193,000, $34,678,000 and $13,650,000 in fiscal 2005, 2004 and 2003, respectively, and included the following effects: - Cash provided by inventories in fiscal 2005 of $1,321,000 and $12,428,000 in fiscal 2004 was primarily the result of increased sales and improved inventory management during the year. Cash used by inventories in fiscal 2003 of $15,103,000 was primarily the result of expanding the store title base in existing stores. - Cash provided by accounts payable is fiscal 2005 of $10,015,000 was the result of improved inventory management in fiscal 2005. Cash used by accounts payable in fiscal 2004 of $11,895,000 was due to lower inventory levels for fiscal 2004. Cash provided by accounts payable in fiscal 2003 was $5,472,000 due to higher inventory levels. - Depreciation and amortization expenses were $17,843,000, $18,325,000 and $18,584,000 in fiscal 2005, 2004 and 2003, respectively. The decrease in fiscal 2005 and 2004 was due to decreased capital expenditures during the respective years. - Cash provided by accrued expenses was $6,379,000, $4,144,000, and $967,000 in fiscal 2005, 2004 and 2003, respectively. The increase, in fiscal 2005 and fiscal 2004 was primarily due to increases in deferred revenues related to the Company's discount card , deferred rent related to landlord allowances, and higher bonus accruals due to the Company's improved earnings performance in fiscal 2005 and fiscal 2004. Cash used in investing activities in fiscal 2005, 2004 and 2003 reflected a net use of cash of $14,879,000, $10,363,000 and $19,776,000, respectively. Cash was used to fund capital expenditures for new store openings, acquisitions of stores, renovation and improvements to existing stores, warehouse distribution purposes and investments in management information systems. 10 BOOKS-A-MILLION 2005 Annual Report Financing activities used cash of $21,103,000 in fiscal 2005 primarily to repay debt under the credit facility ($13,140,000), to purchase stock (treasury stock, $6,359,000) and dividend payments ($3,009,000). Financing activities used cash of $23,944,000 in fiscal 2004 to repay debt under the credit facility. Financing activities in fiscal 2003 provided cash of $5,891,000 from borrowings under the credit facility. Dividends The Company paid $3.0 million in dividends in fiscal 2005. On August 17, 2004, the Board of Directors declared a special dividend of $0.12 per share and a quarterly dividend of $0.03 per share, which was paid on September 14, 2004, to stockholders of record at the close of business on August 31, 2004. On November 16, 2004, the Board of Directors declared a quarterly dividend of $0.03 per share, which was paid on December 14, 2004, to stockholders of record at the close of business on November 30, 2004. On March 15, 2005, the Board of Directors declared a quarterly dividend of $0.05 per share, a 67% increase from the third quarter quarterly dividend, to be paid on April 12, 2005, to stockholders of record at the close of business on March 29, 2005. The Company will pay quarterly dividends in the future, subject to Board approval. Outlook For fiscal 2006, the Company currently expects to open approximately eight to ten new stores, relocate or remodel approximately 20 to 25 stores and close approximately two to four stores. Management estimates that capital expenditures for fiscal 2006 will be approximately $16.0 million and that such amounts will be used primarily for new store openings, renovations and improvements to existing stores, warehouse distribution purposes and investment in management information systems. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004, "Share-Based Payment.") SFAS No. 123R 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 including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R is effective at the beginning of the first annual period beginning after June 15, 2005 (as modified by the SEC on April 14, 2005). Under ABP 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 fiscal 2007, the Company will recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees. The impact of adopting this new accounting standard on the Company's financial position, results of operations or cash flows has not yet been determined. In November 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-13, "Applying the Conditions in Paragraph 42 of FASB No. 144 in Determining Whether to Report Discontinued Operations." EITF No. 03-13 addresses how an ongoing entity should evaluate whether the operations and cash flows of a disposed component have been or will be eliminated from the ongoing operations of the entity and the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. EITF No. 03-13 is effective with the fiscal year beginning January 30, 2005. The impact of adopting this new guidance on the Company's financial position, results of operations or cash flows has not yet been determined. FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities,"was issued in January 2003. This interpretation requires consolidation of variable interest entities ("VIE"), also formerly referred to as "special purpose entities," if certain conditions are met. The interpretation applied immediately to VIE's created after January 31, 2003 and to interests obtained in VIE's after January 31, 2003. Beginning after June 15, 2003, the interpretation applied also to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities-an interpretation of ARB 51" (revised December 2003) ("FIN 46R"), which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN 46R includes revised transition dates for public entities. The Company adopted the provisions of FIN 46R in the first quarter of fiscal 2005. The adoption of this interpretation did not have a material effect on the Company's financial position, results of operations or cash flows. RELATED PARTY ACTIVITIES As discussed in Note 6 of Notes to Consolidated Financial Statements, the Company conducts business with other entities in which certain officers, directors and principal stockholders of the Company have controlling ownership interests. The most significant related party transactions include inventory purchases from, and sales to, related parties. Related party inventory purchases were essentially flat in fiscal 2005 when compared to fiscal 2004. Related party sales transactions decreased in fiscal 2005 due to lower sales of book product. The Company leases certain office, retail and warehouse space from related parties for which the rents have remained relatively unchanged. Management believes the terms of these related party transactions are substantially equivalent to those available from unrelated parties. 11 BOOKS-A-MILLION 2005 Annual Report DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 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 operations; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon 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 obligation to update any such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events or developments. 12 BOOKS-A-MILLION 2005 Annual Report CONSOLIDATED BALANCE SHEETS
AS OF (Dollars In thousands, except per share amounts) 1/29/05 1/31/04 - ------------------------------------------------------------------------------------------------ --------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,559 $ 5,348 Accounts receivable, net of allowance for doubtful accounts of $581 and $545, respectively 6,543 7,271 Related party receivables 73 351 Inventories 210,270 211,591 Prepayments and other 6,911 5,890 Deferred income taxes 1,704 4,450 --------- ---------- Total Current Assets 242,060 234,901 --------- ---------- PROPERTY AND EQUIPMENT: Land 628 628 Buildings 6,439 6,130 Equipment 67,942 67,418 Furniture and fixtures 44,279 44,815 Leasehold improvements 71,323 70,777 Construction in process 5,353 193 --------- ---------- Gross Property and Equipment 195,964 189,961 Less accumulated depreciation and amortization 140,018 130,069 --------- ---------- Net Property and Equipment 55,946 59,892 --------- ---------- OTHER ASSETS: Goodwill 1,368 1,368 Other 1,438 237 --------- ---------- Total Other Assets 2,806 1,605 --------- ---------- TOTAL ASSETS $ 300,812 $ 296,398 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable: Trade $ 97,185 $ 87,984 Related party 9,591 8,777 Accrued expenses 38,360 30,191 Accrued income taxes 1,542 3,226 --------- ---------- Total Current Liabilities 146,678 130,178 --------- ---------- LONG-TERM DEBT 7,500 20,640 DEFERRED INCOME TAXES 1,415 1,957 OTHER LONG-TERM LIABILITIES 10,360 12,622 COMMITMENTS AND CONTINGENCIES 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 19,067,960 and 18,465,387 shares issued at January 29, 2005 and January 31, 2004, respectively 191 185 Additional paid-in capital 74,505 71,799 Treasury stock at cost (2,792,869 shares at January 29, 2005 and 2,010,050 shares at January (11,630) (5,271) 31, 2004, respectively) Deferred compensation (481) (284) Accumulated other comprehensive loss, net of tax (195) (707) Retained earnings 72,469 65,279 --------- ---------- Total Stockholders' Equity 134,859 131,001 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 300,812 $ 296,398 ========= ==========
The accompanying notes are an integral part of these consolidated statements. 13 BOOKS-A-MILLION 2005 Annual Report CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED --------------------------------------- (In thousands, except per share data) 1/29/05 1/31/04 2/1/03 - ------------------------------------------------------------------------------------ ----------- ----------- ---------- 52 WEEKS 52 weeks 52 weeks Net sales $ 475,226 $ 458,290 $ 436,348 Cost of products sold, including warehouse distribution and store occupancy costs(1) 339,851 330,909 317,020 ----------- ----------- ---------- GROSS PROFIT 135,375 127,381 119,328 Operating, selling and administrative expenses 99,399 94,155 91,764 Depreciation and amortization 17,792 18,068 18,230 ----------- ----------- ---------- OPERATING PROFIT 18,184 15,158 9,334 Interest expense, net 1,874 2,909 4,171 ----------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 16,310 12,249 5,163 Provision for income taxes 6,035 4,656 1,962 ----------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 10,275 7,593 3,201 Discontinued operations: Loss from discontinued operations (including impairment charge) (121) (754) (1,044) Income tax benefit 45 287 397 ----------- ----------- ---------- Loss from discontinued operations (76) (467) (647) ----------- ----------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 10,199 7,126 2,554 Cumulative effect of change in accounting principle, net of deferred income tax benefit of $736 -- -- (1,201) ----------- ----------- ---------- NET INCOME $ 10,199 $ 7,126 $ 1,353 =========== =========== ========== Net income per common share: BASIC Income from continuing operations before cumulative effect of change in accounting principle $ 0.62 $ 0.47 $ 0.20 Loss from discontinued operations -- (0.03) (0.04) Income before cumulative effect of change in accounting principle 0.62 0.44 0.16 ----------- ----------- ---------- Cumulative effect of change in accounting principle -- -- (0.08) Net income per share $ 0.62 $ 0.44 $ 0.08 =========== =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,453 16,279 16,190 =========== =========== ========== DILUTED Income from continuing operations before cumulative effect of change in accounting principle $ 0.59 $ 0.45 $ 0.19 Loss from discontinued operations -- (0.03) (0.04) ----------- ----------- ---------- Income before cumulative effect of change in accounting principle 0.59 0.42 0.15 Cumulative effect of change in accounting principle -- -- (0.07) ----------- ----------- ---------- Net income per share $ 0.59 $ 0.42 $ 0.08 =========== =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 17,178 16,789 16,566 =========== =========== ========== Dividends per share - declared $ 0.23 -- -- =========== =========== ==========
(1) Inventory purchases from related parties were $30,059, $30,349 and $30,193, respectively, for the periods presented above. The accompanying notes are an integral part of these consolidated statements. 14 BOOKS-A-MILLION 2005 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED UNVESTED OTHER COMMON STOCK ADDITIONAL TREASURY STOCK RESTRICTED STOCK COMPREHENSIVE TOTAL --------------- PAID-IN -------------------------------- RETAINED INCOME STOCKHOLDERS' (In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT SHARES AMOUNT EARNINGS (LOSS) EQUITY - ----------------------------- ------ ------- ---------- ------ -------- ------ ------ -------- ------------- ------------- BALANCE, FEBRUARY 2, 2002 18,139 $ 181 $ 70,719 2,010 $ (5,271) $ 56,800 $ (1,217) $ 121,212 Net income 1,353 1,353 Unrealized loss on accounting for derivative instruments (2) (2) ------------- Subtotal comprehensive income 1,351 ------------- Issuance of stock for employee stock purchase plan 47 1 85 86 Exercise of stock options 26 39 39 Tax benefit from exercise of stock options 6 6 ------ ------- ---------- ------ -------- ------ ------ -------- ------------- ------------- BALANCE, FEBRUARY 1, 2003 18,212 $ 182 $ 70,849 2,010 $ (5,271) $ 58,153 (1,219) $ 122,694 ====== ======= ========== ====== ======== ====== ====== ======== ============= ============= Net income 7,126 7,126 Unrealized gain on accounting for derivative instruments, net of tax provision of $139 228 228 Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $174 284 284 ------------- Subtotal comprehensive income 7,638 ------------- Issuance of restricted stock 34 284 (284) -- Issuance of stock for employee stock purchase plan 42 83 83 Exercise of stock options 177 3 442 445 Tax benefit from exercise of stock options 141 141 ------ ------- ---------- ------ -------- ------ ------ -------- ------------- ------------- BALANCE, JANUARY 31, 2004 18,465 $ 185 $ 71,799 2,010 $ (5,271) (284) $ 65,279 (707) $ 131,001 ====== ======= ========== ====== ======== ====== ====== ======== ============= ============= Net income 10,199 10,199 Unrealized gain on accounting for derivative instruments, net of tax provision of $285 485 485 Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $16 27 27 ------------- Subtotal comprehensive income 10,711 ------------- Purchase of treasury stock 783 (6,359) (6,359) Dividends paid (3,009) (3,009) Issuance of restricted stock 48 1 363 (364) -- Amortization of deferred compensation related to restricted stock 167 167 Issuance of stock for employee stock purchase plan 22 46 46 Exercise of stock options 533 5 1,354 1,359 Tax benefit from exercise of stock options 943 943 ------ ------- ---------- ------ -------- ------ ------ -------- ------------- ------------- BALANCE, JANUARY 29, 2005 19,068 $ 191 $ 74,505 2,793 $(11,630) $ (481) $ 72,469 $ (195) $ 134,859 ====== ======= ========== ====== ======== ====== ====== ======== ============= =============
The accompanying notes are an integral part of these consolidated statements. 15 BOOKS-A-MILLION 2005 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------ (In thousands) 1/29/05 1/31/04 2/1/03 - ----------------------------------------------------------------------------------- --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,199 $ 7,126 $ 1,353 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax - - 1,201 Depreciation and amortization 17,843 18,325 18,584 Loss on impairment of assets 356 1,211 382 Loss on sale of property (29) 73 136 Deferred income tax provision 2,352 1,934 104 Tax benefit of exercise of stock options 943 141 6 Reclassification of unrealized loss from de-designation of cash flow hedge 27 284 - Deferred compensation amortization 167 - - (Increase) decrease in assets: Accounts receivable 728 528 241 Related party receivables 278 86 530 Inventories 1,321 12,428 (15,103) Prepayments and other (1,021) (510) 59 Noncurrent assets (excluding amortization) (533) - - Increase (decrease) in liabilities: Accounts payable 9,201 (11,601) 2,062 Related party payables 814 (294) 3,410 Accrued income taxes (1,832) 803 (282) Accrued expenses 6,379 4,144 967 --------- --------- -------- Total adjustments 36,994 27,552 12,297 --------- --------- -------- Net cash provided by operating activities 47,193 34,678 13,650 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (14,923) (10,402) (19,836) Proceeds from sale of property and equipment 44 39 60 --------- --------- -------- Net cash used in investing activities (14,879) (10,363) (19,776) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facilities 171,400 192,490 203,378 Repayments under credit facilities (184,540) (216,790) (197,283) Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan 1,405 528 125 Purchase of treasury stock (6,359) - - Payment of dividends (3,009) - - Repayments of other debt - (172) (329) --------- --------- -------- Net cash provided by (used in) financing activities (21,103) (23,944) 5,891 --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,211 371 (235) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,348 4,977 5,212 --------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,559 $ 5,348 $ 4,977 ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,036 $ 3,133 $ 4,084 ========= ========= ======== Income taxes, net of refunds $ 1,650 $ 1,694 $ 1,388 ========= ========= ========
The accompanying notes are an integral part of these consolidated statements. 16 BOOKS-A-MILLION 2005 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Books-A-Million, Inc. and its subsidiaries (the "Company") are principally engaged in the sale of books, magazines and related items through a chain of retail bookstores. The Company presently operates 206 bookstores in 18 states and the District of Columbia, which are predominantly located in the southeastern United States. The Company also operates a retail Internet website. The Company presently consists of Books-A-Million, Inc. and its two wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale") and American Internet Service, Inc ("AIS"). All inter-company balances and transactions have been eliminated in consolidation. For a discussion of the Company business segments, see Note 8. Fiscal Year The Company operates on a 52-53 week year, with the fiscal year ending on the Saturday closest to January 31. Fiscal years 2005, 2004 and 2003 were all 52-week periods. Use of Estimates in the Preparation of Financial Statements In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company believes that the likelihood is remote that materially different amounts will be reported related to actual results for the estimates and judgments described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold and the customer takes delivery. Returns are recognized at the time the merchandise is returned and processed. At each period end, an estimate of sales returns is recorded. Sales return reserves are based on historical returns as a percentage of sales activity. The historical returns percentage is applied to the sales for which returns are projected to be received after period end. The estimated returns percentage and return dollars have not materially changed in the last several years. The Company sells its Millionaire's Club Card, which entitles the customer to receive a ten percent discount on all purchases made during the twelve-month membership period, for a non-refundable fee. The Company recognizes this revenue over the twelve-month membership period based upon historical customer usage patterns. Related deferred revenue is included in accrued expenses. Management recognizes web development and maintenance revenue at the time maintenance is provided or non-returnable product/service (web development) is delivered. Revenue from web development and maintenance is less than .01% of the Company's total revenues. Vendor Allowances The Company receives allowances from its vendors from a variety of programs and arrangements, including placement and co-operative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in costs of goods sold upon the sale of the related inventory. The charge for the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.07 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. Inventories Inventories are valued at the lower of cost or market, using the retail method. Market is determined based on the lower of replacement cost or estimated realizable value. Using the retail method, store and warehouse inventories are valued by applying a calculated cost to retail ratio to the retail value of inventories. Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change was preferable in that it achieves a more appropriate matching of revenues and expenses. The impact of this accounting change was to increase "Costs of Products Sold" in the consolidated statements of operations by $0.4 million and $0.7 million for the fiscal years ended January 29, 2005 and January 31, 2004, respectively. This resulted in an after-tax decrease to net income of $0.3 million or $0.01 per diluted share for fiscal 2005 and an after-tax decrease to net income of $0.4 million or $0.02 per diluted share for fiscal 2004. The cumulative effect of a change in accounting principle from the FIFO method to LIFO method is not determinable. Accordingly, such change has been accounted for 17 BOOKS-A-MILLION 2005 Annual Report prospectively. In addition, pro forma amounts retroactively applying the change cannot be reasonably estimated and have not been disclosed. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $1.1 million as of January 29, 2005 and $0.7 million as of January 31, 2004, whereas the fiscal 2005 and fiscal 2004 inventory before LIFO, at FIFO value is $211.3 million and $212.3 million, respectively. The estimated replacement cost of inventory is the current FIFO value of $211.3 million. The LIFO value did not include any layer liquidation in fiscal 2005 or fiscal 2004. Physical inventory counts are taken throughout the course of the fiscal period and reconciled to the Company's records. Accruals for inventory shortages are estimated based upon historical shortage results. Inventories were:
FISCAL YEAR ENDED -------------------------- JANUARY 29, January 31, (In thousands) 2005 2004 - --------------------- ----------- ----------- Inventories (at FIFO) 211,375 212,251 LIFO reserve (1,105) (660) ------- ------- Net inventories 210,270 211,591 ======= =======
Property and Equipment Property and equipment are recorded at cost. Depreciation on equipment and furniture and fixtures is provided on the straight-line method over the estimated service lives, which range from three to seven years. Depreciation of buildings and amortization of leasehold improvements, including remodels, is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from 5 to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs, which extend the useful life of an asset, are capitalized to property accounts and depreciated over the asset's expected remaining life. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income. Impairment of Long-Lived Assets The Company reviews property and equipment and amortizable intangibles when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Circumstances that are considered in determining impairment are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future cash flows, indications that an asset no longer has an economically useful life, or other factors that would indicate a store cannot be profitable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows at the lowest level of independent cash flows, which is generally at the individual store level. Future events could cause the Company to conclude that impairment indicators exist and those long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. The Company's long-lived assets are principally retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores projected undiscounted cash flows. If impairment is indicated, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 2005, 2004 and 2003, impairment losses of $342,000, $983,000 and $241,000, respectively, were recorded in selling, general and administrative costs (also see Note 7 for impairment losses included in discontinued operations). For all years presented, the impairment losses related to the retail trade business segment. Deferred Rent The Company recognizes rent expense by the straight-line method over the lease term, including lease renewal option periods that can be reasonably assured at the inception of the lease. The lease term commences on the date when the Company takes possession and has the right to control use of the leased premises. Also, funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and are amortized over the lease term as a reduction of rent expense. 18 BOOKS-A-MILLION 2005 Annual Report Loss from Discontinued Operations The Company periodically closes under-performing stores. The Company believes that a store is a component under Statement of Financial Accounting Standard ("SFAS") No. 144. Therefore, each store closure would result in the reporting of a discontinued operation unless the operations and cash flows from the closed store could be absorbed in some part by surrounding Company stores(s) within the same market area. Management evaluates certain factors in determining whether a closed store's operations could be absorbed by surrounding store(s); the primary factor considered is the distance to the next closest Books-A-Million store. When a closed store results in a discontinued operation, the results of operations of the closed store include store closing costs and any related asset impairments. See Note 7 for discontinued operations disclosures. Store Opening Costs Non-capital expenditures incurred in preparation for opening new retail stores are expensed as incurred. Store Closing Costs The Company continually evaluates the profitability of its stores. When the Company closes or relocates a store, the Company incurs unrecoverable costs, including net book value of abandoned fixtures and leasehold improvements, lease termination payments, costs to transfer inventory and usable fixtures and other costs of vacating the leased location. Such costs are primarily expensed as incurred and are included in selling, general and administrative costs. During fiscal 2005, 2004 and 2003, the Company recognized store closing costs of $55,000, $219,000 and $22,000, respectively. Advertising Costs The costs of advertising are expensed as incurred. Advertising costs, net of applicable vendor reimbursements, are charged to operating, selling and administrative expenses, and totaled $3,207,000, $2,995,000 and $4,204,000 for fiscal years 2005, 2004 and 2003, respectively. Insurance Accruals The Company is subject to large deductibles under its workers' compensation and health insurance policies. Amounts are accrued currently for the estimated cost of claims incurred, both reported and unreported. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Receivables Receivables represent customer, landlord and other receivables due within one year and are net of any allowance for doubtful accounts. Net receivables were $6,616,000 and $7,622,000 for January 29, 2005 and January 31, 2004, respectively. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. Stockholders' Equity Basic net income per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution, using the treasury stock method, that could occur if stock options granted to employees are exercised and 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 year. A reconciliation of the weighted average shares for basic and diluted EPS is as follows:
FISCAL YEAR ENDED ------------------------------ (In thousands) 1/29/05 1/31/04 2/1/03 - ------------------------------------------------- --------- --------- -------- Weighted average shares outstanding: Basic 16,453 16,279 16,190 Dilutive effect of stock options outstanding 725 510 376 ------ ------ ------ Diluted 17,178 16,789 16,566 ====== ====== ======
Weighted options outstanding of 157,000, 801,000 and 1,577,000 for the years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively, were not included in the table above as they were anti-dilutive in those periods. 19 BOOKS-A-MILLION 2005 Annual Report In fiscal 2000, the Board of Directors authorized a common stock repurchase program that approved spending up to $6.0 million to repurchase Company outstanding shares. At January 31, 2003 and February 1, 2002, the Company had repurchased 2,010,000 shares for a cost of $5,271,000. Those shares are held in treasury. This repurchase program was discontinued in March 2004. In March 2004, the Board of Directors authorized a new common stock repurchase program for up to an additional 1.6 million shares, or 10% of the outstanding stock. At January 29, 2005 the Company had repurchased 783,000 shares for a cost of $6,359,000. These shares are held in treasury as well. Disclosure of Fair Value of Financial Instruments Based upon the Company's variable rate debt and the short-term nature of its other financial instruments, the estimated fair values of the Company's financial instruments recognized on the balance sheet at January 29, 2005 and January 31, 2004 approximate their carrying values at those dates. Stock-Based Compensation At January 29, 2005 and January 31, 2004, the Company had one stock option plan with outstanding options that is described more fully in Note 5. The Company accounts for the plan under the recognition and measurement principles of Accounting Pronouncements Bulletin (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 to stock-based employee compensation:
FISCAL YEAR ENDED ----------------------------------- (In thousands, except per share amounts) 1/29/05 1/31/04 2/1/03 - ------------------------------------------------------------------------ ------- ------- ------ Net income, as reported $ 10,199 $ 7,126 $1,353 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects 1,139 1,346 1,299 Pro forma net income $ 9,060 $ 5,780 $ 54 Net income per common share: Basic - as reported $ 0.62 $ 0.44 $ 0.08 Basic - pro forma $ 0.55 $ 0.36 - Diluted - as reported $ 0.59 $ 0.42 $ 0.08 Diluted - pro forma $ 0.53 $ 0.34 -
The fair value of the options granted under the Company's stock option plan during fiscal 2005, 2004 and 2003 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, 1.06 and 1.01, respectively; risk free interest rates of 3.45% to 4.31%, 3.87% to 4.90% and 3.63% to 5.10%, respectively; and expected lives of six or ten years. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities," and SFAS No.149, "Amendment of SFAS No. 133 on Derivatives and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The adoption of hedge accounting provided for in these statements, on February 4, 2001, resulted in a cumulative after-tax increase to other comprehensive loss, pertaining to years prior to fiscal 2002, of $465,000. At January 29, 2005 and January 31, 2004, liabilities related to derivatives were classified as other long-term liabilities of $543,000 and $1,507,000, respectively. Comprehensive Income (Loss) Comprehensive income (loss) is net income or loss, plus certain other items that are recorded directly to stockholders' equity. The only such items currently applicable to the Company are the unrealized gains (losses) on the derivative instruments explained in Note 3. 20 BOOKS-A-MILLION 2005 Annual Report Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004, "Share-Based Payment.") SFAS No. 123R 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 including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R is effective at the beginning of the first annual period beginning after June 15, 2005 (as modified by the SEC on April 14, 2005). Under ABP 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 fiscal 2007, the Company will recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees. The impact of adopting this new accounting standard on the Company's financial position, results of operations or cash flows has not yet been determined. In November 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-13, "Applying the Conditions in Paragraph 42 of FASB No. 144 in Determining Whether to Report Discontinued Operations." EITF No. 03-13 addresses how an ongoing entity should evaluate whether the operations and cash flows of a disposed component have been or will be eliminated from the ongoing operations of the entity and the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. EITF No. 03-13 is effective with the fiscal year beginning January 30, 2005. The impact of adopting this new guidance on the Company's financial position, results of operations or cash flows has not yet been determined. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46") was issued in January 2003. This interpretation requires consolidation of variable interest entities ("VIE"), also formerly referred to as "special purpose entities," if certain conditions are met. The interpretation applied immediately to VIE's created after January 31, 2003, and to interests obtained in VIE's after January 31, 2003. Beginning after June 15, 2003, the interpretation applied also to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB 51," (revised December 2003) ("FIN 46R"), which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN 46R includes revised transition dates for public entities. The Company adopted the provisions of FIN 46R in the first quarter of fiscal 2005. The adoption of this interpretation did not have a material effect on the Company's financial position, results of operations or cash flows. Prior Year Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 2. INCOME TAXES A summary of the components of the income tax provision is as follows (in thousands):
FISCAL YEAR ENDED -------------------------------- 1/29/05 1/31/04 2/1/03 ------- ------- ------- Current: Federal $ 4,000 $ 2,916 $ 1,566 State 102 25 32 ------- ------- ------- $ 4,102 $ 2,941 $ 1,598 ------- ------- ------- Deferred: Federal $ 1,681 $ 1,558 $ (35) State 207 (131) 2 ------- ------- ------- 1,888 1,427 (33) ------- ------- ------- Provision for income taxes $ 5,990 $ 4,368 $ 1,565 ======= ======= =======
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
FISCAL YEAR ENDED --------------------------- 1/29/05 1/31/04 2/1/03 ------- ------- ------ Federal statutory income tax rate 35.0% 34.0% 34.0% State income tax provision 0.9% 0.2% 1.0% Nondeductible meals and entertainment expense 0.5% 0.6% 2.7% Other 0.6% 3.2% 0.3% ---- ---- ---- Effective income tax rate 37.0% 38.0% 38.0% ==== ==== ====
21 BOOKS-A-MILLION 2005 Annual Report Temporary differences (in thousands) which created deferred tax assets (liabilities) at January 29, 2005 and January 31, 2004, are as follows:
AS OF 1/29/05 As of 1/31/04 ---------------------- --------------------- CURRENT NONCURRENT Current Noncurrent ------- ---------- ------- ---------- Depreciation $ - $(5,429) $ - $(6,589) Accruals 1,422 3,300 3,174 3,916 Interest rate swap 123 - 434 - Inventory (85) - 639 - State net operating loss carryforwards - 903 - 831 Other 244 (189) 203 (115) ------- ------- ------- ------- Deferred tax asset (liability) $ 1,704 $(1,415) $ 4,450 $(1,957) ======= ======= ======= =======
At January 29, 2005, the Company had state net operating loss carryforwards of approximately $13,686,000 that expire beginning in 2006 through 2024. No valuation allowance for net deferred income tax assets is deemed necessary, as the realization of recorded deferred tax assets is considered more likely than not. 3. DEBT AND LINES OF CREDIT In fiscal 2005, the Company negotiated an extension of its current credit facility for two years to July 2007. The facility allows for unsecured borrowings up to $100 million for which no principal payments are due until the facility expires in July 2007. Interest on borrowing is determined based upon applicable LIBOR rates and the Company's rate spread, which varies depending on the maintenance of certain covenants. The credit facility has certain financial and non-financial covenants. The most restrictive financial covenant is the maintenance of a minimum fixed charge coverage ratio. As of January 29, 2005 the Company had a zero balance and as of January 31, 2004, $13.1 million was outstanding under this credit facility. The maximum and average outstanding balances during fiscal 2005 were $34.4 million and $21.6 million, respectively. The Company is subject to interest rate fluctuations involving its credit facility. To manage this exposure, the Company is subject to interest rate swaps to fix the interest rate on variable debt. The Company entered into two separate $10.0 million swaps on July 24, 2002. Both expire in August 2005 and, prior to the payoff of the debt, effectively fix the interest rate on $20.0 million of variable debt at 5.13%. The counter parties to the interest rate swaps are two of the Company's primary banks. The Company believes the credit and liquidity risk of the counter parties failing to meet their obligation is remote as the Company settles its interest position with the banks on a quarterly basis. During fiscal 1996 and fiscal 1995, the Company acquired and constructed certain warehouse and distribution facilities with the proceeds of loans made pursuant to an industrial development revenue bond (the "Bond"), which are secured by a mortgage interest in these facilities. As of January 29, 2005 and January 31, 2004, there was $7.5 million of borrowings outstanding under these arrangements, which bear interest at variable rates. The net book value of the collateral property securing the Bond was $5,383,000 as of January 29, 2005. The Bond has a maturity date of December 1, 2019, with a purchase provision obligating the Company to repurchase the Bond on May 30, 2006, unless extended by the bondholder. Such an extension may be renewed annually by the bondholder, at the Company's request, to a date no more than five years from the renewal date. The Company maintains a $7.5 million interest rate swap that effectively fixes the interest rate on the Bond at 7.98%. The swap was entered into in May 1996 and has a term of ten years. The Company's hedges are designated as cash flow hedges because they are interest rate swaps that convert variable payments to fixed payments. Cash flow hedges protect against the variability in future cash outflows of current or forecasted debt and related interest expense. The changes in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss) or in earnings, depending on the type of hedging relationship. Over time, the amounts held in accumulated other comprehensive income (loss) will be reclassified to earnings if the hedge transaction becomes ineffective. The Company's interest rate swaps were reported as a liability classified in other long-term liabilities in the accompanying consolidating balance sheets at their fair value of $543,000 and $1.5 million as of January 29, 2005 and January 31, 2004, respectively. For the fiscal years ending January 29, 2005, January 31, 2004, and February 1, 2003, adjustments of $485,000, $228,000, and $(2,000) were recorded as unrealized gains (losses) in accumulated other comprehensive income (loss), after tax. During the fourth quarter of fiscal 2005, one interest rate swap no longer qualified for hedge accounting under SFAS No. 133. Therefore, the Company de-designated the hedge resulting in an expense of $27,000. Previously, in the fourth quarter of fiscal 2004, the other $10 million interest rate swap no longer qualified for hedge accounting under SFAS No. 133 and the Company de-designated that hedge resulting in an expense of $284,000. 22 BOOKS-A-MILLION 2005 Annual Report 4. LEASES The Company leases the premises for its retail bookstores under operating leases, which expire in various years through the year 2015. Many of these leases contain renewal options and require the Company to pay executory costs (such as property taxes, maintenance, and insurance). In addition to fixed minimum rentals, some of the Company's leases require contingent rentals based on a percentage of sales. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of January 29, 2005 are as follows (in thousands):
FUTURE MINIMUM FISCAL YEAR RENT - ------------- -------------- 2006 $ 27,521 2007 21,853 2008 18,133 2009 13,468 2010 8,461 Subsequent years 17,249 -------- Total $106,685 ========
Rental expense for all operating leases consisted of the following (in thousands):
FISCAL YEAR ENDED ------------------------------- 1/29/05 1/31/04 2/1/03 ------- ------- ------ Minimum rentals $28,332 $28,194 $27,982 Contingent rentals 466 684 552 ------- ------- ------- Total $28,798 $28,878 $28,534 ======= ======= =======
5. EMPLOYEE BENEFIT PLANS 401(k) Profit-Sharing Plan The Company and its subsidiaries maintain a 401(k) plan covering all employees who have completed 6 months of service and who are at least 21 years of age, and permit participants to contribute from 2% to 15% of compensation to the plan. Company matching and supplemental contributions are made at management's discretion. The expense under this plan was $675,000, $467,000 and $437,000 in fiscal 2005, 2004 and 2003, respectively. Stock Option Plan The Company maintains a stock option plan reserving 3,800,000 shares of the Company's common stock for grants to executive officers, directors, and key employees. Prior to January 9, 2001, all options granted to employees become exercisable in equal annual increments over a five-year period and expire on the sixth anniversary of the date of grant. On January 9, 2001, the Compensation Committee of the Board of Directors approved an amendment to the Stock Option Plan that allows all options granted on or after that date to vest in equal annual increments over a three-year period and expire on the tenth anniversary of the date of the grant. All stock options have exercise prices equal to the fair market value of the common stock on the date of grant. A summary of the status of the Company's stock option plan is as follows (shares in thousands):
FISCAL YEAR ENDED ---------------------------------------------------------------- JANUARY 29, 2005 January 31, 2004 February 1, 2003 ---------------- ---------------- ----------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 2,296 $ 5.22 2,576 $ 4.90 2,469 $ 5.30 Granted 35 8.64 266 6.45 386 2.41 Exercised (533) 2.54 (177) 2.51 (26) 1.74 Forfeited (292) 10.65 (369) 5.24 (253) 5.30 ----- --------- ----- -------- ------ -------- Outstanding at end of year 1,506 $ 5.19 2,296 $ 5.22 2,576 $ 4.90 ----- --------- ----- -------- ------ -------- Exercisable at end of year 949 $ 5.71 1,525 $ 5.52 1,468 $ 5.60 ----- --------- ----- -------- ------ -------- Weighted average fair value of options granted $ 8.64 $ 5.87 $ 2.20 ===== ========= ===== ======== ====== ========
During fiscal years 2005, 2004 and 2003, the Company recognized tax benefits related to the exercise of stock options in the amount of $943,000, $141,000 and $6,000, respectively. The tax benefits were credited to paid-in capital in the respective years. 23 BOOKS-A-MILLION 2005 Annual Report The following table summarizes information about stock options outstanding at January 29, 2005 (shares in thousands):
Options Outstanding Options Exercisable ------------------------------------------------ -------------------------------- Weighted Number Average Number Outstanding at Remaining Weighted Exercisable at Weighted Range of January 29, Contractual Average January 29, Average Exercise Price 2005 Life (Years) Exercise Price 2005 Exercise Price - -------------- ---- ------------ -------------- ---- -------------- $1.38 - $ 2.37 456 7.06 $ 2.07 246 $ 1.82 $2.39 - $ 7.69 869 5.12 $ 5.95 525 $ 6.29 $7.90 - $11.13 181 1.99 $ 9.37 178 $ 9.39 ----- --- Totals 1,506 5.33 $ 5.19 949 $ 5.71 ===== ==== ======== === ========
The Company also maintains separate option plans for its subsidiaries. A total of 40,000 shares of common stock are authorized under these plans and all 40,000 shares were available for issuance as of January 29, 2005. Employee Stock Purchase Plan The Company maintains an employee stock purchase plan under which 400,000 shares of the Company's common stock are reserved for purchase by employees at 85% of the fair market value of the common stock at the lower of the market value for the Company's stock as of the beginning of the fiscal year or the end of the fiscal year. Of the total reserved shares, 245,870 shares have been purchased as of January 29, 2005. Executive Incentive Plan The Company maintains an Executive Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for awards to certain executive officers of both cash and shares 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 vest based on the grantee's employment at the end of a three year restriction period which commences at the end of the performance period for which the awards were issued. 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. Awards granted under the Incentive Plan for the three year performance periods ended January 29, 2005 and January 31, 2004 totaled $364,000 and $284,000 respectively. No awards were issued under the Incentive Plan for the three year performance period ended February 1, 2003. 6. RELATED PARTY TRANSACTIONS Certain stockholders and directors (including certain officers) of the Company have controlling ownership interests in other entities with which the Company conducts business. Transactions between the Company and these various other entities ("related parties") are summarized in the following paragraphs: The Company purchases a substantial portion of its magazines as well as certain of their seasonal music and newspapers from Anderson Media Corporation ("Anderson Media"), an affiliate through common ownership. During fiscal 2005, 2004 and 2003, purchases of these items from Anderson Media totaled $27,341,000, $28,160,000 and $27,736,000, respectively. The Company purchases certain of its collectibles, gifts and books from Anderson Press, Inc. ("Anderson Press"), an affiliate through common ownership. During fiscal 2005, 2004 and 2003, such purchases from Anderson Press totaled $1,122,000, $853,000 and $1,153,000, 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 items in fiscal 2005, 2004, and 2003 were $371,000, $265,000 and $460,000, respectively. The Company purchases certain magazine subscriptions from Magazines.com, an affiliate through common ownership. During fiscal 2005, 2004, and 2003, purchases of these items were $78,000, $89,000 and $59,000, respectively. The Company purchases content for publication from Publication Marketing Corporation, an affiliate through common ownership. During fiscal 2005, 2004, and 2003, purchases of these items were $72,000, $72,000 and $56,000, 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 $1,075,000, $910,000 and $729,000 for fiscal 2005, 2004, and 2003, respectively. These amounts paid to Anco Far East primarily included the actual cost of the product, as well as duty, freight, and fees for sourcing and consolidation services. All other 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 $75,000, $77,000 and $73,000, respectively. The Company sold books to Anderson Media in the amounts of $115,000, $383,000 and $58,000 in fiscal 2005, 2004 and 2003, respectively. During fiscal 2005, 2004 and 2003, the Company provided $296,000, $226,000 and $131,000, respectively, of internet services to Magazines.com. The Company provided internet services to American Promotional Events of $68,000, $50,000 and $55,000 in fiscal 2005, 2004 and 2003, respectively. 24 BOOKS-A-MILLION 2005 Annual Report 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 lease extends to January 31, 2006. During fiscal 2005, 2004 and 2003, the Company paid rent of $137,000 in each year to the trust under this lease. Anderson & Anderson LLC ("A&A"), which is an affiliate through common ownership, also leases three buildings to the Company. During fiscal 2005, 2004 and 2003, the Company paid A&A a total of $441,000, $446,000 and $455,000, respectively, in connection with such leases. Total minimum future rental payments under all four of these leases are $137,000 at January 29, 2005. 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 fiscal 2005, 2004 and 2003, the Company received $191,000, $191,000 and $161,000, respectively, in rent payments from Hibbett. The Company incurred expenses related to professional services from A&A and Charles C. Anderson, a former member of the Board of Directors, which amounted to $22,000 in fiscal 2005, $0 in fiscal 2004 and $144,000 in fiscal 2003. The Company shares ownership of a plane, which the Company uses in the operations of its business, with an affiliated company. The Company rents the plane to affiliated companies at rates that cover all the variable costs and a portion of the fixed costs. The total amounts received from affiliated companies for use of the plane in fiscal 2005, 2004 and 2003 were $110,000, $270,000 and $269,000, respectively. The Company also occasionally rents a plane from A&A as well. The amounts paid to A&A for plane rental were $92,000, $44,000 and $48,000 for fiscal 2005, 2004 and 2003, respectively. 7. LOSS FROM DISCONTINUED OPERATIONS Discontinued operations represent the fiscal 2005 closure of two retail stores in markets located in Florida and Mississippi and the fiscal 2004 closure of four retail stores in markets located in Georgia (two stores), Louisiana and North Carolina where the Company does not expect another of its existing stores to absorb the closed store customers. These stores had sales of $1,376,000, $4,326,000 and $6,312,000 and pretax operating losses of $121,000, $754,000 and $1,044,000 for fiscal 2005, 2004 and 2003, respectively. Included in the loss on discontinued operations are impairment losses of $14,000, $228,000 and $141,000 for fiscal 2005, 2004 and 2003, respectively. Also, included in the loss on discontinued operations are store closing costs of $50,000, $64,000, and $178,000 for fiscal 2005 2004 and 2003, respectively. 8. BUSINESS SEGMENTS The Company has two reportable segments: retail trade and electronic commerce trade. The retail trade segment is a strategic business segment that is engaged in the retail trade of mostly book merchandise and includes the Company's distribution center operations, which 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 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. Shipping income related to internet sales is included in net sales, and shipping expense is included in cost of sales.
FISCAL YEAR ENDED --------------------------------------- Segment information (in thousands) 1/29/05 1/31/04 2/1/03 - ------------------------------------------ ------- ------- ------ Net Sales Retail Trade $ 466,859 $ 452,131 $ 430,998 Electronic Commerce Trade 26,656 25,451 23,277 Intersegment Sales Elimination (18,289) (19,292) (17,927) --------- --------- --------- Net Sales $ 475,226 $ 458,290 $ 436,348 Operating Profit Retail Trade $ 17,000 $ 14,284 $ 8,836 Electronic Commerce Trade 909 332 (490) Intersegment Elimination of Certain Costs 275 542 988 --------- --------- --------- Total Operating Profit $ 18,184 $ 15,158 $ 9,334 ========= ========= ========= Assets Retail Trade $ 299,703 $ 295,437 Electronic Commerce Trade 1,372 1,527 Intersegment Sales Elimination (263) (566) --------- --------- Total Assets $ 300,812 $ 296,398 ========= =========
25 BOOKS-A-MILLION 2005 Annual Report 9. 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 or results of operations or cash flows of the Company. From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company's request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of 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 January 29, 2005, as such liabilities are considered de minimis. 10. UNUSUAL EVENTS The Company experienced a loss of sales resulting from temporary closings of approximately 35 stores for periods ranging from two to seven days, as well as significant property damage to three stores, due to the cumulative effects of Hurricanes Charley, Francis, and Ivan. The Company is insured for property damage and business interruption, but was liable for the deductible amounts under the insurance coverage. Management also decided not to reopen the store located in Stuart, Florida, see Note 7, of Notes to the Consolidated Financial Statements, Loss from Discontinued Operations. 11. CASH DIVIDEND On March 15, 2005, the Board of Directors declared a quarterly dividend of $0.05 per share to be paid on April 12, 2005, to stockholders of record at the close of business on March 29, 2005. The Company will pay quarterly dividends in the future, subject to Board approval. 12. GOODWILL In accordance with SFAS No. 142, the Company evaluates existing goodwill for impairment by applying the fair-value-based test on an annual basis. Management has determined that the current value of goodwill on the balance sheet ($1,368,000) is not impaired and has thus not recognized a loss relating to goodwill impairment. 26 BOOKS-A-MILLION 2005 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BOOKS-A-MILLION, INC. BIRMINGHAM, ALABAMA We have audited the accompanying consolidated balance sheets of Books-A-Million, Inc. and subsidiaries (the "Company") as of January 29, 2005 and January 31, 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 29, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Books-A-Million, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2005, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the Consolidated Financial Statements, effective February 1, 2002, the Company changed its method of accounting for vendor allowances and effective February 2, 2003, the Company changed its method of accounting for inventories. DELOITTE & TOUCHE LLP Birmingham, Alabama April 25, 2005 27 BOOKS-A-MILLION 2005 Annual Report SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
FISCAL YEAR ENDED JANUARY 29, 2005 ------------------------------------------------------------------ FIRST SECOND THIRD FOURTH TOTAL (In thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR - ---------------------------------------- ------- ------- ------- ------- ---- Net sales $ 108,024 $ 113,614 $ 104,190 $ 149,398 $ 475,226 Gross profit 30,209 31,045 27,846 46,275 135,375 Operating profit (loss) 2,493 2,084 (1,318) 14,925 18,184 Net income (loss) 1,228 989 (1,172) 9,154 10,199 Net income (loss) per share - basic 0.07 0.06 (0.07) 0.56 0.62 Net income (loss) per share - diluted (1) 0.07 0.06 (0.07) 0.54 0.59
Fiscal Year Ended January 31, 2004 ------------------------------------------------------------------- First Second Third Fourth Total (In thousands, except per share amounts) Quarter Quarter Quarter Quarter Year - ---------------------------------------- ------- ------- ------- ------- ---- Net sales $ 98,064 $ 112,654 $ 102,347 $ 145,225 $ 458,290 Gross profit 25,419 31,305 26,924 43,733 127,381 Operating profit (loss) (660) 3,246 (231) 12,803 15,158 Net income (loss) (1,052) 1,347 (776) 7,607 7,126 Net income (loss) per share - basic (0.06) 0.09 (0.05) 0.46 0.44 Net income (loss) per share - diluted (0.06) 0.09 (0.05) 0.44 0.42
(1) The sum of quarterly per share amounts are different from the annual per share amounts because of differences in the weighted average number of common and common equivalent shares used in the quarterly and annual computations. 28 BOOKS-A-MILLION 2005 Annual Report DIRECTORS AND CORPORATE OFFICERS BOARD OF DIRECTORS CORPORATE OFFICERS CLYDE B. ANDERSON CLYDE B. ANDERSON Executive Chairman of the Board Executive Chairman of the Board TERRY C. ANDERSON SANDRA B. COCHRAN Chief Executive Officer and President, President, Chief Executive Officer American Promotional Events, Inc. and Secretary TERRANCE G. FINLEY RONALD G. BRUNO Executive Vice President of President, Books-A-Million, Inc. and President, Bruno Capital Management Corporation American Internet Service, Inc. RICHARD S. WALLINGTON DR. J. BARRY MASON Chief Financial Officer Dean, Culverhouse College of Commerce The University of Alabama WILLIAM H. ROGERS, JR. Executive Vice President, SunTrust Banks, Inc. 29 BOOKS-A-MILLION 2005 Annual Report CORPORATE INFORMATION CORPORATE OFFICE Books-A-Million, Inc. 402 Industrial Lane Birmingham, Alabama 35211 (205) 942-3737 TRANSFER AGENT Wells Fargo Shareowner Services (800) 468-9716 STOCKHOLDER INQUIRIES ADDRESS: 161 North Concord Exchange South St. Paul, Minnesota 55075 E-Mail address: stocktransfer@wellsfargo.com Wells Fargo Stock Transfer Website: www.wellsfargo.com/com/shareowner_services/index CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO: Shareowner Services Post Office Box 64854 St Paul, Minnesota 55164-0854 Fax: (651) 450-4033 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Birmingham, Alabama FORM 10-K AND INVESTOR CONTACT A copy of the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2005, as filed with the Securities and Exchange Commission, as well as key committee charters and code of conduct, are available without charge to stockholders upon written request. Such requests and other investor inquiries should be directed to Richard S. Wallington, the Company's Chief Financial Officer, or you can view those items at www.booksamillioninc.com. MARKET AND DIVIDEND INFORMATION COMMON STOCK The Common Stock of Books-A-Million, Inc., is traded in the Nasdaq National Market under the symbol BAMM. The chart below sets forth the high and low stock prices for each quarter of the fiscal years ending January 29, 2005 and January 31, 2004.
DIVIDENDS QUARTER ENDED HIGH LOW DECLARED - ------------- ---- --- -------- JANUARY 2005 $ 10.29 $ 8.02 $ 0.05 OCTOBER 2004 8.52 6.18 0.03 JULY 2004 7.74 5.15 0.15 APRIL 2004 6.49 5.11 0.00 January 2004 7.02 4.41 0.00 October 2003 5.00 2.80 0.00 July 2003 3.34 2.07 0.00 April 2003 2.45 2.05 0.00
The closing price on April 4, 2005, was $9.10. As of that date Books-A-Million, Inc., had approximately 7,500 stockholders based on the number of individual participants represented by security position listings. Cash dividends were declared and paid for the first time starting with the second quarter of fiscal 2005. ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held on June 1, 2005, at 10:00 a.m. central time, at The Harbert Center, 2019 Fourth Avenue North, Birmingham, Alabama 35203. Stockholders of record as of March 29, 2005, are invited to attend this meeting. 30 BOOKS-A-MILLION 402 INDUSTRIAL LANE BIRMINGHAM, ALABAMA 35211 WWW.BOOKSAMILLIONINC.COM EX-23 4 g94771exv23.txt EX-23 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23 Consent of Deloitte & Touche LLP, independent registered public accounting firm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 33-71812 and 33-86980 of Books-A-Million, Inc. (the "Company") on Form S-8 of our report dated April 25, 2005 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of new accounting principles as described in Note 1 to the consolidated financial statements), incorporated by reference in this Annual Report on Form 10-K for the year ended January 29, 2005, and of our report on the financial statement schedule, dated April 25, 2005, appearing in this Annual Report on Form 10-K for the year ended January 29, 2005. DELOITTE & TOUCHE LLP Birmingham, Alabama April 28, 2005 EX-31.1 5 g94771exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE EXECUTIVE CHAIRMAN OF THE BOARD Exhibit 31.1 CERTIFICATIONS I, Clyde B. Anderson, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this 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 periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Clyde B. Anderson ----------------------------- Clyde B. Anderson Executive Chairman of the Board EX-31.2 6 g94771exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO Exhibit 31.2 CERTIFICATIONS I, Richard S. Wallington, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this 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 periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Richard S. Wallington ----------------------------- Richard S. Wallington Chief Financial Officer EX-31.3 7 g94771exv31w3.txt EX-31.3 SECTION 302 CERTIFICATION OF THE PRESIDENT AND CEO Exhibit 31.3 CERTIFICATIONS I, Sandra B. Cochran, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this 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 periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Sandra B. Cochran ------------------------------ Sandra B. Cochran President and Chief Executive Officer EX-32.1 8 g94771exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE EXECUTIVE CHAIRMAN OF THE BOARD Exhibit 32.1 CERTIFICATION OF EXECUTIVE CHAIRMAN OF THE BOARD Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 29, 2005 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 28, 2005 /s/ Clyde B. Anderson ----------------------------- Clyde B. Anderson Executive Chairman of the Board EX-32.2 9 g94771exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 29, 2005 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 28, 2005 /s/ Richard S. Wallington ------------------------------- Richard S. Wallington Chief Financial Officer EX-32.3 10 g94771exv32w3.txt EX-32.3 SECTION 906 CERTIFICATION OF THE PRESIDENT AND CEO Exhibit 32.3 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 29, 2005 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 28, 2005 /s/ Sandra B. Cochran ------------------------------ Sandra B. Cochran President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----