-----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, I7kEVijTwIz84CSTlrWJJRECiag5nsDzttmj7n1n4iVsyWOjhAcn2ZEKfilqfYM3 USDZXhZmbok3gK7j4jW+cQ== 0000950144-06-003487.txt : 20060413 0000950144-06-003487.hdr.sgml : 20060413 20060413164554 ACCESSION NUMBER: 0000950144-06-003487 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060128 FILED AS OF DATE: 20060413 DATE AS OF CHANGE: 20060413 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: 06758940 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 g00783e10vk.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 28, 2006 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] 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 29, 2005 (based on the closing sale price as reported on the NASDAQ National Market on such date), was $88,405,399. The number of shares outstanding of the Registrant's Common Stock as of April 10, 2006 was 16,569,577. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended January 28, 2006 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 8, 2006 are incorporated by reference into Part III of this report. ================================================================================ BOOKS-A-MILLION, INC. AND SUBSIDIARIES 10-K INDEX
PART I Item I. Business 4 Item IA. Risk Factors 7 Item IB. Unresolved Staff Comments 10 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters To A Vote of Security Holders 11 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 12 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 12 Item 9A. Controls and Procedures 13 PART III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management 17 Item 13. Certain Relationships and Related Transactions 17 Item 14. Principal Accountant Fees and Services 17 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K 17
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 Books-A-Million, Inc. 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, stockholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 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", "Books-A-Million" and "Joe Muggs Newsstands". These stores range in size from 2,000 to 7,000 square feet and are located primarily in enclosed malls. All store formats generally 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. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us, at http: //www.sec.gov. 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 28, 2006, 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 173 superstores as of January 28, 2006. Our superstores emphasize selection, value and customer service. Each of our superstores offers an extensive selection of best sellers and other hardcover and paperback books, magazines, local newspapers and gifts and dedicates 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 generally feature a wide selection of books, magazines and gift items. We had 32 traditional stores as of January 28, 2006. MERCHANDISING We employ several value-oriented merchandising strategies. Books on our best-seller list, which is developed 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. They provide all web development and maintenance for all of our internet sites and networking initiatives. 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 1,500 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 12 and 13 of the Proxy). No one vendor accounted for over 11.0% of our overall merchandise purchases in the fiscal year ended January 28, 2006. 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. Our largest competitors are Barnes and Nobles, Inc. and Borders Group, Inc. 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 2,900 full-time associates and 2,100 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 very good. ITEM 1A. RISK FACTORS. The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected. Intense competition from traditional retail sources and the Internet may adversely affect our business. The retail book business is highly competitive and competition within the industry is fragmented. We face direct competition from other superstores, such as Barnes & Noble and Borders, and we also face competition from mass merchandisers, such as Wal-Mart and Costco, and online retailers such as Amazon, Barnes and Nobles, Borders and Wal-Mart. Our bookstores also compete with specialty retail stores that offer books in particular subject areas, independent single store operators, variety discounters, drug stores, warehouse clubs, mail order clubs and other retailers offering books. In addition, our bookstores may face additional competition from the expanding market for electronic books and from other categories of retailers entering the retail book market. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition, and significantly greater financial, marketing, and other resources than we have. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. Competitors in both the retail and electronic commerce trade also may be able to devote more resources to technology development, fulfillment, and marketing than we are able to. Competition in electronic commerce trade may intensify. The online market is rapidly evolving and intensely competitive, with few barriers to entry. Companies in the retail and electronic commerce trade may enter into business combinations or alliances that strengthen their competitive positions. This increased competition may reduce our sales, operating profits, or both. Our business is highly seasonal. Our business is highly seasonal with sales and earnings generally highest in the fourth quarter and lowest in the first quarter. Our results of operations depend significantly upon the holiday selling season in the fourth quarter. During fiscal 2006, approximately 32% of our sales and approximately 81% of our operating income were generated in the fourth quarter. If we do not stock popular products in sufficient amounts or fail to have sources to timely restock popular products during the busy holiday period such that we fail to meet customer demand, it could significantly affect our revenue and earnings and our future growth. In addition, if we experience less than satisfactory net sales during the fourth quarter, we may not be able to sufficiently compensate for any losses which may be incurred during the first three quarters of the year. Our business is dependent upon consumer spending patterns. Sales of books may depend upon discretionary consumer spending, which may be affected by general economic conditions, consumer confidence and other factors beyond our control. Weather, among other things, can affect comparable store sales, because inclement weather can require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, customers may decide to avoid going to stores in bad weather. In addition, sales are dependant in part on 6 the strength of new release titles offered by vendors. A decline in consumer spending on books could have a material adverse effect on our financial condition and results of operations. Our business may be affected by our relationships with suppliers and delays in product shipments. We rely heavily upon our suppliers to provide us with new products as quickly as possible. The loss of any of our suppliers could reduce our product offerings, which could cause us to be at a competitive disadvantage. In addition, we depend upon the business terms we can obtain from suppliers, including competitive prices, unsold product return policies, new release title quantity allocations, advertising and market development allowances, freight charges and payment terms. Our failure to maintain favorable business terms with our suppliers could adversely affect our ability to offer products to consumers at competitive prices. To the extent that our suppliers rely on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of import restrictions in the form of tariffs or quotas or both and currency fluctuations, could hurt our business. Our vendor relationships subject us to a number of risks, and we heavily rely on one supplier for magazine purchases that is a related party. Although we purchase merchandise from over 1,500 vendors and no one vendor accounted for more than 11% of our inventory purchases in fiscal 2006, we have significant vendors that are important to us. If our current vendors were to stop selling merchandise to us on acceptable terms, we may not be able to acquire merchandise from other suppliers in a timely and efficient manner and on acceptable terms. We have entered into and may, in the future, enter into various transactions and agreements with entities wholly or partially owned by certain stockholders and directors (including certain officers) of the Company. We believe that the transactions and agreements that we have entered into are on terms that are at least as favorable to us as could reasonably have been obtained at such time from third parties. If we do not successfully optimize inventory and manage our distribution, our business could be harmed If we do not successfully optimize our inventory and operate our distribution centers, it could significantly limit our ability to meet customer demand. Because it is difficult to predict demand, we may not manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing, fulfillment, and distribution capacity. Additionally, if we open new stores in new geographic areas where we don't currently have a presence, we may not be able to provide those stores with efficient distribution and fulfillment services which may impact our stores in those markets. We may be unable to adequately staff our fulfillment and customer service centers to meet customer demand. There can be no assurance that we will be able to operate our network effectively. We rely heavily on the American Wholesale warehouse distribution facilities for merchandise distribution functions and to maintain inventory stock for our retail stores. Our ability to distribute merchandise to our stores and maintain adequate inventory levels may be materially impacted by any material damage incurred at our warehouse facilities caused by inclement weather, fire, flood, power loss, earthquakes, acts of war or terrorism, acts of God and similar factors. We also rely heavily on American Wholesale's dedicated transportation fleet for deliveries of inventory. As a result, our 7 ability to receive inbound inventory efficiently may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God and similar factors. Any of the inventory risk factors set forth above may adversely affect our financial condition, operating results and cash flows. Failure to retain key personnel Our continued success depends to a significant extent upon the efforts and abilities of our senior management. The failure to retain our senior managers could have a material adverse effect on our business and our results of operations. We do not maintain "key man" life insurance on any of our senior managers. Failure to attract and retain qualified associates and other labor issues could adversely affect our financial performance. Our ability to continue to expand our operations depends on our ability to attract and retain a large and growing number of qualified associates. Our ability to meet our labor needs generally while controlling our associate wage and related labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to locate, attract and retain qualified personnel or if our costs of labor or related costs increase significantly, our financial performance could be affected adversely. We rely extensively on communication and computer systems to process transactions, summarize results and manage our business. Disruptions in these systems could harm our ability to run our business. Given the number of individual transactions we have each year, it is critical that we maintain uninterrupted operation of our computer and communications hardware and software systems. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as acts of God, fires, tornadoes, hurricanes, floods, earthquakes, power losses, telecommunications failure, acts of war or terrorism, physical or electronic break-ins, and similar events or disruptions, and usage errors by our employees. If our systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer operations may have a material adverse effect on our business or results of operations. Our electronic commerce trade faces business risks, which include: - - risks associated with a limited operating history; - - competition from other Internet-based companies and traditional retailers; - - risks associated with a failure to manage growth effectively; - - risks of the Internet as a medium for commerce including internet security risks; - - risks associated with the need to keep pace with rapid technological change; - - risks of system failure or inadequacy; and - - risks associated with the maintenance of domain names. If any of these risks materializes, it could have an adverse effect on our electronic commerce trade. Government regulation of the Internet and E-commerce is evolving and unfavorable changes could harm our business. We are subject to general business regulations and laws, as well as regulations and laws specifically governing the 8 Internet and e-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may harm our business. We could be liable for breaches of security on our website. A fundamental requirement for e-commerce is the secure storage and transmission of confidential information. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate such fraud or breaches may adversely affect our operating results. We are subject to a number of risks related to payments we accept. We accept payments by a variety of methods, including credit card, debit card, gift cards, direct debit from a customer's bank account, physical bank check and cash. For certain payment transactions, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. If one or more of these agreements are terminated and we are unable to replace them on similar terms, or at all, it could adversely affect our operating results. In addition, as we offer new payment options to our customers, we may be subject to additional regulations and compliance requirements and a greater risk of fraud. We may be unable to protect our intellectual property, which could harm our brand and reputation. To protect our proprietary rights in our intellectually property, we rely generally on copyright, trademark and trade secret laws. Although we do not believe that our trademarks and other intellectual property are materially important to the continuation of our operations, our failure or inability to maintain or protect our proprietary rights could materially decrease their value, and our brand and reputation could be impaired as a result. We are subject to certain legal proceedings that may affect our financial condition and results of operation. We are involved in a number of legal proceedings. 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. However, we can give no assurances that certain lawsuits either now or in the future will not materially affect our financial position or results of operations. Our stock price may be subject to volatility. The trading price of our common stock may fluctuate. Trading prices of our common stock may fluctuate in response to a number of events and factors, many of which are beyond our control, such as: - general economic conditions; - changes in interest rates; - conditions or trends in the retail book and electronic commerce trade industries; - fluctuations in the stock market in general; - quarterly variations in operating results; 9 - new products, services, innovations, and strategic developments by our competitors or us, or business combinations and investments by our competitors or us; - changes in financial estimates by us or securities analysts and recommendations by securities analysts; - changes in regulation; - changes in our capital structure, including issuance of additional debt or equity to the public; - corporate restructurings, including layoffs or closures of facilities; - changes in the valuation methodology of, or performance by, others in the retail book and electronic trade industries; and - transactions in our common stock by major investors; and certain analyst reports, news, and speculation. Any of these events may cause our stock price to rise or fall and may adversely affect our business and financing opportunities. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES Our bookstores are generally 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 12 and 13 of the Proxy). The Birmingham, Alabama office space lease expires on June 30, 2006, and we intend to negotiate additional term under the lease. 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. The NetCentral space is leased month-to-month. We believe that the failure to extend the lease of the corporate office space in Birmingham, Alabama or the loss of any of the corporate office space currently leased on a month-to-month basis would not have a material adverse effect on the Company's business, financial condition or results of operations. 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 loans secured by a mortgage interest in this facility. We also lease, on a month-to-month basis from a related party, a second 210,000 square foot warehouse facility located in Tuscumbia, Alabama. We believe that the failure to extend the lease for this warehouse facility currently leased on a month-to-month basis would not have a material adverse effect on the Company's business, financial condition or results of operations. 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 condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information in footnote 12 Summary of Quarterly Results (Unaudited) on page 29 of the Annual Report to Stockholders for the year ended January 28, 2006 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Selected Consolidated Financial Data" for the years ended February 2, 2002, through January 28, 2006 on page 4 of the Annual Report to Stockholders for the year ended January 28, 2006, is incorporated herein by reference. 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 13 of the Annual Report to Stockholders for the year ended January 28, 2006, 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 existing credit agreement was $10.0 million during fiscal 2006. Outstanding amounts under our credit agreement bear interest at variable rates. Additionally, the Company had $7.2 million of borrowings outstanding at January 28, 2006 from loans made pursuant to an industrial development revenue bond which are secured by a mortgage interest in one of our warehouse facilities. 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 8.73% and expires on June 7, 2006. The counterparty to the remaining interest rate swap is a party to our revolving credit facilities. We believe the credit and liquidity risk of the counterparty 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. The information in note 3 "Debt and Lines of Credit" in the Notes to Consolidated Financial Statements on pages 23 and 24 of the Annual Report to Stockholders for the year ended January 28, 2006 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 28, 2006 are incorporated herein by reference: Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005. Consolidated Statements of Income for the Fiscal Years Ended January 28, 2006, January 29, 2005, and January 31, 2004. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 28, 2006, January 29, 2005, and January 31, 2004 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 28, 2006, January 29, 2005, and January 31, 2004 Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm 11 The information in footnote 12 Summary of Quarterly Results (Unaudited) on page 29 of the Annual Report to Stockholders for the Fiscal Years Ended January 28, 2006 and January 29, 2005 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Upon the recommendation of the Audit Committee of the Board of Directors of the Company, Deloitte & Touche LLP ("Deloitte") was dismissed as the Company's independent auditor effective April 29, 2005. Deloitte served as the Company's independent auditor for fiscal years 2003, 2004 and 2005. The reports of Deloitte for those fiscal years did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During those fiscal years and for fiscal year 2006 through April 29, 2005 there were no (A) disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to such disagreements in its reports provided to the Company; and (B) reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). Effective April 29, 2005, the Company's Audit Committee engaged Grant Thornton LLP to audit the Company's financial statements for the fiscal year ending on January 28, 2006. Prior to the engagement of Grant Thornton LLP, neither the Company nor anyone on behalf of the Company had consulted with Grant Thornton LLP during the Company's two most recent fiscal years and for fiscal year 2006 through April 29, 2005 in any matter regarding either: (A) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither was a written report nor oral advice provided to the Company that Grant Thornton LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (B) any matter which was the subject of either a disagreement or a reportable event, as each are defined in Item 304(a)(1)(iv) and (v) of Regulation S-K, respectively. 12 ITEM 9A. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, chief financial officer and the Board of Directors, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management's judgment. As required by Rules 13a-15 and 15d-15 under the Exchange Act, management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective at the reasonable assurance level. (b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material affect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of the end of the period covered by this report based on the "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, management concluded that the Company's internal control over financial reporting was effective as of the end of the period covered by this report. Grant Thornton LLP, the independent registered certified public accounting firm that audited the Company's financial statements included in this report, has also audited management's assessment of the effectiveness of the Company's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting as of the end of the period covered by this report as stated in their report incorporated herein as part of the Company's Annual Report. (c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the course of its effort to implement Section 404 of the Sarbanes Oxley Act, management identified certain control deficiencies in the Company's internal control over financial reporting. After meeting with the Audit Committee of the Board of Directors, management determined that certain of these control deficiencies constituted significant deficiencies which in the aggregate constituted a material weakness. These significant deficiencies have been remediated during the third and fourth quarters, as described more fully below. The material weakness identified during the second quarter consisted of a combination of the following significant deficiencies relating to accounts payable: (i) inadequate controls over the data used to perform cost of goods sold calculations; (ii) inadequate segregation of duties for accounts payable management and inadequate controls over access to the payables vendor master file; and (iii) inadequate independent verification of expense invoice payment supporting documentation. 13 Inadequate controls over the data used to perform cost of goods sold calculations. Because we did not accumulate product cost data at the item level in the item master file in the past, we calculated cost of goods sold and determined vendor payments and return credits using product line cost data for each vendor. We generally purchase inventory at a wholesale cost that is expressed as a discount from the suggested retail price for the product. When merchandise was received at the warehouse, the discount percentage established for each product line a vendor sold to the Company was used to calculate the expected cost of the merchandise and a warehouse receipt was generated. The warehouse receipt was matched to the vendor's invoice at the total receipt/invoice level to ensure the accuracy of the receipt of product ordered and the amount of payment due to the vendor. In addition, many vendors have several different product lines which may have different discount percentages. For example, publishers, who collectively constitute a majority of our vendors, have several different imprints under which they publish and sell books which they sell to us under varying discount percentages. However, because product cost data at the item level was not then accumulated in the item master file, the information used in the item master file, which is within the warehouse system, to calculate cost of receipts and returns was generated based on a standard discount percentage at the vendor level, which may not have matched the discount percentage on each product line that we purchased from or returned to that vendor. Calculations done at the vendor discount level could have caused discrepancies in the cost amounts determined for the merchandise receipts and returns versus the amounts charged by the vendor. Discrepancies in merchandise receipt amounts versus vendor invoice amounts above certain tolerances were reviewed to ensure the vendor was paid the proper amount. However, the cumulative effect of discrepancies under the tolerance levels could have had an impact on inventory shrinkage. In addition, the cost charged for product on returns had been based on the vendor product line discount reflected in the system and was not reconciled until after the vendor issued a credit for the return. A delay in vendor processing of returns, which could increase unresolved return disputes, could also have impacted inventory shrinkage results. During the third and fourth quarters of fiscal 2006 we updated the item master file to include product cost data at the item level, and we will continue to maintain item level product cost data in the item master file going forward. In addition, because we do not maintain an automated system to calculate cost of goods sold at the item level, a weighted average cost by product line must be determined, which is then applied to sales amounts to calculate cost of goods sold. The weighted average cost percentages are calculated using invoice level data to determine the cost of goods sold percentages by product line. The percentages are determined for each product line using a sampling of invoices for each period. The sample size used historically through the second quarter of fiscal 2006 may have not been large enough to allow us to adequately calculate cost of goods sold on a quarterly basis. However, the sample size of invoices reviewed for verifying the cost of goods sold percentages by product line was expanded significantly in the third and fourth quarters of fiscal 2006. As of the end of the fiscal year covered by this report we had sampled approximately 85% of all year-to-date purchasing activity to ensure that the cost of goods sold calculations were materially accurate. Management believes that this expanded sampling of the majority of all merchandise purchases during the fiscal year, combined with the update and ongoing maintenance of item level product cost data in the item master file, are effective internal controls to ensure the accuracy of the cost of goods sold calculations. To further mitigate the risk of error in the cost of goods sold calculations a full physical inventory was taken at the warehouse and reconciled to the financial records during the fourth quarter of fiscal 2006. The shrinkage calculated during the reconciliation completed during the fourth quarter of fiscal 2006 was inconsequential. A full physical inventory has been and will continue to be taken each year at the warehouse and reconciled to the financial records. The updates to and maintenance of item level product cost data in the item master file is also expected to improve the accuracy of discount percentages used to calculate the credits for merchandise returns. This is expected to reduce significantly the risk of miscalculating the credits for returns. We will continue to reconcile the major vendors' statement activity to payables activity on a quarterly basis to identify return differences and resolve those discrepancies with vendors. Inadequate segregation of duties for accounts payable management and inadequate controls over access to the payables vendor master file. The director of accounts payable and the manager of accounts payable together manage all accounts payable, including the reconciliation of accounts payable detail activity to the general ledger. While our procedures for accounts payable stated that neither the director nor the manager were allowed to be involved in vendor master file maintenance, as of the end of the second quarter the system did not prevent either of them from making entries to, or performing maintenance on, the vendor master file. As of October 14, 2005, access privileges to the vendor file for the director and the manager were revoked. Also, starting with the October 2005 monthly closing process, a senior accounting manager outside of the accounts payable function is reviewing the reconciliation of the accounts payable detail activity to the general ledger each month. Management believes that this significant deficiency was remediated as of the end of the third quarter of fiscal 2006. Inadequate independent verification of expense invoice supporting documentation. In addition to having responsibility for the merchandise payment process, the accounts payable department also has the responsibility to manage and process payments for expense invoices. Our policies and procedures in place as of the second quarter of fiscal 2006 were not adequate to ensure that 14 expense invoices processed for payment were approved by management at the appropriate level and that supporting documentation was adequate to support the amount being paid. As of October 14, 2005, we established company wide expense approval policies and procedures by department that specifically identify which employees have authority for approving invoices, the maximum dollar threshold they can approve and the dollar threshold at which additional approval is required. As of December 1, 2005 we implemented policies and procedures requiring supporting documentation to be provided with expense invoices for certain categories of expense activity for approval by management. Management believes that this significant deficiency was remediated as of December 1, 2005. To mitigate the risk of misstatement of expense activity prior to the time the new expense approval policies and procedures were put in place, during the second and third quarters of fiscal 2006, we completed a subsequent review of invoices processed for sixty days after the end of the second quarter and for thirty days after the end of the third quarter. This process did not identify any significant changes to the amounts originally accrued for the each of the quarter closings. The efforts we have taken as described above are subject to continued management review supported by confirmation and testing by management, our internal auditors and the outside consultants, as well as audit committee oversight. There have been no other material changes in our disclosure controls and procedures, or our internal control over financial reporting, during the fourth quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections under the heading "Proposal I-Election of Directors" entitled "Nominees for Election - Term Expiring 2009," "Incumbent Directors - Term Expiring 2007," and "Incumbent Directors - Term Expiring 2008" on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006, 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 5 through 11 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 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 45 Executive Chairman of the Board Sandra B. Cochran 47 President, Chief Executive Officer and Secretary Terrance G. Finley 52 President Books-A-Million, Inc. Merchandising Group Richard S. Wallington 47 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, a majority stockholder, and the brother of Terry C. Anderson, a member 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 9 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 is incorporated herein by reference. 16 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 2006. 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 11 through 16 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 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 10 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 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 13 and 14 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 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 7 and 8 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 8, 2006 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 28, 2006 are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets as of January 28, 2006, and January 29, 2005. Consolidated Statements of Income for the Fiscal Years Ended January 28, 2006, January 29, 2005 and January 31, 2004. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 28, 2006, January 29, 2005 and January 31, 2004. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 28, 2006, January 29, 2005 and January 31, 2004. 17 Notes to Consolidated Financial Statements. Reports of Independent Registered Public Accounting Firms. 2. Financial Statement Schedule: The following consolidated financial statement schedule of Books-A-Million, Inc. is attached hereto: Reports of Independent Registered Public Accounting Firm on Financial Statement Schedule. Schedule II 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 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). 18 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). 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 to the 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. (incorporated by reference to Exhibit 10.21 to Annual Report on Form 10-K for the fiscal year ended January 29, 2005). 10.22 -- Second Amendment to the Credit Agreement dated as of June 20, 2005 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 99 (B)(3) to Tender Offer Statement by Issuer on Form SC TO-I for the Tender Offer closed on June 23, 2005). 10.23 -- 2005 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to form 8-K for adoption of the plan on June 1, 2005, File No. 333-126008, filed June 29, 2005). 10.24 -- Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 on Form 8-K, File No. 0-20664, filed August 22, 2005). 10.25 -- Director's Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 on Form 8-K, File No. 0-20664, filed August 22, 2005). 13 -- Portions of the Annual Report to Stockholders for the year ended January 28, 2006 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). 23.1 -- Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. 23.2 -- Consent of Deloitte & Touche LLP, 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. (b) 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). 19 20 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 13, 2006 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 13, 2006 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ Richard S. Wallington - ------------------------------------------ Richard S. Wallington Chief Financial Officer Date: April 13, 2006 DIRECTORS: /s/ Clyde B. Anderson - ------------------------------------------ Clyde B. Anderson Date: April 13, 2006 /s/ Ronald G. Bruno - ------------------------------------------ Ronald G. Bruno Date: April 13, 2006 21 DIRECTORS: /s/ J. Barry Mason - ------------------------------------------ J. Barry Mason Date: April 13, 2006 /s/ Terry C. Anderson - ------------------------------------------ Terry C. Anderson Date: April 13, 2006 /s/ Albert C. Johnson - ------------------------------------------ Albert C. Johnson Date: April 13, 2006 /s/ William H. Rogers, Jr. - ------------------------------------------ William H. Rogers, Jr. Date: April 13, 2006 22 REPORT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON FINANCIAL STATEMENTS Board of Directors and Shareholders of Books-A-Million, Inc. We have audited the accompanying balance sheet of Books-A-Million, Inc. as of January 28, 2006 and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Books-A-Million, Inc. as of January 28, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II for the year ended January 28, 2006 is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Books-A-Million, Inc.'s internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 22, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ GRANT THORNTON LLP Atlanta, Georgia March 22, 2006 S-1 REPORT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Shareholders of Books-A-Million, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Controls Over Financial Reporting, that Books-A-Million, Inc. maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Books-A-Million, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Books-A-Million, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the Internal Control - Integrated Framework issued by the COSO. Also in our opinion, Books-A-Million, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Books-A-Million, Inc. as of January 28, 2006, and the related statements of income, stockholders' equity, and cash flows for the year then ended and our report dated March 22, 2006 expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP Atlanta, Georgia March 22, 2006 S-2 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 income , stockholders' equity, and cash flows for the fiscal years then ended. 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 the fiscal years then ended, 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 2, 2003, the Company changed its method of accounting for inventories. DELOITTE & TOUCHE LLP Birmingham, Alabama April 25, 2005 (April 12, 2006 as to Note 7) 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 fiscal years then ended January 29, 2005, and have issued our report thereon dated April 25, 2005 (April 12, 2006 as to Note 7) (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 2006 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Books-A-Million, Inc. for the years ended January 29, 2005 and January 31, 2004, 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-4 SCHEDULE II. BOOKS-A-MILLION, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 31, 2004, JANUARY 29, 2005 AND JANUARY 28, 2006
CHARGED/ BALANCE AT (CREDITED) (DEDUCTIONS)/ BEGINNING TO COSTS RECOVERIES BALANCE AT OF YEAR AND EXPENSES NET END OF YEAR ---------- ------------ ------------- ------------ 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 FOR THE YEAR ENDED JANUARY 28, 2006: Allowance for doubtful accounts $ 580,552 $ 218,493 $ 41,086 $ 840,131
S-5 EX-13 2 g00783exv13.txt EX-13 PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 BOOKS-A-MILLION 2006 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 19 states and the District of Columbia. The Company operates two distinct store formats, including large superstores operating under the names Books-A-Million and Books & Co. and traditional bookstores operating under the names Books-A-Million, Bookland and Joe Muggs Newsstand. FIVE-YEAR HIGHLIGHTS
FOR THE FISCAL YEAR ENDED: (In thousands, except per share amounts) 1/28/06 1/29/05 1/31/04(1) 2/1/03(2) 2/2/02 - ---------------------------------------- --------- --------- ----------- ---------- --------- 52 WEEKS 52 weeks 52 weeks 52 weeks 52 weeks STATEMENT OF INCOME DATA Net sales $ 503,751 $ 474,099 $ 457,234 $ 435,339 $ 434,829 Income before cumulative effect of a change in accounting principle(2) 13,067 10,199 7,126 2,554 3,944 Net income 13,067 10,199 7,126 1,353 3,944 Earnings per share - diluted, before cumulative effect of a change in accounting principle(2) 0.77 0.59 0.42 0.15 0.23 Earnings per share - diluted 0.77 0.59 0.42 0.08 0.23 Weighted average shares - diluted 16,964 17,178 16,789 16,566 16,945 Capital investment 11,297 14,923 10,402 19,836 12,688 Dividends per share - declared 0.23 0.23 0.00 0.00 0.00 BALANCE SHEET DATA Property and equipment, net $ 51,001 $ 55,946 $ 59,892 $ 68,912 $ 67,941 Total assets 311,659 300,812 296,398 319,484 306,083 Long-term debt 7,200 7,500 20,640 44,942 38,846 Stockholders' equity 145,009 134,859 131,001 122,694 121,212 OTHER DATA Working capital $ 106,637 $ 95,382 $ 104,723 $ 112,810 $ 105,638 Debt to total capital ratio 0.05 0.05 0.14 0.27 0.24 OPERATIONAL DATA Total number of stores 205 206 202 207 204 Number of superstores 173 168 163 163 157 Number of traditional stores 32 38 39 44 47
(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 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. 1 BOOKS-A-MILLION 2006 Annual Report TO OUR STOCKHOLDERS: Fiscal year 2006 was one of continued progress for Books-A-Million. We achieved strong comparable store sales results while reducing inventory, improving margins, and strengthening our balance sheet. Book sales were excellent. Nearly all categories showed increases. Highlights included children's books, the games category, teen reading, entertainment, biography, humor, history, cooking and inspirational books. Media once again played a key role in driving sales. The release of Harry Potter and The Half Blood Prince was a major media event. Movie tie-ins such as The Chronicles Of Narnia and Harry Potter further drove business in children's books. The Sudoku craze, reinforced by exposure in countless newspapers and magazines, fueled the game book category. Oprah's pick of James Frey's A Million Little Pieces -- and the resulting controversy -- generated tremendous sales in the biography category. Food Network stars Paula Deen and Rachael Ray dominated the cookbook category. Ultimately, it was a great year for books, and our team did a good job planning for and making the most of these media-driven opportunities. Our non-book departments also performed well. Games and puzzles grew rapidly, benefiting from the Sudoku craze. An initiative in inspirational gifts delivered strong results, as did executive gifts resulting from our increased emphasis on imported gift merchandise. The cafe business is increasingly competitive, but the cold-drink category continues to grow, and an expanded selection of specialty candy saw excellent sales. 2 BOOKS-A-MILLION 2006 Annual Report The positive sales results, combined with improvements in systems and operations, contributed to another year of improving margins, better inventory turn, and reduced debt. We opened seven new stores in 2006 and continued our remodeling program. As a result of our team's dedicated efforts, we saw net income increase more than 28% and earnings per share improve by more than 30%. We increased our quarterly dividend to $0.08 per share, which is now at an annual rate of $0.32 per share. We look forward to the new year with a commitment to maintaining our focus on the fundamentals of our business and continued growth. Thank you for your 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) 1/28/06 1/29/05 - ---------------------------------------- --------- --------- Net sales $ 503,751 $ 474,099 Operating profit 23,037 18,092 Net income 13,067 10,199 Net income per share - diluted 0.77 0.59 Dividends per share - declared 0.23 0.23
AS OF --------------------- (In thousands) 1/28/06 1/29/05 - --------------------- --------- --------- Working capital $ 106,637 $ 95,382 Total assets 311,659 300,812 Stockholders' equity 145,009 134,859
3 BOOKS-A-MILLION 2006 Annual Report SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended (In thousands, except per share data) 1/28/06 1/29/05 1/31/04(1) 2/1/03(2) 2/2/02 - ------------------------------------- ---------- ---------- ---------- ---------- ---------- 52 WEEKS 52 weeks 52 weeks 52 weeks 52 weeks STATEMENT OF OPERATIONS DATA: Net sales $ 503,751 $ 474,099 $ 457,234 $ 435,339 $ 434,829 Cost of products sold, including warehouse distribution and store occupancy costs 357,166 339,012 330,150 316,257 311,398 ---------- ---------- ---------- ---------- ---------- Gross profit 146,585 135,087 127,084 119,082 123,431 Operating, selling and administrative expenses 109,160 99,207 93,974 91,567 95,254 Gain on insurance recovery 1,248 -- -- -- -- Depreciation and amortization 15,636 17,788 18,065 18,229 17,195 ---------- ---------- ---------- ---------- ---------- Operating profit 23,037 18,092 15,045 9,286 10,982 Interest expense, net 1,441 1,874 2,909 4,171 4,429 ---------- ---------- ---------- ---------- ---------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 21,596 16,218 12,136 5,115 6,553 Provision for income taxes 8,545 6,001 4,613 1,944 2,489 ---------- ---------- ---------- ---------- ---------- Income from continuing operations before cumulative effect of change in accounting principle 13,051 10,217 7,523 3,171 4,064 Discontinued operations: (Loss) income from discontinued operations (including impairment charge) 27 (29) (641) (996) (192) Income tax provision (benefit) 11 (11) (244) (379) (72) ---------- ---------- ---------- ---------- ---------- (Loss) income from discontinued operations 16 (18) (397) (617) (120) ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 13,067 10,199 7,126 2,554 3,944 Cumulative effect of change in accounting principle, net of income taxes -- -- -- (1,201) -- ---------- ---------- ---------- ---------- ---------- Net income $ 13,067 $ 10,199 $ 7,126 $ 1,353 $ 3,944 ========== ========== ========== ========== ========== Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.80 $ 0.62 $ 0.46 $ 0.20 $ 0.24 Loss from discontinued operations -- -- (0.02) (0.04) -- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 0.80 0.62 0.44 0.16 0.24 Cumulative effect of change in accounting principle -- -- -- (0.08) -- ---------- ---------- ---------- ---------- ---------- Net income per share $ 0.80 $ 0.62 $ 0.44 $ 0.08 $ 0.24 ========== ========== ========== ========== ========== Weighted average number of shares outstanding - basic 16,384 16,453 16,279 16,190 16,667 ========== ========== ========== ========== ========== DILUTED: Income from continuing operations before cumulative effect of change in accounting principle $ 0.77 $ 0.59 $ 0.45 $ 0.19 $ 0.24 Loss from discontinued operations -- -- (0.03) (0.04) (0.01) ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 0.77 0.59 0.42 0.15 0.23 Cumulative effect of change in accounting principle -- -- -- (0.07) -- ---------- ---------- ---------- ---------- ---------- Net income per share $ 0.77 $ 0.59 $ 0.42 $ 0.08 $ 0.23 ========== ========== ========== ========== ========== Weighted average number of shares outstanding - diluted 16,964 17,178 16,789 16,566 16,945 ========== ========== ========== ========== ========== Dividends per share - declared $ 0.23 $ 0.23 -- -- -- Pro forma amounts assuming the change in accounting principle was applied retroactively:(1) Net income N/A N/A N/A N/A $ 3,891 Net income per share - basic N/A N/A N/A N/A 0.23 Net income per share - diluted N/A N/A N/A N/A 0.23 BALANCE SHEET DATA: Property and equipment, net $ 51,001 $ 55,946 $ 59,892 $ 68,912 $ 67,941 Total assets 311,659 300,812 296,398 319,484 306,083 Long-term debt 7,200 7,500 20,640 44,942 38,846 Stockholders' investment 145,009 134,859 131,001 122,694 121,212 OTHER DATA: Working capital $ 106,637 $ 95,382 $ 104,723 $ 112,810 $ 105,638
(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 2006 Annual Report MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS GENERAL The Company was founded in 1917 and currently operates 205 retail bookstores concentrated primarily in the southeastern United States. Of the 205 stores, 173 are superstores that operate under the names Books-A-Million and Books & Co., and 32 are traditional stores that operate under the Bookland, Books-A-Million and Joe Muggs Newsstand names. 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 28, 2006, the Company employed approximately 5,000 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 2006, the Company opened seven stores, closed eight 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. The remodeled stores have consistently shown improvement in comparable store sales in the first year after completing their remodel. During fiscal 2006, the Company remodeled 16 stores. Approximately 66% 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. 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. CHANGE IN ACCOUNTANTS Upon the recommendation of the Audit Committee of the Board of Directors of the Company, Deloitte & Touche LLP ("Deloitte") was dismissed as the Company's independent auditor effective April 29, 2005. Deloitte served as the Company's independent auditor for fiscal years 2003, 2004 and 2005. The reports of Deloitte for those fiscal years did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During those fiscal years and for fiscal year 2006 through April 29, 2005 there were no (A) disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to such disagreements in its reports provided to the Company; and (B) reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). Effective April 29, 2005, the Company's Audit Committee engaged Grant Thornton LLP to audit the Company's financial statements for the fiscal year ending on January 28, 2006. Prior to the engagement of Grant Thornton LLP, neither the Company nor anyone on behalf of the Company had consulted with Grant Thornton LLP during the Company's two most recent fiscal years and for fiscal year 2006 through April 29, 2005 in any matter regarding either: (A) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither was a written report nor oral advice provided to the Company that Grant Thornton LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (B) any matter which was the subject of either a disagreement or a reportable event, as each are defined in Item 304(a)(1)(iv) and (v) of Regulation S-K, respectively. 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. 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 five 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. 5 BOOKS-A-MILLION 2006 Annual Report Other Long-Lived Assets The Company's other long-lived assets consist of property and equipment which includes leasehold improvements. At January 28, 2006, the Company had $51.0 million of property and equipment, net of accumulated depreciation, accounting for approximately 16.4% of the Company's total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store's estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store's fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset's carrying value in excess of fair value. Impairment losses totaled $0.2 million, $0.3 million and $1.0 million in fiscal 2006, 2005 and 2004, respectively, and were recorded in selling, general and administrative costs. For all years presented, the impairment losses related to the retail trade business segment. Goodwill At January 28, 2006, the Company had $1.4 million of goodwill, accounting for approximately 0.4% of the Company's total assets. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on the goodwill during the fourth quarter of fiscal 2006 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. Changes in market conditions, among other factors, could have a material impact on these estimates. 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 $40,000, $55,000 and $219,000 during fiscal 2006, 2005 and 2004, 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. The Company utilizes the last-in, first-out (LIFO) method of accounting for inventories. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $1.5 million as of January 28, 2006 and $1.1 million as of January 29, 2005. The estimated replacement cost of inventory is the current FIFO value of $206.3 million. 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. 6 BOOKS-A-MILLION 2006 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 income data expressed as a percentage of net sales for the periods presented.
FISCAL YEAR ENDED ---------------------------- 1/28/06 1/29/05 1/31/04 ------- ------- ------- Net sales 100.0% 100.0% 100.0% Gross profit 29.1% 28.5% 27.8% Operating, selling, and administrative expenses 21.7% 20.9% 20.5% Gain on insurance recoveries (0.3%) 0.0% 0.0% Depreciation and amortization 3.1% 3.8% 4.0% Operating profit 4.6% 3.8% 3.3% Interest expense, net 0.3% 0.4% 0.6% Income from continuing operations before income taxes 4.3% 3.4% 2.7% Provision for income taxes 1.7% 1.2% 1.0% Income from continuing operations 2.6% 2.2% 1.7% (Gain)/loss from discontinued operations (including impairment charge), net of tax 0.0% 0.0% 0.1% Net income 2.6% 2.2% 1.6%
Fiscal 2006 Compared to Fiscal 2005 Consolidated net sales increased $29.7 million, or 6.3%, to $503.8 million in fiscal 2006 from $474.1 million in fiscal 2005. 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 and gift sales. Several categories of book sales showed increases, including children's books, the games category, teen reading, entertainment, biography, humor, history, cooking, and inspirational books. Media played a key role in driving sales. The release of Harry Potter and The Half Blood Prince was a major media event. Movie tie-ins such as The Chronicles Of Narnia and Harry Potter drove business in children's books. The Sudoku craze fueled the game book category. Teen fiction continued to experience dynamic growth, predominately as a result of interest in a wide ranging number of fiction titles. Oprah's pick of James Frey's A Million Little Pieces generated sales in the biography category. Bestselling titles 1776 and The World is Flat drove sales in the history category, and Food Network stars Paula Deen and Rachael Ray dominated the cookbook category. The gift department also performed well. Games and puzzles grew rapidly, benefiting from the Sudoku craze. An initiative in inspirational gifts delivered strong results, as did executive gifts from our increased emphasis on imported gift merchandise. The cafe business is increasingly competitive, but the cold-drink category continues to grow, and an expanded selection of specialty candy helped improve sales. The Company opened seven new stores during fiscal 2006 resulting in partial year sales of $9.9 million and closed eight stores during fiscal 2006 with partial year sales of $4.3 million. The stores in Biloxi, Mississippi, and Deerfield Beach, Florida, were temporarily closed due to the hurricanes which decreased sales by $1.4 million for fiscal 2006 versus fiscal 2005. Net sales for the retail trade segment increased $30.9 million, or 6.6%, to $496.6 million in fiscal 2006 from $465.7 million in fiscal 2005. The increase in comparable store sales was primarily attributable to the increases in book and gift sales described above. Net sales for the electronic commerce segment increased $0.9 million, or 3.6%, to $27.6 million in fiscal 2006 from $26.7 million in fiscal 2005. This increase was primarily due to growth in business-to-business sales volume during fiscal 2006. Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, 7 BOOKS-A-MILLION 2006 Annual Report property taxes, utilities and merchant association dues), increased $11.5 million, or 8.5%, to $146.6 million in fiscal 2006 from $135.1 million in fiscal 2005. Gross profit as a percentage of net sales increased to 29.1% in fiscal 2006 from 28.5% in fiscal 2005, partially due to increased sales of proprietary product which has a higher gross profit than regular product. Also, the Company was able to generate higher sales in fiscal 2006 with less promotional discounting. Operating, selling and administrative expenses increased $10.0 million, or 10.0%, to $109.2 million in fiscal 2006, from $99.2 million in fiscal 2005. Operating, selling and administrative expenses as a percentage of net sales increased to 21.7% in fiscal 2006 from 20.9% in fiscal 2005, primarily due to the impact of costs incurred for Sarbanes-Oxley compliance, costs associated with the NASDAQ de-listing hearing in October 2005 and other corporate expenses In fiscal 2006, the Company recognized an insurance gain of $754,000, net of taxes, related to insurance recoveries for hurricane damage suffered at three stores in the third quarter of fiscal 2005. The insurance recovery amounts were finalized with the insurance company during fiscal 2006, therefore the gain was recorded in the current fiscal year. Depreciation and amortization decreased $2.2 million, or 12.1%, to $15.6 million in fiscal 2006 from $17.8 million in fiscal 2005. Depreciation and amortization as a percentage of net sales decreased to 3.1% in fiscal 2006 from 3.8% in fiscal 2005, due to lower capital expenditures in fiscal 2006, as well as the impact of certain assets becoming fully depreciated during the prior year. Consolidated operating profit was $23.0 million for fiscal 2006 compared to $18.1 million in fiscal 2005. Operating profit for the retail trade segment was $22.4 million in fiscal 2006 versus $16.9 million in fiscal 2005. This increase was partially attributable to increased comparable store sales which resulted in higher gross profit for fiscal 2006. Also, gross profit improved as a percentage of sales due to increased sales of proprietary product which has a higher gross profit, as well as less promotional discounting due to the strong sales environment. These increases were partially offset by higher operating, selling and administrative expenses as a percentage of sales due to the costs incurred for Sarbanes-Oxley compliance, costs associated with the NASDAQ de-listing hearing and other corporate expenses. The operating profit for the electronic commerce segment was $1.0 million compared to $0.9 million in fiscal 2005. The improvement in operating results was due to improved gross margin as a result of increased sales. Net interest expense decreased $0.5 million, or 23.1%, to $ 1.4 million in fiscal 2006 from $1.9 million in fiscal 2005, primarily due to lower average debt levels during fiscal 2006. The effective rate for income tax purposes was 39.6% for fiscal 2006 and 37.0% for fiscal 2005. The increase in the effective tax rate was due to a higher state effective tax rate in fiscal 2006. The Company closed two stores in fiscal 2006 and 2005 in markets where the Company does not expect to retain the closed stores' customers at another store. The financial impact of these closings was reported as discontinued operations in the financial statements, but had a minimal impact on the financial results of the Company. Fiscal 2005 Compared to Fiscal 2004 Consolidated net sales increased $16.9 million, or 3.7%, to $474.1 million in fiscal 2005 from $457.2 million in fiscal 2004. Comparable store sales increased 2.5% when compared to the same 52-week period of 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. 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 $14.6 million, or 3.2%, to $465.7 million in fiscal 2005 from $451.1 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. 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 $135.1 million in fiscal 2005 from $127.1 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, 8 BOOKS-A-MILLION 2006 Annual Report 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 $99.2 million in fiscal 2005, from $94.0 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 $18.1 million for fiscal 2005 compared to $15.0 million in fiscal 2004. Operating profit for the retail trade segment was $16.9 million in fiscal 2005 versus $14.2 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. The effective rate for income tax purposes was 37.0% for fiscal 2005 and 38.0% for fiscal 2004. Loss from discontinued operations was $0.0 million in fiscal 2005 compared to $0.6 million in fiscal 2004. The income tax benefit on the loss from discontinued operations was $0.0 million in fiscal 2005 and $0.2 million in fiscal 2004. Loss from discontinued operations, net of tax, was $0.0 million in fiscal 2005 compared to $0.4 million in fiscal 2004. These losses in fiscal 2005 and fiscal 2004 represent the results during those years of two stores that were closed in fiscal 2006, 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. 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 under a credit agreement with a syndicate of banks that allows borrowings up to $100.0 million, for which no principal repayments are due until the facility expires in July 2007. Availability under the facility is reduced by outstanding letters of credit issued under this facility. The credit agreement contains certain financial and non-financial covenants, the most restrictive of which is the maintenance of a minimum fixed charge coverage ratio. As of January 28, 2006 and January 29, 2005, there were no outstanding balances under this credit facility and the face amount of letters of credit issued under the facility was $3.0 million and $2.6 million, respectively. The maximum and average outstanding borrowings under the credit facility (excluding the face amount of letters of credit issued thereunder) during fiscal 2006 were $23.7 million and $10.0 million, respectively. 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 28, 2006 and January 29, 2005, there was $7.2 million and $7.5 million of borrowings outstanding, respectively, under these arrangements, which bear interest at variable rates. The Company's capital expenditures totaled $11.3 million in fiscal 2006. 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 2007 will be approximately $26.4 million and that such amounts will be used for purposes similar to fiscal 2006. The increase in capital expenditures projected for fiscal 2007 is 9 BOOKS-A-MILLION 2006 Annual Report partially due to more new stores expected to be opened and relocations expected in fiscal 2007 versus fiscal 2006, and partially due to a greater number of the new stores expected to be opened in fiscal 2007 being built entirely by the Company with the Company then being reimbursed by the landlord through allowances treated as a sale/leaseback transaction. 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 2007. Financial Position During fiscal 2006, the Company opened seven stores and closed eight stores. Improved inventory management resulted in a decrease in inventory balances to $204.8 million at January 28, 2006, as compared to $210.3 million at January 29, 2005. The improvement in inventory management was driven by enhancements to the inventory replenishment systems which allowed the Company to more effectively manage inventory levels at the individual store level. Net property and equipment decreased due to lower capital expenditures in fiscal 2006. Additionally, cash and cash equivalents increased as of January 28, 2006 compared to January 29, 2005 primarily due to improved earnings, lower inventory balances 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 28, 2006:
PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS ---------------------------------------------------------------------------- (in thousands) TOTAL FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 THEREAFTER - -------------- -------- -------- -------- -------- -------- -------- ---------- Long-term debt - revolving credit facility $ -- $ -- $ -- $ -- $ -- $ -- $ -- Long-term debt - industrial revenue bond 7,200 -- 7,200 -- -- -- -- Operating leases 138,506 30,916 27,343 22,083 17,028 13,404 27,732 -------- -------- -------- -------- -------- -------- -------- Total of obligations $145,706 $ 30,916 $ 34,543 $ 22,083 $ 17,028 $ 13,404 $ 27,732 ======== ======== ======== ======== ======== ======== ========
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 28, 2006 and January 29, 2005, as such liabilities are considered de minimis. Cash Flows Operating activities provided cash of $36,713,000, $47,193,000 and $34,678,000 in fiscal 2006, 2005 and 2004, respectively, and included the following effects: - Cash provided by inventories was $5,481,000, $1,321,000 and $12,428,000 in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. This was primarily the result of increased sales and improved inventory management during the respective years. 10 BOOKS-A-MILLION 2006 Annual Report - Cash used by accounts payable (including related party payables) in fiscal 2006 of $5,914,000 was due to lower inventory levels for fiscal 2006 which resulted in lower accounts payable balances. Cash provided by accounts payable (including related party payables) in fiscal 2005 of $10,015,000 was the result of improved accounts payable leveraging with vendors in fiscal 2005. Cash used by accounts payable (including related party payables) in fiscal 2004 of $11,895,000 was due to lower inventory levels for fiscal 2004 which resulted in lower accounts payable balances. - Depreciation and amortization expenses were $15,651,000, $17,843,000 and $18,325,000 in fiscal 2006, 2005 and 2004, respectively. The decrease in fiscal 2006 and 2005 was primarily due to certain assets becoming fully depreciated in those years. - Cash provided by accrued expenses was $5,519,000, $6,379,000 and $4,144,000 in fiscal 2006, 2005 and 2004, respectively. The increase in fiscal 2006, 2005 and 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 2006, 2005 and 2004. Cash used in investing activities in fiscal 2006, 2005 and 2004 reflected a net use of cash of $11,286,000, $14,879,000 and $10,363,000, respectively. Cash was used to fund capital expenditures for new store openings, renovation and improvements to existing stores, warehouse distribution purposes and investments in management information systems. Financing activities used cash of $4,467,000 in fiscal 2006 primarily to purchase stock ($5,324,000) and for dividend payments ($3,273,000), offset by proceeds from the issuance of stock upon the exercise of stock options ($4,430,000). 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 ($6,359,000) and for dividend payments ($3,009,000). Financing activities used cash of $23,944,000 in fiscal 2004 representing a net repayment of debt under the credit facility. Dividends The Company paid $3.3 million in dividends in fiscal 2006 and $3.0 million in dividends in fiscal 2005. See the table below for summary of dividends declared each quarter.
Dividends Declared Fiscal 2006 Fiscal 2005 ----------- ------------ First quarter $ 0.05 -- Second quarter $ 0.05 $ 0.15 (1) Third quarter $ 0.05 $ 0.03 Fourth quarter $ 0.08 $ 0.05 ------ ------ Annual Total $ 0.23 $ 0.23 ====== ======
(1) In August, 2004 a special one-time dividend of $0.12 per share was declared, as well as the first quarterly dividend of $0.03 per share. Outlook For fiscal 2007, the Company currently expects to open approximately eight to ten new stores, relocate or remodel approximately 10 to 15 stores and close approximately two to four stores. Management estimates that capital expenditures for fiscal 2007 will be approximately $26.4 million and that such amounts will be used primarily for new store openings, renovations and improvements to existing stores, warehouse distribution improvements, and investment in management information systems. The increase in capital expenditures versus prior years is partially due to more new stores and relocations projected in fiscal 2007, as well as a greater number of the new stores being built by the Company with the Company then being reimbursed by the landlord through allowances treated as a sale/leaseback transaction. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004, "Share-Based Payment.") SFAS No. 123R, "Accounting for Stock-Based Compensation" is a revision of SFAS No. 123 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 APB Opinion No. 25, no stock-based compensation cost had been reflected in the net income of the Company for grants of stock options to employees. No new stock options have been granted to employees since December 2004. 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 will be to reduce net income by approximately $400,000, net of taxes, or $0.02 per diluted share in fiscal 2007 for unvested options issued prior to January 28, 2006. In November, 2004 FASB issued SFAS No. 151, "Inventory Costs," which amends ARB No. 43, Chapter 4 "Inventory Pricing." SFAS No. 151 clarifies the accounting for inventory costs related to abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criteria of "so abnormal." SFAS No. 151 is effective with fiscal years beginning after June 15, 2005. The 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 December, 2004 FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets", which amends APB Opinion No. 29, "Accounting For Nonmonetary Transactions," to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective in the first fiscal period beginning after June 15, 2005. The adoption of this new accounting standard is not expected to have a material effect on the Company's financial position, results of operations or cash flows. In May, 2005 FASB issued SFAS No. 154 "Accounting Changes and Error Corrections." which replaced APB Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for, and the reporting of, a change in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 now requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective with fiscal years beginning after December 15, 2005. The impact of adopting this new accounting standard on the Company's financial position, results of operations or cash flows has not yet been determined. FASB Staff Position No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"), was issued in November, 2005, which amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations," and APB Opinion No. 18 " The Equity Method of Accounting for Investments in Common Stock." FSP No. 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. FSP No. 115-1 is effective with fiscal periods beginning after December 15, 2005. The impact of adopting this new staff position on the Company's financial position, results of operations or cash flows has not yet been determined. 11 BOOKS-A-MILLION 2006 Annual Report 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 of merchandise to, related parties. Related party inventory purchases increased by $4.5 million, or 14.7%, to $34.6 million in fiscal 2006 compared to fiscal 2005 purchases of $30.1 million. The increase in related party purchases was primarily due to increased magazine purchases versus fiscal 2005. Related party sales transactions increased in fiscal 2006 to $1.1 million, an increase of $0.6 million as a result of increased book merchandise sales. 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. 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 2006 Annual Report CONSOLIDATED BALANCE SHEETS
AS OF (Dollars In thousands, except per share amounts) 1/28/06 1/29/05 - ------------------------------------------------ ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 37,519 $ 16,559 Accounts receivable, net of allowance for doubtful accounts of $840 and $581, respectively 9,668 6,543 Related party receivables 1,134 73 Inventories 204,789 210,270 Prepayments and other 4,340 6,911 Deferred income taxes - 1,704 ---------- ---------- Total Current Assets 257,450 242,060 ---------- ---------- PROPERTY AND EQUIPMENT: Land 628 628 Buildings 6,470 6,439 Equipment 72,594 67,942 Furniture and fixtures 48,370 44,279 Leasehold improvements 73,404 71,323 Construction in process 2,072 5,353 ---------- ---------- Gross Property and Equipment 203,538 195,964 Less accumulated depreciation and amortization 152,537 140,018 ---------- ---------- Net Property and Equipment 51,001 55,946 ---------- ---------- DEFERRED INCOME TAXES 1,662 - ---------- ---------- OTHER ASSETS: Goodwill 1,368 1,368 Other 178 1,438 ---------- ---------- Total Other Assets 1,546 2,806 ---------- ---------- TOTAL ASSETS $ 311,659 $ 300,812 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable: Trade $ 98,171 $ 97,185 Related party 2,691 9,591 Accrued expenses 45,459 38,360 Accrued income taxes 1,838 1,542 Deferred income taxes 2,654 - ---------- ---------- Total Current Liabilities 150,813 146,678 ---------- ---------- LONG-TERM DEBT 7,200 7,500 ---------- ---------- DEFERRED INCOME TAXES - 1,415 ---------- ---------- OTHER LONG-TERM LIABILITIES 8,637 10,360 ---------- ---------- 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 19,764,223 and 19,067,960 shares issued at January 28, 2006 and January 29, 2005, respectively 198 191 Additional paid-in capital 80,976 74,505 Treasury stock at cost (3,287,317 shares at January 28, 2006 and 2,792,869 shares at January 29, 2005, respectively) (16,954) (11,630) Deferred compensation (1,467) (481) Accumulated other comprehensive loss, net of tax (7) (195) Retained earnings 82,263 72,469 ---------- ---------- Total Stockholders' Equity 145,009 134,859 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,659 $ 300,812 ========== ==========
The accompanying notes are an integral part of these consolidated statements. 13 BOOKS-A-MILLION 2006 Annual Report CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED ------------------------------------- (In thousands, except per share data) 1/28/06 1/29/05 1/31/04 - ------------------------------------------------------------------------- ---------- ---------- ---------- 52 WEEKS 52 weeks 52 weeks Net sales $ 503,751 $ 474,099 $ 457,234 Cost of products sold, including warehouse distribution and store occupancy costs 357,166 339,012 330,150 ---------- ---------- ---------- GROSS PROFIT 146,585 135,087 127,084 Operating, selling and administrative expenses 109,160 99,207 93,974 Gain on insurance recoveries (note 10) 1,248 - - Depreciation and amortization 15,636 17,788 18,065 ---------- ---------- ---------- OPERATING PROFIT 23,037 18,092 15,045 Interest expense, net 1,441 1,874 2,909 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 21,596 16,218 12,136 Provision for income taxes 8,545 6,001 4,613 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 13,051 10,217 7,523 Discontinued operations: (Loss) income from discontinued operations before taxes (including impairment charge) 27 (29) (641) Income tax provision (benefit) 11 (11) (244) ---------- ---------- ---------- (Loss) Income from discontinued operations 16 (18) (397) ---------- ---------- ---------- NET INCOME $ 13,067 $ 10,199 $ 7,126 ========== ========== ========== Net income per common share: BASIC Income from continuing operations $ .80 $ 0.62 $ 0.46 Loss from discontinued operations -- -- (0.02) ---------- ---------- ---------- Net Income per share .80 0.62 0.44 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 16,384 16,453 16,279 ========== ========== ========== DILUTED Income from continuing operations $ 0.77 $ 0.59 $ 0.45 Loss from discontinued operations -- -- (0.03) ---------- ---------- ---------- Net Income per share 0.77 0.59 0.42 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 16,964 17,178 16,789 ========== ========== ========== Dividends per share - declared $ 0.23 $ 0.23 -- ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. 14 BOOKS-A-MILLION 2006 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK ADDITIONAL TREASURY STOCK RESTRICTED OTHER TOTAL ------------- PAID-IN ---------------- STOCK RETAINED COMPREHENSIVE STOCKHOLDERS' (In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT AMOUNT EARNINGS INCOME (LOSS) EQUITY - ---------------------------------------- ------ ------ ------- ------ --------- ---------- -------- ------------- ------------- 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, at cost 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 ------ ----- ------- ----- -------- ------- ------- ------- -------- Net income $13,067 $13,067 Unrealized gain on accounting for derivative instruments, net of tax provision of $89 141 141 Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $30 47 47 -------- Subtotal comprehensive income 13,255 -------- Purchase of treasury stock, at cost 494 (5,324) (5,324) Dividends paid (3,273) (3,273) Issuance of restricted stock 43 1 1,433 (1,434) -- Amortization of deferred compensation related to restricted stock 448 448 Issuance of stock for employee stock purchase plan 13 84 84 Exercise of stock options 640 6 4,341 4,347 Tax benefit from exercise of stock options 613 613 ------ ----- ------- ----- -------- ------- ------- ------- -------- BALANCE, JANUARY 28, 2006 19,764 $ 198 $80,976 3,287 $(16,954) $(1,467) $82,263 $ (7) $145,009 ====== ===== ======= ===== ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated statements 15 BOOKS-A-MILLION 2006 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended -------------------------------------- (In thousands) 1/28/06 1/29/05 1/31/04 - -------------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,067 $ 10,199 $ 7,126 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,651 17,843 18,325 Loss on impairment of assets 215 356 1,211 (Gain) loss on sale of property and equipment (4) (29) 73 Deferred income tax provision 1,281 2,352 1,934 Tax benefit of exercise of stock options 613 943 141 Reclassification of unrealized loss from de-designation of cash flow hedge 47 27 284 Deferred compensation amortization 448 167 - (Increase) decrease in assets: Accounts receivable (2,673) 728 528 Related party receivables (1,061) 278 86 Inventories 5,481 1,321 12,428 Prepayments and other 2,571 (1,021) (510) Noncurrent assets (excluding amortization) 1,176 (533) - Increase (decrease) in liabilities: Accounts payable 986 9,201 (11,601) Related party payables (6,900) 814 (294) Accrued income taxes 296 (1,832) 803 Accrued expenses 5,519 6,379 4,144 ---------- ---------- ---------- Total adjustments 23,646 36,994 27,552 ---------- ---------- ---------- Net cash provided by operating activities 36,713 47,193 34,678 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (11,297) (14,923) (10,402) Proceeds from sale of property and equipment 11 44 39 ---------- ---------- ---------- Net cash used in investing activities (11,286) (14,879) (10,363) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facilities 189,120 171,400 192,490 Repayments under credit facilities (189,420) (184,540) (216,790) Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan 4,430 1,405 528 Purchase of treasury stock (5,324) (6,359) - Payment of dividends (3,273) (3,009) - Repayments of other debt - - (172) ---------- ---------- ---------- Net cash used in financing activities (4,467) (21,103) (23,944) ---------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 20,960 11,211 371 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,559 5,348 4,977 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 37,519 $ 16,559 $ 5,348 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,607 $ 2,036 $ 3,133 ========== ========== ========== Income taxes, net of refunds $ 6,787 $ 1,650 $ 1,694 ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. 16 BOOKS-A-MILLION 2006 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 205 bookstores in 19 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's business segments, see Note 8. Fiscal Year The Company operates on a 52 or 53-week year, with the fiscal year ending on the Saturday closest to January 31. Fiscal years 2006, 2005 and 2004 were all 52-week periods. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Actual results could differ from those 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. 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 cost of products sold upon the sale of the related inventory. 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. The Company currently utilizes the last-in, first-out (LIFO) method of accounting for inventories. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $1.5 million as of January 28, 2006 and $1.1 million as of January 29, 2005. The estimated replacement cost of inventory is the current FIFO value of $206.3 million. 17 BOOKS-A-MILLION 2006 Annual Report 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 28, January 29, (In thousands) 2006 2005 - -------------- ------------ ------------ Inventories (at FIFO) $ 206,314 $ 211,375 LIFO reserve (1,525) (1,105) ----------- ----------- Net inventories $ 204,789 $ 210,270 =========== ===========
Property and Equipment Property and equipment are recorded at cost. Depreciation of 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 five 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. Other Long-Lived Assets The Company's other long-lived assets consist of property and equipment which includes leasehold improvements. At January 28, 2006, the Company had $51.0 million of property and equipment, net of accumulated depreciation, accounting for approximately 16.4% of the Company's total assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store's estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store's fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset's carrying value in excess of fair value. Impairment losses totaled $0.2 million, $0.3 million and $1.0 million in fiscal 2006, 2005 and 2004, respectively, and were recorded in selling, general administrative costs. For all years presented, the impairment losses related to the retail trade business segment. Goodwill At January 28, 2006, the Company had $1.4 million of goodwill, accounting for approximately 0.4% of the Company's total assets. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on the goodwill during the fourth quarter of fiscal 2006 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. Changes in market conditions, among other factors, could have a material impact on these estimates. 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. 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. 18 BOOKS-A-MILLION 2006 Annual Report 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 2006, 2005 and 2004, the Company recognized store closing costs of $40,000, $55,000 and $219,000, respectively. 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 became effective with the fiscal year beginning January 30, 2005. Prior to the effective date of EITF No. 03-13, the Company was already reporting certain closed stores as discontinued operations (see footnote 7). Therefore, adopting this new guidance did not impact the Company's financial position, results of operations or cash flows. 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 $3,578,000, $3,207,000 and $2,995,000 for fiscal years 2006, 2005 and 2004, 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. Accounts Receivable and Allowance for Doubtful Accounts Receivables represent customer, landlord and other receivables due within one year and are net of any allowance for doubtful accounts. Net receivables were $10,802,000 and $6,616,000 for January 28, 2006 and January 29, 2005, respectively. Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as the case of a bankruptcy filing or other material events impacting its business, a specific reserve for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered. 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: 19 BOOKS-A-MILLION 2006 Annual Report
FISCAL YEAR ENDED ----------------------------------- (In thousands) 1/28/06 1/29/05 1/31/04 - -------------- ------- ------- ------- Weighted average shares outstanding: Basic 16,384 16,453 16,279 Dilutive effect of stock options outstanding 580 725 510 ------ ------ ------ Diluted 16,964 17,178 16,789 ====== ====== ======
Weighted options outstanding of 94,000, 157,000 and 801,000 for the years ended January 28, 2006, January 29, 2005 and January 31, 2004, respectively, were not included in the table above as they were anti-dilutive in those periods. The Board of Directors discontinued a stock repurchase program in March of 2004 that was originally authorized in fiscal 2000. This program authorized the expenditure of $6.0 million to repurchase Company outstanding shares. The Company repurchased 2,010,000 shares at a cost of $5,271,000 under this program. 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. Under this plan, the Company has repurchased 1,221,000 and 783,000 shares at a cost of $10,639,000 and $6,359,000 as of fiscal 2006 and fiscal 2005, respectively. Additionally, in June 2005 the Company commenced a modified "Dutch Auction" tender offer (the "Tender Offer") to purchase up to 4,000,000 shares of its outstanding common stock at a price per share of not less than $8.75 nor in excess of $10.00 per share, for an aggregate purchase price of up to $40.0 million. Pursuant to the Tender Offer, the Company purchased 56,406 shares of common stock at a purchase price of $10.00 per share, plus expenses for completing the Tender Offer, for a total cost of $1,044,000. Disclosure of Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying financial statements at cost, which approximates fair value because of the short-term maturity of these instruments. Investments are reflected in the accompanying financial statements at current market value. Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities at January 28, 2006 and January 29, 2005, the Company's debt approximates fair value. Stock-Based Compensation On June 1, 2005, the stockholders of the Company approved the adoption of the Books-A-Million, Inc. 2005 Incentive Award Plan. The Company's board of directors had previously approved this plan subject to stockholder approval. An aggregate of 300,000 shares of common stock may be issued pursuant to awards granted under the Plan. On June 29, 2005, the Company granted 77,100 shares of restricted stock to the Company's officers and key employees pursuant to the terms of the Plan. Additionally, the Company granted 3,333 shares of restricted stock to a Director that joined the Company's Board of Directors in August 2005. The compensation expense related to these grants is being expensed over the vesting period for the individual grants. For fiscal 2006, the Company has recorded $224,000 of stock-based compensation expense for the restricted stock grants. The Company has one stock option plan that provides for the issuance of options to employees and members of the board of directors. Upon the approval of the 2005 Incentive Award Plan by our stockholders at the Company's annual meeting, the Company determined that there will be no additional awards made under the Company's stock option plan. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost for this plan 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. 148 ("SFAS 148") "Accounting for Stock-Based Compensation- Transaction and Disclosure - an Amendment of FASB statement No. 123" to stock-based employee compensation: 20 BOOKS-A-MILLION 2006 Annual Report
FISCAL YEAR ENDED --------------------------------- (In thousands, except per share amounts) 1/28/06 1/29/05 1/31/04 - ---------------------------------------- ------- ------- ------- Net income, as reported $13,067 $10,199 $7,126 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects 541 1,139 1,346 Pro forma net income $12,526 $ 9,060 $5,780 Net income per common share: Basic - as reported $ 0.80 $ 0.62 $ 0.44 Basic - pro forma $ 0.76 $ 0.55 $ 0.36 Diluted - as reported $ 0.77 $ 0.59 $ 0.42 Diluted - pro forma $ 0.74 $ 0.53 $ 0.34
The fair value of the options granted under the Company's stock option plan during fiscal 2005 and 2004 was estimated on their date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: $0.03 per quarter dividend yield for fiscal 2005 only; expected stock price volatility rate of 44% and 106%, respectively; risk free interest rates of 3.45% to 4.31% and 3.87% to 4.90%, respectively; and expected lives of six or ten years. No options were granted in fiscal year 2006. Stock-based compensation expense reflected in the above table for fiscal 2006 relates to the fair value of options granted in prior years that would be expensed over their vesting period. 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. At January 28, 2006 and January 29, 2005, liabilities related to derivatives were classified as other long-term liabilities of $61,000 and $543,000, 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. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004, "Share-Based Payment") SFAS No. 123R, "Accounting for Stock-Based Compensation," is a revision of SFAS No. 123 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. 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 will be to reduce net income by approximately $400,000, net of taxes, or $0.02 per diluted shares in fiscal 2007. In November 2004 FASB issued SFAS No. 151 , "Inventory Costs," which amends ARB No. 43, Chapter 4 "Inventory Pricing." SFAS No. 151 clarifies the accounting for inventory costs related to abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criteria of "so abnormal." SFAS No. 151 is effective with fiscal years beginning after June 15, 2005. The 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 December 2004 FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets," which amends APB Opinion No. 29, "Accounting For Nonmonetary Transactions," to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective in the first fiscal period beginning after June 15, 2005. The adoption of this new accounting standard is not expected to have a material effect on the Company's financial position, results of operations or cash flows. In May 2005 FASB issued SFAS No. 154 "Accounting Changes and Error Corrections. which replaced APB Opinion No. 20 "Accounting Changes" and SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for, and the reporting of, a change in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 now requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective with fiscal years beginning after December 15, 2005. The impact of adopting this new accounting standard on the Company's financial position, results of operations or cash flows has not yet been determined. FASB Staff Position No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"), was issued in November, 2005, which amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations," and APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock." FSP No. 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. FSP No. 115-1 is effective with fiscal periods beginning after December 15, 2005. The impact of adopting this new staff position on the Company's financial position, results of operations or cash flows has not yet been determined. Prior Year Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 21 BOOKS-A-MILLION 2006 Annual Report 2. INCOME TAXES A summary of the components of the income tax provision is as follows (in thousands):
FISCAL YEAR ENDED ------------------------------ 1/28/06 1/29/05 1/31/04 -------- -------- -------- Current: Federal $ 6,495 $ 4,000 $ 2,916 State 899 102 25 -------- -------- -------- $ 7,394 $ 4,102 $ 2,941 -------- -------- -------- Deferred: Federal $ 1,000 $ 1,681 $ 1,558 State 162 207 (131) -------- -------- -------- 1,162 1,888 1,427 -------- -------- -------- Provision for income taxes $ 8,556 $ 5,990 $ 4,368 ======== ======== ========
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
FISCAL YEAR ENDED --------------------------- 1/28/06 1/29/05 1/31/04 ------- ------- ------- Federal statutory income tax rate 35.0% 35.0% 34.0% State income tax provision 3.5% 0.9% 0.2% Nondeductible meals and entertainment expense 0.3% 0.5% 0.6% Other 0.8% 0.6% 3.2% ---- ---- ---- Effective income tax rate 39.6% 37.0% 38.0% ==== ==== ====
Temporary differences (in thousands) which created deferred tax assets (liabilities) at January 28, 2006 and January 29, 2005, are as follows:
AS OF 1/28/06 As of 1/29/05 ----------------------- ------------------------ CURRENT NONCURRENT Current Noncurrent -------- ---------- -------- ---------- Depreciation $ -- $ (1,612) $ -- $ (5,429) Accruals 2,247 -- 1,325 -- Interest rate swap 4 -- 123 -- Inventory (4,371) -- (85) -- State net operating loss carry forwards -- 398 -- 903 Deferred Rent 571 3,061 1,963 3,300 -------- -------- -------- -------- Prepaids (1,464) -- (1,866) -- -------- -------- -------- -------- Other 359 (185) 244 (189) -------- -------- -------- -------- Deferred tax asset (liability) $ (2,654) $ 1,662 $ 1,704 $ (1,415) ======== ======== ======== ========
At January 28, 2006, the Company had state net operating loss carry forwards of approximately $9,859,000 that expire beginning in 2006 through 2024. A valuation allowance for net deferred income tax assets has been recorded for $139,000 related to deferred taxes for a wholly-owned subsidiary. There are no other valuation allowances as the realization of the balance of the recorded deferred tax assets is considered more likely than not. 3. DEBT AND LINES OF CREDIT The Company's current credit facility allows for unsecured borrowings up to $100 million for which no principal payments are due until the facility expires in July 2007. Availability under the facility is reduced by outstanding letters of credit issued thereunder. Interest on borrowings under the credit facility 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 contains financial and non-financial covenants, the most restrictive of which is the maintenance of a minimum fixed charge coverage ratio. As of January 28, 2006 and January 29, 2005 there were no outstanding borrowings under this credit facility and the face amount of letters of credit issued under the credit facility were $3.0 million and $2.6 million, respectively. The maximum and average outstanding borrowings under the credit facility (excluding letters of credit issued thereunder) during fiscal 2006 were $23.7 million and $ 10.0 million, respectively. The Company is subject to interest rate fluctuations on borrowings under its credit facility. To manage this exposure, the Company has used interest rate swaps in the past to fix the interest rate on variable debt. The Company entered into two separate $10.0 million swaps on 22 BOOKS-A-MILLION 2006 Annual Report July 24, 2002. Both expired in August 2005 and, prior to the payoff of the debt, effectively fixed the interest rate on $20.0 million of variable debt at 5.13%. The counter parties to the interest rate swaps were two of the Company's primary banks. The Company did not replace the swaps at expiration. 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 28, 2006 and January 29, 2005, there was $7.2 million and $7.5 million of borrowings outstanding, respectively, under these arrangements, which bear interest at variable rates. The net book value of the collateral property securing the Bond was $5,283,000 as of January 28, 2006. The Bond has a maturity date of December 1, 2019, with a purchase provision obligating the Company to repurchase the Bond on May 30, 2007, unless extended by the bondholder. Such an extension may be renewed annually by the bondholder, at the Company's request, to a date 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 8.73%. The swap was entered into in May 1996 and will expire in May 2006. The Company does not intend to enter into a new swap to manage the exposure to interest rate fluctuations on the Bond. 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 consolidated balance sheets at their fair value of $61,000 and $543,000 as of January 28, 2006 and January 29, 2005, respectively. For the fiscal years ending January 28, 2006, January 29, 2005 and January 31 2004, adjustments of $141,000, $485,000, and $228,000 were recorded as unrealized gains in accumulated other comprehensive income (loss), after tax. During the fourth quarter of fiscal 2005, one of the $10 million interest rate swaps no longer qualified for hedge accounting under SFAS No. 133. Therefore, the Company de-designated the hedge resulting in an expense of $27,000 in fiscal 2005. 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 in fiscal 2004. 4. LEASES The Company leases the premises for its retail bookstores under operating leases, which expire in various years through the year 2017. 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. The Company also has minimal operating leases for equipment and trailer trucks. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of January 28, 2006 are as follows (in thousands):
FUTURE MINIMUM FISCAL YEAR RENT - ---------------- -------------- 2007 $ 30,916 2008 27,343 2009 22,083 2010 17,028 2011 13,404 Subsequent years 27,732 -------- Total $138,506 ========
Rental expense for all operating leases consisted of the following (in thousands):
FISCAL YEAR ENDED ------------------------------------ 1/28/06 1/29/05 1/31/04 -------- -------- -------- Minimum rentals $ 30,944 $ 28,332 $ 28,194 Contingent rentals 249 466 684 -------- -------- -------- Total $ 31,193 $ 28,798 $ 28,878 ======== ======== ========
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 six months of service and who are at least 21 years of age, and permit participants to contribute from 1% to 15% of compensation and participants over 50 years of age are allowed to make catch-up contributions. Limits to contributions by employees are established by the Internal Revenue Code. 23 BOOKS-A-MILLION 2006 Annual Report Company matching and supplemental contributions are made at management's discretion. Company matching contributions were 70%, 70% and 75% for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. The employer contributions are made on employee contributions up to a maximum of 6% of the employee's salary. The expense under this plan was $806,000, $675,000 and $467,000 in fiscal 2006, 2005 and 2004, respectively. 2005 Incentive Award Plan On June 1, 2005, the stockholders of the Company approved the adoption of the Books-A-Million, Inc. 2005 Incentive Award Plan. An aggregate of 300,000 shares of common stock may be issued pursuant to awards granted under the Plan. On June 29, 2005, the Company granted 77,100 shares of restricted stock to the Company's officers and key employees pursuant to the terms of the Plan. Additionally, the Company granted 3,333 shares of restricted stock to a Director that joined the Company's Board of Directors in August 2005. The compensation expense related to these grants is being expensed over the vesting period for the individual grants. For Fiscal 2006, the Company has recorded $224,000 of stock-based compensation expense for the restricted stock grants. Stock Option Plan The Company has one stock option plan for grants to executive officers, directors, and key employees. Upon the approval of the 2005 Incentive Award Plan by the Company's stockholders at the Company's annual meeting, the Company closed this plan to further issuance of option grants. Options previously issued are still valid and subject to the vesting schedule. 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 the three-year period beginning on the date of the grant 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 28, 2006 January 29, 2005 January 31, 2004 ------------------ ------------------ ------------------ WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 1,506 $ 5.19 2,296 $ 5.22 2,576 $ 4.90 Granted 0 N/A 35 8.64 266 6.45 Exercised (640) 6.82 (533) 2.54 (177) 2.51 Forfeited (52) 7.13 (292) 10.65 (369) 5.24 ----- -------- ----- -------- ----- -------- Outstanding at end of year 814 $ 3.77 1,506 $ 5.19 2,296 $ 5.22 ----- -------- ----- -------- ----- -------- Exercisable at end of year 566 $ 3.30 949 $ 5.71 1,525 $ 5.52 ----- -------- ----- -------- ----- -------- Weighted average fair value of options granted N/A $ 8.64 $ 5.87 ======== ======== ========
During fiscal years 2006, 2005 and 2004, the Company recognized tax benefits related to the exercise of stock options in the amount of $613,000, $943,000 and $141,000, respectively. The tax benefits were credited to paid-in capital in the respective years. The following table summarizes information about stock options outstanding at January 28, 2006 (shares in thousands):
Options Outstanding Options Exercisable ------------------------------------------------ -------------------------------- Weighted Number Average Number Outstanding at Remaining Weighted Exercisable at Weighted Range of January 28, Contractual Average January 28, Average Exercise Price 2006 Life (Years) Exercise Price 2006 Exercise Price - -------------- -------------- ------------ -------------- -------------- -------------- $1.38 - $ 2.37 367 6.08 $2.08 271 $1.98 $2.39 - $ 7.69 422 7.01 $4.91 271 $4.06 $7.90 - $11.13 25 8.92 $9.59 24 $9.61 --- --- Totals 814 6.65 $3.77 566 $3.30 === ==== ===== === =====
The Company previously established separate option plans for its subsidiaries, however options were never granted under these plans. During fiscal 2006 the separate subsidiary option plans were dissolved and closed. 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, 258,902 shares have been 24 BOOKS-A-MILLION 2006 Annual Report purchased as of January 28, 2006. Executive Incentive Plan The Company maintains an Executive Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for awards to certain executive officers of either cash or shares of restricted stock. The Company has always issued awards in the form of restricted stock. Issuance of awards under the Incentive Plan is based on the Company achieving pre-established performance goals during a three consecutive fiscal year performance period. Awards issued under the Incentive Plan for a particular performance period vest on the third anniversary of the last day of such performance period if the recipient remains employed by the Company on such vesting date. Awards under the Incentive Plan are expensed ratably over the period from the date that the issuance of such awards becomes probable through the end of the restriction period. Awards granted under the Incentive Plan for the three year performance periods ended January 28, 2006, January 29, 2005, and January 31, 2004 totaled $592,000 (50,824 shares), $364,000 (39,116 shares) and $284,000 (45,528 shares), respectively. Executives' Deferred Compensation Plan During fiscal 2006, the Board adopted the Books-A-Million, Inc. Executives' Deferred Compensation Plan (the "Executives' Deferred Compensation Plan"). The Executives' Deferred Compensation Plan provides a select group of management or highly compensated employees of the Company and certain of its subsidiaries (the "Participants") with the opportunity to defer the receipt of certain cash compensation. Each Participant may elect to defer under the Executives' Deferred Compensation Plan a portion of his or her cash compensation that may otherwise be payable in a calendar year. A Participant's compensation deferrals are credited to the Participant's bookkeeping account (the "Account") maintained under the Executives' Deferred Compensation Plan. Each Participant's Account is credited with a deemed rate of interest and/or earnings or losses depending upon the investment performance of the deemed investment option. With certain exceptions, a Participant's Account will be paid after the earlier of: (1) a fixed payment date, as elected by the Participant (if any); or (2) the Participant's separation from service with Company or its subsidiaries. Participants may generally elect that payments be made in a single sum or installments in the year specified by the Participant or upon their separation from service with the Company. Additionally, a Participant may elect to receive payment upon a Change of Control, as defined in, and to the extent permitted by, Section 409A of the Internal Revenue Code of 1986, as amended. Directors' Deferred Compensation Plan During fiscal 2006, the Board adopted the Books-A-Million, Inc. Directors' Deferred Compensation Plan (the "Directors' Deferred Compensation Plan"). The Directors' Deferred Compensation Plan provides the Non-Employee Directors with the opportunity to defer the receipt of certain amounts payable for serving as a member of the Board (the "Fees"). A Non-Employee Director's Fee deferrals are credited to the Non-Employee Director's bookkeeping account (the "Account") maintained under the Directors' Deferred Compensation Plan. Each participating Non-Employee Director's Account is credited with a deemed rate of interest and/or earnings or losses depending upon the investment performance of the deemed investment option. With certain exceptions, a participating Non-Employee Director's Account will be paid after the earlier of: (1) a fixed payment date, as elected by the participating Non-Employee Director (if any); or (2) the participating Non-Employee Director's separation from service on the Board. The participating Non-Employee Director may generally elect that payments be made in a single sum or installments in the year specified by the participating Non-Employee Director or upon the Non-Employee Director's separation from service on the Board. Additionally, a participating Non-Employee Director may elect to receive payment upon a Change of Control, as defined in, and to the extent permitted by, Section 409A of the Internal Revenue Code of 1986, as amended. 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 seasonal music and newspapers from Anderson Media Corporation ("Anderson Media"), an affiliate through common ownership. During fiscal 2006, 2005 and 2004, purchases of these items from Anderson Media totaled $30,746,000, $27,405,000 and $28,160,000, respectively. The Company purchases certain of its collectibles, gifts and books from Anderson Press, Inc. ("Anderson Press"), an affiliate through common ownership. During fiscal 2006, 2005 and 2004, such purchases from Anderson Press totaled $1,272,000, $1,122,000 and $853,000, 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 2006, 2005 and 2004 were $223,000, $371,000 and $265,000, respectively. The Company purchases certain magazine subscriptions from Magazines.com, an affiliate through common ownership. During fiscal 2006, 2005 and 2004, purchases of these items were $71,000, $78,000 and $89,000, respectively. The Company purchases content for publication from Publication Marketing Corporation, an affiliate through common ownership. During fiscal 2006, 2005 and 2004, purchases of these items were $71,000, $72,000 and $72,000, 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 $2,113,000, $1,075,000 and $910,000 for fiscal 2006, 2005 and 2004, respectively. These amounts paid to Anco Far East primarily included the actual cost of the product, as well as fees for sourcing and consolidation services. All 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 $148,000, $75,000 and $77,000, respectively. The Company purchased certain store fixtures from K&A Crylics, an affiliate through common ownership. In fiscal 2006 these purchases were $64,000. Prior to fiscal 2006, K&A Crylics was not a related party. The Company sold books to Anderson Media in the amounts of $1,017,000, $115,000 and $383,000 in fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, 2005 and 2004, the Company provided $11,000, $296,000, and $226,000, respectively, of Internet services to Magazines.com. The Company provided internet services to American Promotional Events of $77,000, $68,000 and $50,000 in fiscal 2006, 2005 and 2004, respectively. The Company leases its principal executive offices from a trust, which was established for the benefit of the grandchildren of Mr. Charles C. Anderson, a former member of the Board of Directors. The initial lease expired on January 31, 2006, and a short-term extension was signed through June 30, 2006. During fiscal 2006, 2005 and 2004, 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 2006, 2005 and 2004, the Company paid A&A a total of $445,000, $441,000, and $446,000, respectively, in connection with such leases. There were no future minimum rental payments on any of the four leases at January 28, 2006. The Company subleases certain property to Hibbett Sporting Goods, Inc. ("Hibbett"), a sporting goods retailer in the southeastern United States. The Company's Executive Chairman, Clyde B. Anderson, is a member of Hibbett's board of directors. During fiscal 2006, 2005 and 2004, the Company received $191,000 each year in rent payments from Hibbett. 25 BOOKS-A-MILLION 2006 Annual Report 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 $25,000 in fiscal 2006, $22,000 in fiscal 2005, and $0 in fiscal 2004. 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 of operating the plane. The total amounts received from affiliated companies for use of the plane in fiscal 2006, 2005 and 2004 were $146,000, $110,000 and $270,000, respectively. The Company also occasionally rents a plane from A&A at rates that cover all of the variable costs and a portion of the fixed costs of operating the plane. The amounts paid to A&A for plane rental were $70,000, $92,000 and $44,000 for fiscal 2006, 2005 and 2004, respectively. 7. INCOME OR (LOSS) FROM DISCONTINUED OPERATIONS Discontinued operations represent the results for the closed stores for the years presented due to the fiscal 2006 closure of two retail stores in markets located in Tennessee and West Virginia, 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. For fiscal 2006, 2005 and 2004 the closed stores had sales of $689,000, $2,503,000 and $5,382,000, and pretax operating income (loss) of $27,000, $(29,000) and $(641,000) , respectively. Included in the loss on discontinued operations are impairment losses of $0, $14,000 and $228,000 for fiscal 2006, 2005 and 2004, respectively. Also, included in the loss on discontinued operations are store closing costs of $20,000, $50,000, and $64,000 for fiscal 2006, 2005 and 2004, 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 supplies merchandise predominantly 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) 1/28/06 1/29/05 1/31/04 - ---------------------------------- ---------- ---------- ---------- Net Sales Retail Trade $ 496,609 $ 465,732 $ 451,075 Electronic Commerce Trade 27,605 26,656 25,451 Intersegment Sales Elimination (20,463) (18,289) (19,292) ---------- ---------- ---------- Net Sales $ 503,751 $ 474,099 $ 457,234 Operating Profit Retail Trade $ 22,431 $ 16,908 $ 14,171 Electronic Commerce Trade 1,027 909 332 Intersegment Elimination of Certain Costs (421) 275 542 ---------- ---------- ---------- Total Operating Profit $ 23,037 $ 18,092 $ 15,045 ========== ========== ========== Assets Retail Trade $ 310,447 $ 299,703 Electronic Commerce Trade 1,286 1,372 Intersegment Sales Elimination (74) (263) ---------- ---------- Total Assets $ 311,659 $ 300,812 ========== ==========
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, 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. 26 BOOKS-A-MILLION 2006 Annual Report 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 28, 2006 and January 29, 2005, as such liabilities are considered de minimis. The Company is subject to potential ongoing sales and use tax audits, income tax audits and other tax issues for both its retail and internet segments. It is the policy of the Company to estimate any potential tax contingency liabilities based on various factors such as ongoing state and federal tax audits, historical results of audits at the state or federal level and specific tax issues. Accruals for potential tax contingencies are recorded by the Company when they are deemed to have a probable likelihood of a liability and the liability can be reasonably estimated. 10. GAIN ON INSURANCE RECOVERIES In fiscal 2006 the Company recognized an insurance gain of $754,000, net of taxes, related to insurance recoveries for hurricane damage suffered at three stores in the third quarter of fiscal 2005. The insurance recovery amounts were finalized with the insurance company during the third quarter of fiscal 2006, therefore the gain was recorded in the current fiscal year. 11. CASH DIVIDEND On March 15, 2006, the Board of Directors declared a quarterly dividend of $0.08 per share to be paid on April 12, 2006 to stockholders of record at the close of business on March 29, 2006. The Company intends to pay quarterly dividends in the future, subject to Board approval. 12. SUMMARY OF QUARTERLY RESULTS (unaudited)
FISCAL YEAR ENDED JANUARY 28, 2006 --------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL (In thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR - ---------------------------------------- -------- -------- -------- -------- -------- Net sales $112,866 $122,277 $107,515 $161,093 $503,751 Gross profit 31,611 34,054 28,117 52,803 146,585 Operating profit (loss) 2,105 3,182 (1,019) 18,769 23,037 Net income (loss) 1,060 1,701 (873) 11,179 13,067 Net income (loss) per share - basic 0.07 0.10 (0.05) 0.68 0.80 Net income (loss) per share - diluted 0.06 0.10 (0.05) 0.66 0.77
Fiscal Year Ended January 29, 2005 --------------------------------------------------------- First Second Third Fourth Total (In thousands, except per share amounts) Quarter Quarter Quarter Quarter Year - ---------------------------------------- -------- -------- -------- -------- -------- Net sales $107,792 $113,370 $103,945 $148,992 $474,099 Gross profit 30,155 30,993 27,787 46,152 135,087 Operating profit (loss) 2,484 2,079 (1,329) 14,858 18,092 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
(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. 27 BOOKS-A-MILLION 2006 Annual Report REPORT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON FINANCIAL STATEMENTS Board of Directors and Shareholders of Books-A-Million, Inc. We have audited the accompanying balance sheet of Books-A-Million, Inc. as of January 28, 2006 and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Books-A-Million, Inc. as of January 28, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II for the year ended January 28, 2006 is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Books-A-Million, Inc.'s internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 22, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ GRANT THORNTON LLP Atlanta, Georgia March 22, 2006 28 BOOKS-A-MILLION 2006 Annual Report REPORT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Shareholders of Books-A-Million, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Controls Over Financial Reporting, that Books-A-Million, Inc. maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Books-A-Million, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Books-A-Million, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the Internal Control - Integrated Framework issued by the COSO. Also in our opinion, Books-A-Million, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Books-A-Million, Inc. as of January 28, 2006, and the related statements of income, stockholders' equity, and cash flows for the year then ended and our report dated March 22, 2006 expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP Atlanta, Georgia March 22, 2006 29 BOOKS-A-MILLION 2006 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 income, stockholders' equity, and cash flows for the fiscal years then ended. 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 the fiscal years then ended, 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 2, 2003, the Company changed its method of accounting for inventories. DELOITTE & TOUCHE LLP Birmingham, Alabama April 25, 2005 (April 12, 2006 as to Note 7) 30 BOOKS-A-MILLION 2006 Annual Report DIRECTORS AND CORPORATE OFFICERS BOARD OF DIRECTORS CLYDE B. ANDERSON Executive Chairman of the Board TERRY C. ANDERSON Chief Executive Officer and President, American Promotional Events, Inc. RONALD G. BRUNO President, Bruno Capital Management Corporation ALBERT C. JOHNSON Independent Financial Consultant and Retired Partner, Arthur Andersen LLP DR. J. BARRY MASON, Dean, Culverhouse College of Commerce The University of Alabama WILLIAM H. ROGERS, JR. Executive Vice President, SunTrust Banks, Inc. CORPORATE OFFICERS CLYDE B. ANDERSON Executive Chairman of the Board SANDRA B. COCHRAN President, Chief Executive Officer and Secretary TERRANCE G. FINLEY President, Books-A-Million, Inc. Merchandising Group RICHARD S. WALLINGTON Chief Financial Officer 31 BOOKS-A-MILLION 2006 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 Grant Thornton LLP Atlanta, Georgia FORM 10-K AND INVESTOR CONTACT A copy of the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2006, 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 28, 2006 and January 29, 2005.
DIVIDENDS QUARTER ENDED HIGH LOW DECLARED - ------------- ------ ----- --------- JANUARY 2006 $11.55 $8.76 $0.08 OCTOBER 2005 10.29 8.16 0.05 JULY 2005 10.26 7.47 0.05 APRIL 2005 9.82 7.25 0.05 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
The closing price on April 10, 2006 was $11.62. As of that date Books-A-Million, Inc., had approximately 7,800 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 8, 2006, at 10:00 a.m. central time, at The Harbert Center, 2019 Fourth Avenue North, Birmingham, Alabama 35203. Stockholders of record as of April 10, 2006, are invited to attend this meeting. 32 BOOKS-A-MILLION 402 INDUSTRIAL LANE BIRMINGHAM, ALABAMA 35211 WWW.BOOKSAMILLIONINC.COM EX-23.1 3 g00783exv23w1.txt EX-23.1 CONSENT OF GRANT THORNTON LLP Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated March 22, 2006, accompanying the financial statements and schedule and on internal control over financial reporting included in the Annual Report of Books-A-Million, Inc. on Form 10-K for the year ended January 28, 2006. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Books-A-Million, Inc. on Forms S-8 (File No. 33-72812, File No. 33-86980, File No. 333-126008, File No. 333-116831, File No. 333-84822 File No. 333-34384 and File No. 333-58619). /s/ GRANT THORNTON LLP Atlanta, Georgia March 22, 2006 EX-23.2 4 g00783exv23w2.txt EX-23.2 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 33-72812, 33-86980, 333-126008, 333-116831, 333-84822, 333-34384 and 333-58619 of Books-A-Million, Inc. (the "Company") on Form S-8 of our report dated April 25, 2005 (April 12, 2006 as to Note 7)(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 28, 2006, 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 28, 2006. DELOITTE & TOUCHE LLP Birmingham, Alabama April 12, 2006 EX-31.1 5 g00783exv31w1.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 13, 2006 /s/ Clyde B. Anderson ------------------------------------- Clyde B. Anderson Executive Chairman of the Board EX-31.2 6 g00783exv31w2.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 13, 2006 /s/ Richard S. Wallington ------------------------------------- Richard S. Wallington Chief Financial Officer EX-31.3 7 g00783exv31w3.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 13, 2006 /s/ Sandra B. Cochran ------------------------------------- Sandra B. Cochran President and Chief Executive Officer EX-32.1 8 g00783exv32w1.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 28, 2006 (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 13, 2006 /s/ Clyde B. Anderson ------------------------------------- Clyde B. Anderson Executive Chairman of the Board EX-32.2 9 g00783exv32w2.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 28, 2006 (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 13, 2006 /s/ Richard S. Wallington ------------------------------------- Richard S. Wallington Chief Financial Officer EX-32.3 10 g00783exv32w3.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 28, 2006 (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 13, 2006 /s/ Sandra B. Cochran ------------------------------------- Sandra B. Cochran President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----