-----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, TI65iuRgpvIFdYwVMHIH1EU8ps+L+lbeb+r7FAw3Hw7BFZ7Plau3wGcq6/xuqhtp 8NJmC8teNUiffLLIyodQWQ== 0000950144-99-005071.txt : 19990430 0000950144-99-005071.hdr.sgml : 19990430 ACCESSION NUMBER: 0000950144-99-005071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990429 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: SEC FILE NUMBER: 000-20664 FILM NUMBER: 99605000 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 BOOKS-A-MILLION,INC. 1 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 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to ________________ Commission File No. 0-20664 BOOKS-A-MILLION, INC. (Exact name of Registrant as specified in its charter) DELAWARE 63-0798460 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 402 INDUSTRIAL LANE BIRMINGHAM, ALABAMA 35211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (205) 942-3737 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ CONTINUED 2 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 [ ]. 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 April 19, 1999 (based on the closing sale price as reported on the NASDAQ National Market on such date), was $102,023,442. The number of shares outstanding of the Registrant's Common Stock as of April 19, 1999 was 18,059,486. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended January 30, 1999 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 3, 1999 are incorporated by reference into Part III of this report. 3 PART I SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market area; 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 Year 2000 issues; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 1. BUSINESS GENERAL Books-A-Million, Inc. (the "Company" or the "Registrant") is a leading book retailer and is one of the dominant book retailers in the southeastern United States. The Company, which was founded in 1917, has developed three distinct store formats to address the various market areas it serves. Superstores, the first of which was opened in 1988, average approximately 20,000 square feet and operate under the name "Books-A-Million." Combination book and greeting card stores, which are operated under the name "Bookland," have approximately 4,500 square feet and are generally located in smaller markets that do not readily sustain stand-alone book and greeting card stores. "Traditional" bookstores, also operated under the name "Bookland," have approximately 3,500 square feet and are located primarily in malls. All store formats offer an extensive selection of best sellers and other hardcover and paperback books, magazines, newspapers, cards and gifts. In addition to the retail store formats, the Company began to offer its products over the Internet with the launch of its Booksamillion.com web site in November 1998 and Joemuggs.com web site in March 1999. The Company is also a wholesaler of books to, among others, bookstores, wholesale clubs, supermarkets, department stores and mass merchandisers. The Company was originally incorporated under the laws of the State of Alabama in 1964 and was reincorporated in Delaware in September 1992. The principal executive offices of the Company are located at 402 Industrial Lane, Birmingham, Alabama 35211, and its telephone number is (205) 942-3737. Unless the context otherwise requires, references to the Company include its wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale"), American Internet Services, Inc. ("AIS") and NetCentral, Inc. BOOKS-A-MILLION SUPERSTORES The Company opened its first Books-A-Million superstore in April 1988. The Company developed its 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. The Company operates 124 Books-A-Million superstores as of January 30, 1999. 1 4 Books-A-Million superstores emphasize selection, value and customer service. Books-A-Million superstores offer an extensive selection of best sellers and other hardcover and paperback books, magazines, local and out-of-town newspapers, greeting cards and gifts. Books-A-Million superstores also dedicate space to bargain books that are sold at a discount from publishers' originally suggested retail prices. Each Books-A-Million superstore has a centrally located 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 the superstores also include an espresso and coffee bar called Joe Muggs. The Company's superstores are conveniently located on major, high-traffic roads and in enclosed malls or strip shopping centers with adequate parking. Books-A-Million superstores are generally open seven days a week from 9:00 a.m. to 11:00 p.m. BOOKLAND STORES The Company's Bookland stores utilize two formats, the combination and traditional store formats, which are tailored to the size, demographics and competitive conditions of the particular market area. Combination stores average approximately 4,500 square feet and carry a broad selection of best sellers and other hardcover and paperback books, bargain books, magazines, gifts and greeting cards. Because of the increased customer traffic it generates, the combination store format has been particularly successful in smaller market areas that do not readily sustain stand-alone book and greeting card stores. The Company has 27 combination stores as of January 30, 1999. The Company's traditional bookstores average approximately 3,500 square feet and offer a wide selection of best sellers and other hardcover and paperback books, magazines and newspapers. The Company's traditional bookstores are located in multiple types of market areas, but are generally located in market areas that are larger than those in which combination stores are located. The Company has 22 traditional bookstores as of January 30, 1999. MERCHANDISING The Company employs several value-oriented merchandising strategies. Books on the Company's best-seller list, which is developed exclusively by the Company based on its sales and customer demand in its stores, are generally sold in the Company's superstores at 33% below publishers' suggested retail prices. In addition, superstore customers can join the Millionaire's Club and save 10% on all purchases in Books-A-Million superstores, including already discounted best-sellers. Bookland store customers can join the Read & Save Club and enjoy similar discounts. The Company's point-of-sale computer system provides the data necessary to enable the Company to anticipate consumer demand and customize store inventory selection to reflect local customer interest and demand. MARKETING The Company maintains a regional focus, which involves dedicating space in its stores to books of regional and local interest and creating special departments such as regional literature, cooking and religious books. Store managers are given the flexibility to select titles that are responsive to consumer demand in that particular market area, and the Company continuously modifies its title selection in each bookstore to tailor selection to local consumer preferences. The Company offers frequent promotions that have a regional flavor, including book autograph sessions with popular regional authors. The Company promotes its bookstores principally through the use of geographically concentrated newspaper advertising and direct mail circulars, as well as point-of-sale materials posted and distributed in the stores. In certain markets, television advertising is also used on a selective basis. Store managers are instrumental in tailoring certain promotions for their particular market area and in designing store displays. The Company also arranges for special appearances and book autograph sessions with recognized authors to attract customers and to build and reinforce customer awareness of its stores. A substantial portion of the Company's advertising expenses are reimbursed from publishers through their cooperative advertising programs. 2 5 STORE OPERATIONS AND SITE SELECTION In choosing specific store sites within a market area, the Company applies standardized site selection criteria that take into account numerous factors, including the local demographics, desirability of available leasing arrangements, proximity to existing Company operations and overall level of retail activity. In general, stores are located on major high-traffic roads convenient to customers and have adequate parking. The Company generally negotiates short-term leases with renewal options. The Company periodically reviews the profitability trends and prospects of each of its stores and evaluates whether or not any underperforming stores should be closed, converted to a different format or relocated to more desirable locations. INTERNET INITIATIVE The Company, through its wholly owned subsidiary, AIS, sells a broad range of products over the Internet under the name Booksamillion.com. Products sold by Booksamillion.com are similar to that sold in the Company's Books-A-Million superstores and include a wide selection of books, magazines and gift items. Booksamillion.com also operates an online cafe on its web site under the name Joemuggs.com. Joemuggs.com offers a wide selection of whole bean coffee, confections and related gift items for purchase over the Internet. In January of 1999, the Company acquired NetCentral, Inc., an Internet development company in order to assist the Company in its Internet development efforts. PURCHASING The Company's purchasing decisions are centralized and are made by the Company's merchandising department. The Company's buyers negotiate terms, discounts and cooperative advertising allowances for all the Company's bookstores and decide which books to purchase, in what quantity and for which stores. The buyers use current inventory and sales information provided by the Company's in-store point-of-sale computer system to make reorder decisions. Although the majority of purchases are made by the Company's merchandising department, individual store managers have the flexibility to influence purchasing decisions in order to respond to local demand. The Company purchases merchandise from over 500 vendors. The Company purchases the majority of its collectors' supplies from one supplier, the majority of its music inventory from one supplier and substantially all of its magazines from another supplier, each of which is a related party. No one vendor accounted for more than 12.9% of the Company's overall merchandise purchases in the fiscal year ended January 30, 1999. In general, approximately 80% of the Company's inventory may be returned by the Company for full credit, which substantially reduces the Company's 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 the Company's 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 the Company's 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 the Company. The Company competes directly with national and regional bookstore chains, independent bookstores, booksellers on the Internet, certain mass merchandisers and greeting card stores. The Company is one of the top three retail bookstore chains in the nation. 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. The Company also experiences indirect competition from 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. 3 6 SEASONALITY Similar to many retailers, the Company's business is seasonal, with its highest retail sales, gross profit and net income historically occurring in its 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 at their 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 effect on the Company's results of operations for the full year. In addition to seasonality, 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. Accordingly, the addition of a large number of new stores in a particular fiscal quarter could adversely affect the Company's results of operations for that quarter. 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," "Kids-A-Million," "Teachers First", "The Write-Price," "Book$mart" and "NetCentral" are the primary registered trademarks of the Company. Management does not believe that these trademarks are crucial to the continuation of the Company's operations. EMPLOYEES As of fiscal year end, the Company employed approximately 2,700 full-time associates and 1,800 part-time associates. The number of part-time associates employed by the Company fluctuates based upon seasonal needs. None of the Company's associates are covered by a collective bargaining agreement, and management believes that the Company's relations with its associates are excellent. ITEM 2. PROPERTIES The Company's bookstores are located either in enclosed malls or strip shopping centers. All of the Company's stores are leased. Generally, these leases have terms ranging from five to ten years and require the Company to 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). The Company's principal executive offices are located in a 20,550 square foot leased building located in Birmingham, Alabama. The lease, which is with a related party, extends to January 31, 2001, and the Company has an option to extend the lease for an additional five years. American Wholesale owns its wholesale distribution center that is located in an approximately 252,000 square foot facility located in Florence, Alabama. During fiscal 1995 and 1996, the Company financed the acquisition and construction of the wholesale distribution facility through loans obtained from the proceeds of an industrial revenue bond, which are secured by a mortgage interest in this facility. The Company also leases, from a related party, a second warehouse facility, which is located in an approximately 286,000 square foot facility in Tuscumbia, Alabama. In addition, the Company leases all of its tractor trailers, which comprise its transportation fleet. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any with respect to those proceedings is not presently expected to materially affect the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 4 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the heading "Market and Dividend Information" on the inside back cover of the Annual Report to Stockholders for the year ended January 30, 1999 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Selected Consolidated Financial Data" for the years ended January 28, 1995, through January 30, 1999 on page 6 of the Annual Report to Stockholders for the year ended January 30, 1999, 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 7 through 11 of the Annual Report to Stockholders for the year ended January 30, 1999 is incorporated herein by reference. ITEM 7.A. MARKET RISK The Company is subject to market risk from interest rate fluctuations involving its credit facilities. The average amount of debt outstanding under the Company's credit facilities was $59.0 million during fiscal 1999. However, the Company utilizes both fixed and variable debt to manage this exposure. On February 9, 1998, the Company entered into an interest rate swap agreement which carries a notional principal amount of $30.0 million. The swap effectively fixes the interest rate on $30.0 million of variable rate debt at 6.73%. The swap agreement expires on February 9, 2003. A hypothetical increase or decrease of 10% in interest rates would not have a material impact on the Company's financial condition and results of operations. 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 30, 1999 are incorporated herein by reference: Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998. Consolidated Statements of Income for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Statements of Stockholders' Investment for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. The information under the heading "Summary of Quarterly Results (Unaudited)" on page 24 of the Annual Report to Stockholders for the year ended January 30, 1999 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 5 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections under the heading "Proposal I-Election of Directors" entitled "Nominee for Election - Term Expiring 2002", "Incumbent Directors - Term Expiring 2000" and "Incumbent Directors Term Expiring 2001" on pages 2 through 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 1999, are incorporated herein by reference for information on the directors of the Registrant. EXECUTIVE OFFICERS All executive officers of the Company are elected annually by and serve at the discretion of the Board of Directors. The executive officers of the Company are listed below:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Charles C. Anderson 64 Chairman of the Board of Directors Clyde B. Anderson 38 Chief Executive Officer, President and Director Sandra B. Cochran 40 Executive Vice President, Chief Financial Officer and Secretary Terrance G. Finley 45 President, Booksamillion.com
Charles C. Anderson has served as the Chairman of the Board of Directors of the Company for more than 29 years. He also served as the Chief Executive Officer of the Company from 1964 until July 1992. Mr. Anderson is the father of Clyde B. Anderson, the Company's Chief Executive Officer and a member of the Company's Board of Directors, and Terry C. Anderson, a member of the Company's Board of Directors. Clyde B. Anderson has served as the President of the Company since November 1987 and as Chief Executive Officer of the Company since July 1992. Mr. Anderson joined the Company in 1983 and served as the Chief Operating Officer of the Company from November 1987 to March 1994. Mr. Anderson has served as a director of the Company since August 1987 and serves on the Board of Directors and the Compensation Committee of Hibbett Sporting Goods, Inc., a sporting goods retailer. Mr. Anderson is the son of Charles C. Anderson, the Chairman of the Company's Board of Directors, and the brother of Terry C. Anderson, a member of the Company's Board of Directors. Sandra B. Cochran has served as Secretary since June 1998, Executive Vice President since February 1996, Chief Financial Officer since September 1993, and previously served as Vice President and Assistant Secretary of the Company since August 1992. 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. Terrance G. Finley has served as the President of Booksamillion.com since December 1998. Mr. Finley served as Senior Vice President - Merchandising from January 1998 to December 1998. Mr. Finley served as Vice President - Merchandising from April 1994 to January 1998 and was named an executive officer of the Company in March 1995. 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. 6 9 COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's 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 the Company with copies of all such forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, its directors, executive officers and greater than 10% stockholders complied with all applicable Section 16(a) filing requirements during fiscal 1999. 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 8 through 16 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 1999 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section under the heading "Proposal I-Election of Directors" entitled "Beneficial Ownership of Common Stock" on pages 6 and 7 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 1999 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 10 and 11 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 1999 are incorporated herein by reference. PART IV ITEM 14. 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 30, 1999 are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets as of January 30,1999 and January 31, 1998. Consolidated Statements of Income for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Statements of Stockholders' Investment for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 30, 1999, January 31, 1998 and February 1, 1997. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. 7 10 2. Financial Statement Schedule: The following consolidated financial statement schedule of Books-A-Million, Inc. is attached hereto: Schedule 2 Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. 3. Exhibits **
Exhibit Number - ------- 3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 3.2 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 4.1 -- See Exhibits 3.1 and 3.2 hereto incorporated herein by reference to the Exhibits of the same number to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992. 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 Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). *10.2 -- Amended and Restated Stock Option Plan. *10.3 -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). *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 Appendix A of the Registrant's Proxy Statement, File No. 0-20664, dated April 26, 1999, for the Annual Meeting of the Registrant's Stockholders to be held June 3, 1999). *10.6 -- 401(k) Plan (together with related documents) (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 10.7 -- Shareholders Agreement dated as of September 1, 1992 (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended January 31, 1993, File No. 0-20664, filed May 3, 1993). *10.8 -- Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended January 28, 1995, File No. 0-20664, filed April 28, 1995).
8 11 10.9 -- Short-Term Credit Agreement dated as of October 27, 1995, between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended February 3, 1996, File No. 0-20664, filed May 3, 1996). 10.10 -- Revolving Loan Agreement dated as of October 27, 1995 between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the fiscal year ended February 3, 1996, File 0-20664, filed May 3, 1996). 10.11 -- First amendment to Short-Term Credit Agreement, dated as of November 1, 1996 between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended February 1, 1997, File 0-20664, filed May 2, 1997). 10.12 -- First amendment to Revolving Loan Agreement dated June 4, 1997 between the Company and AmSouth Bank of Alabama, SunTrust Bank, Atlanta and NationsBank, N.A. and Master Assignment and Acceptance Agreement dated November 7, 1997 between AmSouth Bank, NationsBank, N.A., SunTrust Bank, Atlanta and SouthTrust Bank, N. A. (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended January 31, 1998, File 0-20664, filed May 1, 1998). 10.13 -- Second amendment to Short-Term Credit Agreement, dated June 4, 1997 between the Company and AmSouth Bank of Alabama (incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended January 31, 1998, File 0-20664, filed May 1, 1998). 10.14 -- Second amendment to Revolving Loan Agreement dated June 19, 1998 between the Company and AmSouth Bank of Alabama, SunTrust Bank, Atlanta and NationsBank, N.A. and Master Assignment and Acceptance Agreement dated November 7, 1997 between AmSouth Bank, NationsBank, N.A., SunTrust Bank, Atlanta and SouthTrust Bank, N. A. 10.15 -- Third amendment to Short-Term Credit Agreement, dated June 3, 1998 between the Company and AmSouth Bank of Alabama. 13 -- Portions of the Annual Report to Stockholders for the year ended January 30, 1999 that are expressly incorporated by reference into Part II of this Report. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Independent Public Accountants to the incorporation of their report on the Company's consolidated financial statements for the fiscal year ended January 30, 1999, into the Registration Statements on Form S-8. (File Nos. 33-72812 and 33-86980). 27 -- Financial Data Schedule (for SEC use only).
* The indicated exhibit is a compensatory plan required to be filed as an exhibit to this Annual Report on Form 10-K. ** The Company has financed certain capital expenditures with proceeds of an industrial development revenue bond (the "Bond"), for which the outstanding balance as of January 30, 1999, is less than 10% of the Company's total assets. The Bond documents have not been included as an exhibit hereto but the Company will provide such documents to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K Not applicable. (c) See Item 14(a) (3), the Exhibit Index and the Exhibits attached hereto. (d) See Item 14(a) (2). 9 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOOKS-A-MILLION, INC. by: /s/ Clyde B. Anderson ----------------------------------------- Clyde B. Anderson Chief Executive Officer and President Date: April 29, 1999 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 Chief Executive Officer and President Date: April 29, 1999 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ Sandra B. Cochran - ----------------------------------------------------- Sandra B. Cochran Executive Vice President, Chief Financial Officer and Secretary Date: April 29, 1999 DIRECTORS: /s/ Charles C. Anderson - ----------------------------------------------------- Charles C. Anderson Date: April 29, 1999 /s/ Clyde B Anderson - ----------------------------------------------------- Clyde B. Anderson Date: April 29, 1999 13 DIRECTORS: /s/ Ronald G. Bruno - ----------------------------------------------------- Ronald G. Bruno Date: April 29, 1999 /s/ John E. Southwood - ----------------------------------------------------- John E. Southwood Date: April 29, 1999 /s/ J. Barry Mason - ----------------------------------------------------- J. Barry Mason Date: April 29, 1999 /s/ Terry C. Anderson - ----------------------------------------------------- Terry C. Anderson Date: April 29, 1999 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Books-A-Million, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of BOOKS-A-MILLION, INC. (A Delaware corporation) AND ITS SUBSIDIARIES incorporated by reference in this Form 10-K and have issued our report thereon dated March 16, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not 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, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Birmingham, Alabama March 16, 1999 S-1 15 SCHEDULE 2. BOOKS-A-MILLION, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED FEBRUARY 1, 1997, JANUARY 31, 1998 AND JANUARY 30, 1999
CHARGED/ BALANCE AT (CREDITED) (DEDUCTIONS)/ BEGINNING TO COSTS RECOVERIES BALANCE AT OF YEAR AND EXPENSES NET END OF YEAR ---------- ------------ ------------- ----------- FOR THE YEAR ENDED FEBRUARY 1, 1997: Allowance for doubtful accounts $ 149,997 $ 180,101 $ -- $ 330,098 FOR THE YEAR ENDED JANUARY 31, 1998: Allowance for doubtful accounts $ 330,098 $ 25,416 $ -- $ 355,514 FOR THE YEAR ENDED JANUARY 30, 1999: Allowance for doubtful accounts $ 355,514 $ 691,870 $(108,761) $ 938,623
S-2 16 INDEX TO EXHIBITS
Exhibit Number - ------- 3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 3.2 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 4.1 -- See Exhibits 3.1 and 3.2 hereto incorporated herein by reference to the Exhibits of the same number to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992. 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 Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). *10.2 -- Amended and Restated Stock Option Plan. *10.3 -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). *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 Appendix A of the Registrant's Proxy Statement, File No. 0-20664, dated April 26, 1999, for the Annual Meeting of the Registrant's Stockholders to be held June 3, 1999). *10.6 -- 401(k) Plan (together with related documents) (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992). 10.7 -- Shareholders Agreement dated as of September 1, 1992 (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended January 31, 1993, File No. 0-20664, filed May 3, 1993). *10.8 -- Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended January 28, 1995, File No. 0-20664, filed April 28, 1995). 10.9 -- Short-Term Credit Agreement dated as of October 27, 1995, between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended February 3, 1996, File No. 0-20664, filed May 3, 1996). 10.10 -- Revolving Loan Agreement dated as of October 27, 1995 between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the fiscal year ended February 3, 1996, File 0-20664, filed May 3, 1996). 10.11 -- First amendment to Short-Term Credit Agreement, dated as of November 1, 1996 between the Company and AmSouth Bank, N.A. (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended February 1, 1997, File 0-20664, filed May 2, 1997). 10.12 -- First amendment to Revolving Loan Agreement dated June 4, 1997 between the Company and AmSouth Bank of Alabama, SunTrust Bank, Atlanta and NationsBank, N.A. and Master Assignment and Acceptance Agreement dated November 7, 1997 between AmSouth Bank, NationsBank, N.A., SunTrust Bank, Atlanta and SouthTrust Bank, N. A. (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended January 31, 1998, File 0-20664, filed May 1, 1998). 10.13 -- Second amendment to Short-Term Credit Agreement, dated June 4, 1997 between the Company and AmSouth Bank of Alabama (incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended January 31, 1998, File 0-20664, filed May 1, 1998). 10.14 -- Second amendment to Revolving Loan Agreement dated June 19, 1998 between the Company and AmSouth Bank of Alabama, SunTrust Bank, Atlanta and NationsBank, N.A. and Master Assignment and Acceptance Agreement dated November 7, 1997 between AmSouth Bank, NationsBank, N.A., SunTrust Bank, Atlanta and SouthTrust Bank, N. A. 10.15 -- Third amendment to Short-Term Credit Agreement, dated June 3, 1998 between the Company and AmSouth Bank of Alabama. 13 -- Portions of the Annual Report to Stockholders for the year ended January 30, 1999 that are expressly incorporated by reference into Part II of this Report. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Independent Public Accountants to the incorporation of their report on the Company's consolidated financial statements for the fiscal year ended January 30, 1999, into the Registration Statements on Form S-8. (File Nos. 33-72812 and 33-86980). 27 -- Financial Data Schedule (for SEC use only).
17 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 30, 1999, and January 31, 1998.
Quarter Ended High Low - ---------------------------------------- January, 1999 $47 $2 11/16 October, 1998 5 2 1/4 July, 1998 7 1/2 4 1/8 April, 1998 6 5/8 5 1/32 January, 1998 7 3/8 5 3/8 October, 1997 7 1/4 4 33/64 July, 1997 5 3/8 4 1/2 April, 1997 5 7/8 4 1/8
The closing price on April 13, 1999, was $ 9 15/16. No cash dividends have been declared since completion of the Company's initial public offering. As of April 13, 1999, Books-A-Million, Inc., had approximately 25,300 stockholders based on the number of individual participants represented by security position listings. ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held on June 3, 1999, at 10:00 a.m. central time at The Harbert Center, 2019 Fourth Avenue North, Birmingham, Alabama 35203. Stockholders of record as of April 19, 1999, are invited to attend this meeting. 18 SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
Fiscal Year Ended ----------------------------------------------------------------- 1/30/99 1/31/98 2/1/97 2/3/96 1/28/95 - ------------------------------------------------------------------------------------------------------ STATEMENT OF INCOME DATA: Net sales $347,877 $324,762 $278,613 $229,801 $ 172,366 Cost of products sold 256,793 238,342 206,269 164,124 124,107 ----------------------------------------------------------------- Gross profit 91,084 86,420 72,344 65,677 48,259 Operating, selling and administrative expenses 66,394 59,260 50,636 43,559 31,580 Depreciation and amortization 12,974 11,588 9,540 6,833 4,256 Store closing charge -- -- -- 2,945 -- ----------------------------------------------------------------- Operating profit 11,716 15,572 12,168 12,340 12,423 Interest expense (income), net 4,435 4,331 2,826 474 (601) ----------------------------------------------------------------- Income before income taxes 7,281 11,241 9,342 11,866 13,024 Provision for income taxes 2,767 4,272 3,550 4,390 4,949 ----------------------------------------------------------------- Net income $ 4,514 $ 6,969 $ 5,792 $ 7,476 $ 8,075 ================================================================= Weighted average number of shares outstanding - basic 17,497 17,425 17,405 17,371 17,322 Net income per share - basic $ 0.26 $ 0.40 $ 0.33 $ 0.43 $ 0.47 ================================================================= Weighted average number of shares outstanding - diluted 17,554 17,428 17,580 17,641 17,509 Net income per share - diluted $ 0.26 $ 0.40 $ 0.33 $ 0.42 $ 0.46 ================================================================= As of ----------------------------------------------------------------- 1/30/99 1/31/98 2/1/97 2/3/96 1/28/95 - ------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA: Working capital $ 84,022 $ 82,771 $ 70,629 $ 54,693 $ 50,193 Property and equipment, net 67,377 65,814 63,147 49,253 35,864 Total assets 271,551 245,816 233,539 190,933 163,403 Long-term debt 36,944 45,240 37,645 14,087 4,600 Stockholders' investment 115,022 103,485 96,420 90,455 82,444
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market area; 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 Year 2000 issues; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 19 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS GENERAL The Company was founded in 1917 and currently operates 179 retail bookstores, including 130 superstores, concentrated in the southeastern United States. The Company's growth strategy is focused on opening superstores in new and existing market areas, particularly in the Southeast. In addition to opening new stores, management intends to continue its practice of reviewing the profitability trends and prospects of existing stores and closing or relocating underperforming stores or converting stores to different formats. 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 ------------------------------- 1/30/99 1/31/98 2/1/97 - -------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Gross profit 26.2% 26.6% 26.0% Operating, selling, and administrative expenses 19.1% 18.2% 18.2% Depreciation and amortization 3.7% 3.6% 3.4% Operating profit 3.4% 4.8% 4.4% Interest expense, net 1.3% 1.3% 1.0% Income before income taxes 2.1% 3.5% 3.4% Provision for income taxes 0.8% 1.3% 1.3% Net income 1.3% 2.2% 2.1%
FISCAL 1999 COMPARED WITH FISCAL 1998 Net sales increased $23.1 million, or 7.1%, to $347.9 million in fiscal 1999 from $324.8 million in fiscal 1998. Comparable store sales decreased 2.8% for fiscal year 1999. The increase in net sales resulted from net sales generated by 16 new stores opened during fiscal 1999, and 16 new stores opened in the second half of fiscal 1998. In addition, the Company closed eight underperforming stores in fiscal 1999. The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing program, pricing strategies, store operations and competition. Gross profit increased $4.7 million, or 5.4%, to $91.1 million in fiscal 1999 from $86.4 million in fiscal 1998. Gross profit as a percentage of net sales decreased to 26.2% in fiscal 1999 from 26.6% in fiscal 1998, primarily due to increased occupancy costs and higher warehouse distribution costs as a percentage of net sales. Operating, selling and administrative expenses increased $7.1 million, or 12.0%, to $66.4 million in fiscal 1999, from $59.3 million in fiscal 1998. Operating, selling and administrative expenses as a percentage of net sales increased to 19.1% in fiscal 1999 from 18.2% in fiscal 1998, primarily due to higher store selling expenses. Depreciation and amortization increased $1.4 million, or 12.0%, to $13.0 million in fiscal 1999 from $11.6 million in fiscal 1998. Depreciation and amortization as a percentage of net sales increased to 3.7% in fiscal 1999 from 3.6% in fiscal 1998, primarily as a result of the capital expenditures for new stores during fiscal 1999 and the second half of fiscal 1998. Net interest expense was relatively constant with last year at $4.4 million in fiscal 1999 versus net interest expense of $4.3 million in fiscal 1998. 20 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS FISCAL 1998 COMPARED WITH FISCAL 1997 Net sales increased $46.2 million, or 16.6%, to $324.8 million in fiscal 1998 from $278.6 million in fiscal 1997. Comparable store sales increased 1.4% for fiscal 1998. The increase in net sales resulted from net sales generated by 21 new stores opened during fiscal 1998 (including 16 superstores), and 18 new stores opened in the second half of fiscal 1997. In addition, the Company closed seven underperforming stores in fiscal 1998. 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 increased $14.1 million, or 19.5%, to $86.4 million in fiscal 1998 from $72.3 million in fiscal 1997. Gross profit as a percentage of net sales increased to 26.6% in fiscal 1998 from 26.0% in fiscal 1997, primarily due to decreased promotional activity and lower warehouse distribution costs as a percentage of net sales. Operating, selling and administrative expenses increased $8.7 million, or 17.0%, to $59.3 million in fiscal 1998, from $50.6 million in fiscal 1997. Operating, selling and administrative expenses as a percentage of net sales remained constant with fiscal 1997 at 18.2%. Depreciation and amortization increased $2.1 million, or 21.5%, to $11.6 million in fiscal 1998 from $9.5 million in fiscal 1997. Depreciation and amortization as a percentage of net sales increased to 3.6% in fiscal 1998 from 3.4% in fiscal 1997, primarily as a result of the significant capital expenditures for new stores during fiscal 1998 and the second half of fiscal 1997. Net interest expense was $4.3 million in fiscal 1998 versus net interest expense of $2.8 million in fiscal 1997. The increased interest expense resulted from long-term borrowings incurred primarily to fund capital expenditures and inventory purchases related to new stores opened during fiscal 1998. 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. 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 During fiscal 1998, the Company increased borrowing availability under its revolving credit facility (the "Revolving Facility") to $90.0 million from $50.0 million. The Company also amended its short-term credit agreement (the "Facility") to $10.0 million of borrowing availability from $20.0 million. As of January 30, 1999, $29.4 million was outstanding under these facilities. Additionally, as of January 30, 1999, the Company has outstanding borrowings associated with the issuance of an industrial revenue bond totaling $7.5 million. The Company's capital expenditures totaled $15.7 million in fiscal 1999. These expenditures were primarily used to open new stores, perform renovations and make improvements to 21 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS existing stores and investments in management information systems. Management estimates that capital expenditures for fiscal 2000 will be approximately $14.0 million and that such amounts will be used primarily for new stores, renovation and improvements to existing stores and investments in management information systems. Management believes that existing cash balances and net cash from operating activities, together with borrowings under the Company's credit facilities, will be adequate to finance the Company's planned capital expenditures and to meet the Company's working capital requirements for fiscal 2000. RELATED-PARTY ACTIVITIES As discussed in Note 6 of Notes to Consolidated Financial Statements, the Company conducts business with other entities in which certain officers, directors and principal stockholders of the Company have controlling ownership interests. The most significant related-party transactions include inventory purchases from, and sales to, related parties. As the Company has expanded, the related-party inventory purchase transactions have grown proportionately. Related-party sales transactions decreased in fiscal 1999 due to lower bargain book sales to related parties. Management believes the terms of these related-party transactions are substantially equivalent to those available from unrelated parties and, therefore, have no significant impact on gross profit. FINANCIAL POSITION During fiscal 1999, the Company opened 16 new stores, including 15 superstores. The store openings resulted in increased inventory and property and equipment balances at January 30, 1999, compared with January 31, 1998. YEAR 2000 COMPLIANCE During fiscal 1999, the Company has continued to evaluate its management information systems to identify and address Year 2000 issues. As part of this evaluation, the Company has classified its Year 2000 issues into the following categories: 1. Key information systems that are required for standard operations (including major merchandising, financial, distribution and warehouse systems). 2. Other information systems that are important but not required for daily operations (electronic data transfer of purchase orders and invoices, selling cost tracking reports, automated sales tax reporting, etc.). 3. Non-information systems items (phone system, security system, heating and air conditioning systems, etc.). 4. Third party compliance (vendors, wholesale customers, service organizations such as banks and utilities, etc.). 22 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS The Company has reviewed the Year 2000 compliance issues and developed an implementation program that is classified into the following categories: 1. Evaluation and Initial Assessment 2. Remediation/Reprogramming 3. Testing 4. Contingency Planning The Company has plans in place to complete the evaluation and assessment of all systems during the quarter ending May 1,1999, and expects to complete Year 2000 reprogramming and testing of all systems during the quarter ending July 31, 1999. The Company plans to continue to rely primarily on internal resources in order to complete these steps. However, third-party services will be employed as necessary to meet deadlines. The Company's financial systems (excluding sales audit) are third-party vendor software programs which are being upgraded and will be, upon completion of upgrades in the quarter ending May 1, 1999, certified as Year 2000 compliant by the software vendors. These upgrades were previously planned and were not accelerated due to Year 2000 issues. The sales audit system is an in-house program which is not Year 2000 compliant. The system evaluation will be completed during the quarter ending May 1, 1999, with the necessary reprogramming and testing completed during the quarter ending July 31, 1999. The Company's distribution systems (excluding the returns system) are third-party vendor software programs which are certified as Year 2000 compliant by the software vendor. The returns system was evaluated during fiscal 1999. Few date-sensitive processes were identified in the programs, which mitigates the Year 2000 compliance risk. The system will be modified as necessary to make the programs Year 2000 compliant during the quarter ending July 31, 1999. The Company's merchandising systems are supported by a combination of in-house developed software and third-party software. All third-party merchandising software programs are certified as Year 2000 compliant by the software vendor. The in-house merchandising programs are not currently Year 2000 compliant. An evaluation of the in-house programs will be completed during the quarter ending May 1, 1999, and reprogramming and testing of the necessary changes to the system for Year 2000 compliance will be completed during the quarter ending July 31, 1999. The Company's point-of-sale system operates the cash registers in the stores. The registers run on a personal computer system using a third-party software. Although the point-of-sale operating system is not Year 2000 compliant, the software has been upgraded in order to accept credit cards with expiration dates beyond December 31, 1999. The system evaluation will be completed during the quarter ending May 1, 1999, with the necessary reprogramming and testing completed during the quarter ending July 31, 1999. Other information systems that are not critical to daily operations will be assessed during the quarter ending May 1, 1999, and will be upgraded, if necessary, during calendar year 1999. The Company has not deferred any significant information technology projects in order to address the Year 2000 issue. Based on present information, the Company believes that its current plans, as outlined above, will substantially mitigate the risk of a material disruption in the Company's operations due to internal Year 2000 factors. However, possible consequences of the Company not being Year 2000 compliant include, but are not limited to, loss of revenues, loss of communication 23 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS capability with stores, inability to process or quantify merchandise, and inability to engage in other operational and financial activities. At the present time, the Company has not established a contingency plan for possible Year 2000 issues. The Company expects to consider contingency plans based on the results of its Year 2000 testing and its assessment of related risks. Additionally, the Company is in the process of communicating with third parties in order to assess their Year 2000 readiness and the extent to which the Company may be vulnerable to any third party's failure to remediate their Year 2000 issues. The Company is trying to obtain written confirmation of third parties' Year 2000 compliance. However, the Company cannot assure timely compliance of third parties and may be adversely affected by failure of a significant third party to become Year 2000 compliant. Amounts expended to date related to Year 2000 compliance have been immaterial. The Company currently expects that the total costs of Year 2000 compliance for the Company's current systems will not exceed $400,000, which may include the lease or purchase of a system on which to conduct Year 2000 testing. These costs are not expected to have a significant impact on the Company's financial reporting. The costs associated with Year 2000 compliance are based on management's current views with respect to future events and may be updated as additional information becomes available. Please refer to the Special Note Regarding Forward-looking Statements. 24 CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
As of ------------------------ 1/30/99 1/31/98 - -------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and temporary cash investments $ 4,322 $ 3,909 Accounts receivable, net of allowance for doubtful accounts of $939 and $356, respectively 12,282 11,732 Related party receivables 3,998 7,559 Inventories 175,211 151,312 Prepayments and other 2,938 816 Deferred income taxes 3,715 3,098 ------------------------ TOTAL CURRENT ASSETS 202,466 178,426 ------------------------ PROPERTY AND EQUIPMENT: Land 628 628 Buildings 7,142 5,367 Equipment 33,087 28,558 Furniture and fixtures 34,416 31,894 Leasehold improvements 41,434 37,552 Construction in process 299 783 ------------------------ 117,006 104,782 Less accumulated depreciation and amortization 49,629 38,968 ------------------------ NET PROPERTY AND EQUIPMENT 67,377 65,814 ------------------------ Other Assets: Goodwill, net 1,495 1,538 Other 213 38 ------------------------ TOTAL OTHER ASSETS 1,708 1,576 ------------------------ TOTAL ASSETS $ 271,551 $245,816 ======================== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable: Trade $ 94,249 $ 71,439 Related party 9,014 7,493 Accrued income taxes 476 2,730 Accrued expenses 14,705 13,993 ------------------------ TOTAL CURRENT LIABILITIES 118,444 95,655 ------------------------ LONG-TERM DEBT 36,944 45,240 ------------------------ DEFERRED INCOME TAXES 1,141 1,436 ------------------------ COMMITMENTS AND CONTINGENCIES -- -- ------------------------ STOCKHOLDERS' INVESTMENT: Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares outstanding -- -- Common stock, $.01 par value; 30,000,000 shares authorized, 18,016,525 and 17,427,593 shares issued and outstanding at January 30, 1999 and January 31, 1998, respectively 180 174 Additional paid-in capital 70,124 62,925 Treasury stock at cost (81,600 shares at January 30, 1999) (252) -- Retained earnings 44,970 40,386 ------------------------ Total Stockholders' Investment 115,022 103,485 ------------------------ Total Liabilities and Stockholders' Investment $ 271,551 $245,816 ========================
The accompanying notes are an integral part of these consolidated balance sheets. 25 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Fiscal Year Ended ------------------------------------ 1/30/99 1/31/98 2/1/97 - ---------------------------------------------------------------------------------------- NET SALES $347,877 $324,762 $278,613 Cost of products sold, including warehouse distribution and store occupancy costs(1) 256,793 238,342 206,269 ------------------------------------ GROSS PROFIT 91,084 86,420 72,344 Operating, selling and administrative expenses 66,394 59,260 50,636 Depreciation and amortization 12,974 11,588 9,540 ------------------------------------ OPERATING PROFIT 11,716 15,572 12,168 Interest expense, net 4,435 4,331 2,826 ------------------------------------ INCOME BEFORE INCOME TAXES 7,281 11,241 9,342 Provision for income taxes 2,767 4,272 3,550 ------------------------------------ NET INCOME $ 4,514 $ 6,969 $ 5,792 ==================================== Weighted average number of shares outstanding - basic 17,497 17,425 17,405 ------------------------------------ NET INCOME PER SHARE - BASIC $ 0.26 $ 0.40 $ 0.33 ==================================== Weighted average number of shares outstanding - diluted 17,554 17,428 17,580 ------------------------------------ NET INCOME PER SHARE - DILUTED $ 0.26 $ 0.40 $ 0.33 ====================================
(1) Inventory purchases from related parties were $36,836, $32,303 and $23,120, respectively, for the periods presented above. The accompanying notes are an integral part of these consolidated statements. 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (In thousands)
Common Treasury Stock Additional Stock ------------------ Paid-In ----------------- Retained Shares Amount Capital Shares Amount Earnings - ------------------------------------------------------------------------------------------------------------ BALANCE, FEBRUARY 3, 1996 17,387 $ 174 $62,656 -- $ -- $27,625 Net income -- -- -- -- -- 5,792 Issuance of stock for employee stock purchase plan 15 -- 102 -- -- -- Exercise of stock options 7 -- 71 -- -- -- ------------------------------------------------------------------- BALANCE, FEBRUARY 1, 1997 17,409 174 62,829 -- -- 33,417 Net income -- -- -- -- -- 6,969 Issuance of stock for employee stock purchase plan 19 -- 96 -- -- -- ------------------------------------------------------------------- BALANCE, JANUARY 31, 1998 17,428 174 62,925 -- -- 40,386 Net income -- -- -- -- -- 4,514 Issuance of stock for employee stock purchase plan 16 -- 78 -- -- -- Purchase of treasury stock -- -- -- 82 (252) -- Exercise of stock options 460 5 4,132 -- -- -- Tax benefit from exercise of stock options -- -- 2,333 -- -- -- Issuance of stock for acquisition accounted for as pooling of interests 112 1 2 -- -- 70 Contributions from certain stockholders -- -- 1,054 -- -- -- Tax provision for contributions from certain stockholders -- -- (400) -- -- -- ------------------------------------------------------------------- BALANCE, JANUARY 30, 1999 18,016 $ 180 $70,124 82 $(252) $44,970 ===================================================================
The accompanying notes are an integral part of these consolidated statements. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended ----------------------------------------- 1/30/99 1/31/98 2/1/97 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,514 $ 6,969 $ 5,792 Adjustments to reconcile net income to net ----------------------------------------- cash provided by operating activities: Depreciation and amortization 12,974 11,588 9,540 (Gain) loss on sale of property (472) 44 114 Deferred income tax provision, net (912) (97) (15) (Increase) decrease in assets: Accounts receivable (550) 1,466 (4,825) Related party receivables 3,561 (1,705) (1,506) Inventories (23,899) (9,882) (19,422) Prepayments and other (2,223) (214) 136 Increase (decrease) in liabilities: Accounts payable 24,331 (2,465) 9,760 Accrued income taxes (321) 769 1,419 Accrued expenses 744 (718) 1,696 ---------------------------------------- Total adjustments 13,233 (1,214) (3,103) ---------------------------------------- Net cash provided by operating activities 17,747 5,755 2,689 CASH FLOWS FROM INVESTING ACTIVITIES: ---------------------------------------- Proceeds from sale of property and equipment 1,627 42 126 Capital expenditures (15,682) (14,355) (23,674) ---------------------------------------- Net cash used in investing activities (14,055) (14,313) (23,548) CASH FLOWS FROM FINANCING ACTIVITIES: ---------------------------------------- Proceeds from exercise of stock options and purchase of shares under employee stock purchase plan 4,215 96 154 Contributions from certain stockholders 1,054 -- -- Purchase of treasury stock (252) -- -- Borrowings under credit facilities 153,475 152,296 142,933 Repayments under credit facilities (161,771) (144,701) (119,375) ----------------------------------------- Net cash provided by (used in) financing activities (3,279) 7,691 23,712 ----------------------------------------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 413 (867) 2,853 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 3,909 4,776 1,923 ----------------------------------------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 4,322 $ 3,909 $ 4,776 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: ========================================= Cash paid during the year for: Interest $ 4,625 $ 4,276 $ 2,693 Income taxes, net of refunds $ 4,026 $ 4,023 $ 2,146 =========================================
The accompanying notes are an integral part of these consolidated statements. 28 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 179 bookstores in 17 states, which are predominantly located in the southeastern United States. The Company also serves as a wholesale book distributor for certain other retailers and wholesalers. The Company presently consists of Books-A-Million, Inc., and its wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale"), American Internet Services, Inc. and NetCentral, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. BASIS OF PRESENTATION The Company operates on a 52-53 week year, with the fiscal year ending on the Saturday closest to January 31. Fiscal years 1999, 1998 and 1997 were 52-week periods. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES Inventories are valued at the lower of cost or market using the retail method, with cost determined on a first-in, first-out ("FIFO") basis and market based on the lower of replacement cost or estimated realizable value. The Company includes certain distribution and other expenses in its inventory costs. 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 leasehold improvements is provided on the straight-line basis over the periods of the applicable leases. Maintenance and repairs are charged to expense as incurred. Costs of renewals and betterments are capitalized by charges 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. GOODWILL The Company amortizes goodwill on a straight-line basis over 40 years. As of January 30, 1999 and January 31, 1998, accumulated amortization of goodwill was $210,000 and $167,000, respectively. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related operating profits over the remaining life of the goodwill in measuring recoverability. STORE OPENING COSTS Non-capital expenditures incurred in preparation for opening new retail stores are expensed in the first full month of the stores' operations. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INSURANCE ACCRUALS The Company is subject to large deductibles under its workers' compensation policy. Insurance coverage is maintained for cumulative losses in amounts management considers adequate. Amounts are accrued currently for the estimated cost of claims incurred. INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or 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. STATEMENTS OF CASH FLOWS 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. EARNINGS PER SHARE Basic net income per share ("EPS") excludes dilution and 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 that could occur if securities or other contracts to issue common stock are exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS has been computed based on the average number of shares outstanding including the effect of outstanding stock options, if dilutive, in each respective year. A reconciliation of the weighted average shares for basic and diluted EPS is as follows:
Fiscal Year Ended (in thousands) 1/30/99 1/31/98 2/1/97 - -------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 17,497 17,425 17,405 Dilutive effect of stock options outstanding 57 3 175 ------------------------------- Diluted 17,554 17,428 17,580 ===============================
Options outstanding of 619,000, 1,557,000, and 371,000 for the years ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively, were not included in the table above as they were anti-dilutive. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS In the opinion of management, the carrying value of all financial instruments approximates fair value. LEGAL The Company is a party to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect the financial position or results of operations of the Company. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity and its components. This standard was adopted in fiscal 1999 and did not have an impact on the Company's financial reporting. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131, which supersedes SFAS Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria that management disaggregates a business for making operating decisions and assessing performance. This standard was adopted in fiscal 1999 and did not have a significant impact on the Company's financial reporting. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About Pensions and Other Post-retirement Benefits. SFAS No. 132, which supersedes SFAS Nos. 87, 88 and 106, standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS Nos. 87, 88 and 106 were issued. The Company adopted the new rules in fiscal 1999 with no impact on the its financial reporting. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. This statement is not expected to have a material effect on the Company's financial statements. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires capitalization of certain costs of internal-use software. The Company will adopt this statement in fiscal 2000 and does not anticipate a significant impact on the Company's financial statements. The AICPA has issued SOP 98-5, Reporting on the Costs of Start-up Activities. This statement provides guidance on the financial reporting of start-up costs and organization costs, and requires these costs to be expensed as incurred. The new rules are not expected to have a significant impact on the Company's financial statements. BUSINESS COMBINATION The acquisition of NetCentral, Inc. was accounted for as a pooling of interests; however, the Company's previously reported consolidated results have not been restated to include the effect of the acquisition prior to the acquisition date of January 5, 1999, since the effect is not material. CONTRIBUTIONS FROM CERTAIN SHAREHOLDERS In fiscal 1999, contributions of short-swing profits from certain stockholders were received by the Company totaling $1,054,000 with a related tax provision of $400,000 charged to paid-in capital. PRIOR-YEAR RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to the current year presentation. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INCOME TAXES A summary of the components of the income tax provision is as follows (dollars in thousands):
Fiscal Year Ended ----------------------------------- 1/30/99 1/31/98 2/1/97 - --------------------------------------------------------------------- Current: Federal $ 3,337 $ 3,831 $ 3,325 State 342 538 240 ----------------------------------- 3,679 4,369 3,565 ----------------------------------- Deferred taxes arising from: Depreciation (321) 61 463 Accruals (443) 4 (330) Inventory 25 (181) (436) Other (173) 19 288 ----------------------------------- (912) (97) (15) ----------------------------------- Provision for income taxes $ 2,767 $ 4,272 $ 3,550 =================================== A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Fiscal Year Ended ----------------------------------- 1/30/99 1/31/98 2/1/97 - --------------------------------------------------------------------- Federal statutory income tax rate 34.0% 34.0% 34.0% State income tax provision 3.1% 3.2% 3.0% Other 0.9% 0.8% 1.0% ----------------------------------- Effective income tax rate 38.0% 38.0% 38.0% ===================================
Temporary differences which created deferred tax assets and liabilities at January 30, 1999, and January 31, 1998, are detailed below (dollars in thousands):
As of 1/30/99 As of 1/31/98 ------------------------------------------------ Current Noncurrent Current Noncurrent - ----------------------------------------------------------------------------------- Depreciation $ -- $(1,005) $ -- $(1,326) Accruals 2,614 -- 2,171 -- Inventory 765 -- 790 -- Other 336 (136) 137 (110) ------------------------------------------------ Deferred tax asset (liability) $3,715 $(1,141) $3,098 $(1,436) ================================================
No valuation allowance is deemed necessary by management, as the realization of recorded deferred tax assets is considered more likely than not. 3. DEBT AND LINES OF CREDIT The Company has a revolving credit facility that allows borrowings of up to $90 million for which no principal repayments are due until the facility expires on June 18, 2003, and an unsecured working capital line of credit for $10 million, which is subject to annual renewal. Both credit facilities have certain financial and nonfinancial covenants with which the Company is in 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS compliance. As of January 30, 1999 and January 31, 1998, $29.4 million and $37.7 million, respectively, were outstanding under these credit facilities. The maximum and average outstanding balances during fiscal 1999 were $77.7 million and $59.0 million, respectively. The outstanding borrowings as of January 30, 1999, had interest rates ranging from 5.53% to 6.06%. The Company is subject to interest rate fluctuations involving its credit facilities. However, the Company utilizes both fixed and variable debt to manage this exposure. On February 9, 1998, the Company entered into an interest rate swap agreement which carries a notional principal amount of $30.0 million. The swap effectively fixes the interest rate on $30.0 million of variable rate debt at 6.73% The swap agreement expires on February 9, 2003. A hypothetical increase or decrease of 10% in interest rates would not cause the Company's interest expense to increase or decrease significantly. During fiscal 1996 and fiscal 1995, the Company financed the acquisition and construction of certain warehouse and distribution facilities through loans, obtained from the proceeds of an industrial development revenue bond (the "Bond"), which are secured by a mortgage interest in these facilities. As of January 30, 1999 and January 31, 1998, there was $7.5 million of borrowings outstanding under these arrangements, at variable rates. The Bond has a maturity date of December 1, 2019, with a purchase provision obligating the Company to repurchase the Bond on December 1, 2003, 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. In the opinion of management, the carrying value of all debt instruments at January 30, 1999, approximates fair value. 4. LEASES The Company leases the premises for its retail bookstores under operating leases which expire in various years through the year 2011. 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 which the Company records throughout the year based upon the best available information. The Company also leases certain office, warehouse and retail store space from related parties. Effective April 1, 1998, a lease agreement was entered into with a related party for 280,450 square feet of warehouse space in Tuscumbia, Alabama. Rental expense under these leases was approximately $624,000, $411,000 and $407,000 in fiscal 1999, 1998 and 1997, respectively. Total minimum future rental payments under these leases are $687,000. Minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year as of January 30, 1999, are as follows (in thousands):
Fiscal Year ------------------------------ 2000 $ 20,378 2001 19,700 2002 18,478 2003 17,129 2004 13,759 Subsequent years 51,301 -------- $140,745 ========
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rental expense for all operating leases consisted of the following (in thousands):
Fiscal Year Ended --------------------------------- 1/30/99 1/31/98 2/1/97 - ---------------------------------------------------------------- Minimum rentals $21,151 $18,171 $14,627 Contingent rentals 425 690 493 --------------------------------- $21,576 $18,861 $15,120 =================================
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 12 months of service and who are at least 21 years of age, and permit participants to contribute from 2% to 15% of compensation to the plan. Company matching and supplemental contributions are made at management's discretion. The expenses under this plan were $333,000, $238,000 and $341,000 in fiscal 1999, 1998 and 1997, respectively. STOCK OPTION PLAN The Company maintains a stock option plan reserving 3,300,000 shares of the Company's common stock for grants to executive officers, directors, and key employees. The reserve was increased by 1,500,000 shares at the fiscal 1998 annual meeting of the stockholders from 1,800,000 shares. Options granted generally vest over a five-year period, expire on the sixth anniversary of the grant date, and have exercise prices generally 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:
Fiscal Year Ended ------------------------------------------------------------------------------------ January 30, 1999 January 31, 1998 February 1, 1997 Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - -------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,571,130 $ 7.57 1,164,060 $ 8.32 834,730 $ 9.61 Granted 431,850 10.83 458,250 5.80 389,200 5.81 Exercised (460,550) 8.98 -- -- (6,600) 7.94 Forfeited (207,030) 7.25 (51,180) 9.20 (53,270) 12.13 ------------------------------------------------------------------------------------ Outstanding at end of year 1,335,400 $ 8.25 1,571,130 $ 7.57 1,164,060 $ 8.32 ------------------------------------------------------------------------------------ Exercisable at end of year 315,280 $ 8.58 573,448 $ 8.86 408,336 $ 9.35 ------------------------------------------------------------------------------------ Weighted average fair value of options granted $ 9.30 $ 2.89 $ 5.34 ====================================================================================
The following table summarizes information about stock options outstanding at January 30, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------------------------------------- Weighted Number Average Number Outstanding at Remaining Weighted Exercisable at Weighted Range of January 30, Contractual Average January 30, Average Exercise Price 1999 Life (Years) Exercise Price 1999 Exercise Price - --------------------------------------------------------------------------------------------------- $3.38-$8.00 814,960 3.50 $ 6.06 202,390 $ 6.15 $8.00-$16.88 520,440 3.97 $11.68 112,890 $12.92
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 established financial accounting and reporting standards for stock-based compensation and for transactions in which an entity issues its equity instruments to acquire goods and services for nonemployees. In accordance with SFAS No. 123, the Company continues to account for and record compensation expense under APB No. 25. However, the Company adopted the disclosure only provisions of SFAS No. 123, as required. If the Company had recorded compensation expense in accordance with SFAS No. 123 under the fair value based method, the Company's net income and net income per share would have been as indicated below (in thousands, except per share data):
Fiscal Year Ended --------------------------------------- 1/30/99 1/31/98 2/1/97 - -------------------------------------------------------------------------------------- Net income-as reported $ 4,514 $ 6,969 $ 5,792 Net income-pro forma 4,257 6,788 5,727 Net income per share-diluted, as reported 0.26 0.40 0.33 Net income per share-diluted, pro forma 0.24 0.39 0.33
For the purposes of the foregoing calculation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in connection with this model show no expected dividend yield, a five-year expected life of the options, and an expected stock price volatility rate of 1.35 with risk-free interest rates ranging from 4.53% to 5.79%. During fiscal years 1999, 1998, and 1997, the Company recognized tax benefits related to the exercise of stock options in the amount of $2,333,000, $0, and $19,000, respectively. The tax benefits were credited to paid-in capital in the respective years. EMPLOYEE STOCK PURCHASE PLAN The Company maintains an employee stock purchase plan under which 100,000 shares of the Company's common stock are reserved for purchase by employees at 85% of the fair market value of the common stock. Of the total reserved shares, 63,698 shares have been purchased as of January 30, 1999. 6. RELATED-PARTY TRANSACTIONS Certain majority stockholders 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 and Note 4. The Company purchases a portion of its inventories for resale from related parties; such purchases amounted to $36,836,000, $32,303,000 and $23,120,000 in fiscal 1999, 1998, and 1997, respectively. The Company sells a portion of its inventories to related parties; such sales amounted to $5,301,000, $10,273,000 and $9,819,000 in fiscal 1999, 1998 and 1997, respectively. The Company purchases promotional marketing material from a related party; such purchases amounted to $29,000, $202,000 and $47,000 in fiscal 1999, 1998 and 1997, respectively. The Company utilizes the logistics services of a related party; such services amounted to $128,000, $0 and $0 in fiscal 1999, 1998 and 1997, respectively. 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Books-A-Million, Inc.: We have audited the accompanying consolidated balance sheets of Books-A-Million, Inc. (a Delaware corporation), and its subsidiaries as of January 30, 1999, and January 31, 1998, and the related consolidated statements of income, stockholders' investment, and cash flows for each of the three fiscal years in the period ended January 30, 1999. 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 generally accepted auditing standards. 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 audits provide 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., and its subsidiaries as of January 30, 1999, and January 31, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Birmingham, Alabama March 16, 1999 36 SUMMARY OF QUARTERLY RESULTS (Unaudited) (In thousands, except per share data)
Fiscal Year Ended January 30, 1999 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total - --------------------------------------------------------------------------------------------------------------- Net sales $74,469 $77,955 $78,962 $116,491 $347,877 Gross profit 18,995 19,413 18,720 33,956 91,084 Operating profit 1,135 351 (1,026) 11,256 11,716 Net income (loss) 10 (514) (1,459) 6,477 4,514 Net income (loss) per share - basic 0.00 (0.03) (0.08) 0.37 0.26 Net income (loss) per share - diluted (1) 0.00 (0.03) (0.08) 0.36 0.26 Fiscal Year Ended January 31, 1998 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total - --------------------------------------------------------------------------------------------------------------- Net sales $68,237 $ 71,867 $ 71,613 $113,045 $324,762 Gross profit 17,541 18,686 17,480 32,713 86,420 Operating profit 1,606 2,024 652 11,290 15,572 Net income (loss) 369 527 (300) 6,373 6,969 Net income (loss) per share - basic 0.02 0.03 (0.02) 0.37 0.40 Net income (loss) per share - diluted 0.02 0.03 (0.02) 0.37 0.40
(1) The sum of the 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. EX-10.2 2 AMENDED AND RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.2 BOOKS-A-MILLION, INC. STOCK OPTION PLAN AS AMENDED AND RESTATED AS OF MARCH 18, 1998 SECTION 1 PURPOSE The purpose of this Plan is to promote the interests of the Company and its stockholders by granting Options to purchase stock to Employees and Directors in order (1) to provide an additional incentive to each Employee or Director to work to increase the value of the Company's stock, and (2) to provide each Employee or Director with a stake in the future of the Company which corresponds to the stake of each of the Company's stockholders. SECTION 2 DEFINITIONS Each term set forth in this Section 2 shall have the meaning set forth opposite such term for purposes of this Plan and, for purposes of such definitions, the singular shall include the plural and the plural shall include the singular. 2.1 Board - means the Board of Directors of the Company. 2.2 Change in Control - means (a) the acquisition of the power to direct, or cause the direction of, the management and policies of the Company by a person (not previously possessing such power), acting alone or in conjunction with others, whether through the ownership of Stock, by contract or otherwise, or (b) the acquisition, directly or indirectly, of the power to vote more than 50% of the outstanding Stock by any person or by two or more persons acting together. For purposes of this definition, (1) the term "person" means a natural person, corporation, partnership, joint venture, trust, government or instrumentality of a government, and (2) customary agreements with or between underwriters and selling group members with respect to a bona fide public offering of Stock shall be disregarded. 2.3 Code - means the Internal Revenue Code of 1986, as amended. 2.4 Committee - means the committee appointed by the Board to administer this Plan which at all times shall consist of two or more members of the Board. 2.5 Company - means Books-A-Million, Inc., a Delaware corporation, and any successor to such corporation. 2.6 Director - means any member of the Board who is not an employee of the Company or a Subsidiary. 1 2 2.7 Employee - means any full-time employee of the Company who the Committee, acting in its absolute discretion, has determined to be eligible for the grant of an Option under this Plan. 2.8 Exchange Act - means the Securities Exchange Act of 1934, as amended. 2.9 Fair Market Value - means (a) the closing price on any date for a share of Stock as reported by The Wall Street Journal under the New York Stock Exchange Composite Transactions quotation system (or under any successor quotation system), or (b) if the Stock is not traded on the New York Stock Exchange, under the quotation system under which such closing price is reported, or (c) if The Wall Street Journal does not report such closing price, such closing price as reported by a newspaper or trade journal selected by the Committee, or (d) if no such closing price is available on such date, such closing price as so reported or so quoted in accordance with Section 2.9(a) for the immediately preceding business day, or (e) if no newspaper or trade journal reports such closing price or if no such price quotation is available, the price which the Committee acting in good faith determines through any reasonable valuation method that a share of Stock might change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. 2.10 ISO - means an option granted under this Plan to purchase Stock which is intended by the Company to satisfy the requirements of Code Section 422. 2.11 Non-ISO - means an option granted under this Plan to purchase Stock which is not intended by the Company to satisfy the requirements of Code Section 422. 2.12 Option - means an ISO or a Non-ISO. 2.13 Option Certificate - means the written certificate or instrument which sets forth the terms of an Option granted to an Employee or Director under this Plan. 2.14 Option Price - means the price which shall be paid to purchase one share of Stock upon the exercise of an Option granted under this Plan. 2.15 Parent Corporation - means any corporation which is a parent of the Company within the meaning of Section 424(e) of the Code. 2.16 Plan - means this Books-A-Million, Inc. Stock Option Plan, as amended from time to time. 2.17 Rule 16b-3 - means the exemption under Rule 16b-3 to Section 16(b) of the Exchange Act or any successor to such rule. 2.18 Stock - means the $.01 par value common stock of the Company. 2.19 Subsidiary - means a corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) of the Company. 2 3 2.20 Ten Percent Stockholder - means a person who owns (after taking into account the attribution rules of code Section 424(d)) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent Corporation or its Subsidiary. SECTION 3 SHARES RESERVED UNDER THE PLAN There shall be 3,300,000 shares of Stock reserved for use under this Plan, and such shares of Stock shall be reserved to the extent that the Company deems appropriate from authorized but unissued shares of Stock and from shares of Stock which have been reacquired by the Company. Furthermore, any shares of Stock subject to an Option which remain unissued after the cancellation, expiration or exchange of such Option thereafter shall again become available for use under this Plan. SECTION 4 EFFECTIVE DATE The effective date of this Plan shall be the date it is adopted by the Board, provided that the stockholders of the Company shall approve this Plan after the date of its adoption and, to the extent this Plan provides for the issuance of ISOs, the stockholders of the Company shall approve those portions of this Plan related to the granting of ISOs within twelve (12) months after the date of adoption. If any Options are granted under this Plan before the date of such stockholder approval, such Options automatically shall be granted subject to such approval. SECTION 5 ADMINISTRATION The Plan shall be administered by the Committee. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee shall be filled by the Board. The Committee shall select one of its members as Chairman and shall hold meetings at such times and places as it may determine. The Committee acting in its absolute discretion shall exercise such powers and take such action as expressly called for under this Plan and, further, the Committee shall have the power to interpret this Plan and (subject to Rule 16b-3) to take such other action (except to the extent the right to take such action is expressly and exclusively reserved for the Board or the Company's stockholders) in the administration and operation of this Plan as the Committee deems equitable under the circumstances, which action shall be binding on the Company, on each affected Employee or Director and on each other person directly or indirectly affected by such action. SECTION 6 ELIGIBILITY Only Employees and Directors shall be eligible for the grant of Options under this Plan. 3 4 SECTION 7 GRANT OF OPTIONS 7.1 Committee Action. The Committee, acting in its absolute discretion, shall have the right to grant Options to Employees under this Plan from time to time to purchase shares of Stock and, further, shall have the right to grant new Options in exchange for outstanding Options which have a higher or lower Option Price. Each grant of an Option to an Employee shall be evidenced by an Option Certificate, and each such Option Certificate shall (1) specify whether the Option is an ISO or Non-ISO and (2) incorporate such other terms and conditions as the Committee, acting in its absolute discretion, deems consistent with the terms of this Plan, including (without limitation) a restriction on the number of shares of Stock subject to the Option which first become exercisable during any calendar year. If the Committee grants an ISO and a Non-ISO to an Employee on the same date, the right of the Employee to exercise one such Option shall not be conditioned on his or her failure to exercise the other such Option. 7.2 $100,000 Limit. To the extent that the aggregate Fair Market Value of Stock (determined as of the date the ISOs are granted) with respect to which ISOs first become exercisable in any calendar year exceeds $100,000, such Options in excess of the limitation shall be treated as Non-ISOs. The Fair Market Value of the Stock subject to any other option (determined as of the date such option was granted) which (1) satisfies the requirements of Section 422 of the Code and (2) is granted to an Employee under a plan maintained by the Company, a Subsidiary or a Parent Corporation shall be treated (for purposes of this $100,000 limitation) as if granted under this Plan. This $100,000 limitation shall be administered in accordance with the rules under Section 422(d) of the Code. 7.3 Grants to Directors. Each Director shall be granted (without any further action on the part of the Committee) a Non-ISO under this Plan as of the first day he serves as such to purchase 10,000 shares of Stock at the Fair Market Value of such Stock on such date; provided, however, that for Non-ISOs granted under this Section 7.3 prior to the completion by the Company of an initial public offering of Stock (the "Initial Public Offering"), the exercise price shall be the Price to the public to be set forth on the cover of the final prospectus relating to the Initial Public Offering; and provided further, however, that any such Non-ISOs granted under this Section 7.3 prior to the completion by the Company of an Initial Public Offering shall be forfeited if the Initial Public Offering is not completed on or before December 31, 1992. Thereafter, each Director who is serving as such on the last business day of each calendar year and who has served as such for more than one year shall be granted (without any further action on the part of the Committee) a Non-ISO under this Plan as of the last business day of each calendar year to purchase 6,000 shares of Stock from the Company at the Fair Market Value of such Stock on such date. Each Non-ISO granted under this Plan to a Director shall be evidenced by an Option Certificate, shall be fully vested upon grant and shall expire 90 days after a Director ceases to serve as such or, if earlier, on the sixth anniversary of the date of the grant of the Non-ISO. A Non-ISO granted to a Director under this Plan shall conform in all other respects to the terms and conditions of a Non-ISO under this Plan, and no Director shall be eligible to receive an Option under this Plan except as provided in this Section 7.3. 4 5 SECTION 8 OPTION PRICE The Option Price for each share of Stock subject to an ISO shall be no less than the Fair Market Value of a share of Stock on the date the ISO is granted; provided, however, if the Option is an ISO granted to a Ten Percent Stockholder, the Option Price for each share of Stock subject to such ISO shall be no less than 110% of the Fair Market Value of a share of Stock on the date such ISO is granted. The Option Price for each share of Stock subject to a Non-ISO which is granted to an Employee may (in the absolute discretion of the Committee) be more or less than or equal to the Fair Market value of a share of Stock on the date the Non-ISO is granted; provided, however, that in no event shall the Option Price be less than adequate consideration as determined by the Committee. The Option Price for each share of Stock subject to a Non-ISO which is granted to a Director shall equal the fair market value of a share of Stock on the date the Non-ISO is granted. The Option Price shall be payable in full upon the exercise of any Option and, at the discretion of the Committee, an Option Certificate can provide for the payment of the Option Price either in cash, by check, or in Stock acceptable to the Committee. Any payment made in Stock shall be treated as equal to the Fair Market Value of such Stock on the date the properly endorsed certificate for such Stock is delivered to the Committee or its delegate. SECTION 9 EXERCISE PERIOD Each Option granted under this Plan to an Employee shall be exercisable in whole or in part at such time or times as set forth in the related Option Certificate, but no Option Certificate shall make an Option granted to an Employee exercisable (1) before the last day of the six-month period which begins on the date such Option is granted or (2) after the earlier of: (a) the date such Option is exercised in full, (b) the date which is the fifth anniversary of the date the Option is granted, if the Option is an ISO and the Employee is a Ten Percent Stockholder on the date the Option is granted, or (c) the date which is the tenth anniversary of the date the Option is granted, if the Option is (i) a Non-ISO or (ii) an ISO which is granted to an Employee who is not a Ten Percent Stockholder on the date the Option is granted. An Option Certificate may provide for the exercise of an Option granted to an Employee after the employment of such Employee has terminated for any reason whatsoever, including death or disability. SECTION 10 NONTRANSFERABILITY No Option granted under this Plan shall be transferable by an Employee or Director other than by will or by the laws of descent and distribution, and such Option shall be exercisable during 5 6 the lifetime of an Employee or Director only by such Employee or Director. The person or persons to whom an Option is transferred by will or by the laws of descent and distribution thereafter shall be treated for purposes of such Option as the Employee or Director under this Plan. SECTION 11 SECURITIES REGISTRATION Each Option Certificate shall provide that, upon the receipt of shares of Stock as a result of the exercise of an Option, the Employee or Director shall, if so requested by the Company, hold such shares of Stock for investment and not with a view to resale or distribution to the public and, if so requested by the Company, shall deliver to the Company a written statement satisfactory to the Company to that effect. Each Option Certificate also shall provide that, if so requested by the Company, the Employee or Director shall make a written representation to the Company that he or she will not sell or offer to sell any of such Stock unless a registration statement shall be in effect with respect to such Stock under the Securities Act of 1933, as amended ("1933 Act") and any applicable state securities law or unless he or she shall have furnished to the Company an opinion, in form and substance satisfactory to the Company, of legal counsel acceptable to the Company, that such registration is not required. Certificates representing the Stock transferred upon the exercise of an Option granted under this Plan may at the discretion of the Company bear a legend to the effect that such Stock has not been registered under the 1933 Act or any applicable state securities law and that such Stock may not be sold or offered for sale in the absence of an effective registration statement as to such Stock under the 1933 Act and any applicable state securities law or an opinion, in form and substance satisfactory to the Company, of legal counsel acceptable to the Company, that such registration is not required. SECTION 12 LIFE OF PLAN No Option shall be granted under this Plan on or after the earlier of: (1) the tenth anniversary of the effective date of this Plan (as determined under Section 4 of this Plan), in which event this Plan thereafter shall continue in effect until all outstanding Options have been exercised in full or no longer are exercisable, or (2) the date on which all of the Stock reserved under Section 3 of this Plan has (as a result of the exercise of Options granted under this Plan) been issued or no longer is available for use under this Plan, in which event this Plan also shall terminate on such date. SECTION 13 ADJUSTMENT The number of shares of Stock reserved under Section 3 of this Plan, the number of shares of Stock subject to Options granted under this Plan and the Option Price of such Options shall be adjusted by the Committee in an equitable manner to reflect any change in the capitalization of the Company, including, but not limited to, such changes as stock dividends or stock splits. The Committee shall have the right to adjust (in a manner which satisfies the requirements of Section 6 7 424(a) of the Code) the number of shares of Stock reserved under Section 3 of this Plan, the number of shares of Stock subject to Options granted under this Plan, and the Option Price of such Options in the event of any corporate transaction described in Section 424(a) of the Code which provides for the substitution or assumption of Options. If any adjustment under this Section 13 would create a fractional share of Stock or a right to acquire a fractional share of Stock, such fractional share shall be disregarded and the number of shares of Stock reserved under this Plan and the number subject to any Options granted under this Plan shall be the next lower number of shares of Stock, rounding all fractions downward. An adjustment made under this Section 13 by the Committee shall be conclusive and binding on all affected persons. SECTION 14 SALE OR MERGER OR CHANGE IN CONTROL 14.1 Sale or Merger. If the Company agrees to sell all or substantially all of its assets for cash or property or for a combination of cash and property or agrees to any merger, consolidation, reorganization, division or other corporate transaction in which Stock is converted into another security or into the right to receive securities or property and such agreement does not provide for the assumption or substitution of the Options granted under this Plan, each Option granted (a) to an Employee may, at the direction of the Committee, (1) be cancelled unilaterally by the Company (subject to such conditions, if any, as the Committee deems appropriate under the circumstances) in exchange for whole shares of Stock (and cash in lieu of a fractional share) the number of which, if any, shall be determined by the Committee on a date set by the Committee for this purpose by dividing (A) the excess of the then Fair Market Value of the Stock then subject to exercise under such Option (as determined without regard to any vesting schedule for such Option) over the Option Price of such Stock by (B) the then Fair Market Value of a share of such Stock, or (2) be cancelled unilaterally by the Company if the Option Price equals or exceeds the Fair Market Value of a share of Stock on such date, and (b) to a Director may be cancelled unilaterally by the Company as of any date to the extent then unexercised after advance written notice to each affected Director. 14.2 Change in Control. If there is a Change in Control of the Company or a tender or exchange offer is made for Stock other than by the Company, the Committee thereafter shall have the right (a) to take such action with respect to any unexercised Options granted to Employees, or all such Options, as the Committee deems appropriate under the circumstances to protect the interest of the Company in maintaining the integrity of such grants under this Plan, including following the procedures set forth in Section 14.1 for a sale or merger of the Company, and (b) to follow the procedures for Directors set forth in Section 14.1 with respect to any and all unexercised Options granted to Directors. The Committee shall have the right to take different action under this Section 14.2 with respect to different Employees or different groups of Employees, as the Committee deems appropriate under the circumstances. 7 8 SECTION 15 AMENDMENT OR TERMINATION This Plan may be amended by the Committee from time to time to the extent that the Committee deems necessary or appropriate; provided, however (a) no such amendment shall be made absent the approval of the stockholders of the Company required under Section 422 of the Code (1) to increase the number of shares of Stock reserved under Section 3, or (2) to change the class of employees eligible for Options under Section 6 and (b) no provision of this Plan shall be amended more than once every 6 months if amending such provision would result the in loss of an exemption under Rule 16b-3. Subject to the other limitations set forth in this Section 15, any amendment which specifically applies to Non-ISOs shall not require stockholder approval unless such approval is necessary to comply with Section 16 of the Exchange Act. The Committee also may suspend the granting of Options under this Plan at any time and may terminate this Plan at any time; provided, however, that the Committee shall not have the right unilaterally to modify, amend or cancel any Option granted before such suspension or termination unless (1) the Employee or Director consents in writing to such modification, amendment or cancellation, or (2) there is a dissolution or liquidation of the Company or a transaction described in Section 13 or Section 14 of this Plan. SECTION 16 MISCELLANEOUS 16.1 No Stockholder Rights. No Employee or Director shall have any rights as a stockholder of the Company as a result of the grant of an Option to him or to her under this Plan or his or her exercise of such Option pending the actual delivery of Stock subject to such Option to such Employee. 16.2 No Contract of Employment. The grant of an Option to an Employee or Director under this Plan shall not constitute a contract of employment or a right to continue to serve on the Board and shall not confer on any Employee or Director any rights upon his or her termination of employment or service in addition to those rights, if any, expressly set forth in the Option Certificate which evidences his or her Option. 16.3 Other Conditions. Each Option Certificate may require that an Employee or Director (as a condition to the exercise of an Option) enter into any agreement or make such representations prepared by the Company, including any agreement which restricts the transfer of Stock acquired pursuant to the exercise of such Option or provides for the repurchase of such Stock by the Company under certain circumstances. 16.4 Withholding. The exercise of any Option granted under this Plan shall constitute full and complete consent by an Employee to whatever action the Committee deems necessary to satisfy the federal and state tax withholding requirements, if any, which the Committee acting in its discretion deems applicable to such exercise. The Committee also shall have the right to provide in an Option Certificate that an Employee may elect to satisfy federal and state withholding requirements through a reduction in the number of shares of Stock actually transferred to him or her under this Plan, and if the Employee is subject to the reporting requirements under Section 16 of the 8 9 Exchange Act, any such election and any such reduction shall be effected so as to satisfy the conditions to the exemption under Rule 16b-3 under the Exchange Act. 16.5 Construction. This Plan shall be construed under the laws of the State of Delaware. 9 10 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan this 18th day of March, 1998 to evidence its adoption of this Plan. BOOKS-A-MILLION, INC. BY: /s/ Sandra B. Cochran -------------------------------- 10 EX-10.14 3 SECOND AMENDMENT TO REVOLVING LOAN AGREEMENT 1 EXHIBIT 10.14 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated June 19, 1998 ("this Amendment") is entered into by BOOKS-A-MILLION, INC., a Delaware corporation ("BAM"), AMERICAN WHOLESALE BOOK COMPANY, INC., an Alabama corporation ("AWBC"; BAM and AWBC are sometimes together referred to as the "Borrowers"), AMSOUTH BANK, an Alabama banking corporation formerly known as AmSouth Bank of Alabama ("AmSouth"), SUNTRUST BANK, ATLANTA, a Georgia banking corporation, NATIONSBANK, N.A., a national banking association, successor by merger to NationsBank, N.A. (South), a national banking association formerly known as NationsBank of Georgia, N.A., and SOUTHTRUST BANK, NATIONAL ASSOCIATION, a national banking association (collectively, the "Lenders"), and AMSOUTH BANK, an Alabama banking corporation formerly known as AmSouth Bank of Alabama, as agent for the Lenders (the "Agent"). RECITALS A. The Borrowers, the Agent and the Lenders are parties to that certain Credit Agreement dated October 27, 1995 as amended by a First Amendment to Credit Agreement dated June 4, 1997 (collectively, the "Agreement") pursuant to which the Lenders have made available to the Borrowers a revolving credit facility in an aggregate principal amount outstanding not to exceed $90,000,000 (the "Revolving Facility"), the proceeds of which are to be used by the Borrowers for general corporate purposes. A. The Borrowers have applied to the Lenders for an extension of the Termination Date of the Revolving Facility until June 18, 2003, and for a provision permitting additional extensions of the Termination Date under agreed terms and conditions. B. The Lenders are willing to extend the Termination Date as requested only if, among other things, the Borrowers enter into this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals, and to induce the Lenders to increase the amount of the Revolving Facility, the Borrowers, the Lenders and the Agent hereby agree as follows: 1. Capitalized terms used in this Amendment and not otherwise defined herein have the respective meanings attributed thereto in the Agreement. 2. The defined term "Termination Date" set forth in Article I of the Agreement is hereby deleted and replaced in its entirety by the following: "Termination Date shall mean June 18, 2003, as the same may be extended from 2 time to time in accordance with Section 2.12 hereof." 3. Section 2.12 of the Agreement is hereby deleted in its entirety and replaced by the following: "SECTION 2.12 EXTENSION OF TERMINATION DATE 2.12 EXTENSION OF TERMINATION DATE. If the Borrowers have furnished to the Agent and the Lenders the financial statements referred to in Section 7.3 within the time set forth therein, the Borrowers may request, not earlier than thirty (30) days prior to June 19, 1999 and June 19, 2000, respectively, that the Termination Date be extended for an additional period of one year. The Agent shall notify the Borrowers in writing, within sixty (60) days of receipt of such request, of the decision of the Lenders as to whether to extend the Termination Date. Failure by the Agent to give such notice shall constitute refusal by the Lenders to extend the Termination Date. The Termination Date shall be extended only upon written consent of all Lenders." 4. Pursuant to Section 10.2(b) of the Agreement, NationsBank, N.A. hereby designates the address and facsimile number set forth below its signature on the attached signature page as its notice address for all purposes under the Agreement. 5. Notwithstanding the execution of this Amendment, all of the indebtedness evidenced by each of the Notes shall remain in full force and effect, as modified hereby, and nothing contained in this Amendment shall be construed to constitute a novation of the indebtedness evidenced by any of the Notes or to release, satisfy, discharge, terminate or otherwise affect or impair in any manner whatsoever (a) the validity or enforceability of the indebtedness evidenced by any of the Notes; (b) the liens, security interests, assignments and conveyances effected by the Agreement or the Loan Documents, or the priority thereof; (c) the liability of any maker, endorser, surety, guarantor or other person that may now or hereafter be liable under or on account of any of the Notes or the Agreement or the Loan Documents; or (d) any other security or instrument now or hereafter held by the Lender as security for or as evidence of any of the above-described indebtedness. 6. All references in the Loan Documents to "Credit Agreement" shall refer to the Agreement as amended by this Amendment, and as the Agreement may be further amended from time to time. 7. The Borrowers hereby certify that the organizational documents of the Borrowers have not been amended since October 27, 1995. 8. The Borrowers hereby represent and warrant to the Lender that all representations and warranties contained in the Agreement are true and correct as of the date hereof; and the Borrowers hereby certify that no Event of Default nor any event that, upon notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing. 9. Except as hereby amended, the Agreement shall remain in full force and effect as written. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which when taken together shall constitute one and the same instrument. The covenants and agreements contained in this Amendment shall apply to and inure 2 3 to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 10. Nothing contained herein shall be construed as a waiver, acknowledgment or consent to any breach of or Event of Default under the Agreement and the Loan Documents not specifically mentioned herein. 11. This Amendment shall be governed by the laws of the State of Alabama. [Remainder of this page intentionally blank.] 3 4 IN WITNESS WHEREOF, each of the Borrowers, the Lenders and the Agent has caused this Amendment to be executed and delivered by its duly authorized corporate officer as of the day and year first above written. BOOKS-A-MILLION, INC. By: /s/ Sandra B. Cochran -------------------------------------- Its Executive Vice President ----------------------------------- AMERICAN WHOLESALE BOOK COMPANY, INC. By: /s/ Sandra B. Cochran -------------------------------------- Its Executive Vice President ----------------------------------- Hand Delivery Address: 402 Industrial Lane Birmingham, Alabama 35211 FAX: (205) 945-1772 Attention: Chief Financial Officer Mailing Address: Post Office Box 19768 Birmingham, Alabama 35219 FAX: (205) 945-1772 Attention: Chief Financial Officer 5 AMSOUTH BANK By: /s/ David A. Simmons -------------------------------------- Its Senior Vice President Commitment Amount: $27,000,000 Applicable Commitment Percentage: 30.000% Lending Office and Hand Delivery Address: 7th Floor, AmSouth-Sonat Tower 1900 Fifth Avenue North Birmingham, Alabama 35203 FAX: (205) 801-0157 Attention: David A. Simmons Mailing Address: P. O. Box 11007 Birmingham, Alabama 35288 FAX: (205) 801-0157 Attention: David A. Simmons 6 SUNTRUST BANK, ATLANTA By: /s/ David J. Edge --------------------------------------- Its Vice President ------------------------------------ By: /s/ John R. Frazer --------------------------------------- Its Vice President ------------------------------------ Commitment Amount: $24,000,000 Applicable Commitment Percentage: 26.667% Lending Office and Hand Delivery Address: 25 Park Place N.E. Mail Code 120 - 24th Floor Atlanta, Georgia 30303 FAX: (404) 827-6270 Attention: F. McClellan Deaver, III Mailing Address: Post Office Box 4418 Mail Code 120 Atlanta, Georgia 30302 FAX: (404) 827-6270 Attention: F. McClellan Deaver, III 7 NATIONSBANK, N.A. By: /s/ Nancy S. Goldman --------------------------------------- Its: Vice President ----------------------------------- Commitment Amount: $24,000,000 Applicable Commitment Percentage: 26.667% Lending Office, Hand Delivery and Mailing Address: 600 Peachtree Street, N.E. 9th Floor Atlanta, Georgia 30308-2213 FAX: (404) 607-6467 Attention: Nancy S. Goldman 8 SOUTHTRUST BANK, NATIONAL ASSOCIATION By: /s/ J. Burton McDonald --------------------------------------- Its: Group Vice President ----------------------------------- Commitment Amount: $15,000,000 Applicable Commitment Percentage: 16.666% Lending Office and Hand Delivery Address: 6th Floor, SouthTrust Tower 420 North 20th Street Birmingham, Alabama 35203 FAX: (205) 254-5911 Attention: J. Burton McDonald, Jr. Mailing Address: Post Office Box 2554 Birmingham, Alabama 35290 Attention: J. Burton McDonald, Jr. 9 AMSOUTH BANK, as Agent By: /s/ David A. Simmons --------------------------------------- Its Senior Vice President EX-10.15 4 THIRD AMENDMENT TO SHORT-TERM CREDIT AGREEMENT 1 EXHIBIT 10.15 [EXECUTION COPY] THIRD AMENDMENT TO SHORT-TERM CREDIT AGREEMENT THIS THIRD AMENDMENT TO SHORT-TERM CREDIT AGREEMENT dated effective June 3, 1998 ("this Amendment") is entered into by BOOKS-A-MILLION, INC., a Delaware corporation ("BAM"), AMERICAN WHOLESALE BOOK COMPANY, INC., an Alabama corporation ("AWBC"; BAM and AWBC are sometimes together referred to as the "Borrowers") and AMSOUTH BANK, an Alabama banking corporation formerly known as AmSouth Bank of Alabama (the "Lender"). RECITALS A. The Borrowers and the Lender have heretofore entered into a Short-Term Credit Agreement dated as of October 27, 1995, as amended by a First Amendment thereto dated as of November 1, 1996, and as further amended by a Second Amendment thereto dated June 4, 1997 (as so amended, the "Credit Agreement") whereby the Lender has made available to the Borrowers a revolving credit facility in an aggregate principal amount outstanding not to exceed $10,000,000 (the "Revolving Facility"), the proceeds of which are to be used by the Borrowers for general corporate purposes. B. The Borrowers have applied to the Lender for an extension of the Termination Date of the Revolving Facility until June 2, 1999. C. The Borrowers and the Lender wish to amend the Agreement as requested by the Borrowers and as further set forth in this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the recitals and the mutual obligations and covenants contained herein, the Borrowers and the Lender hereby agree as follows: 1. Capitalized terms used in this Amendment and not otherwise defined herein have the respective meanings attributed thereto in the Agreement. 2. The defined term "Termination Date" set forth in Article I of the Agreement is hereby amended to read, in its entirety, as follows: "Termination Date" means June 2, 1999, as the same may be extended from time to time in accordance with Section 2.7 hereof." 3. Section 2.7 of the Agreement is hereby deleted in its entirety and replaced by the following: "SECTION 2.7 EXTENSION OF TERMINATION DATE. Upon written notice to the Lender in the form attached as Schedule 2.7(a) at least thirty (30) days (but not more than sixty (60) days) prior to the Termination Date then in effect, the Borrowers may request that such Termination Date be extended for an additional 364 days. 2 The Lender shall notify the Borrowers in writing in the form attached as Schedule 2.7(b) at least fourteen (14) days prior to such Termination Date of the decision of the Lender as to whether to extend the Termination Date. Failure by the Lender to give such notice shall constitute refusal by the Lender to extend the Termination Date." 4. Notwithstanding the execution of this Amendment, all of the indebtedness evidenced by the Note shall remain in full force and effect, as modified hereby, nothing contained in this Amendment shall be construed to constitute a novation of the indebtedness evidenced by the Note or to release, satisfy, discharge, terminate or otherwise affect or impair in any manner whatsoever (a) the validity or enforceability of the indebtedness evidenced by the Note; (b) the liens, security interests, assignments and conveyances effected by the Agreement or the Loan Documents, or the priority thereof; (c) the liability of any maker, endorser, surety, guarantor or other person that may now or hereafter be liable under or on account of the Note or the Agreement or the Loan Documents; or (d) any other security or instrument now or hereafter held by the Lender as security for or as evidence of any of the above-described indebtedness. 5. All references in the Loan Documents to "Credit Agreement" shall refer to the Agreement as amended by this Amendment, and as the Agreement may be further amended from time to time. 6. The Borrowers hereby certify that the organizational documents of the Borrowers have not been amended since October 27, 1995. 7. The Borrowers hereby represent and warrant to the Lender that all representations and warranties contained in the Agreement are true and correct as of the date hereof; and the Borrowers hereby certify that no Event of Default nor any event that, upon notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing. 8. Except as hereby amended, the Agreement shall remain in full force and effect as written. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which when taken together shall constitute one and the same instrument. The covenants and agreements contained in this Amendment shall apply to and inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 9. Nothing contained herein shall be construed as a waiver, acknowledgment or consent to any breach of or Event of Default under the Agreement and the Loan Documents not expressly waived, acknowledged or consented to previously by the Lender in writing. 10. This Amendment shall be governed by the laws of the State of Alabama. 2 3 IN WITNESS WHEREOF, each of the Borrowers and the Lender has caused this Amendment to be executed and delivered by its duly authorized corporate officer to be effective as of the day and year first above written. BOOKS-A-MILLION, INC. By: /s/ Sandra B. Cochran -------------------------------------- Its Executive Vice President ----------------------------------- AMERICAN WHOLESALE BOOK COMPANY, INC. By: /s/ Sandra B. Cochran -------------------------------------- Its Executive Vice President ----------------------------------- Hand Delivery Address: 402 Industrial Lane Birmingham, Alabama 35211 FAX: (205) 945-1772 Attention: Chief Financial Officer Mailing Address: Post Office Box 19768 Birmingham, Alabama 35219 FAX: (205) 945-1772 Attention: Chief Financial Officer 4 AMSOUTH BANK By: /s/ David A. Simmons -------------------------------------- Its Senior Vice President Hand Delivery Address: AmSouth-Sonat Tower 1900 Fifth Avenue North Birmingham, Alabama 35203 FAX: (205) 326-5601 Attention: David A. Simmons Mailing Address: P. O. Box 11007 Birmingham, Alabama 35288 FAX: (205) 326-5601 Attention: David A. Simmons 5 SCHEDULE 2.7(A) (Request for Extension of Termination Date) 6 Date:________________ BY FACSIMILE - 801-0157 ORIGINAL BY CERTIFIED U.S. MAIL Mr. David A. Simmons Senior Vice President Regional Banking AmSouth Bank P.O. Box 11007 Birmingham, Alabama 35203 Re: $10,000,000 Revolving Line of Credit by AmSouth Bank, as Lender, to Books-A-Million, Inc. and American Wholesale Book Company, Inc., as Borrowers Dear Mr. Simmons: This letter is to request that you extend the Termination Date for the above revolving loan to _______________________ pursuant to Section 2.7 of the Short-Term Credit Agreement dated as of October 27, 1995 (as amended from time to time, the "Credit Agreement"). No Event of Default exists under the Credit Agreement and no event has occurred that with notice or the passage of time, or both, could become an Event of Default. The Borrowers have delivered to the Lender all financial information required to be submitted to date under the terms of the Credit Agreement. Thank you for your assistance. We look forward to your reply. BOOKS-A-MILLION, INC. By: ------------------------------------- Its: ------------------------------------- AMERICAN WHOLESALE BOOK COMPANY, INC. By: ------------------------------------- Its: ------------------------------------- 7 SCHEDULE 2.7(B) (Notice of Extension of Termination Date) 8 Date:________________ BY FACSIMILE - 945-1772 ORIGINAL BY CERTIFIED U.S. MAIL Chief Financial Officer Books-A-Million, Inc. American Wholesale Book Company, Inc. 402 Industrial Lane Birmingham, Alabama 35211 Re: $10,000,000 Revolving Line of Credit by AmSouth Bank, as Lender, to Books-A-Million, Inc. and American Wholesale Book Company, Inc., as Borrowers Dear Sir or Madam: Please be advised that AmSouth Bank is pleased to extend the Termination Date of the above revolving loan to the following date: _______________________. All references in the Credit Agreement and other Credit Documents to the capitalized term "Termination Date" shall hereafter refer to this date. AMSOUTH BANK By: ------------------------------------- Its: ------------------------------------- EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant The Company's subsidiaries are the following: American Wholesale Book Company, Inc., an Alabama corporation. American Internet Services, Inc., an Alabama corporation NetCentral, Inc., a Tennessee corporation EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-72812 and 33-86980. ARTHUR ANDERSEN LLP Birmingham, Alabama April 26, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BOOKS-A-MILLION INC. CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE PERIOD ENDED JANUARY 30, 1999. 1,000 U.S. DOLLARS YEAR JAN-30-1999 FEB-01-1998 JAN-30-1999 1 4,322 0 17,219 939 175,211 202,466 117,006 49,629 271,551 118,444 0 0 0 180 114,842 271,551 347,877 347,877 256,793 323,187 12,974 0 4,435 7,281 2,767 4,514 0 0 0 4,514 0.26 0.26 (OTHER CURRENT ASSETS) 6,653 OTHER CURRENT ASSETS. (OTHER ASSETS) 1,708 OTHER ASSETS. (LONG-TERM DEBT) 36,944 LONG TERM DEBT. (DEFERRED INCOME TAXES) 1,141 DEFERRED INCOME TAXES. THE EARNINGS PER SHARE CALCULATIONS HAVE BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128 AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY DILUTED, RESPECTIVELY.
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