2008            Annual Report 

 

Exhibit 13

 

**COMPANYPROFILE**

Books-A-Million is one of the nation’s leading book retailers and            sells on the Internet at*www.booksamillion.com*. The Company            presently operates more than 200 stores in 20 states and the District of Columbia. The            Company operates two distinct store formats, including large superstores operating            under the names Books-A-Million and Books & Co. and traditional bookstores            operating under the names Books-A-Million and Bookland.

 

 

**FIVE-YEARHIGHLIGHTS**

|                                                                  |
|-----------------------------------------------------------------------|
|                                                                  | **For the Fiscal Year Ended:** |
| *(In thousands, except per share                            amounts)* | **2/2/08** | 2/3/07(1) | 1/28/06 | 1/29/05 | 1/31/04 |
| **Statement of Income Data**                                          | **52 weeks** | 53 weeks | 52 weeks | 52 weeks | 52 weeks |
| Net revenue                                                           | **$535,128** | $520,416 | $ 503,751 | $ 474,099 | $ 457,234 |
| Net income                                                            | **16,522** | 18,887 | 13,067 | 10,199 | 7,126 |
| Earnings per share – diluted                                    | **1.01** | 1.12 | 0.77 | 0.59 | 0.42 |
| Weighted average shares – diluted                               | **16,302** | 16,805 | 16,888 | 17,178 | 16,789 |
| Capital investment                                                    | **16,878** | 14,907 | 11,297 | 14,923 | 10,402 |
| Dividends per share - declared                                        | **3.36** | 0.33 | 0.23 | 0.23 | 0.00 |
|                                                                  |   |   |   |   |   |
| **Balance Sheet Data**                                                |   |   |   |   |   |
| Property and equipment, net                                           | **$53,514** | $ 51,471 | $ 51,001 | $ 55,946 | $ 59,892 |
| Total assets                                                          | **284,833** | 304,037 | 311,659 | 300,812 | 296,398 |
| Long-term debt                                                        | **6,975** | 7,100 | 7,200 | 7,500 | 20,640 |
| Stockholders’ equity                                            | **99,051** | 157,034 | 145,009 | 134,859 | 131,001 |
|                                                                  |   |   |   |   |   |
| **Other Data**                                                        |   |   |   |   |   |
| Working capital                                                       | **$58,785** | $117,737 | $ 106,637 | $ 95,382 | $ 104,723 |
| Debt to total capital ratio                                           | **0.26** | 0.04 | 0.05 | 0.05 | 0.14 |
|                                                                  |   |   |   |   |   |
| **Operational Data**                                                  |   |   |   |   |   |
| Total number of stores                                                | **208** | 206 | 205 | 206 | 202 |
| Number of superstores                                                 | **184** | 179 | 173 | 168 | 163 |
| Number of traditional stores                                          | **24** | 27 | 32 | 38 | 39 |

 

 

|   | (1) | The year ended February 3, 2007 included an extra week                            and $2.3 million of gift card breakage from prior periods. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

1

2008            Annual Report

 

 

**TOOURSTOCKHOLDERS:**

Fiscal            Year 2008 was a year of stark contrasts. The summer brought the unprecedented success            of the publication of the final book in the Harry Potter series and the fall brought a            difficult holiday sales environment and the beginnings of what we now know to be a            significant economic slowdown. Despite the tough environment we were able to control            costs, manage our inventory and deliver solid earnings.

 

Our            core book department business was down slightly for the year, however several            categories performed well. Fiction sales were very strong, driven by commercial fiction            and the January publication of John Grisham’s**The            Appeal**and Stephen King’s**Duma            Key**. The biography category experienced the phenomenal            success of Elizabeth Gilbert’s memoir,**Eat, Pray,            Love**. We also built on the positive sales trends in teen,            graphic novels and our Faithpoint inspirational book category. Children’s books            were an obvious bright spot with sales of**Harry Potter and The            Deathly Hallows**setting new records and the ongoing growth of            the broader category.

 

Our            stores also produced solid gains in bargain books and gifts with toys and games            emerging as an exciting growth opportunity. Our investment in new fixtures in the gift            departments paid off and we continue to adjust our store model to exploit the growth            areas of our business.

 

We            opened 9 new stores during the year and were pleased with their performance. We intend            to grow somewhat faster in the year ahead with an eye toward both filling in our            existing real estate footprint and expanding to high growth markets.

 

We see            a challenging year ahead as we face the economic headwinds that have developed in            recent months. We remain focused on the fundamentals of our business and committed to a            disciplined approach to delivering results.

 

|   |  |
|--------|--|

 

 

| Clyde B. Anderson | Sandra B. Cochran |
|-------------------|-------------------|

| Executive Chairman of the Board | President, Chief Executive Officer and                            Secretary |
|---------------------------------|-----------------------------------------------------------------------------|

 

 

 

 

 

| **FINANCIALHIGHLIGHTS**                                               | **Fiscal Year Ended** |
|-----------------------------------------------------------------------|-----------------------|
| *(In thousands, except per share                            amounts)* | **2/2/08**            | 2/3/07 |
| Net revenue                                                           | **$535,128**          | $520,416   |
| Operating profit                                                      | **27,420**            | 30,099   |
| Net income                                                            | **16,522**            | 18,887   |
| Net income per share – diluted                                  | **1.01**              | 1.12   |
| Dividends per share – declared                                  | **3.36**              | 0.33   |
|                                                                  |                  |   |
|                                                                  | **As of**             |
| *(In thousands)*                                                      | **2/2/08**            | 2/3/07 |
| Working capital                                                       | **$58,785**           | $117,737   |
| Total assets                                                          | **284,833**           | 304,037   |
| Stockholders’ equity                                            | **99,051**            | 157,034   |

 

2

2008 Annual Report 

 

 

| **SELECTEDCONSOLIDATEDFINANCIALDATA**                                                                                            |
|----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                             | Fiscal Year Ended |
| *(In thousands, except per share data)*                                                                                          | **2/2/08** | 2/3/07 | 1/28/06 | 1/29/05 | 1/31/04 |
| **Statement of Operations Data:**                                                                                                | **52 weeks** | 53 weeks | 52 weeks | 52 weeks | 52 weeks |
| Net revenue                                                                                                                      | **$535,128** | $520,416 | $503,751 | $474,099 | $457,234  |
| Cost of products sold, including warehouse distribution                            and store

occupancy costs                    | **376,580** | 363,688 | 357,166 | 339,012 | 330,150  |
| Gross profit                                                                                                                     | **158,548** | 156,728 | 146,585 | 135,087 | 127,084  |
| Operating, selling and administrative                            expenses                                                        | **117,139** | 112,560 | 109,160 | 99,207 | 93,974  |
| Gain on insurance recovery                                                                                                       |   | -- | 1,248 | -- | --  |
| Depreciation and amortization                                                                                                    | **13,989** | 14,069 | 15,636 | 17,788 | 18,065  |
| Operating profit                                                                                                                 | **27,420** | 30,099 | 23,037 | 18,092 | 15,045  |
| Interest expense, net                                                                                                            | **1,346** | 105 | 1,441 | 1,874 | 2,909  |
| Income from continuing operations before income                            taxes                                                 | **26,074** | 29,994 | 21,596 | 16,218 | 12,136  |
| Provision for income taxes                                                                                                       | **9,552** | 11,107 | 8,545 | 6,001 | 4,613  |
| Income from continuing operations                                                                                                | **16,522** | 18,887 | 13,051 | 10,217 | 7,523  |
|                                                                                                                             |   |   |   |   |   |
| Discontinued operations:                                                                                                         |   |   |   |   |   |
| (Loss) income from discontinued operations (including                            impairment     charge) | **--** | -- | 27 | (29) | (641) |
| Income tax provision (benefit)                                                                                                   | **--** | -- | 11 | (11) | (244) |
| (Loss) income from discontinued operations                                                                                       | **--** | -- | 16 | (18) | (397) |
| Net income                                                                                                                       | **$16,522** | $ 18,887 | $ 13,067 | $ 10,199 | $ 7,126  |
|                                                                                                                             |   |   |   |   |   |
| Net income per common share:                                                                                                     |   |   |   |   |   |
| **Basic**:                                                                                                                       |   |   |   |   |   |
| Income from continuing operations                                                                                                | **$1.03** | $ 1.16 | $ 0.80 | $ 0.62 | $ 0.46  |
| Loss from discontinued operations                                                                                                | **--** | -- | -- | -- | (0.02) |
| Net income per share                                                                                                             | **$1.03** | $ 1.16 | $ 0.80 | $ 0.62 | $ 0.44  |
| Weighted average number of shares outstanding -                            basic                                                 | **16,089** | 16,352 | 16,275 | 16,453 | 16,279  |
|                                                                                                                             |   |   |   |   |   |
| **Diluted**:                                                                                                                     |   |   |   |   |   |
| Income from continuing operations                                                                                                | **$1.01** | $ 1.12 | $ 0.77 | $ 0.59 | $ 0.45  |
| Loss from discontinued operations                                                                                                | **--** | -- | -- | -- | (0.03) |
| Net income per share                                                                                                             | **$1.01** | $ 1.12 | $ 0.77 | $ 0.59 | $ 0.42  |
| Weighted average number of shares outstanding -                            diluted                                               | **16,302** | 16,805 | 16,888 | 17,178 | 16,789  |
|                                                                                                                             |   |   |   |   |   |
| Dividends per share – declared                                                                                             | **$3.36** | $ 0.33 | $ 0.23 | $ 0.23 | -- |
|                                                                                                                             |   |   |   |   |   |
| **Balance Sheet Data:**                                                                                                          |   |   |   |   |   |
| Property and equipment, net                                                                                                      | **$53,514** | $ 51,471 | $ 51,001 | $ 55,946 | $ 59,892  |
| Total assets                                                                                                                     | **284,833** | 304,037 | 311,659 | 300,812 | 296,398  |
| Long-term debt                                                                                                                   | **6,975** | 7,100 | 7,200 | 7,500 | 20,640  |
| Stockholders’ investment                                                                                                   | **99,051** | 157,034 | 145,009 | 134,859 | 131,001  |
|                                                                                                                             |   |   |   |   |   |
| **Other Data:**                                                                                                                  |   |   |   |   |   |
| Working capital                                                                                                                  | **$58,785** | $117,737 | $106,637 | $ 95,382 | $104,723  |

             

             

3

2008            Annual Report

 

 

**MANAGEMENT'SDISCUSSION&ANALYSISOFFINANCIALCONDITION&RESULTSOFOPERATIONS**

 

**General**

The            Company was founded in 1917 and currently operates 208 retail bookstores concentrated            primarily in the southeastern United States. Of the 208 stores, 184 are superstores            that operate under the names Books-A-Million and Books & Co., and 24 are            traditional stores that operate under the Bookland and Books-A-Million names. In            addition to the retail store formats, the Company offers its products over the Internet            at*www.booksamillion*.*com*. As of February 2, 2008, the Company employed approximately 5,000 full            and part-time employees.

 

The            Company’s growth strategy is focused on opening superstores in new and existing            market areas, particularly in the Southeast. In addition to opening new stores,            management intends to continue its practice of reviewing the profitability trends and            prospects of existing stores and closing or relocating under-performing stores. During            fiscal 2008, the Company opened nine stores, closed seven stores and relocated three            stores.

 

The            Company’s performance is partially measured based on comparable store sales,            which is similar to most retailers. Comparable store sales are determined each fiscal            quarter during the year based on all stores that have been open at least 12 full months            as of the first day of the fiscal quarter. Any stores closed during a fiscal quarter            are excluded from comparable store sales as of the first day of the quarter in which            they close. The factors affecting the future trend of comparable store sales include,            among others, overall demand for products the Company sells, the Company’s            marketing programs, pricing strategies, store operations and competition.

 

**Executive Summary**

The            purpose of this section is to provide a brief summary overview of the 52-week period            ended February 2, 2008. Additional detail about the income statement and balance sheet            is provided in the pages following this summary.

 

*Income Statement*

For the            52-week period ended February 2, 2008, Books-A-Million reported net income of $16.5            million. This represents a 12.5% reduction from the 53-week period ended February 3,            2007. The decrease is primarily attributable to two events that occurred in fiscal year            2007. First, the 2007 fiscal year included one week more than fiscal year 2008. This            additional week produced $9.0 million in net sales. Secondly, the 2007 fiscal year            included one-time additional sales income of $2.3 million related to the recognition of            gift card breakage from prior years. Without these two items, fiscal year 2007 net            income would have been $16.8 million or $0.3 million higher than fiscal year            2008.

 

Consolidated net revenue increased $25.9 million, or 5.1% in the 52-week            ended February 2, 2008, compared to the 52-week period ended February 3, 2007 (which            excludes the $9.0 million of additional sales from the 53rd week and the one-time            additional sales income of $2.3 million from prior year gift card breakage recorded in            fiscal year 2007). Comparable store sales increased 1.4% in fiscal year 2008 compared            to the 52 week period ended February 3, 2007. The increase is primarily due to            increased sales in best sellers and promotional items.

 

Gross            profit, which includes cost of sales, distribution costs and occupancy costs, increased            $1.8 million, or 1.2%, in the 52-week period ended February 2, 2008, compared to the            53-week period ended February 3, 2007. Excluding the additional week and one-time sales            income associated with prior year gift card breakage recorded in fiscal year 2007,            gross profit increased $7.1 million or 4.7% in fiscal year 2008. Gross profit as a            percentage of sales decreased over the same period. The decrease is attributable to            higher occupancy costs offset by higher club card membership income and lower markdowns            and inventory shrinkage.

 

Consolidated operating profit was $27.4 million for the 52-week period            ended February 2, 2008, compared to $30.1 million for the 53-week period ended February            3, 2007. Excluding the extra week and gift card breakage recorded in fiscal 2007,            operating profit increased $0.6 million during fiscal 2008. This increase was primarily            attributable to increased store sales.

 

*Balance Sheet*

Current            assets decreased $21.6 million in fiscal year 2008 compared to fiscal year 2007. The            decrease is primarily attributable to the $28.5 million decrease in cash and cash            equivalents. This is partially offset by a $6.6 million increase in inventory. The            decrease in cash and cash equivalents is primarily the result of the increase in shares            repurchased, and the increase in dividends paid during fiscal 2008, and the reduction            in sales during the fourth quarter. The increase in inventory is primarily due to the            sales shortfall in the fourth quarter.

 

 

4

2008 Annual Report 

 

Current            liabilities increased $37.4 million in fiscal year 2008 compared to fiscal year 2007.            The increase is primarily attributable to the $28.0 million increase in short-term            borrowings and a $4.8 million increase in accounts payable. Accounts payable increased            primarily due to a change in payment practices to more effectively meet vendor payment            guidelines. The increase in short-term borrowings is the result of the increase in            shares repurchased and the increase in dividends paid.

 

**Critical Accounting Policies**

*General*

Management’s Discussion and Analysis of Financial Condition and            Results of Operations discusses the Company’s consolidated financial statements,            which have been prepared in accordance with accounting principles generally accepted in            the United States of America. The preparation of these financial statements require            management to make estimates and assumptions in certain circumstances that affect            amounts reported in the accompanying consolidated financial statements and related            footnotes. In preparing these financial statements, management has made its best            estimates and judgments of certain amounts included in the financial statements, giving            due consideration to materiality. The Company believes that the likelihood is remote            that materially different amounts will be reported related to actual results for the            estimates and judgments described below. However, application of these accounting            policies involves the exercise of judgment and use of assumptions as to future            uncertainties and, as a result, actual results could differ from these            estimates.

 

*Property and Equipment*

Property and equipment are recorded at cost. Depreciation on equipment            and furniture and fixtures is provided on the straight-line method over the estimated            service lives, which range from three to seven years. Depreciation of buildings and            amortization of leasehold improvements, including remodels, is provided on the            straight-line basis over the lesser of the assets estimated useful lives (ranging from            five to 40 years) or, if applicable, the periods of the leases. Determination of useful            asset life is based on several factors requiring judgment by management and adherence            to generally accepted accounting principles for depreciable periods. Judgment used by            management in the determination of useful asset life could relate to any of the            following factors: expected use of the asset; expected useful life of similar assets;            any legal, regulatory, or contractual provisions that may limit the useful life; and            other factors that may impair the economic useful life of the asset. Maintenance and            repairs are charged to expense as incurred. Improvement costs are capitalized to            property accounts and depreciated using applicable annual rates. The cost and            accumulated depreciation of assets sold, retired or otherwise disposed of are removed            from the accounts, and the related gain or loss is credited or charged to            income.

 

*Other Long-Lived Assets*

The            Company’s other long-lived assets consist of property and equipment which            includes leasehold improvements. At February 2, 2008, the Company had $53.5 million of            property and equipment, net of accumulated depreciation, accounting for approximately            18.8% of the Company’s total assets. The Company reviews its long-lived assets            for impairment whenever events or changes in circumstances indicate that the carrying            amount of an asset may not be recoverable in accordance with Statement of Financial            Accounting Standards (SFAS) No. 144, “*Accounting            for the Impairment or Disposal of Long-Lived Assets.*”            The Company evaluates long-lived assets for impairment at the individual store level,            which is the lowest level at which individual cash flows can be identified. When            evaluating long-lived assets for potential impairment, the Company will first compare            the carrying amount of the assets to the individual store’s estimated future            undiscounted cash flows. If the estimated future cash flows are less than the carrying            amount of the assets, an impairment loss calculation is prepared. The impairment loss            calculation compares the carrying amount of the assets to the individual store’s            fair value based on its estimated discounted future cash flows. If required, an            impairment loss is recorded for that portion of the asset’s carrying value in            excess of fair value. Impairment losses totaled $0.1 million, $0.3 million and $0.2            million in fiscal 2008, 2007 and 2006, respectively, and were recorded in selling,            general and administrative costs. For all years presented, the impairment losses            related to the retail trade business segment.

 

*Goodwill*

At            February 2, 2008, the Company had $1.4 million of goodwill, accounting for            approximately 0.5% of the Company’s total assets. SFAS No. 142,            “*Goodwill and Other Intangible            Assets,*” requires that goodwill and other unamortizable            intangible assets no longer be amortized, but instead be tested for impairment at least            annually or earlier if there are impairment indicators. The Company performs a two-step            process for impairment testing of goodwill as required by SFAS No. 142. The first            step of this test, used to identify potential impairment, compares the estimated fair            value of a reporting unit with its carrying amount. The second step (if necessary)            measures the amount of the impairment. The Company completed its annual impairment test            on the goodwill during the fourth quarter of fiscal 2008 and determined that no            impairment charge was necessary. The Company has noted no subsequent indicators of            impairment. Changes in market conditions, among other factors, could have a material            impact on these estimates.

             

*Closed Store Expenses*

Management considers several factors in determining when to close or            relocate a store. Some of these factors are: decreases in store sales from the prior            year, decreases in store sales from the current year budget, annual measurement of            individual store pre-tax future net cash flows, indications that an asset no longer has            an economically useful life, remaining term of an individual store lease, or other            factors that would indicate a store in the current location cannot be            profitable.

 

5

2008            Annual Report

 

 

When            the Company closes or relocates a store, the Company charges unrecoverable costs to            expense. Such costs include the net book value of abandoned fixtures and leasehold            improvements, lease termination costs, costs to transfer inventory and usable fixtures,            other costs in connection with vacating the leased location, and a provision for future            lease obligations, net of expected sublease recoveries. Costs associated with store            closings of $599,810, $418,000 and $40,000 during fiscal 2008, 2007 and 2006,            respectively, are included in selling and administrative expenses in the accompanying            consolidated statements of income.

 

*Inventories*

Inventories are taken throughout the fiscal year. Store inventory counts            are performed by an independent inventory service, while warehouse inventory counts are            performed internally. All physical inventory counts are reconciled to the            Company’s records. The Company’s accrual for inventory shortages is based            upon historical inventory shortage results.

 

Cost            is assigned to store and warehouse inventories using the retail inventory method. Using            this method, store and warehouse inventories are valued by applying a calculated            cost-to-retail ratio to the retail value of inventories. The retail method is an            averaging method that is widely used within the retail industry. Inventory costing also            requires certain significant management estimates and judgments involving markdowns,            the allocation of vendor allowances and shrinkage. These practices affect ending            inventories at cost as well as the resulting gross margins and inventory turnover            ratios.

 

The            Company utilizes the last-in, first-out (LIFO) method of accounting for inventories.            The cumulative difference between replacement and current cost of inventory over stated            LIFO value is $2.5 million as of February 2, 2008 and $2.1 million as of February 3,            2007. The estimated replacement cost of inventory is the current FIFO value of $209.3            million.

 

*Vendor Allowances*

The            Company receives allowances from its vendors from a variety of programs and            arrangements, including merchandise placement and cooperative advertising programs.            Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task            Force (“EITF”) No. 02-16,*Accounting by a Customer            (Including a Reseller) for Certain Consideration Received from a            Vendor*, which addresses the accounting for vendor allowances.            As a result of the adoption of this statement, vendor allowances in excess of            incremental direct costs are reflected as a reduction of inventory costs and recognized            in cost of products sold upon the sale of the related inventory.

 

*Accrued Expenses*

On a            monthly basis, certain material expenses are estimated and accrued to properly record            those expenses in the period incurred. Such estimates include those made for payroll            and employee benefits costs, occupancy costs and advertising expenses among other            items. Certain estimates are made based upon analysis of historical results.            Differences in management’s estimates and assumptions could result in accruals            that are materially different from the actual results.

 

*Income Taxes*

The            Company recognizes deferred tax assets and liabilities for the expected future tax            consequences of events that result in temporary differences between the amounts            recorded in its financial statements and tax returns. Under this method, deferred tax            assets and liabilities are determined based on the differences between the financial            statement and tax bases of assets and liabilities using enacted tax rates in effect for            the year in which the differences are expected to reverse.

 

**Results of Operations**

The            following table sets forth statement of income data expressed as a percentage of net            sales for the periods presented.

 

|                                                                                                          | **Fiscal Year Ended** |
|---------------------------------------------------------------------------------------------------------------|-----------------------|
|                                                                                                          | **2/2/08**            | 2/3/07 | 1/28/06 |
|                                                                                                          | **52 weeks**          | 53 weeks | 52 weeks |
|                                                                                                          |                  |   |   |
| Net revenue                                                                                                   | **100.0%**            | 100.0% | 100.0%  |
| Gross profit                                                                                                  | **29.6%**             | 30.1% | 29.1%  |
| Operating, selling, and administrative                            expenses                                    | **21.9%**             | 21.6% | 21.7%  |
| Gain on insurance recoveries                                                                                  | **0.0%**              | 0.0% | (0.3%) |
| Depreciation and amortization                                                                                 | **2.6%**              | 2.7% | 3.1%  |
| Operating profit                                                                                              | **5.1%**              | 5.8% | 4.6%  |
| Interest expense, net                                                                                         | **0.3%**              | 0.0% | 0.3%  |
| Income from continuing operations before income                            taxes                              | **4.9%**              | 5.8% | 4.3%  |
| Provision for income taxes                                                                                    | **1.8%**              | 2.2% | 1.7%  |
| Income from continuing operations                                                                             | **3.1%**              | 3.6% | 2.6%  |
| (Gain)/loss from discontinued operations (including                            impairment charge), net of tax | **0.0%**              | 0.0% | 0.0%  |
| Net income                                                                                                    | **3.1%**              | 3.6% | 2.6%  |

 

 

6

2008 Annual Report 

 

*Fiscal 2008 Compared to Fiscal 2007*

Consolidated net revenue increased $14.7 million, or 2.8%, to $535.1            million for the 52-week period ended February 2, 2008 from $520.4 million for the            53-week period ended February 3, 2007. Two events occurred in the year ended February            3, 2007 that increased total net revenue when compared to the year ended February 2,            2008. First, the 2007 fiscal year included one more week than the 2008 fiscal year.            This additional week produced $9.0 million in net sales. Second, the 2007 fiscal year            included one-time additional sales income of $2.3 million related to the recognition of            gift card breakage from prior years. Consolidated net revenue increased $25.9 million,            or 5.1%, to $535.1 million for the 52-week period ended February 2, 2008, when compared            with $509.3 million during the period ending February 3, 2007 on a 52-week operating            basis (which excludes the $9.0 million of additional sales from the 53rd            week of the 2007 fiscal year and the one-time additional sales income of $2.3 million            in fiscal 2007 related to gift card breakage from prior years).

 

Comparable store sales for the 52-week period ended February 2, 2008            increased 1.4% when compared to the same 52-week period in the prior fiscal year. The            increase in comparable store sales was primarily attributable to a strong performance            in our best sellers and promotional items. During the second quarter of the year ended            February 2, 2008,*Harry Potter and the Deathly            Hallows*was released and added to our comparable store sales            increase.

 

Consolidated net revenue included $1.4 million of gift card breakage            income for the 52-week period ended February 2, 2008 compared to $3.2 million for the            53-week period ended February 3, 2007. The 53-week period ended February 3, 2007            included $2.3 million, $1.4 million net of taxes, of gift card breakage income related            to periods prior to fiscal 2007. In fiscal 2007 the Company formed a gift card            subsidiary, Books-A-Million Card Services (“Card Services”), and began            recording gift card breakage income for those cards for which the likelihood of            redemption is deemed to be remote (after 24 months of inactivity) and which there is no            legal obligation to remit the value of such redeemed gift cards to the relevant            jurisdictions. The primary function of Card Services is to administer the            Company’s gift card program and to provide a more advantageous legal structure.            The $2.3 million related to periods prior to fiscal 2007 represents a change in            estimate in the escheat liability due to operational changes related to the creation of            Card Services.

 

Our            core book department business was down slightly for the year. However, several            categories performed well. Fiction sales were very strong, driven by commercial fiction            and the January publication of John Grisham’s*The            Appeal*and Stephen King’s*Duma            Key*. The biography category experienced the success of            Elizabeth Gilbert’s memoir,*Eat, Pray            Love*. We also built on the positive sales trends in teen,            graphic novels and our Faithpoint inspirational book category. Children’s books            sales increased over prior year due to sales of*Harry Potter            and The Deathly Hallows*setting new records and the ongoing            growth of the broader category. Our stores produced solid gains in bargain books and            gifts with toys and games experiencing gains over prior periods.

 

The Company opened nine new stores during fiscal 2008 resulting in            partial year sales of $6.4 million and closed seven stores during fiscal 2008 with            partial year sales of $1.2 million. The Company also converted one traditional store to            a superstore during fiscal 2008 with partial year sales of $1.0 million.

 

Net            sales for the retail trade segment increased $15.6 million, or 3.0%, to $528.6 million            in the 52-week period ended February 2, 2008, from $513.0 million in the 53-week period            ended February 3, 2007. When compared to the same 52-week period last year, the retail            trade segment increased $23.8 million, or 4.7%. In addition to the factors discussed            above, the increase in net sales for the retail trade segment was primarily due to new            stores opened in fiscal 2008.

 

Net sales for the electronic commerce segment increased $1.0 million, or            3.6%, to $27.0 million in the 52-week period ended February 2, 2008, from $26.0 million            in the 53-week period ended February 3, 2007. When compared to the same 52-week period            last year, the electronic commerce segment increased $1.7 million, or 6.7%. The            increase in net sales for the electronic commerce segment was primarily due to            increased business to business sales.

 

Gross            profit, which includes cost of sales, distribution costs and occupancy costs (including            rent, common area maintenance, property taxes, utilities and merchant association            dues), increased $1.8 million, or 1.2%, to $158.5 million in the 52-week period ended            February 2, 2008, from $156.7 million in the 53-week period ended February 3, 2007.            Gross profit as a percentage of net sales decreased to 29.6% in the 52-week period            ended February 2, 2008 from 30.1% in the 53-week period ended February 3, 2007.            Excluding the extra week and gift card breakage recorded in fiscal 2007, gross profit            as a percentage of net sales decreased 0.2% in fiscal 2008. The decrease is primarily            the result of higher occupancy and warehouse costs partially offset by lower            promotional discounts, lower markdowns, improvements in store inventory shrinkage and            higher club card membership income.

 

 

 

7

2008            Annual Report

 

 

Operating, selling and administrative expenses increased $4.5 million,            or 4.1%, to $117.1 million in the 52-week period ended February 2, 2008, from $112.6            million in the 53-week period ended February 3, 2007. Operating, selling and            administrative expenses as a percentage of net sales remained relatively flat at 21.9%            in the 52-week period ending February 2, 2008 compared to 21.6% in the 53-week period            ended February 3, 2007. Excluding the extra week recorded in fiscal 2007, operating,            selling and administrative expenses as a percentage of net sales increased 0.2% in            fiscal 2008. The increase was primarily due to an increase in health care expense,            promotional expense for our club card program and a revision of the franchise tax            estimate.

 

Depreciation and amortization decreased $0.1 million, or 0.6%, to $14.0            million in fiscal 2008, from $14.1 million in fiscal 2007. Depreciation and            amortization as a percentage of net sales decreased to 2.6% in fiscal 2008, from 2.7%            in fiscal 2007, due to the impact of certain assets becoming fully depreciated during            the prior year.

 

Consolidated operating profit was $27.4 million for the 52-week period            ended February 2, 2008, compared to $30.1 million for the 53-week period ended February            3, 2007. Excluding the extra week and gift card breakage recorded in fiscal 2007,            operating profit increased $0.6 million during fiscal 2008. This increase was primarily            attributable to increased store sales for the reasons set forth above, which resulted            in higher gross profit for fiscal 2008. Operating profit as a percentage of sales was            5.1% for fiscal 2008. Excluding the extra week and the gift card breakage recorded in            fiscal 2007, operating profit was 5.3% of sales for fiscal 2007. The decrease as a            percentage of sales from fiscal 2007 is attributable to the decrease in gross margin as            a percent of sales plus the increase in operating, selling and administrative expenses            offset by the reduction in depreciation as outlined above. The operating profit for the            electronic commerce segment was $1.5 million, compared to $1.4 million in fiscal 2007.            The improvement in operating results was primarily due to higher gross margin partially            offset by higher customer service payroll, an adjustment to our gift card reserves,            software maintenance and bad debt.

 

Net            interest expense increased $1.2 million, or 1185.8%, to $1.3 million in fiscal 2008,            from $0.1 million in fiscal 2007, primarily due to borrowing from our revolving credit            facility primarily as a result of the special dividend paid on July 5, 2007 and our            share repurchase program. During fiscal 2008, the Company purchased 1.4 million shares            of its common stock at a total cost of $20.0 million under its share repurchase            program.

 

The            effective rate for income tax purposes was 36.64% for fiscal 2008 and 37.0% for fiscal            2007. The decrease in the effective tax rate was due to federal tax credits for prior            year returns taken in fiscal 2008.

 

The            Company closed two stores in fiscal 2008 in a market where the Company does not expect            to retain the closed stores’ customers at another store in the same market. The            store’s sales and operating results for fiscal 2008 have not been included in            discontinued operations because the impact on the financial statements was immaterial.            The Company continues to report in discontinued operations for prior year stores closed            where the Company does not expect to retain the closed stores’ customers at            another store. One such store was closed in fiscal 2007. The financial impact of these            closings was reported as discontinued operations in the financial statements, but had a            minimal impact on the financial results of the Company.

 

Presented below is certain financial information for the fiscal year            ended February 3, 2007 on a 52-week “operating basis,” the effect of which            is to exclude the financial results for the final week of the fiscal period and to            exclude the effect of prior year gift card breakage income. This information is            presented because the fiscal year ended February 3, 2007 was one week longer than the            fiscal year ended February 2, 2008 and included gift card breakage income related to            periods prior to fiscal 2007.

 

Management uses these non-GAAP financial measures because it believes            that they are important to investors in comparing the Company’s financial            performance in one fiscal period against a prior fiscal period in circumstances where            the fiscal periods are of a different duration or include a material non-recurring item            such as a change in estimate. As noted above, the fiscal year ended February 3, 2007,            was one week longer than the fiscal year ended February 2, 2008 and included $2.3            million, $1.4 million net of taxes, of prior year gift card breakage income.

 

These            non-GAAP financial measures have limitations as analytical tools, and you should not            consider them in isolation or as substitutes for results determined in accordance with            GAAP. Additionally, other companies in the retail industry may not exclude portions of            a fiscal period from the financial results for such period, limiting their usefulness            as a comparative measure. The following table reconciles the non-GAAP measures from the            fiscal year ended February 3, 2007, with the comparable financial measure calculated            and presented in accordance with GAAP.

 

 

 

 

8

2008 Annual Report 

 

 

| **BOOKS-A-MILLION, INC.**                                                                              |                                     |
|--------------------------------------------------------------------------------------------------------|-------------------------------------|
| **Unaudited Consolidated Statements of                            Income**                             |                                     |
| *(In thousands, except per share data)*                                                                |                                     |
| ***Year-to-Date FY 2008***                                                                             |                                     |
|                                                                                                        |                                     |  |  |  |  |  |
|                                                                                                        | **Year Ended February 2, 2008**     |  | **Year Ended February 3, 2007** |  |
|                                                                                                        | **GAAP Basis**                      |  | **GAAP Basis** | **Adjustments** | **Operating Basis** |  |
| **(52 weeks)**                                                                                         | **(53 weeks)**                      | **(52 weeks)** |  |
| NET SALES                                                                                              | $535,128                            |  | $520,416 | $11,244 | $509,172 |  |
| Cost of sales (including warehouse, distribution and                            store occupancy costs) | 376,580                             |  | 363,688 | 6,005 | 357,683 |  |
|                                                                                                        |
|                                                                                                        |                                     |  |  |  |  |  |
| GROSS PROFIT                                                                                           | 158,548                             |  | 156,728 | 5,239 | 151,489 |  |
| Operating, selling and administrative                            expenses                              | 117,139                             |  | 112,560 | 1,892 | 110,668 |  |
| Depreciation and amortization                                                                          | 13,989                              |  | 14,069 | - | 14,069 |  |
|                                                                                                        |                                     |  |  |  |  |  |
| OPERATING INCOME                                                                                       | 27,420                              |  | 30,099 | 3,347 | 26,752 |  |
| Interest expense (income), net                                                                         | 1,346                               |  | 105 | - | 105 |  |
|                                                                                                        |                                     |  |  |  |  |  |
| INCOME BEFORE INCOME TAXES                                                                             | 26,074                              |  | 29,994 | 3,347 | 26,647 |  |
| Income tax provision                                                                                   | 9,552                               |  | 11,107 | 1,239 | 9,868 |  |
|                                                                                                        |                                     |  |  |  |  |  |
| NET INCOME                                                                                             | $ 16,522                       |  | $ 18,887 | $   2,107 | $ 16,780 |  |
|                                                                                                        |                                     |  |  |  |  |  |
| NET INCOME PER COMMON SHARE:                                                                           |                                     |  |  |  |  |  |
| Basic:                                                                                                 |                                     |  |  |  |  |  |
| Net income                                                                                             | $     1.03 |  | $     1.16 | $     0.13 | $     1.03 |  |
| Weighted average shares outstanding                                                                    | 16,089                              |  | 16,353 | 16,353 | 16,353 |  |
|                                                                                                        |                                     |  |  |  |  |  |
| Diluted:                                                                                               |                                     |  |  |  |  |  |
| Net income                                                                                             | $     1.01 |  | $     1.12 | $     0.12 | $     1.00 |  |
| Weighted average shares outstanding                                                                    | 16,302                              |  | 16,805 | 16,805 | 16,805 |  |
|                                                                                                        |

 

 

*Fiscal 2007 Compared to Fiscal 2006*

Consolidated net revenue increased $16.6 million, or 3.3%, to $520.4            million for the 53-week period ended February 3, 2007, from $503.8 million for the            52-week period ended January 28, 2006. Sales for the 52-week period ended January 27,            2007 increased 1.6%. Comparable store sales for the 52-week period ended January 27,            2007 decreased 0.6% when compared to the same 52-week period in the prior year. The            decrease in comparable store sales was primarily attributable to a decrease in            magazines sales and café sales, with book and gift sales primarily flat with the            previous year. The café business is increasingly competitive with saturation of            the market from new competitor store openings. Magazines sales continued to experience            negative comparable sales as book retailers’ shares declined due to grocery and            convenience store offerings.

 

 

 

 

9

2008            Annual Report

 

 

Included in fiscal 2007 net revenue is $3.2 million of gift card            breakage income of which $2.3 million relates to periods prior to fiscal 2007. In            fiscal 2007 the Company formed a gift card subsidiary, Books-A-Million Card Services            (“Card Services”), and began recording gift card breakage income for those            cards for which the likelihood of redemption is deemed to be remote (after 24 months of            inactivity) and which there is no legal obligation to remit the value of such            unredeemed gift cards to the relevant jurisdictions. The primary function of Card            Services is to administer the Company’s gift card program and to provide a more            advantageous legal structure. The $2.3 million represents a change in estimate in the            escheat liability due to operational changes related to the creation of Card            Services.

 

Several categories of book sales showed increases during fiscal 2007,            including adventure books, inspirational books, fiction, the gift category, social            sciences, pets, teen reading, and cooking. These increases were offset by lower sales            in the children’s book category driven by the phenomenal sales of*The Chronicles of Narnia*and*Harry Potter and the Half Blood Prince*in            the prior year. John Grisham’s non-fiction bestseller,*Innocent Man*, drove sales in the social            science category. The gift category experienced growth from import book accessories.            The pet category increases were driven by sales of two            titles-*Marley and Me*and*Caesar’s Way*. Teen fiction continued            to experience dynamic growth, predominately as a result of interest in a wide ranging            number of fiction titles and Food Network stars Paula Deen and Rachael Ray dominated            the cookbook category. A diet book,*You: On A            Diet*, proved to be a surprise fourth-quarter bestseller in            the cookbook category.

 

The Company opened nine new stores during fiscal 2007 resulting in            partial year sales of $12.6 million and closed eight stores during fiscal 2007 with            partial year sales of $3.9 million. The stores in Biloxi, Mississippi, and Deerfield            Beach, Florida, which were temporarily closed due to the hurricanes in the prior year,            were reopened in fiscal 2007.

 

Net sales for the retail trade segment increased $16.4 million, or 3.3%,            to $513.0 million in fiscal 2007, from $496.6 million in fiscal 2006. In addition to            the factors discussed above, the increase in net sales for the retail trade segment was            primarily due to new stores opened during fiscal 2007 and the additional selling week            in fiscal 2007.

 

Net sales for the electronic commerce segment decreased $1.6 million, or            5.6%, to $26.0 million in fiscal 2007, from $27.6 million in fiscal 2006. The decrease            in net sales for the electronic commerce segment for fiscal 2007 was primarily due to            sales of*Harry Potter and the Half Blood Prince*during fiscal 2006, which were not replaced in fiscal 2007.

 

Gross profit, which includes cost of sales, distribution costs and            occupancy costs (including rent, common area maintenance, property taxes, utilities and            merchant association dues), increased $10.1 million, or 6.9%, to $156.7 million in            fiscal 2007, from $146.6 million in fiscal 2006. Gross profit as a percentage of net            sales increased to 30.1% in fiscal 2007, from 29.1% in fiscal 2006, partially due to            gift card breakage income discussed above as well as increased sales of proprietary            product which has a higher gross profit than regular product. Also, the Company was            able to generate higher sales in fiscal 2007 with less promotional            discounting.

 

Operating, selling and administrative expenses increased $3.4 million,            or 3.1%, to $112.6 million in fiscal 2007, from $109.2 million in fiscal 2006.            Operating, selling and administrative expenses as a percentage of net sales remained            relatively flat at 21.6% in fiscal 2007 compared to 21.7% in fiscal 2006. Higher stock            based compensation expense in fiscal 2007 was offset by a reduction in costs incurred            for Sarbanes-Oxley compliance, other corporate expenses and the non-recurrence of costs            associated with the NASDAQ de-listing hearing in October 2005.

 

In fiscal 2006 the Company recognized an insurance gain of $754,000, net            of taxes, related to insurance recoveries for hurricane damage suffered at certain            stores in fiscal 2005. The insurance recovery amount was finalized with the insurance            company during the third quarter of fiscal 2006 (for stores damaged by hurricanes in            fiscal 2005), and therefore the gain was recorded in the respective period.

 

Depreciation and amortization decreased $1.5 million, or 10.0%, to $14.1            million in fiscal 2007, from $15.6 million in fiscal 2006. Depreciation and            amortization as a percentage of net sales decreased to 2.7% in fiscal 2007 from 3.1% in            fiscal 2006, due to lower capital expenditures in fiscal 2007, as well as the impact of            certain assets becoming fully depreciated during the prior year.

 

Consolidated operating profit was $30.1 million for fiscal 2007,            compared to $23.0 million in fiscal 2006. Operating profit for the retail trade segment            was $29.2 million in fiscal 2007, versus $22.4 million in fiscal 2006. This increase            was partially attributable to increased store sales for the reasons set forth above,            which resulted in higher gross profit for fiscal 2007. Also, gross profit improved as a            percentage of sales due to increased gift card breakage income, increased sales of            proprietary product which has a higher gross profit, as well as less promotional            discounting. These increases were partially offset by higher operating, selling and            administrative expenses due to higher store selling costs and other corporate expenses.            The operating profit for the electronic commerce segment was $1.4 million, compared to            $1.0 million in fiscal 2006. The improvement in operating results was primarily due to            lower costs incurred for shipping and warehouse handling

 

 

10

2008 Annual Report 

 

Net            interest expense decreased $1.3 million, or 92.7%, to $0.1 million in fiscal 2007 from            $1.4 million in fiscal 2006, primarily due to lower average debt levels and increased            short term investments during fiscal 2007.

 

The            effective rate for income tax purposes was 37.0% for fiscal 2007 and 39.6% for fiscal            2006. The decrease in the effective tax rate was due to a lower state effective tax            rate in fiscal 2007.

 

The            Company closed one store in fiscal 2007 in a market where the Company does not expect            to retain the closed stores’ customers at another store in the same market. The            store’s sales and operating results for fiscal 2007 have not been included in            discontinued operations because the impact on the financial statements was immaterial.            The Company continues to report in discontinued operations for prior year stores closed            where the Company does not expect to retain the closed stores’ customers at            another store. Two such stores were closed in fiscal 2006. The financial impact of            these closings was reported as discontinued operations in the financial statements, but            had a minimal impact on the financial results of the Company.

 

**Seasonality and Quarterly Results**

Similar to many retailers, the Company’s business is seasonal,            with its highest retail sales, gross profit and net income historically occurring in            the fourth fiscal quarter. This seasonal pattern reflects the increased demand for            books and gifts experienced during the year-end holiday selling season. Working capital            requirements are generally highest during the third fiscal quarter and the early part            of the fourth fiscal quarter due to the seasonality of the Company’s business.            The Company’s results of operations depend significantly upon net sales generated            during the fourth fiscal quarter, and any significant adverse trend in the net sales of            such period would have a material adverse impact on the Company’s results of            operations for the full year.

 

In            addition, the Company’s results of operations may fluctuate from quarter to            quarter as a result of the amount and timing of sales and profits contributed by new            stores as well as other factors. New stores require the Company to incur pre-opening            expenses and often require several months of operation before generating acceptable            sales volumes. Accordingly, the addition of a large number of new stores in a            particular quarter could adversely affect the Company’s results of operations for            that quarter.

 

**Liquidity and Capital Resources**

The            Company’s primary sources of liquidity are cash flows from operations, including            credit terms from vendors, and borrowings under its credit facilities. The Company has            an unsecured revolving credit facility under a credit agreement with a syndicate of            banks that allows borrowings up to $100.0 million, which expires in July,            2011. Availability under the facility is reduced by outstanding letters of credit            issued under this facility. The credit agreement contains certain financial and            non-financial covenants, the most restrictive of which is the maintenance of a minimum            fixed charge coverage ratio. The outstanding balance under this credit facility as of            February 2, 2008 and February 3, 2007, was $28.0 million and $0, respectively, and the            face amount of letters of credit issued under the facility was $2.4 million and $2.9            million, respectively. The maximum and average outstanding borrowings under the credit            facility (excluding the face amount of letters of credit issued thereunder) during            fiscal 2008 were $55.9 million and $20.7 million, respectively.

 

During fiscal 1996 and fiscal 1995, the Company acquired and constructed            certain warehouse and distribution facilities with the proceeds of loans made pursuant            to an industrial development revenue bond (the “Bond”). As of February 2,            2008 and February 3, 2007, there was $7.0 million and $7.1 million of borrowings            outstanding, respectively, under these arrangements, which bear interest at variable            rates.

 

The            Company’s capital expenditures totaled $16.9 million in fiscal 2008. These            expenditures were primarily used for new store openings, renovation and improvements to            existing stores, upgrades and expansion of warehouse distribution facilities            and

investment in management information systems.

 

*Financial Position*

During fiscal 2008, the Company opened nine stores, closed seven stores            and re-opened three other stores. The challenging retail environment in the fourth            quarter resulted in an increase in inventory balances to $206.8 million at February 2,            2008, as compared to $200.3 million at February 3, 2007. The challenging retail            environment resulted in lower sales than anticipated in the fourth quarter which, in            turn, increased inventory levels.

 

Net            property and equipment increased due to higher capital expenditures primarily for nine            new stores opened and three other stores re-opened in fiscal 2008. Additionally, cash            and cash equivalents decreased by $28.5 million as of February 2, 2008 as compared with            the balance as of February 3, 2007, primarily due to the special dividend and the share            repurchase program. Offsetting the reduced cash balance were higher accounts payable            balances of $4.8 million between fiscal years and a $28.0 million increase in            short-term borrowings. The increase in accounts payable was primarily due to a change            in payment practices to more effectively meet vendor payment guidelines. The increase            in short-term borrowings is the result of the special dividend and the share repurchase            program.

 

11

2008            Annual Report

 

 

*Future Commitments*

The            following table lists the aggregate maturities of various classes of obligations and            expiration amounts of various classes of commitments related to Books-A-Million, Inc.            at February 2, 2008:

 

|                                   | **Payments Due Under Contractual                            Obligations** |
|----------------------------------------|---------------------------------------------------------------------------|
| *(in thousands)*                       | **Total**                                                                 | **FY 2009** | **FY 2010** | **FY 2011** | **FY 2012** | **FY 2013** | **Thereafter** |
| Short-term borrowings(1)               | $27,967                                                                   | $27,967 | $ -- | $ -- | $ -- | $ -- | $ -- |
| Long-term debt-industrial revenue bond | 6,975                                                                     | -- | -- | -- | 6,975 | -- | -- |
| Subtotal of debt                       | 34,942                                                                    | 27,967 | -- | -- | 6,975 | -- | -- |
| Operating leases                       | 133,101                                                                   | 30,297 | 24,752 | 19,991 | 14,730 | 11,521 | 31,810 |
| Total of obligations                   | $168,043                                                                  | $58,264 | $24,752 | $19,991 | $21,705 | $11,521 | $31,810 |

 

| (1) | Short term borrowings represent borrowings under the                            $100 million credit facility that are due in 12 months or                            less. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Guarantees*

From            time to time, the Company enters into certain types of agreements that require the            Company to indemnify parties against third-party claims. Generally, these agreements            relate to: (a) agreements with vendors and suppliers, under which the Company may            provide customary indemnification to its vendors and suppliers in respect of actions            they take at the Company’s request or otherwise on its behalf, (b) agreements            with vendors who publish books or manufacture merchandise specifically for the Company            to indemnify the vendors against trademark and copyright infringement claims concerning            the books published or merchandise manufactured on behalf of the Company, (c) real            estate leases, under which the Company may agree to indemnify the lessors for claims            arising from the Company’s use of the property, and (d) agreements with the            Company’s directors, officers and employees, under which the Company may agree to            indemnify such persons for liabilities arising out of their relationship with the            Company. The Company has Directors and Officers Liability Insurance, which, subject to            the policy’s conditions, provides coverage for indemnification amounts payable by            the Company with respect to its directors and officers up to specified limits and            subject to certain deductibles.

 

The            nature and terms of these types of indemnities vary. The events or circumstances that            would require the Company to perform under these indemnities are transaction and            circumstance specific. Historically, the Company has not incurred significant costs            related to performance under these types of indemnities.

 

*Cash Flows*

Operating activities provided cash of $34,493,000, $21,306,000 and            $36,713,000 in fiscal 2008, 2007 and 2006 respectively, and included the following            effects:

|   | **•** | Cash used by inventories in fiscal 2008 of $6,559,000                            was the result of the sales shortfall in the fourth quarter. Cash                            provided by inventories was $4,512,000 and $5,481,000 in fiscal 2007                            and 2006 respectively. This was primarily the result of increased sales                            and improved inventory management during the respective                            years. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Cash provided by accounts payable (including related                            party payables) in fiscal 2008 of $4,800,000 was the result of a                            deliberate change in our payment practices to more effectively meet                            vendor payment guidelines, and improved accounts payable leveraging                            with vendors. Cash used by accounts payable (including related party                            payables) in fiscal 2007 of $14,455,000 was due to the timing of vendor                            payments for fourth quarter merchandise versus the prior year end and                            lower inventory levels for fiscal 2007. Cash used by accounts payable                            (including related party payables) in fiscal 2006 of $5,914,000 was due                            to lower inventory levels for fiscal 2006 which resulted in lower                            accounts payable balances. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Depreciation and amortization expenses were $13,989,000,                            $14,069,000 and $15,651,000 in fiscal 2008, 2007 and 2006,                            respectively. The decrease in fiscal 2008 and 2007 was primarily due to                            the impact of certain assets becoming fully depreciated during the                            prior years. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Cash provided by accrued expenses was $4,537,000 in                            fiscal 2008 and was primarily due to unused gift card reserve, accrued                            payroll taxes and the adoption of FASB Staff Position FIN 48-1. Cash                            used by accrued expenses was $3,090,000 in fiscal 2007 and was                            primarily due to a lower gift card liability due to the recognition of                            gift card breakage, lower capital expenditure accruals and lower audit                            fee accruals. Cash provided by accrued expenses was $5,519,000 in                            fiscal 2006 and was primarily due to increases in deferred revenues                            related to the Company’s discount card, deferred rent related to                            landlord allowances and higher bonus accruals due to the                            Company’s improved earnings performance. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

12

2008 Annual Report 

 

Cash            used in investing activities in fiscal 2008, 2007 and 2006 reflected a net use of cash            of $16,878,000, $16,176,000 and $11,286,000, respectively. Cash was used to fund            capital expenditures for new store openings, renovation and improvements to existing            stores, warehouse distribution purposes and investments in management information            systems.

 

Financing activities used cash of $46,141,000 in fiscal 2008 primarily            to purchase stock ($20,054,000) and for dividend payments ($56,824,000), offset by            proceeds from the issuance of stock upon the exercise of stock options ($1,257,000) and            related tax benefits ($1,638,000). Financing activities used cash of $8,528,000 in            fiscal 2007 primarily to purchase stock ($7,460,000) and for dividend payments            ($5,303,000), offset by proceeds from the issuance of stock upon the exercise of stock            options ($1,768,000). Financing activities used cash of $4,467,000 in fiscal 2006            primarily to purchase stock ($5,324,000) and for dividend payments ($3,273,000), offset            by proceeds from the issuance of stock upon the exercise of stock options            ($4,431,000).

 

*Dividends*

The            Company paid $56.8 million in dividends in fiscal 2008 and $5.3 million in dividends in            fiscal 2007. See the table below for summary of dividends declared each quarter. On            June 4, 2007, the Company’s board of directors declared a special one-time cash            dividend of $3.00 per common share. The dividend was paid on July 5, 2007 to            stockholders of record at the close of business on June 20, 2007. A total of $50.9            million was paid on the Company’s 16,958,000 outstanding shares of common stock            as a result of the special dividend.

                                                                                                          

|  |                                Dividends Declared |
|--|--------------------------------------------------------------------------------------|
|  | Fiscal 2008                                                                          | Fiscal 2007 |

|   | First quarter | $0.09 | $0.08 |
|--------|---------------|-------|-------|

|   | Second quarter | $3.09 | $0.08 |
|--------|----------------|-------|-------|

|   | Third quarter | $0.09 | $0.08 |
|--------|---------------|-------|-------|

|   | Fourth quarter | $0.09 | $0.09 |
|--------|----------------|-------|-------|

|   | Annual Total | $3.36 | $0.33 |
|--------|--------------|-------|-------|

 

**Impact of Recent Accounting Pronouncements**

 

**Recently Adopted Accounting Pronouncements**

In June            2006, the FASB issued FASB Interpretation No. 48,*“Accounting for Uncertainty in Income Taxes”*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty            in income taxes recognized in an enterprise’s financial statements in accordance            with SFAS No. 109,*“Accounting for Income            Taxes.”*FIN 48 prescribes a recognition threshold and            measurement attributes for the financial statement recognition and measurement of a tax            position taken or expected to be taken in a tax return. FIN 48 also provides guidance            on de-recognition, classification, interest and penalties, accounting in interim            periods, disclosure and transition. The Company adopted the provisions of FIN 48,            effective February, 4, 2007. As a result of the adoption of FIN 48, the Company            recorded an increase of $1,987,000 in other long-term liabilities in its consolidated            balance sheet for unrecognized tax benefits, which was accounted for as a cumulative            effect adjustment to the February 4, 2007 balance of retained earnings.

 

**Recently Issued Accounting Pronouncements Not Yet            Adopted**

In            September 2006, the FASB issued SFAS No. 157, “*Fair            Value Measurements*” (“SFAS No. 157”). SFAS            No. 157 was issued to provide increased consistency and comparability in fair value            measurements. Specifically, SFAS No. 157 creates a significant definition of fair value            emphasizing fair value as a market-based measurement. The Company is required to adopt            SFAS No. 157 as of the beginning of its fiscal year that begins after November 15,            2007. The adoption of SFAS No. 157 is not expected to have a material effect on the            Company’s financial position, results of operations or cash flows.

 

In            February 2007, the FASB issued SFAS No. 159, “*The Fair            Value Option for Financial Assets and Financial**Liabilities: Including an amendment of FASB No.            115*” (“SFAS No. 159”). SFAS No. 159 permits            all entities to elect to measure many financial instruments and certain other items at            fair value with changes in fair value reported in earnings. The fair value option is            generally applied on an instrument-by-instrument basis and may be elected for a single            item without electing other identical items, even if issued in a single transaction.            The Company is required to adopt SFAS No. 159 as of the beginning of its fiscal year            that begins after November 15, 2007. The adoption of SFAS No. 159 is not expected to            have a material effect on the Company’s financial position, results of operations            or cash flows.

 

In May            2007, the FASB issued FASB Staff Position No. FIN 48-1,            “*Definition of Settlement in FASB Interpretation No.            48*” (“FSP FIN 48-1”). FSP FIN 48-1 amends            FASB Interpretation No. 48, “*Accounting for Uncertainty            in Income Taxes*,” to provide guidance on how an            enterprise should determine whether a tax position is effectively settled for the            purposes of recognizing previously unrecognized tax benefits. The Company is required            to apply the guidance provided in FSP FIN 48-1 upon its adoption of FIN 48 which was as            of February 4, 2007. The application of FSP FIN 48-1 has not had a material effect on            the Company’s financial position, results of operations, or cash            flows.

 

13

2008            Annual Report

 

 

In June            2007, the Emerging Issues Task Force (EITF) of the FASB ratified their consensus            position 06-11, “*Accounting for Income Tax Benefits of            Dividends on Share-Based Payment Awards*” (“EITF            06-11”). EITF 06-11 provides guidance on how a company should recognize the            income tax benefit received on dividends that are paid to employees holding            equity-classified nonvested shares, equity-classified nonvested share units, or            equity-classified outstanding share options charged to retained earnings under FASB            Statement 123(R), “*Share-Based            Payment*.” The Company is required to apply the guidance            provided in EITF 06-11 prospectively to income tax benefits of dividends on            equity-classified employee share-based payment awards that are declared in fiscal years            beginning after September 15, 2007. Early adoption of EITF 06-11 is permitted for the            income tax benefit of dividends on equity-classified employee share-based payment            awards that are declared in periods for which financial statements have not yet been            issued. The Company has elected early adoption of this pronouncement as of the fiscal            quarter ending August 4, 2007. The early adoption of EITF 06-11 has not had a material            effect on the Company’s financial position, results of operation or cash            flows.

 

In            December 2007, the FASB issued*SFAS            No.* *141 revised, Business            Combinations*. The objective of this Statement is to improve            the relevance, representational faithfulness, and comparability of the information that            a reporting entity provides in its financial reports about a business combination and            its effects.   SFAS 141 revised is effective for the Company on            January 1, 2009 and is not expected to have a significant impact on the            Company’s financial statements.

 

In            December 2007, the FASB issued*SFAS            No.* *160, Noncontrolling            Interests in Consolidated Financial Statements—an amendment of ARB No.            51*.  The objective of this Statement is to improve the            relevance, comparability, and transparency of the financial information that a            reporting entity provides in its consolidated financial statements by establishing            accounting and reporting standards for the Noncontrolling interest in a subsidiary and            for the decosolation of a subsidiary.  SFAS 160 is effective for the Company            on January 1, 2009 and is not expected to have a significant impact on the            Company’s financial statements.

 

In            March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about            Derivative Instruments and Hedging Activities”. The new standard is intended to            improve financial reporting about derivative instruments and hedging activities by            requiring enhanced disclosures to enable investors to better understand their effects            on an entity’s financial position, financial performance, and cash flows. It is            effective for financial statements issued for fiscal years and interim periods            beginning after November 15, 2008, with early application encouraged. Based on current            conditions, the Company does not expect the adoption of SFAS 161 to have a significant            impact on its results of operations or financial position.

 

**Related Party Activities**

As            discussed in Note 6 of Notes to Consolidated Financial Statements, the Company conducts            business with other entities in which certain officers, directors and principal            stockholders of the Company have controlling ownership interests. The most significant            related party transactions include inventory purchases from, and sales of merchandise            to, related parties. Related party inventory purchases increased by $1.8 million, or            6.2%, to $30.8 million in fiscal 2008, compared to fiscal 2007 purchases of $29.0            million. The increase in related party purchases was primarily due to increased            magazine, music and collectibles purchases versus fiscal 2007. Related party sales            transactions increased in fiscal 2008 to $3.6 million, an increase of $1.2 million, as            a result of increased book merchandise sales. The Company leases certain office, retail            and warehouse space from related parties, for which the rents have remained relatively            unchanged. Management believes the terms of these related party transactions are            substantially equivalent to thoseavailable from unrelated            parties.

 

**Disclosure Regarding Forward-Looking Statements**

This            document contains certain forward-looking statements within the meaning of the Private            Securities Litigation Reform Act of 1995 that involve a number of risks and            uncertainties. A number of factors could cause actual results, performance,            achievements of the Company, or industry results to be materially different from any            future results, performance or achievements expressed or implied by such            forward-looking statements. These factors include, but are not limited to, the            competitive environment in the book retail industry in general and in the            Company’s specific market areas; inflation; economic conditions in general and in            the Company’s specific market areas; the number of store openings and closings;            the profitability of certain product lines; capital expenditures and future liquidity;            liability and other claims asserted against the Company; uncertainties related to the            Internet and the Company’s Internet operations; and other factors referenced            herein. In addition, such forward-looking statements are necessarily dependent upon            assumptions, estimates and dates that may be incorrect or imprecise and involve known            and unknown risks, uncertainties and other factors. Accordingly, any forward-looking            statements included herein do not purport to be predictions of future events or            circumstances and may not be realized. Given these uncertainties, stockholders and            prospective investors are cautioned not to place undue reliance on such forward-looking            statements. The Company disclaims any obligation to update any such factors or to            publicly announce the results of any of the forward-looking statements contained herein            to reflect future events or developments*.*

 

 

14

2008 Annual Report 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON            CONSOLIDATED FINANCIAL STATEMENTS**

 

Board            of Directors and Shareholders

Books-A-Million, Inc.

We have            audited the accompanying consolidated balance sheets of Books-A-Million, Inc. and            subsidiaries (the “Company”) as of February 2, 2008 and February 3, 2007            and the related consolidated statements of income, stockholders’ equity, and cash            flows for each of the three years in the period ended February 2, 2008. 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 the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audits 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 consolidated financial statements referred to above present fairly, in all            material respects, the financial position of the Company as of February 2, 2008 and            February 3, 2007, and the results of its operations and its cash flows for each of the            years in the periods ended February 2, 2008, February 3, 2007 and January 28, 2006 in            conformity with accounting principles generally accepted in the United States of            America.

As            discussed in Note 1 to the consolidated financial statements, the Company adopted the            provisions of Financial Accounting Standards Board (“FASB”) Interpretation            No. 48, "Accounting for Uncertainty in Income Tax - an interpretation of FASB Statement            No. 109" effective February 4, 2007 and adopted the provisions of Statement of            Financial Accounting Standards No. 123 (revised 2004), “Share-Based            Payment” effective January 29, 2006.

We also            have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the Company’s internal control over financial            reporting as of February 2, 2008, based on criteria established in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway            Commission (COSO) and our report dated April 15, 2008 expressed an unqualified            opinion.

 

/s/            GRANT THORNTON LLP

 

Atlanta, Georgia

April            15, 2008

 

15

2008            Annual Report

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL            CONTROL OVER FINANCIAL REPORTING**

Board            of Directors and Stockholders

Books-A-Million, Inc.

We have            audited Books-A-Million, Inc.'s and subsidiaries (the "Company") internal control            over financial reporting as of February 2, 2008, based on criteria established            in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway            Commission (COSO). The Company's management is responsible for maintaining effective            internal control over financial reporting and for its assessment of the effectiveness            of internal control over financial reporting, included in the accompanying Management's            Report on Internal Controls Over Financial Reporting. Our responsibility is to express            an opinion on Books-A-Million, Inc.'s internal control over financial reporting based            on our audit.

We            conducted our audit in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether effective internal control over            financial reporting was maintained in all material respects. Our audit included            obtaining an understanding of internal control over financial reporting, assessing the            risk that a material weakness exists, testing and evaluating the design and operating            effectiveness of internal control based on the assessed risk, and performing such other            procedures as we considered necessary in the circumstances. We believe that our audit            provides a reasonable basis for our opinion.

A            company's internal control over financial reporting is a process designed to provide            reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external purposes in accordance with generally            accepted accounting principles. A company's internal control over financial reporting            includes those policies and procedures that (1) pertain to the maintenance of            records that, in reasonable detail, accurately and fairly reflect the transactions and            dispositions of the assets of the company; (2) provide reasonable assurance that            transactions are recorded as necessary to permit preparation of financial statements in            accordance with generally accepted accounting principles, and that receipts and            expenditures of the company are being made only in accordance with authorizations of            management and directors of the company; and (3) provide reasonable assurance            regarding prevention or timely detection of unauthorized acquisition, use, or            disposition of the company's assets that could have a material effect on the financial            statements.

Because            of its inherent limitations, internal control over financial reporting may not prevent            or detect misstatements. Also, projections of any evaluation of effectiveness to future            periods are subject to the risk that controls may become inadequate because of changes            in conditions, or that the degree of compliance with the policies or procedures may            deteriorate.

In our            opinion, the Company maintained, in all material respects, effective internal control            over financial reporting as of February 2, 2008, based on criteria established            in*Internal Control—Integrated Framework*issued by COSO.

We also            have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the consolidated statements of financial position of            the Company as of February 2, 2008 and February 3, 2007, and the related consolidated            statements of income, stockholder's equity, and cash flows for each of the years in the            periods ended February 2, 2008, February 3, 2007 and January 28, 2006 and our report            dated April 15, 2008 expressed an unqualified opinion on those financial            statements.

| /s/ GRANT THORNTON LLP |
|------------------------|

Atlanta, Georgia

April            15, 2008

 

 

16

2008 Annual Report 

 

 

| **Consolidated Balance Sheets**                                                                                                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                               | **As of** |
| *(Dollars in thousands, except per share                            amounts)*                                                                                                                                                                                      | **2/2/08** | 2/3/07 |
| **Assets**                                                                                                                                                                                                                                                         |   |   |
| **Current Assets:**                                                                                                                                                                                                                                                |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                          | **$5,595** | $ 34,121  |
| Accounts receivable, net of allowance for doubtful                            accounts of $741 and $711,                                   respectively                                                                              | **6,450** | 7,524  |
| Related party receivables                                                                                                                                                                                                                                          | **3,780** | 2,647  |
| Inventories                                                                                                                                                                                                                                                        | **206,836** | 200,277  |
| Prepayments and other                                                                                                                                                                                                                                              | **4,678** | 4,365  |
| Total Current Assets                                                                                                                                                                                                                                               | **227,339** | 248,934  |
|                                                                                                                                                                                                                                                               |   |   |
| **Property and Equipment:**                                                                                                                                                                                                                                        |   |   |
| Land                                                                                                                                                                                                                                                               | **628** | 628  |
| Buildings                                                                                                                                                                                                                                                          | **6,915** | 6,869  |
| Equipment                                                                                                                                                                                                                                                          | **84,843** | 77,806  |
| Furniture and fixtures                                                                                                                                                                                                                                             | **53,071** | 51,354  |
| Leasehold improvements                                                                                                                                                                                                                                             | **76,653** | 74,263  |
| Construction in process                                                                                                                                                                                                                                            | **398** | 54  |
| Gross Property and Equipment                                                                                                                                                                                                                                       | **222,508** | 210,974  |
| Less accumulated depreciation and                            amortization                                                                                                                                                                                          | **168,994** | 159,503  |
| Net Property and Equipment                                                                                                                                                                                                                                         | **53,514** | 51,471  |
|                                                                                                                                                                                                                                                               |   |   |
| **Deferred Income Taxes**                                                                                                                                                                                                                                          | **2,452** | 2,031  |
| **Other Assets:**                                                                                                                                                                                                                                                  |   |   |
| Goodwill                                                                                                                                                                                                                                                           | **1,368** | 1,368  |
| Other                                                                                                                                                                                                                                                              | **160** | 233  |
| Total Other Assets                                                                                                                                                                                                                                                 | **1,528** | 1,601  |
| **Total Assets**                                                                                                                                                                                                                                                   | **$284,833** | $304,037  |
|                                                                                                                                                                                                                                                               |   |   |
| **Liabilities and Stockholders’                            Equity**                                                                                                                                                                                          |   |   |
| **Current Liabilities:**                                                                                                                                                                                                                                           |   |   |
| Accounts payable:                                                                                                                                                                                                                                                  |   |   |
| Trade                                                                                                                                                                                                                                                              | **$88,994** | $ 83,419  |
| Related party                                                                                                                                                                                                                                                      | **2,213** | 2,988  |
| Accrued expenses                                                                                                                                                                                                                                                   | **41,539** | 38,584  |
| Accrued income taxes                                                                                                                                                                                                                                               | **995** | 2,714  |
| Deferred income taxes                                                                                                                                                                                                                                              | **6,846** | 3,492  |
| Short-term borrowings                                                                                                                                                                                                                                              | **27,967** |   |
| Total Current Liabilities                                                                                                                                                                                                                                          | **168,554** | 131,197  |
|                                                                                                                                                                                                                                                               |   |   |
| **Long-term Debt**                                                                                                                                                                                                                                                 | **6,975** | 7,100  |
| **Other Long-term Liabilities**                                                                                                                                                                                                                                    | **10,253** | 8,706  |
| **Commitments and Contingencies**                                                                                                                                                                                                                                  |   |   |
| **Stockholders’ Equity:**                                                                                                                                                                                                                                    |   |   |
| Preferred stock, $.01 par value; 1,000,000 shares                            authorized, no shares outstanding                                                                                                                                                     | **-** | -   |
| Common stock, $.01 par value; 30,000,000 shares                            authorized 20,850,611 and                                 20,461,333shares issued                            at February 2, 2008 and February 3, 2007, respectively | **209** | 205  |
| Additional paid-in capital                                                                                                                                                                                                                                         | **89,752** | 85,396  |
| Treasury stock at cost (5,216,951 shares at February 2,                            2008 and 3,818,356 shares                                 atFebruary 3, 2007,                            respectively)                                      | **(44,468)** | (24,414) |
| Retained earnings                                                                                                                                                                                                                                                  | **53,558** | 95,847  |
| Total Stockholders’ Equity                                                                                                                                                                                                                                   | **99,051** | 157,034  |
| **Total Liabilities and Stockholders’                            Equity**                                                                                                                                                                                    | **$284,833** | $304,037  |

 

 

 

*The accompanying notes are an integral part of these consolidated            statements.*

 

17

2008            Annual Report

 

 

**CONSOLIDATEDSTATEMENTSOFINCOME**

|                                                                                                             | **Fiscal Year Ended**                       |
|------------------------------------------------------------------------------------------------------------------|---------------------------------------------|
| *(In thousands, except per share                            data*)                                               | **2/2/08**                                  | 2/3/07 | 1/28/06 |
|                                                                                                             | **52 weeks**                                | 53 weeks | 52 weeks |
| Net revenue                                                                                                      | **$535,128**                                | $520,416 | $503,751 |
| Cost of products sold, including warehouse distribution                            and store occupancy costs     | **376,580**                                 | 363,688 | 357,166 |
| **Gross profit**                                                                                                 | **158,548**                                 | 156,728 | 146,585 |
|                                                                                                             |                                        |   |   |
| Operating, selling and administrative                            expenses                                        | **117,139**                                 | 112,560 | 109,160 |
| Gain on insurance recoveries (note 10)                                                                           | **--**                                      | -- | 1,248 |
| Depreciation and amortization                                                                                    | **13,989**                                  | 14,069 | 15,636 |
| **Operating profit**                                                                                             | **27,420**                                  | 30,099 | 23,037 |
|                                                                                                             |                                        |   |   |
| Interest expense, net                                                                                            | **1,346**                                   | 105 | 1,441 |
| **Income from continuing operations before income                            taxes**                             | **26,074**                                  | 29,994 | 21,596 |
|                                                                                                             |                                        |   |   |
| Provision for income taxes                                                                                       | **9,552**                                   | 11,107 | 8,545 |
| **Income from continuing operations**                                                                            | **16,522**                                  | 18,887 | 13,051 |
|                                                                                                             |                                        |   |   |
| Discontinued operations:                                                                                         |                                        |   |   |
| Income (loss) from discontinued operations before taxes                            (including impairment charge) | **--**                                      |  

-- |  

27 |
| **Income tax provision (benefit)**                                                                               | **--**                                      | **--** | 11 |
| Income (loss) from discontinued operations                                                                       | **--**                                      | -- | 16 |
|                                                                                                             |                                        |   |   |
| **Net Income**                                                                                                   | **$16,522**                                 | $  18,887 | $  13,067 |
|                                                                                                             |                                        |   |   |
| Net income per common share:                                                                                     |                                        |   |   |
| **Basic**                                                                                                        |                                        |   |   |
| Income from continuing operations                                                                                | **$1.03**                                   | $     1.16 | $      0.80 |
| Income (loss) from discontinued operations                                                                       | **--**                                      | -- | -- |
| Net Income per share                                                                                             | **$1.03**                                   | $     1.16 | $      0.80 |
| **Weighted average number of shares outstanding –                            basic**                       | **16,089**                                  | 16,352 | 16,276 |
|                                                                                                             |                                        |   |   |
| **Diluted**                                                                                                      |                                        |   |   |
| Income from continuing operations                                                                                | **$1.01**                                   | $     1.12 | $      0.77 |
| Income (loss) from discontinued operations                                                                       | **--**                                      | -- | -- |
| Net Income per share                                                                                             | **$1.01**                                   | $     1.12 | $      0.77 |
| **Weighted average number of shares outstanding –                            diluted**                     | **16,302**                                  | 16,805 | 16,888 |
|                                                                                                             |                                        |   |   |
| Dividends per share – declared                                                                             | **$**     **3.36** | $     0.33 | $      0.23 |

             

 

 

 

 

 

 

*The accompanying notes are an integral part of these consolidated            statements.*

 

18

2008 Annual Report 

 

**CONSOLIDATEDSTATEMENTSOFCHANGESINSTOCKHOLDERS'EQUITY**

 

|                                                                                                                                     |             |           |               |         |              | **Accumulated**   |                              |
|------------------------------------------------------------------------------------------------------------------------------------------|------------------|----------------|--------------------|--------------|-------------------|-------------------|-----------------------------------|
|                                                                                                                                     |             | **Additional** |               |         |              | **Other**         | **Total**                         |
|                                                                                                                                     | **Common Stock** | **Paid-In**    | **Treasury Stock** | **Retained** | **Comprehensive** | **Stockholders'** |
| *(In thousands)*                                                                                                                         | **Shares**       | **Amount**     | **Capital**        | **Shares**   | **Amount**        | **Earnings**      | **Income (Loss)**                 | **Equity** |
|                                                                                                                                     |             |           |               |         |              |              |                              |   |
| **Balance, January 29, 2005**                                                                                                            | 19,068           | $191           | $74,024       | 2,793        | $(11,630)         | $72,469      | $(195)                            | $134,859  |
|                                                                                                                                     |             |           |               |         |              |              |                              |   |
| Net income                                                                                                                               |             |           |               |         |              | $13,067      |                              | $  13,067  |
| Unrealized gain on accounting for derivative

instruments, net of tax provision of $89                                                   |             |           |               |         |              |              | 141                          | 141  |
| Reclassification of unrealized loss related                            to

de-designation of cash flow hedge, net of tax

benefit of $30 |             |           |               |         |              |              | 47                           | 47  |
| Subtotal comprehensive income                                                                                                            |             |           |               |         |              |              |                              | 13,255  |
| Purchase of treasury stock, at cost                                                                                                      |             |           |               | 494          | (5,324)           |              |                              | (5,324) |
| Dividends paid                                                                                                                           |             |           |               |         |              | (3,273)           |                              | (3,273) |
| Issuance of restricted stock                                                                                                             | 43               | 1              | (1)                |         |              |              |                              | --  |
| Amortization of deferred compensation related

to restricted stock                                                                       |             |           | 448           |         |              |              |                              | 448  |
| Issuance of stock for employee stock

purchase plan                                                                                      | 13               |           | 84            |         |              |              |                              | 84  |
| Exercise of stock options                                                                                                                | 640              | 6              | 4,341         |         |              |              |                              | 4,347  |
| Tax benefit from exercise of stock options                                                                                               |             |           | 613           |         |              |              |                              | 613  |
| **Balance, January 28, 2006**                                                                                                            | 19,764           | $198           | $79,509       | 3,287        | $(16,954)         | $82,263      | $   (7)            | $145,009  |
|                                                                                                                                     |             |           |               |         |              |              |                              |   |
| Net income                                                                                                                               |             |           |               |         |              | 18,887       |                              | 18,887  |
| Unrealized gain on accounting for derivative

instruments, net of tax provision of $4                                                    |             |           |               |         |              |              | 7                            | 7  |
| Subtotal comprehensive income                                                                                                            |             |           |               |         |              |              |                              | 18,894  |
| Purchase of treasury stock, at cost                                                                                                      |             |           |               | 531          | (7,460)           |              |                              | (7,460) |
| Dividends paid                                                                                                                           |             |           |               |         |              | (5,303)           |                              | (5,303) |
| Issuance of restricted stock                                                                                                             | 148              | 1              | 1,558         |         |              |              |                              | 1,559  |
| Issuance of stock for employee stock

purchase plan                                                                                      | 9                |           | 88            |         |              |              |                              | 88  |
| Exercise of stock options                                                                                                                | 540              | 6              | 1,674         |         |              |              |                              | 1,680  |
| Tax benefit from exercise of stock options                                                                                               |             |           | 2,567         |         |              |              |                              | 2,567  |
| **Balance, February 3, 2007**                                                                                                            | 20,461           | $205           | $85,396       | 3,818        | $(24,414)         | $95,847      | $    --  | $157,034  |
|                                                                                                                                     |             |           |               |         |              |              |                              |   |
| Net income                                                                                                                               |             |           |               |         |              | 16,522            |                              | 16,522 |
| Subtotal comprehensive income                                                                                                            |             |           |               |         |              |              |                              | 16,522 |
| FIN 48 Adjustment                                                                                                                        |             |           |               |         |              | (1,987)           |                              |   (1,987) |
| Purchase of treasury stock, at cost                                                                                                      |             |           |               | 1,399        | (20,054)          |              |                              | (20,054) |
| Dividends paid                                                                                                                           |             |           |               |         |              | (56,824)          |                              | (56,824) |
| Issuance of restricted stock                                                                                                             | 155              | 2              | 1,464              |         |              |              |                              | 1,466 |
| Issuance of stock for employee stock

purchase plan                                                                                      | 8                |           | 118                |         |              |              |                              | 118 |
| Exercise of stock options                                                                                                                | 226              | 2              | 1,136              |         |              |              |                              | 1,138 |
| Tax benefit from exercise of stock options                                                                                               |             |           | 1,638              |         |              |              |                              | 1,638 |
| **Balance, February 2, 2008**                                                                                                            | 20,850           | $209           | $89,752            | 5,217        | $(44,468)         | $53,558           | $    --  | $99,051 |

 

 

 

 

 

 

*The accompanying notes are an integral part of these consolidated            statements*

 

19

2008            Annual Report

 

 

**CONSOLIDATEDSTATEMENTSOFCASHFLOWS**

 

|                                                                                                                                | Fiscal Year Ended |
|-------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| *(In thousands)*                                                                                                                    | **2/2/08**        | 2/3/07 | 1/28/06 |
|                                                                                                                                |              |   |   |
| **Cash Flows from Operating Activities:**                                                                                           |              |   |   |
| Net income                                                                                                                          | **$16,522**       | $18,887  | $13,067  |
| Adjustments to reconcile net income to net cash provided                            by operating activities:                        |              |   |   |
| Depreciation and amortization                                                                                                       | **13,989**        | 14,069  | 15,651  |
| Stock-based compensation                                                                                                            | **1,466**         | 1,559  | 448  |
| Loss on impairment of assets                                                                                                        | **60**            | 336  | 215  |
| (Gain) loss on sale of property and equipment                                                                                       | **479**           | 228 | (4) |
| Deferred income tax provision                                                                                                       | **2,933**         | 465 | 1,281  |
| Excess tax benefit of exercise of stock                            options                                                          | **(1,638)**       | (2,567) | 613 |
| Reclassification of unrealized loss from de-designation                            of cash flow hedge                               | **--**            | --  | 47  |
| (Increase) decrease in assets:                                                                                                      |              |   |   |
| Accounts receivable                                                                                                                 | **1,074**         | 2,144  | (2,673) |
| Related party receivables                                                                                                           | **(1,133)**       | (1,513) | (1,061) |
| Inventories                                                                                                                         | **(6,559)**       | 4,512  | 5,481  |
| Prepayments and other                                                                                                               | **(315)**         | (25) | 2,571  |
| Noncurrent assets (excluding amortization)                                                                                          | **(3)**           | (124) | 1,176  |
| Increase (decrease) in liabilities:                                                                                                 |              |   |   |
| Accounts payable                                                                                                                    | **5,575**         | (14,752) | 986  |
| Related party payables                                                                                                              | **(775)**         | 297  | (6,900) |
| Accrued income taxes                                                                                                                | **(1,719)**       | 880  | 296  |
| Accrued expenses                                                                                                                    | **4,537**         | (3,090) | 5,519  |
| Total adjustments                                                                                                                   | **17,971**        | 2,419  | 23,646  |
| Net cash provided by operating activities                                                                                           | **34,493**        | 21,306  | 36,713  |
|                                                                                                                                |              |   |   |
| **Cash Flows from Investing Activities:**                                                                                           |              |   |   |
| Capital expenditures                                                                                                                | **(16,878)**      | (16,191) | (11,297) |
| Proceeds from sale of property and equipment                                                                                        | **--**            | 15  | 11  |
| Net cash used in investing activities                                                                                               | **(16,878)**      | (16,176) | (11,286) |
|                                                                                                                                |              |   |   |
| **Cash Flows from Financing Activities:**                                                                                           |              |   |   |
| Borrowings under credit facilities                                                                                                  | **174,212**       | 2,850  | 189,119  |
| Repayments under credit facilities                                                                                                  | **(146,370)**     | (2,950) | (189,420) |
| Proceeds from exercise of stock options and issuance of                            common stock under employee

stock purchase plan | **1,257**         | 1,768 | 4,431  |
| Purchase of treasury stock                                                                                                          | **(20,054)**      | (7,460) | (5,324) |
| Payment of dividends                                                                                                                | **(56,824)**      | (5,303) | (3,273) |
| Excess tax benefit from exercise of stock                            options                                                        | **1,638**         | 2,567  | --  |
| Net cash used in financing activities                                                                                               | **(46,141)**      | (8,528) | (4,467) |
|                                                                                                                                |              |   |   |
| **Net (Decrease) increase in Cash and Cash                            Equivalents**                                                 | **(28,526)**      | (3,398) | 20,960  |
| **Cash and Cash Equivalents at Beginning of                            Year**                                                       | **34,121**        | 37,519  | 16,559  |
| **Cash and Cash Equivalents at End of                            Year**                                                             | **$5,595**        | $34,121  | $37,519  |
|                                                                                                                                |              |   |   |
| **Supplemental Disclosures of Cash Flow                            Information:**                                                   |              |   |   |
| Cash paid during the year for:                                                                                                      |              |   |   |
| Interest                                                                                                                            | **$1,907**        | $     910  | $  1,607  |
| Income taxes, net of refunds                                                                                                        | **$6,666**        | $  7,199  | $  6,787  |
| **Supplemental Disclosures of Non Cash Investing                            Activities:**                                           |              |   |   |
| Capital expenditures in accrued expenses                                                                                            | **$(368)**        | $(1,284) | $ -- |

 

 

 

*The accompanying notes are an integral part of these consolidated            statements.*

 

20

2008 Annual Report 

 

**NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS**

 

| **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 208 bookstores in 20 states            and the District of Columbia, which are predominantly located in the southeastern            United States. The Company also operates a retail Internet website. The Company            presently consists of Books-A-Million, Inc. and its three wholly owned subsidiaries,            American Wholesale Book Company, Inc. (“American Wholesale”) , American            Internet Service, Inc (“AIS”) and Books-A-Million Card Services, Inc.            (“Card Services”). All inter-company balances and transactions have been            eliminated in consolidation. For a discussion of the Company’s business segments,            see Note 8.

 

*Fiscal Year*

The            Company operates on a 52 or 53-week year, with the fiscal year ending on the Saturday            closest to January 31. Fiscal year 2008 was a 52-week period while fiscal year 2007 was            a 53-week period. Fiscal year 2006 was a 52-week period.

 

*Use of Estimates in the Preparation of Financial            Statements*

The            preparation of financial statements in conformity with accounting principles generally            accepted in the United States of America requires that management make estimates and            assumptions that affect the reported amounts of assets and liabilities, the disclosure            of contingent assets and liabilities at the date of the financial statements and the            reported revenues and expenses during the reporting periods. Actual results could            differ from those estimates.

 

*Revenue Recognition*

The            Company recognizes revenue from the sale of merchandise at the time the merchandise is            sold and the customer takes delivery. Returns are recognized at the time the            merchandise is returned and processed. At each period end, an estimate of sales returns            is recorded. Sales return reserves are based on historical returns as a percentage of            sales activity. The historical returns percentage is applied to the sales for which            returns are projected to be received after period end. The estimated returns percentage            and return dollars have not materially changed in the last several years. Sales tax            collected is recorded net and is not recognized as revenue and is included on the            consolidated balance sheets in accrued expenses.

 

The            Company sells its Millionaire’s Club Card, which entitles the customer to receive            a ten percent discount on all purchases made during the twelve-month membership period,            for a non-refundable fee. The Company recognizes this revenue over the twelve-month            membership period based upon historical customer usage patterns. Related deferred            revenue is included in accrued expenses.

 

The            Company sells gift cards to its customers in its retail stores. The gift cards do not            have an expiration date. Income is recognized from gift cards when: (1) the gift card            is redeemed by the customer; or (2) the likelihood of the gift card being redeemed by            the customer is remote (gift card breakage) and there is no legal obligation to remit            the value of the unredeemed gift cards to the relevant jurisdictions. The gift card            breakage rate is determined based upon historical redemption patterns. Based on this            historical information, the likelihood of a gift card remaining unredeemed can be            determined after 24 months of card inactivity. At that time, breakage income is            recognized for those cards for which the likelihood of redemption is deemed to be            remote and which there is no legal obligation to remit the value of such unredeemed            gift cards to the relevant jurisdictions. In fiscal 2007, the Company formed a gift            card subsidiary, Books-A-Million Card Services ("Card Services") to administer the            Company’s gift card program and to provide a more advantageous legal structure.            During fiscal 2008, the Company recognized $1.4 million of gift card breakage income.            Breakage income for fiscal 2007 was $3.2 million of which $2.3 million relates to            periods prior to fiscal 2007. The $2.3 million represents a change in estimate in the            escheat liability due to operational changes related to the creation of Card Services.            Breakage income for fiscal 2006 was $482,000. Gift card breakage income is included in            revenue.

 

*Vendor Allowances*

The            Company receives allowances from its vendors from a variety of programs and            arrangements, including placement and co-operative advertising programs. Effective            February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force            (“EITF”) No. 02-16,*Accounting by a Customer            (Including a Reseller) for Certain Consideration Received from a            Vendor*, which addresses the accounting for vendor allowances.            As a result of the adoption of this statement, vendor allowances in excess of            incremental direct costs are reflected as a reduction of inventory costs and recognized            in cost of products sold upon the sale of the related inventory.

 

*Accounts Payable*

The            Company classifies its checks written but not yet cleared by the bank in Accounts            Payable*.*Checks are only written            once approved by management. Amounts included in Accounts Payable as of February 2,            2008 and February 3, 2007 were $24,991,000 and $12,719,000, respectively.

 

21

2008            Annual Report

 

 

*Inventories*

Inventories are valued at the lower of cost or market, using the retail            method. Market is determined based on the lower of replacement cost or estimated            realizable value. Using the retail method, store and warehouse inventories are valued            by applying a calculated cost to retail ratio to the retail value of            inventories.

 

The            Company currently utilizes the last-in, first-out (LIFO) method of accounting for            inventories. The cumulative difference between replacement and current cost of            inventory over stated LIFO value is $2.5 million as of February 2, 2008 and $2.1            million as of February 3, 2007. The estimated replacement cost of inventory is the            current FIFO value of $209.3 million.

 

Physical inventory counts are taken throughout the course of the fiscal            period and reconciled to the Company’s records. Accruals for inventory shortages            are estimated based upon historical shortage results.

             

Inventories were:

|                     |   | **Fiscal Year Ended** |
|--------------------------|--------|-----------------------|
|  

*(In thousands)* |   | **February 2, 2008**  |   | February 3, 2007 |
| Inventories (at FIFO)    |   | **$209,314**          |   | $202,327  |
| LIFO reserve             |   | **(2,478)**           |   | (2,050) |
| Net inventories          |   | **$206,836**          |   | $200,277  |

 

*Property and Equipment*

Property and equipment are recorded at cost. Depreciation of equipment            and furniture and fixtures is provided on the straight-line method over the estimated            service lives, which range from three to seven years. Depreciation of buildings and            amortization of leasehold improvements, including remodels, is provided on the            straight-line basis over the lesser of the assets’ estimated useful lives            (ranging from five to 40 years) or, if applicable, the periods of the leases.            Determination of useful asset life is based on several factors requiring judgment by            management and adherence to generally accepted accounting principles for depreciable            periods. Judgment used by management in the determination of useful asset life could            relate to any of the following factors: expected use of the asset; expected useful life            of similar assets; any legal, regulatory, or contractual provisions that may limit the            useful life; and other factors that may impair the economic useful life of the asset.            Maintenance and repairs are charged to expense as incurred. Improvement costs, which            extend the useful life of an asset, are capitalized to property accounts and            depreciated over the asset's expected remaining life. The cost and accumulated            depreciation of assets sold, retired or otherwise disposed of are removed from the            accounts, and the related gain or loss is credited or charged to income.

 

*Long-Lived Assets*

The            Company’s long-lived assets consist of property and equipment which includes            leasehold improvements. At February 2, 2008, the Company had $53.5 million of property            and equipment, net of accumulated depreciation, accounting for approximately 18.8% of            the Company’s total assets. The Company reviews its long-lived assets for            impairment whenever events or changes in circumstances indicate that the carrying            amount of an asset may not be recoverable in accordance with Statement of Financial            Accounting Standards (SFAS) No. 144, “*Accounting            for the Impairment or Disposal of Long-Lived Assets*.”            The Company evaluates long-lived assets for impairment at the individual store level,            which is the lowest level at which individual cash flows can be identified. When            evaluating long-lived assets for potential impairment, the Company will first compare            the carrying amount of the assets to the individual store’s estimated future            undiscounted cash flows. If the estimated future cash flows are less than the carrying            amount of the assets, an impairment loss calculation is prepared. The impairment loss            calculation compares the carrying amount of the assets to the individual store’s            fair value based on its estimated discounted future cash flows. If required, an            impairment loss is recorded for that portion of the asset’s carrying value in            excess of fair value. Impairment losses totaled $0.1 million, $0.3 million and $0.2            million in fiscal 2008, 2007 and 2006, respectively, and were recorded in selling,            general administrative costs. For all years presented, the impairment losses related to            the retail trade business segment.

 

*Goodwill*

At            February 2, 2008, the Company had $1.4 million of goodwill, accounting for            approximately 0.5% of the Company’s total assets. SFAS No. 142,            “*Goodwill and Other Intangible            Assets*,” requires that goodwill and other indefinite            life intangible assets no longer be amortized, but instead be tested for impairment at            least annually or earlier if there are impairment indicators. The Company performs a            two-step process for impairment testing of goodwill as required by SFAS No. 142.            The first step of this test, used to identify potential impairment, compares the            estimated fair value of a reporting unit with its carrying amount. The second step (if            necessary) measures the amount of the impairment. The Company completed its annual            impairment test on the goodwill during the fourth quarter of fiscal 2008 and deemed            that no impairment charge was necessary. The Company has noted no subsequent indicators            of impairment. Changes in market conditions, among other factors, could have a material            impact on these estimates.

 

22

2008 Annual Report 

 

*Deferred Rent*

The            Company recognizes rent expense by the straight-line method over the lease term,            including lease renewal option periods that can be reasonably assured at the inception            of the lease. The lease term commences on the date when the Company takes possession            and has the right to control use of the leased premises. Also, funds received from the            lessor intended to reimburse the Company for the cost of leasehold improvements are            recorded as a deferred credit resulting from a lease incentive and are amortized over            the lease term as a reduction of rent expense.

 

*Loss from Discontinued Operations*

The            Company periodically closes under-performing stores. The Company believes that a store            is a component under SFAS No. 144. Therefore, each store closure would result in the            reporting of a discontinued operation unless the operations and cash flows from the            closed store could be absorbed in some part by surrounding Company stores(s) within the            same market area. Management evaluates certain factors in determining whether a closed            store’s operations could be absorbed by surrounding store(s); the primary factor            considered is the distance to the next closest Books-A-Million store. When a closed            store results in a discontinued operation, the results of operations of the closed            store include store closing costs and any related asset impairments. See Note 7 for            discontinued operations disclosures.

 

In            November 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-13,            "*Applying the Conditions in Paragraph 42 of FASB No. 144 in            Determining Whether to Report Discontinued Operations*." EITF            No. 03-13 addresses how an ongoing entity should evaluate whether the operations and            cash flows of a disposed component have been or will be eliminated from the ongoing            operations of the entity and the types of continuing involvement that constitute            significant continuing involvement in the operations of the disposed component. EITF            No. 03-13 became effective with the fiscal year beginning January 30, 2005. Prior to            the effective date of EITF No. 03-13, the Company was already reporting certain closed            stores as discontinued operations (see footnote 7). Therefore, adopting this new            guidance did not impact the Company’s financial position, results of operations            or cash flows.

 

*Store Opening Costs*

Non-capital expenditures incurred in preparation for opening new retail            stores are expensed as incurred.

 

*Store Closing Costs*

The            Company continually evaluates the profitability of its stores. When the Company closes            or relocates a store, the Company incurs unrecoverable costs, including net book value            of abandoned fixtures and leasehold improvements, lease termination payments, costs to            transfer inventory and usable fixtures and other costs of vacating the leased location.            Such costs are primarily expensed as incurred and are included in selling, general and            administrative costs. During fiscal 2008, 2007 and 2006, the Company recognized store            closing costs of $599,810, $418,000 and $40,000, respectively.

 

*Advertising Costs*

The            costs of advertising are expensed as incurred. Advertising costs, net of applicable            vendor reimbursements of $1,756,487, $1,413,000 and $1,647,000, are charged to            operating, selling and administrative expenses, and totaled $3,801,000, $3,629,000 and            $3,578,000 for fiscal years 2008, 2007 and 2006, respectively.

 

*Insurance Accruals*

The            Company is subject to large deductibles under its workers’ compensation and            health insurance policies. Amounts are accrued currently for the estimated cost of            claims incurred, both reported and unreported.

 

*Income Taxes*

The            Company recognizes deferred tax assets and liabilities for the expected future tax            consequences of events that result in temporary differences between the amounts            recorded in its financial statements and tax returns. Under this method, deferred tax            assets and liabilities are determined based on the differences between the financial            statement and tax bases of assets and liabilities using enacted tax rates in effect for            the year in which the differences are expected to reverse.

 

*Accounts Receivable and Allowance for Doubtful            Accounts*

Receivables represent customer, landlord and other receivables due            within one year and are net of any allowance for doubtful accounts. Net receivables            were $10,230,000 and $10,171,000 for February 2, 2008 and February 3, 2007,            respectively. Trade accounts receivable are stated at the amount the Company expects to            collect and do not bear interest. The collectability of trade receivable balances is            regularly evaluated based on a combination of factors such as customer            credit-worthiness, past transaction history with the customer, current economic            industry trends and changes in customer payment patterns. If it is determined that a            customer will be unable to fully meet its financial obligation, such as the case of a            bankruptcy filing or other material events impacting its business, a specific reserve            for doubtful accounts is recorded to reduce the related receivable to the amount            expected to be recovered.

 

23

2008            Annual Report

 

 

*Cash and Cash Equivalents*

For            purposes of the consolidated statements of cash flows, the Company considers all            short-term, highly liquid investments with original maturities of 90 days or less to be            cash equivalents.

 

*Sales and Use Tax Contingencies*

The            Company is subject to potential ongoing sales and use tax audits, income tax audits and            other tax issues for both its retail and electronic commerce segments. It is the policy            of the Company to estimate any potential tax contingency liabilities based on various            factors such as ongoing state and federal tax audits, historical results of audits at            the state or federal level and specific tax issues. Accruals for potential tax            contingencies are recorded by the Company when they are deemed to have a probable            likelihood of a liability and the liability can be reasonably estimated.

 

*Stockholders' Equity*

Basic net income per share (“EPS”) is computed by dividing            income available to common shareholders by the weighted-average number of common shares            outstanding for the period. Diluted EPS reflects the potential dilution, using the            treasury stock method that could occur if stock options are exercised or restricted            stock granted to employees vested and resulted in an increase 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            and restricted stock, 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)*                                                                             | **2/2/08**            | 2/3/07 | 1/28/06 |
| Weighted average shares outstanding:                                                         |                  |   |   |
| Basic                                                                                        | **16,089**            | 16,352 | 16,276 |
| Dilutive effect of stock options and restricted stock                            outstanding | **213**               | 453 | 612 |
| Diluted                                                                                      | **16,302**            | 16,805 | 16,888 |

 

Weighted options outstanding of 0, 0 and 94,000 for the years ended            February 2, 2008, February 3, 2007 and January 28, 2006, respectively, were not            included in the table above as they were anti-dilutive in those periods.

 

In            March 2004, the Board of Directors authorized a common stock repurchase program for up            to 1.6 million shares, or 10% of the outstanding stock (“The March 2004            Plan”). Under the March 2004 Plan, the Company repurchased a total of 1,452,000            shares at a cost of $13,667,000. This plan is now discontinued.

             

On            June 8, 2006, the Board approved a new stock repurchase program (“The June 2006            Plan”). The program authorized the repurchase of up to $10 million in shares of            the Company’s common stock over the next twelve months, but no specific number of            shares was approved. This stock repurchase program replaced the March 2004            Plan.

             

On            August 23, 2006, the Board approved an additional stock repurchase program (“The            August 2006 Plan”). This program authorized the repurchase of up to additional            $25 million in shares of the Company’s common stock over the next eighteen            months. This program is in addition to the June 2006 Plan to repurchase up to $10            million in shares of common stock. Under the August 2006 Plan, the Company repurchased            1,399,000 and 300,000 shares at a cost of $20,054,000 and $4,436,000 during the fiscal            years ended February 2, 2008 and February 3, 2007, respectively. This plan expired on            February 23, 2008. On March 26, 2008, the Board of Directors authorized a new common            stock repurchase program for up to $5 million. The plan will expire on April 30,            2009.

 

Additionally, in June 2005 the Company commenced a modified “Dutch            Auction” tender offer (the “Tender Offer”) to purchase up to            4,000,000 shares of its outstanding common stock at a price per share of not less than            $8.75 nor in excess of $10.00 per share, for an aggregate purchase price of up to $40.0            million. Pursuant to the Tender Offer, the Company purchased 56,406 shares of common            stock at a purchase price of $10.00 per share, plus expenses for completing the Tender            Offer, for a total cost of $1,040,000.

 

*Disclosure of Fair Value of Financial Instruments*

Cash            and cash equivalents, accounts receivable, accounts payable and accrued liabilities are            reflected in the accompanying financial statements at cost, which approximates fair            value because of the short-term maturity of these instruments. Investments are            reflected in the accompanying financial statements at current market value. Based on            the borrowing rates currently available to the Company for bank loans with similar            terms and maturities at February 2, 2008 and February 3, 2007, the Company’s debt            approximates fair value.

 

 

24

2008 Annual Report 

 

*Stock-Based Compensation*

On            January 29, 2006, the Company adopted the provisions of SFAS No. 123(R),            “*Share-Based            Payment*,”which revises SFAS No. 123,            “*Accounting for Stock-Based            Compensation,”*and supersedes APB Opinion 25,            “*Accounting for Stock Issued to            Employees.”*SFAS No. 123(R) requires the Company to            recognize expense related to the fair value of its stock-based compensation awards,            including employee stock options.

Prior to the adoption of SFAS No. 123(R), the Company accounted for            stock-based compensation awards using the intrinsic value method as required by APB            Opinion 25. Accordingly, the Company did not recognize compensation expense in the            statement of income for options granted that had an exercise price equal to or greater            than the market value of the underlying common stock on the date of grant. However, the            Company did record compensation expense related to restricted stock units based on the            market value of its stock at the date of grant. As required by SFAS No. 123, the            Company also provided certain pro forma disclosures for stock-based awards as if the            fair-value-based approach of SFAS No. 123 had been applied.

The            Company used the modified prospective transition method as permitted by SFAS No. 123(R)            and, therefore, has not restated its financial results for prior periods. Under this            transition method, the Company applied the provisions of SFAS No. 123(R) to new awards            and to awards modified, repurchased or cancelled after January 29, 2006. In addition,            the Company will recognize compensation cost for the portion of awards for which the            requisite service has not been rendered (unvested awards) that are outstanding as of            January 29, 2006, as the remaining service is rendered. The compensation cost recorded            for these awards is based on their grant-date fair value as calculated for the pro            forma disclosures required by SFAS No. 123.

Prior to fiscal 2007, the Company accounted for stock-based employee            compensation under the recognition and measurement principles of Accounting Principles            Board (APB) Opinion No. 25, “*Accounting for Stock Issued            to Employees,*” and related Interpretations. No            stock-based employee compensation cost for this plan is reflected in net income, as all            options granted under the plan had an exercise price equal to the market value of the            underlying common stock on the date of grant. The following table illustrates the            effect on net income and net income per common share if the Company had applied the            fair value recognition provisions of Statement of Financial Accounting Standards No.            148 (“SFAS 148”) “Accounting for Stock-Based Compensation-            Transaction and Disclosure – an Amendment of FASB Statement No. 123” to            stock-based employee compensation:

 

|                                                                                                                                                                                      | **Fiscal Year Ended** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|
| *(In thousands, except per share                            amounts)*                                                                                                                     | **1/28/06**           |
| Net income, as reported                                                                                                                                                                   | **$13,067**           |
| Deduct: Total stock-based employee compensation expense                            determined under fair value based method for all awards, net of tax                            effects |  

**541**       |
| Pro forma net income                                                                                                                                                                      | **$12,526**           |
| Net income per common share:                                                                                                                                                              |                  |
| Basic – as reported                                                                                                                                                                 | **$ 0.80**            |
| Basic – pro forma                                                                                                                                                                   | **$ 0.76**            |
| Diluted – as reported                                                                                                                                                               | **$ 0.77**            |
| Diluted – pro forma                                                                                                                                                                 | **$ 0.74**            |

 

The            Company’s pre-tax compensation cost for stock-based employee compensation was            $1,466,000 ($904,000 net of taxes), $1,559,000 ($982,000 net of taxes) and $448,000            ($270,000 net of taxes) for the years ended February 2, 2008, February 3, 2007 and            January 28, 2006, respectively.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax            benefits resulting from the exercise of stock options as operating cash flows in the            Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that cash flows from            the exercise of stock options resulting from tax benefits in excess of recognized            cumulative compensation cost (excess tax benefits) be classified as financing cash            flows. For the year ended February 2, 2008, $1,638,000 of such excess tax benefits was            classified as financing cash flows. Excess tax benefits for the years ended February 3,            2007 and January 28, 2006 were $2,567,000 and $613,000, respectively.

 

*Accounting for Derivative Instruments and Hedging            Activities*

In            June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS            No. 133, “*Accounting for Derivative Instruments and            Hedging Activities*,” amended by SFAS No. 137,            “*Accounting for Derivative Instruments and Hedging            Activities – Deferral of the Effective Date of FASB Statement No.            133,*”and SFAS No.            138*,*“*Accounting for Certain Derivatives and            Certain Hedging Activities*,” and SFAS No.149,            “*Amendment of SFAS No. 133 on Derivatives and Hedging            Activities*.” SFAS No. 133 established accounting and            reporting standards requiring that every derivative instrument (including certain            derivative instruments embedded in other contracts) be recorded in the balance sheet as            either an asset or liability measured at its fair value. SFAS No. 133 requires that            changes in the derivative’s fair value be recognized currently in earnings unless            specific hedge accounting criteria are met. Special accounting for qualifying hedges            allows a derivative’s gains and losses to offset related results on the hedged            item in the income statement and requires that a company must formally document,            designate, and assess the effectiveness of transactions that receive hedge accounting.            At February 2, 2008 and February 3, 2007, liabilities related to derivatives were            classified as other long-term liabilities of $0 and $0, respectively.

 

25

2008            Annual Report

 

 

*Comprehensive Income (Loss)*

Comprehensive income (loss) is net income or loss, plus certain other            items that are recorded directly to stockholders’ equity. The only such items            currently applicable to the Company are the unrealized gains (losses) on the derivative            instruments explained in Note 3.

 

*Recent Accounting Pronouncements*

In June            2006, the FASB issued FASB Interpretation No. 48,*“Accounting for Uncertainty in Income Taxes”*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty            in income taxes recognized in an enterprise’s financial statements in accordance            with SFAS No. 109,*“Accounting for Income            Taxes.”*FIN 48 prescribes a recognition threshold and            measurement attributes for the financial statement recognition and measurement of a tax            position taken or expected to be taken in a tax return. FIN 48 also provides guidance            on de-recognition, classification, interest and penalties, accounting in interim            periods, disclosure and transition. The Company adopted the provisions of FIN 48,            effective February, 4, 2007. As a result of the adoption of FIN 48, the Company            recorded an increase of $1,987,000 in other long-term liabilities in its consolidated            balance sheet for unrecognized tax benefits, which was accounted for as a cumulative            effect adjustment to the February 4, 2007 balance of retained earnings.

             

In            September 2006, the FASB issued SFAS No. 157, “*Fair            Value Measurements*” (“SFAS No. 157”). SFAS            No. 157 was issued to provide increased consistency and comparability in fair value            measurements. Specifically, SFAS No. 157 creates a significant definition of fair value            emphasizing fair value as a market-based measurement. The Company is required to adopt            SFAS No. 157 as of the beginning of its fiscal year that begins after November 15,            2007. The adoption of SFAS No. 157 is not expected to have a material effect on the            Company’s financial position, results of operations or cash flows.

             

In            February 2007, the FASB issued SFAS No. 159, “*The Fair            Value Option for Financial Assets and Financial**Liabilities: Including an amendment of FASB No.            115*” (“SFAS No. 159”). SFAS No. 159 permits            all entities to elect to measure many financial instruments and certain other items at            fair value with changes in fair value reported in earnings. The fair value option is            generally applied on an instrument-by-instrument basis and may be elected for a single            item without electing other identical items, even if issued in a single transaction.            The Company is required to adopt SFAS No. 159 as of the beginning of its fiscal year            that begins after November 15, 2007. The adoption of SFAS No. 159 is not expected to            have a material effect on the Company’s financial position, results of operations            or cash flows.

             

In May            2007, the FASB issued FASB Staff Position No. FIN 48-1,            “*Definition of Settlement in FASB Interpretation No.            48*” (“FSP FIN 48-1”). FSP FIN 48-1 amends            FASB Interpretation No. 48, “*Accounting for Uncertainty            in Income Taxes*,” to provide guidance on how an            enterprise should determine whether a tax position is effectively settled for the            purposes of recognizing previously unrecognized tax benefits. The Company is required            to apply the guidance provided in FSP FIN 48-1 upon its adoption of FIN 48 which was as            of February 4, 2007. The application of FSP FIN 48-1 has not had a material effect on            the Company’s financial position, results of operations, or cash            flows.

 

In June            2007, the Emerging Issues Task Force (EITF) of the FASB ratified their consensus            position 06-11, “*Accounting for Income Tax Benefits of            Dividends on Share-Based Payment Awards*” (“EITF            06-11”). EITF 06-11 provides guidance on how a company should recognize the            income tax benefit received on dividends that are paid to employees holding            equity-classified nonvested shares, equity-classified nonvested share units, or            equity-classified outstanding share options charged to retained earnings under FASB            Statement 123(R), “*Share-Based            Payment*.” The Company is required to apply the guidance            provided in EITF 06-11 prospectively to income tax benefits of dividends on            equity-classified employee share-based payment awards that are declared in fiscal years            beginning after September 15, 2007. Early adoption of EITF 06-11 is permitted for the            income tax benefit of dividends on equity-classified employee share-based payment            awards that are declared in periods for which financial statements have not yet been            issued. The Company has elected early adoption of this pronouncement as of the fiscal            quarter ending August 4, 2007. The early adoption of EITF 06-11 has not had a material            effect on the Company’s financial position, results of operation or cash            flows.

 

In            December 2007, the FASB issued*SFAS            No.* *141 revised, Business            Combinations*. The objective of this Statement is to improve            the relevance, representational faithfulness, and comparability of the information that            a reporting entity provides in its financial reports about a business combination and            its effects.   SFAS 141 revised is effective for the Company on            January 1, 2009 and is not expected to have a significant impact on the            Company’s financial statements.

 

In            December 2007, the FASB issued*SFAS            No.* *160, Noncontrolling            Interests in Consolidated Financial Statements—an amendment of ARB No.            51*.  The objective of this Statement is to improve the            relevance, comparability, and transparency of the financial information that a            reporting entity provides in its consolidated financial statements by establishing            accounting and reporting standards for the Noncontrolling interest in a subsidiary and            for the decosolation of a subsidiary.  SFAS 160 is effective for the Company            on January 1, 2009 and is not expected to have a significant impact on the            Company’s financial statements.

 

 

 

26

2008 Annual Report 

 

In            March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about            Derivative Instruments and Hedging Activities”. The new standard is intended to            improve financial reporting about derivative instruments and hedging activities by            requiring enhanced disclosures to enable investors to better understand their effects            on an entity’s financial position, financial performance, and cash flows. It is            effective for financial statements issued for fiscal years and interim periods            beginning after November 15, 2008, with early application encouraged. Based on current            conditions, the Company does not expect the adoption of SFAS 161 to have a significant            impact on its results of operations or financial position.

 

| **2.** | **Income Taxes** |
|--------|------------------|

A summary of the components of the income tax provision is as            follows*(in thousands)*:

> 
                                 

**Fiscal Year Ended**

                                 

**2/2/08**

2/3/07

1/28/06

Current:

                                 

                                 

                                 

Federal

**$6,304**

$10,089

$6,495

State

**314**

553

899

                                 

**$6,618**

$10,642

$7,394

Deferred:

                                 

                                 

                                 

Federal

**$2,481**

$338

$1,000

State

**453**

127

162

                                 

**2,934**

465

1,162

                                 

                                 

                                 

                                 

Provision for income taxes

**$9,552**

$11,107

$8,556

 

 

A            reconciliation of the federal statutory income tax rate to the effective income tax            rate is as follows:

             

             

|                                          | **Fiscal Year Ended** |
|-----------------------------------------------|-----------------------|
|                                          | **2/2/08**            | 2/3/07 | 1/28/06 |
|                                          |                  |   |   |
| Federal statutory income tax rate             | **35.0%**             | 35.0% | 35.0% |
| State income tax provision                    | **2.1%**              | 1.7% | 3.5% |
| Nondeductible meals and entertainment expense | **0.3%**              | 0.2% | 0.3% |
| Other                                         | **0.1%**              | 0.1% | 0.8% |
| Federal tax credits                           | **(0.9%)**            | -- | -- |
| Effective income tax rate                     | **36.6%**             | 37.0% | 39.6% |

 

 

Temporary differences (in thousands) which created deferred tax assets            (liabilities) at February 2, 2008 and February 3, 2007, are as follows:

 

 

> 
                                 

**2/2/08**

As of 2/3/07

                                 

**Current**

**Noncurrent**

Current

Noncurrent

                                 

Depreciation

$ -- 

$ (628)

$ -- 

$ (1,215)

                                 

Accruals

**2,261**

**--**

2,639 

-- 

                                 

Inventory

**(8,672)**

**--**

(5,769)

-- 

                                 

State net operating loss carry forwards

**--**

**--**

-- 

204 

                                 

Deferred Rent

**695**

**3,418**

822 

3,680 

                                 

Prepaids

**(1,435)**

**--**

(1,477)

-- 

                                 

Amortization

**--**

**(358)**

-- 

(303)

                                 

Allowance for bad debts

**305**

**--**

293

-- 

                                 

State tax

**--**

**19**

-- 

(139)

                                 

                                 

**(6,846)**

**2,451**

(3,492)

2,227 

                                 

Less: Valuation allowances

**--**

**--**

-- 

(196)

                                 

Deferred tax asset (liability)

**$(6,846)**

**$2,451**

$ (3,492)

$ 2,031 

                                 

 

 

 

27

2008            Annual Report

 

 

In July            2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in            Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"),            which provides criteria for the recognition, measurement, presentation and disclosure            of uncertain tax positions. The Company adopted the provisions of FIN 48 on            February 4, 2007. As a result of the implementation of FIN 48, the Company            has recognized an increase of $2.0 million in the liability for unrecognized tax            benefits, which was accounted for as a decrease to the balance of retained earnings.            The total amount of unrecognized tax benefits that, if recognized, would affect the            effective tax rate is $2.0 million. A reconciliation of the beginning and ending            amount of unrecognized tax benefits is as follows:

|                                                                                     |        |
|-------------------------------------------------------------------------------------|--------|
| Balance at February 4, 2007                                                         |   | $ | 2,227 |   |
| Additions based on tax positions related to current                            year |   |   | 350 |   |
| Expiration of statute of limitation                                                 |   |   | ( 403) |   |
|                                                                                |   |   |   |   |
| Balance at February 2, 2008                                                         |   | $ | 2,174 |   |
|                                                                                     |        |  |  |   |
|                                                                                     |        |  |  |  |  |  |

The            Company and its subsidiaries are subject to United States federal income tax as well as            income tax of multiple state jurisdictions. In many cases these uncertain tax positions            are related to tax years that remain subject to examination by the relevant taxing            authorities. The Company has operations in various state jurisdictions that are            currently under audit for years ranging from 2001 through 2006. With few exceptions, we            are no longer subject to U.S. federal, state and local, or non-United States, income            tax examinations for years prior to 2004.

It is            reasonably possible that the amount of unrecognized tax benefits will increase or            decrease in the next twelve months. These changes may be the result of settlement of            ongoing state audits. It is expected that certain state audits will be completed in the            next 12 months resulting in a reduction of the liability for unrecognized tax benefits            of $0.1 million. Depending on the outcome of these audits, the reduction of the            liability for unrecognized tax benefits discussed above may affect the effective tax            rate.

The            Company's policy is to record interest and penalties related to income tax matters in            income tax expense. Accrued interest and penalties were $0.68 million and $0.68            million as of February 2, 2008 and February 3, 2007, respectively. During fiscal year            2008 the Company recognized interest and penalties of $0.03 million.

A valuation allowance was established at the end of the previous fiscal            year for net deferred taxes for a wholly-owned subsidiary. As of February 2, 2008, that            entity was merged out of existence into the parent company. As a result, the net            operating losses of that subsidiary are no longer available, and a valuation allowance            is deemed unnecessary, as the realization of the remaining net operating losses is            considered more likely than not.

 

| **3.** | **Debt and Lines of Credit** |
|--------|------------------------------|

The Company’s current credit facility allows for unsecured            borrowings up to $100 million which expires in July 2011. Availability under the            facility is reduced by outstanding letters of credit issued there under. Interest on            borrowings under the credit facility is determined based upon applicable LIBOR rates            and the Company’s rate spread, which varies depending on the maintenance of            certain covenants. The credit facility contains financial and non-financial covenants,            the most restrictive of which is the maintenance of a minimum fixed charge coverage            ratio. The Company was in compliance with all covenants for fiscal 2008 and as of            February 2, 2008. The outstanding balance under this credit facility as of February 2,            2008 and February 3, 2007, was $28.0 million and $0, respectively, and the face amount            of letters of credit issued under the facility was $2.4 million and $2.9 million,            respectively. The maximum and average outstanding borrowings under the credit facility            (excluding the face amount of letters of credit issued there under) during fiscal 2008            were $55.9 million and $20.7 million, respectively. The outstanding amount is            considered short-term in the financial statements because all borrowings under the            credit facility are due in 12 months or less.

 

The Company is subject to interest rate fluctuations on borrowings under            its credit facility. To manage this exposure, the Company has used interest rate swaps            in the past to fix the interest rate on variable debt. The Company entered into two            separate $10.0 million swaps on July 24, 2002. Both expired in August 2005 and, prior            to the payoff of the debt, effectively fixed the interest rate on $20.0 million of            variable debt at 5.13%. The Company did not replace the swaps at expiration.

 

 

28

2008 Annual Report 

 

During fiscal 1996 and fiscal 1995, the Company acquired and constructed            certain warehouse and distribution facilities with the proceeds of loans made pursuant            to an industrial development revenue bond (the “Bond”), which was secured            by a mortgage interest in these facilities. As of February 2, 2008 and February 3,            2007, there was $7.0 million and $7.1 million of borrowings outstanding, respectively,            under these arrangements, which bear interest at variable rates (4.25% as of February            2, 2008). The Bond has a maturity date of December 1, 2019, with a purchase provision            obligating the Company to repurchase the Bond, unless extended by the bondholder. In            fiscal 2007, an unrelated bank purchased the Bond from the existing bondholder, and the            new bondholder extended the date of the Company’s purchase obligation of the Bond            until July 1, 2011 and did not require a mortgage interest to secure the bond. Such an            extension may be renewed annually by the bondholder, at the Company’s request, to            a date no more than five years from the renewal date. The Company entered into a $7.5            million interest rate swap in May 1996 that expired on June 7, 2006 and effectively            fixed the interest rate on the Bond during that period at 8.73% (the “Bond            Hedge”). The Company did not replace the Bond Hedge when it expired.

 

The            Company’s hedges were designated as cash flow hedges because they are interest            rate swaps that convert variable payments to fixed payments. Cash flow hedges protect            against the variability in future cash outflows of current or forecasted debt and            related interest expense. The changes in the fair value of these hedges are reported on            the balance sheet with a corresponding adjustment to accumulated other comprehensive            income (loss) or in earnings, depending on the type of hedging relationship. Over time,            the amounts held in accumulated other comprehensive income (loss) were reclassified to            earnings if the hedge transaction became ineffective.

 

Prior to its expiration, the Bond Hedge was reported as a liability in            the accompanying consolidated balance sheets at a fair value of $61,000 as of January            28, 2006. For the fiscal years ending February 3, 2007 and January 28, 2006,            adjustments of $7,000, and $141,000 were recorded as unrealized gains in accumulated            other comprehensive income (loss), after tax. During fiscal 2006, a portion of the bond            hedge no longer qualified for hedge accounting under SFAS No. 133. Therefore, the            Company de-designated a portion of the hedge resulting in an expense of $47,000 in            fiscal 2006. During fiscal 2005, one of the $10 million interest rate swaps no longer            qualified for hedge accounting under SFAS No. 133 and the Company de-designated the            hedge resulting in an expense of $27,000 in fiscal 2005.

 

| **4.** | **Leases** |
|--------|------------|

The            Company leases the premises for its retail bookstores under operating leases, which            expire in various years through the year 2022. Many of these leases contain renewal            options and require the Company to pay executory costs (such as property taxes,            maintenance, and insurance). In addition to fixed minimum rentals, some of the            Company’s leases require contingent rentals based on a percentage of sales. The            Company also has minimal operating leases for equipment and trailer trucks.

 

Minimum future rental payments under non-cancelable operating leases            having remaining terms in excess of one year as of February 2, 2008 are as            follows*(in thousands)*:

 

| **Fiscal Year**  | **Future Minimum Rent** |
|------------------|-------------------------|
| 2009             | $ 30,297                |
| 2010             | 24,752                  |
| 2011             | 19,991                  |
| 2012             | 14,730                  |
| 2013             | 11,521                  |
| Subsequent years | 31,810                  |
| Total            | $133,101                |

 

Rental            expense for all operating leases consisted of the following*(in thousands)*:

 

|               | **Fiscal Year Ended** |
|--------------------|-----------------------|
|               | **2/2/08**            | 2/3/07 | 1/28/06 |
| Minimum rentals    | **$35,347**           | $33,205  | $30,944 |
| Contingent rentals | **(25)**              | 53  | 249 |
| Total              | **$35,322**           | $33,258  | $31,193 |

 

| **5.** | **Employee Benefit Plans** |
|--------|----------------------------|

*401(k) Profit-Sharing Plan*

The            Company and its subsidiaries maintain a 401(k) plan covering all employees who have            completed six months of service and who are at least 21 years of age, and permit            participants to contribute from 1% to 15% of compensation and participants over 50            years of age are allowed to make catch-up contributions. Limits to contributions by            employees are established by the Internal Revenue Code. Company matching and            supplemental contributions are made at management’s discretion. Company matching            contributions were 50%, 70% and 70% for fiscal 2008, 2007 and 2006, respectively. The            employer contributions are made on employee contributions up to a maximum of 6% of the            employee’s salary. The expense under this plan was $744,000, $472,000 and            $806,000 in fiscal 2008, 2007 and 2006, respectively.

 

29

2008            Annual Report

 

 

*2005 Incentive Award Plan*

On            June 1, 2005, the stockholders of the Company approved the adoption of the            Books-A-Million, Inc. 2005 Incentive Award Plan (the “2005 Plan”) for a            total of 300,000 shares. On June 8, 2006, the stockholders of the Company approved an            additional 300,000 shares to be awarded under the Plan. An aggregate of 600,000 shares            of common stock may be awarded under the 2005 Plan. From June 1, 2005 through February            2, 2008, awards under the 2005 Plan consisted solely of awards of restricted stock.            Each year the compensation committee makes awards to the Company’s officers and            key employees pursuant to the terms of the plan. In addition, directors who have served            eleven consecutive months are eligible for awards as well as new directors appointed to            the Board. Shares granted under the 2005 Plan (net of cancellations) were 81,475,            161,800 and 78,933 in fiscal 2008, 2007 and 2006, respectively. The compensation            expense related to these grants is being expensed over the vesting period for the            individual grants. The Company has recorded $1,425,000 and $643,000 of stock-based            compensation for the restricted stock grants in fiscal 2008 and 2007,            respectively.

 

There are two types of restricted stock awards to employees. The first            type of restricted stock award is “career based shares.” Career based            shares are completely unvested until the last day of the fifth fiscal year after the            date of the grant whereupon such career based shares vest in full if the employee who            received the grant is then employed by the Company. The compensation expense for these            shares is recognized ratably over the five-year requisite service period. The second            type of restricted stock award is “performance based shares.” Performance            based shares are earned based on the achievement of certain performance goals for the            fiscal year in which they are granted.If the performance goals            are met, the performance based shares vest in 50% increments at the end of the first            and second fiscal years after the fiscal year in which they were granted if the            employee who received the grant is then employed by the Company. Compensation expense            for these shares is recognized ratably over the period beginning on the date the            Company determines that it is probable the performance goals will be achieved and            ending on the last day of the vesting period.

 

Additionally, there are annual restricted stock grants to directors.            Each director who has served at least eleven consecutive months as of the            Company’s annual meeting of stockholders receives a restricted stock grant, which            shares of restricted stock vest in one-third increments on each of the first, second            and third anniversaries of the grant date. The expense related to the directors’            grants is recognized ratably over the three-year vesting period.

 

*Executive Incentive Plan*

The Company maintains an Executive Incentive Plan (the “Incentive            Plan”). The Incentive Plan provides for awards to certain executive officers of            either cash or shares of restricted stock. The Company has always issued awards in the            form of restricted stock. Issuance of awards under the Incentive Plan is based on the            Company achieving pre-established performance goals during a three consecutive fiscal            year performance period. Awards issued under the Incentive Plan for a particular            performance period vest on the third anniversary of the last day of such performance            period if the recipient remains employed by the Company on such vesting date. Awards            under the Incentive Plan are expensed ratably over the period from the date that the            issuance of such awards becomes probable through the end of the restriction period.            Awards granted under the Incentive Plan for the two year performance periods ended            February 3, 2007 and January 28, 2006 totaled $100,000 (6,707 shares) and $592,000            (50,824 shares), respectively. The final grant for the Incentive Plan was awarded in            March 2006 for the January 28, 2006 three year performance period. There will be no            future awards under the Incentive Plan.

             

*Restricted Stock Table*

A combined summary of the status of restricted stock grants to employees            and directors under the 2005 Incentive Award Plan and the Executive Incentive Plan is            as follows*(shares in thousands):*

             

|                          | **Fiscal Year Ended**     |
|-------------------------------|---------------------------|
|                          | **February 2, 2008**      | February 3, 2007 |
|                          | Shares                    | Weighted Average Grant DateFair Value | Shares | Weighted Average Grant DateFair Value |
| Shares at beginning of period | **281**    | **$11.56** | 214    | $ 9.70 |
| Shares granted                | **87**     | **$14.16** | 169    | $12.29 |
| Shares vested                 | **(92)**        | **$11.35** | (66)   | $ 7.82 |
| Shares forfeited              | **(5)**         | **$13.14** | (36)   | $10.72 |
| Shares at end of period       | **271**    | **$12.44** | 281 271 | $11.56 |

 

 

 

 

 

30

2008 Annual Report 

 

*Stock Option Plan*

In April 1999, the Company adopted the Stock Option Plan which provided            for option grants to executive officers, directors, and key employees. Upon the            approval of the 2005 Incentive Award Plan by the Company’s stockholders at the            Company’s annual meeting held in June 2005, the board determined that no more            awards would be made under the Stock Option Plan. Options previously issued under the            Stock Option Plan remain valid. All options granted prior to January 9, 2001 vested            over a five-year period and expired on the sixth anniversary of the date of grant, and            all options granted on and after January 9, 2001 vest over a three-year period and            expire on the tenth anniversary of the date of grant. All options have exercise prices            equal to the fair market value of the common stock on the date of grant. A summary of            the status of the Company’s stock option plan is as follows*(shares in thousands)*:

 

|                             | **Fiscal Year Ended** |
|----------------------------------|-----------------------|
|                             | **February 2, 2008**  | February 3, 2007 | January 28, 2006 |
|                             | **Shares**            | **Weighted**Average**Exercise**Price******** | Shares | WeightedAverageExercisePrice | Shares | WeightedAverageExercisePrice |
| Outstanding at beginning of year | **270**               | **$5.09** | 814   | $3.77   | 1,506  | $ 5.19   |
| Granted                          | **--**                | **--** | --   | N/A   | --  | N/A   |
| Exercised                        | **(226)**             | **5.05** | (540)  | 3.11   | (640) | 6.82   |
| Forfeited                        | **(1)**               | **5.76** | (4)  | 4.80   | (52)  | 7.13   |
| Outstanding at end of year       | **43**                | **$5.31** | 270   | $5.09   | 814  | $ 3.77   |
| Exercisable at end of year       | **43**                | $5.31 | 268 | $5.08 | 566 | $ 3.30 |

 

During fiscal years 2008, 2007 and 2006, the Company recognized tax            benefits related to the exercise of stock options in the amount of $1,638,000,            $2,567,000 and $613,000, respectively. The tax benefits were credited to paid-in            capital in the respective years.

 

The            total intrinsic value of stock options exercised during the year ended February 2, 2008            was $2,159,725.

 

The            following table summarizes information about stock options outstanding as of February            2, 2008*(shares in            thousands)*:

 

|                                                                                                   | Options Outstanding                                                    | Options Exercisable                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  

                             

                             

Range ofExercise Price |  

Number                            Oustanding atFebruary 2,2008 | Weighted                            Average                            Remaining                            Contractual                            Life (Years) |  

                             

WeightedAverageExercise Price |  

NumberExercisable atFebruary 2,2008 |  

                             

WeightedAverageExercise Price |
| $1.69 - $ 2.37                                                                                         | 11                                                                     | 4.81                                                                                                                                                            | $2.31 | 11 | $2.31 |
| $2.68 - $ 5.85                                                                                         | 7                                                                      | 4.00                                                                                                                                                            | $3.04 | 7 | $3.04 |
| $6.13 - $9.62                                                                                          | 25                                                                     | 6.21                                                                                                                                                            | $7.25 | 25 | $7.25 |
| Totals                                                                                                 | 43                                                                     | 5.50                                                                                                                                                            | $5.31 | 43 | $5.31 |

 

The            aggregate intrinsic values of outstanding options and exercisable options under the            Stock Option Plan at February 2, 2008 were $399,000 and $399,000,            respectively.

 

*Other Information*

As            of February 2, 2008 the Company has $2,436,000 of total unrecognized compensation cost            related to non-vested awards granted under our various share-based plans, which it            expects to recognize over the following fiscal years:

 

| Fiscal Year |   | Stock-based Compensation Expense |
|-------------|--------|----------------------------------|
| 2009        |   | $ 1,276,000                      |
| 2010        |   | $ 539,000                        |
| 2011        |   | $ 405,000                        |
| 2012        |   | $ 216,000                        |
| Total       |   | $ 2,436,000                      |

 

The            Company received cash from options exercised during the fiscal years 2008, 2007 and            2006 of $1,139,000, $1,680,000, and $4,347,000 respectively. The impact of these cash            receipts is included in financing activities in the accompanying Consolidated            Statements of Cash Flows.

 

31

2008            Annual Report

 

 

The            number of shares of common stock currently reserved under the 2005 Plan for stock-based            compensation programs as of February 2, 2008 is 271,852 shares.

 

*Employee Stock Purchase Plan*

The            Company maintains an employee stock purchase plan under which 400,000 shares of the            Company’s common stock are reserved for purchase by employees at 85% of the fair            market value of the common stock at the lower of the market value for the            Company’s stock as of the beginning of the fiscal year or the end of the fiscal            year. Of the total reserved shares, 276,732, 268,167 and 258,902 shares have been            purchased as of February 2, 2008, February 3, 2007 and January 28, 2006,            respectively.

 

*Executives’ Deferred Compensation Plan*

During fiscal 2006, the Board adopted the Books-A-Million, Inc.            Executives’ Deferred Compensation Plan (the “Executives’ Deferred            Compensation Plan”). The Executives’ Deferred Compensation Plan provides a            select group of management or highly compensated employees of the Company and certain            of its subsidiaries (the “Participants”) with the opportunity to defer the            receipt of certain cash compensation. Each Participant may elect to defer under the            Executives’ Deferred Compensation Plan a portion of his or her cash compensation            that may otherwise be payable in a calendar year. A Participant’s compensation            deferrals are credited to the Participant’s bookkeeping account (the            “Account”) maintained under the Executives’ Deferred Compensation            Plan. Each Participant’s Account is credited with a deemed rate of interest            and/or earnings or losses depending upon the investment performance of the deemed            investment option.

 

With            certain exceptions, a Participant’s Account will be paid after the earlier of:            (1) a fixed payment date, as elected by the Participant (if any); or (2) the            Participant’s separation from service with Company or its subsidiaries.            Participants may generally elect that payments be made in a single sum or installments            in the year specified by the Participant or upon their separation from service with the            Company. Additionally, a Participant may elect to receive payment upon a Change of            Control, as defined in, and to the extent permitted by, Section 409A of the Internal            Revenue Code of 1986, as amended.

 

*Directors’ Deferred Compensation Plan*

During fiscal 2006, the Board adopted the Books-A-Million, Inc.            Directors’ Deferred Compensation Plan (the “Directors’ Deferred            Compensation Plan”). The Directors’ Deferred Compensation Plan provides the            Non-Employee Directors with the opportunity to defer the receipt of certain amounts            payable for serving as a member of the Board (the “Fees”). A Non-Employee            Director’s Fee deferrals are credited to the Non-Employee Director’s            bookkeeping account (the “Account”) maintained under the Directors’            Deferred Compensation Plan. Each participating Non-Employee Director’s Account is            credited with a deemed rate of interest and/or earnings or losses depending upon the            investment performance of the deemed investment option.

 

With            certain exceptions, a participating Non-Employee Director’s Account will be paid            after the earlier of: (1) a fixed payment date, as elected by the participating            Non-Employee Director (if any); or (2) the participating Non-Employee Director's            separation from service on the Board. The participating Non-Employee Director may            generally elect that payments be made in a single sum or installments in the year            specified by the participating Non-Employee Director or upon the Non-Employee            Director’s separation from service on the Board. Additionally, a participating            Non-Employee Director may elect to receive payment upon a Change of Control, as defined            in, and to the extent permitted by, Section 409A of the Internal Revenue Code of 1986,            as amended.

 

| **6.** | **Related Party Transactions** |
|--------|--------------------------------|

Certain stockholders and directors (including certain officers) of the            Company have controlling ownership interests in other entities with which the Company            conducts business. Transactions between the Company and these various other entities            (“related parties”) are summarized in the following paragraphs:

 

The            Company purchases a substantial portion of its magazines as well as certain seasonal            music and newspapers from Anderson Media Corporation (“Anderson Media”), an            affiliate through common ownership. During fiscal 2008, 2007 and 2006, purchases of            these items from Anderson Media totaled $25,514,000, $24,702,000 and $30,746,000,            respectively. The Company purchases certain of its collectibles, gifts and books from            Anderson Press, Inc. (“Anderson Press”), an affiliate through common            ownership. During fiscal 2008, 2007 and 2006, such purchases from Anderson Press            totaled $2,284,000, $1,423,000 and $1,272,000, respectively. The Company purchases            certain of its greeting cards and gift products from C.R. Gibson, Inc., an affiliate            through common ownership. The purchases of these items in fiscal 2008, 2007 and 2006            were $346,000, $447,000 and $223,000, respectively. The Company utilizes import            sourcing and consolidation services from Anco Far East Importers, LTD (“Anco Far            East”), an affiliate through common ownership. The total paid to Anco Far East            was $2,622,000, $2,391,000 and $2,113,000 for fiscal 2008, 2007 and 2006, respectively.            These amounts paid to Anco Far East primarily included the actual cost of the product,            as well as fees for sourcing and consolidation services. All other costs, other than            the sourcing and consolidation service fees, were passed through from other vendors.            Anco Far East fees, net of the passed-through costs, for fiscal years 2008, 2007 and            2006 were $184,000, $167,000 and $148,000, respectively.

 

32

2008 Annual Report 

 

The            Company sold books to Anderson Media in the amounts of $3,653,000, $2,430,000 and            $1,017,000 in fiscal 2008, 2007 and 2006, respectively.

 

The            Company leases its principal executive offices from a trust, which was established for            the benefit of the grandchildren of Mr. Charles C. Anderson, a former member of the            Board of Directors. The lease term is month to month. During fiscal 2008, 2007 and            2006, the Company paid rent of $141,000, $137,000, and $137,000, respectively, to the            trust under this lease. Anderson & Anderson LLC (“A&A”), which is            an affiliate through common ownership, also leases three buildings to the Company.            During fiscal 2008, 2007 and 2006, the Company paid A&A a total of $428,000,            $448,000, and $445,000, respectively, in connection with such leases. There were no            future minimum rental payments on any of the four leases at February 2, 2008. The            Company subleases certain property to Hibbett Sports, Inc. (“Hibbett”), a            sporting goods retailer in the southeastern United States. The Company’s            Executive Chairman, Clyde B. Anderson, is a member of Hibbett’s board of            directors. Effective March 14, 2008, Terry Finley, President Books-A-Million, Inc.            Merchandising Group, was appointed to the board of directors of Hibbett. During fiscal            2008, 2007 and 2006, the Company received $236,000, $191,000, and $191,000,            respectively, in rental payments from Hibbett.

 

The            Company shares ownership of a plane, which the Company uses in the operations of its            business, with an affiliated company. The Company rents the plane to affiliated            companies at rates that cover all the variable costs and a portion of the fixed costs            of operating the plane. The total amounts received from affiliated companies for use of            the plane in fiscal 2008, 2007 and 2006 were $668,000, $388,000 and $146,000,            respectively. The Company also occasionally rents a plane from A&A at rates that            cover all of the variable costs and a portion of the fixed costs of operating the            plane. The amounts paid to A&A for plane rental were $110,000, $47,000 and $70,000            for fiscal 2008, 2007 and 2006, respectively.

 

| **7.** | **Income or (Loss) from Discontinued                            Operations** |
|--------|------------------------------------------------------------------------------|

The            Company closed one store in fiscal 2008 in a market located in Georgia and one store in            a market located in Indiana where the Company does not expect another of its existing            stores to absorb the closed store customers. The store sales and operating results for            fiscal 2008 have not been included in discontinued operations because the impact on the            financial statements was immaterial. The Company continues to report in discontinued            operations stores closed in prior years where the Company does not expect to retain the            closed stores’ customers at another store. For fiscal 2008 the closed stores had            sales of $1.5 million and pretax operating loss of $382,000.

 

The            Company closed one store in fiscal 2007 in a market located in Georgia where the            Company does not expect another of its existing stores to absorb the closed store            customers. The store sales and operating results for fiscal 2007 have not been included            in discontinued operations because the impact on the financial statements was            immaterial. The Company continues to report in discontinued operations stores closed in            prior years where the Company does not expect to retain the closed stores’            customers at another store. For fiscal 2007 the closed store had sales of $139,000 and            pretax operating loss of $90,000.

 

Discontinued operations represent the results for the closed stores for            the years presented due to the fiscal 2006 closure of two retail stores in markets            located in Tennessee and West Virginia where the Company does not expect another of its            existing stores to absorb the closed store customers. For fiscal 2006 the closed stores            had sales of $689,000 and pretax operating income of $27,000. Also included in the loss            on discontinued operations are store closing costs of $20,000 for fiscal            2006.

 

 

 

 

 

 

 

 

 

 

33

2008            Annual Report

 

 

| **8.** | **Business Segments** |
|--------|-----------------------|

The            Company has two reportable segments: retail trade and electronic commerce trade. The            retail trade segment is a strategic business segment that is engaged in the retail            trade of mostly book merchandise and includes the Company’s distribution center            operations, which supplies merchandise predominantly to the Company’s retail            stores. The electronic commerce trade segment is a strategic business segment that            transacts business over the Internet and is managed separately due to divergent            technology and marketing requirements. The Company evaluates performance of the            segments based on profit and loss from operations before interest and income taxes.            Certain intersegment cost allocations have been made based upon consolidated and            segment revenues. Shipping income related to internet sales is included in net sales,            and shipping expense is included in cost of sales.

 

|                                                           | **Fiscal Year Ended** |
|----------------------------------------------------------------|-----------------------|
| Segment information*(in                            thousands)* | **2/2/08**            | 2/3/07 | 1/28/06 |   |
| Net Sales                                                      |                  |   |   |   |
| Retail Trade                                                   | **$528,606**          | $512,967 | $496,609  |   |
| Electronic Commerce Trade                                      | **26,992**            | 26,048 | 27,605  |   |
| Intersegment Sales Elimination                                 | **(20,470)**          | (18,599) | (20,463) |   |
| Net Sales                                                      | **$535,128**          | $520,416  | $503,751  |   |
|                                                           |                  |   |   |   |
| Operating Profit                                               |                  |   |   |   |
| Retail Trade                                                   | **$26,911**           | $  29,223  | $ 22,431  |   |
| Electronic Commerce Trade                                      | **1,462**             | 1,400  | 1,027  |   |
| Intersegment Elimination of Certain Costs                      | **(953)**             | (524) | (421) |   |
| Total Operating Profit                                         | **$27,420**           | $  30,099  | $ 23,037  |   |
|                                                           |                  |   |   |   |
| Assets                                                         |                  |   |   |   |
| Retail Trade                                                   | **$283,452**          | $303,110  | $310,447  |   |
| Electronic Commerce Trade                                      | **1,381**             | 927  | 1,286  |   |
| Intersegment Sales Elimination                                 | **--**                | --  | (74) |   |
| Total Assets                                                   | **$284,833**          | $304,037  | $311,659  |   |

 

| **9.** | **Commitments and Contingencies** |
|--------|-----------------------------------|

The            Company is a party to various legal proceedings incidental to its business. In the            opinion of management, after consultation with legal counsel, the ultimate liability,            if any, with respect to those proceedings is not presently expected to materially            affect the financial position, results of operations or cash flows of the            Company.

 

From            time to time, the Company enters into certain types of agreements that require the            Company to indemnify parties against third party claims. Generally, these agreements            relate to: (a) agreements with vendors and suppliers, under which the Company may            provide customary indemnification to its vendors and suppliers in respect of actions            they take at the Company’s request or otherwise on its behalf, (b) agreements            with vendors who publish books or manufacture merchandise specifically for the Company            to indemnify the vendors against trademark and copyright infringement claims concerning            the books published or merchandise manufactured on behalf of the Company, (c) real            estate leases, under which the Company may agree to indemnify the lessors for claims            arising from the Company’s use of the property, and (d) agreements with the            Company’s directors, officers and employees, under which the Company may agree to            indemnify such persons for liabilities arising out of their relationship with the            Company. The Company has Directors and Officers Liability Insurance, which, subject to            the policy’s conditions, provides coverage for indemnification amounts payable by            the Company with respect to its directors and officers up to specified limits and            subject to certain deductibles.

 

The            nature and terms of these types of indemnities vary. The events or circumstances that            would require the Company to perform under these indemnities are transaction and            circumstance specific. The overall maximum amount of obligations cannot be reasonably            estimated. Historically, the Company has not incurred significant costs related to            performance under these types of indemnities. No liabilities have been recorded for            these obligations on the Company’s balance sheet at each of February 2, 2008 and            February 3, 2007, as such liabilities are considered de minimis.

 

| **10.** | **Gain on Insurance Recoveries** |
|---------|----------------------------------|

In            fiscal 2006 the Company recognized an insurance gain of $754,000, net of taxes, related            to insurance recoveries for hurricane damage suffered at certain stores in fiscal 2005.            The insurance recovery amount was finalized with the insurance company during the third            quarter of fiscal 2006 (for stores damaged by hurricanes in fiscal 2005), and therefore            the gain was recorded in the respective period.

 

 

34

2008 Annual Report 

 

| **11.** | **Cash Dividend** |
|---------|-------------------|

On            March 26, 2008, the Board of Directors declared a quarterly dividend of $0.09 per share            to be paid on April 23, 2008 to stockholders of record at the close of business on            April 9, 2008. The Company intends to pay quarterly dividends in the future, subject to            Board approval.

 

| **12.** | **Accrued Expenses** |
|---------|----------------------|

Accrued expenses consist of the following (*in            thousands*):

 

|                                  | **As of 2/2/08** | As of 2/3/07 |
|---------------------------------------|------------------|--------------|
| Accrued expenses:                     |             |         |
| Salaries, wages and employee benefits | **$7,756**       | $ 7,548      |
| Giftcard liabilities to customers     | **10,273**       | 9,612        |
| Deferred club card income             | **6,623**        | 5,399        |
| Taxes, other than income              | **5,734**        | 4,992        |
| Rent                                  | **2,237**        | 2,754        |
| Other                                 | **8,916**        | 8,279        |
|                                  | **$41,539**      | $38,584      |

 

**13.            Summary of Quarterly Results (Unaudited)**

The            following tables set forth certain unaudited financial data for the quarters            indicated:

 

|                                                                     | **Fiscal Year Ended February 2, 2008** |
|--------------------------------------------------------------------------|----------------------------------------|
|                                                                     | **First**                              | **Second** | **Third** | **Fourth** | **Total** |
| *(In thousands, except per share                            amounts)*    | **Quarter**                            | **Quarter** | **Quarter** | **Quarter** | **Year** |
| Net revenue                                                              | **$116,318**                           | **$132,802** | **$117,696** | **$168,312** | **$535,128** |
| Gross profit                                                             | **33,759**                             | **37,692** | **32,095** | **55,002** | **158,548** |
| Operating profit (loss)                                                  | **3,454**                              | **4,865** | **(524)** | **19,625** | **27,420** |
| Net income (loss)                                                        | **2,111**                              | **3,100** | **(555)** | **11,866** | **16,522** |
| Net income (loss) per share – basic                                | **0.13**                               | **0.19** | **(0.03)** | **0.77** | **1.03** |
| Net income (loss) per share – diluted                              | **0.13**                               | **0.19** | **(0.03)** | **0.76** | **1.01** |
|                                                                     |                                   |   |   |   |   |
|                                                                     | Fiscal Year Ended February 3, 2007     |
|                                                                     | First                                  | Second | Third | Fourth (2) | Total |
| *(In thousands, except per share                            amounts)*    | Quarter                                | Quarter | Quarter | Quarter | Year |
| Net revenue                                                              | $113,887                               | $121,209 | $110,692  | $174,628 | $520,416 |
| Gross profit                                                             | 32,610                                 | 34,918 | 29,087  | 60,113 | 156,728 |
| Operating profit (loss)                                                  | 2,592                                  | 4,053 | (314) | 23,768 | 30,099 |
| Net income (loss)                                                        | 1,512                                  | 2,457 | (201) | 15,119 | 18,887 |
| Net income (loss) per share – basic                            (1) | 0.09                                   | 0.15 | (0.01) | 0.92 | 1.16 |
| Net income (loss) per share – diluted                              | 0.09                                   | 0.14 | (0.01) | 0.90 | 1.12 |
|                                                                     |                                   |   |   |   |   |
|                                                                          |                                        |  |  |  |  |  |  |  |  |

             

(1) The            sum of the quarterly amounts are different from the annual per share amounts because of            differences in the weighted average number of common and common equivalents shares used            in the quarterly and annual computations.

(2)The Company changed its estimate of gift card            liabilities which resulted in recognition of $2.3 million in gift card breakage income            during the fourth quarter of fiscal 2007 as disclosed in note 1.

35

2008            Annual Report

 

 

 

**DIRECTORSANDCORPORATEOFFICERS**

 

| **Board of Directors**                                                         | **Corporate Officers**                                                            |
|--------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|
|                                                                           |                                                                              |
| **Clyde B. Anderson**                                                          | **Clyde B. Anderson**                                                             |
| *Executive Chairman of the Board*                                              | *Executive Chairman of the Board*                                                 |
|                                                                           |                                                                              |
| **Sandra B. Cochran**                                                          | **Sandra B. Cochran**                                                             |
| *President, Chief Executive Officer and                            Secretary*  | *President and Chief Executive Officer*                                           |
|                                                                           |                                                                              |
| **Terry C. Anderson**                                                          | **Terrance G. Finley**                                                            |
| *Chief Executive Officer and President,*                                       | *President, Books-A-Million, Inc. Merchandising                            Group* |
| *American Promotional Events, Inc.*                                            |                                                                                   |
|                                                                           | **Douglas G. Markham**                                                            |
| **Ronald G. Bruno**                                                            | *Chief Financial Officer and Secretary*                                           |
| *President,*                                                                   |                                                                              |
| *Bruno Capital Management Corporation*                                         |                                                                              |
|                                                                           |                                                                              |
| **Albert C. Johnson**                                                          |                                                                              |
| *Independent Financial Consultant and*

*Retired Partner, Arthur Andersen LLP* |                                                                              |
|                                                                           |                                                                              |
| **Dr. J. Barry                            Mason***,*                           |                                                                              |
| *Dean, Culverhouse College of Commerce*                                        |                                                                              |
| *The University of Alabama*                                                    |                                                                              |
|                                                                           |                                                                              |
| **William H. Rogers, Jr.**                                                     |                                                                              |
| *Executive Vice President,*                                                    |                                                                              |
| *SunTrust Banks, Inc.*                                                         |                                                                              |

 

36

2008 Annual Report 

 

**CORPORATEINFORMATION**

 

**Corporate Office**

Books-A-Million, Inc.

402            Industrial Lane

Birmingham, Alabama 35211

(205)            942-3737

 

**Transfer Agent**

Wells            Fargo Shareowner Services

(800)            468-9716

 

***Stockholder Inquiries Address:***

161 North Concord Exchange

South St. Paul, Minnesota 55075

E-Mail address:stocktransfer@wellsfargo.com

Wells Fargo Stock Transfer Website:*www.wellsfargo.com/com/shareowner_services/index*

             

***Certificates for Transfer and Address Changes            to:***

Shareowner Services

Post Office Box 64854

St Paul, Minnesota 55164-0854

Fax: (651) 450-4033

             

**Independent Registered Public Accounting Firm**

Grant            Thornton LLP

Atlanta, Georgia

 

**Form            10-K and Investor Contact**

A            copy of the Company’s Annual Report on Form 10-K for the fiscal year ended            February 2, 2008, as filed with the Securities and Exchange Commission, as well as key            committee charters and code of conduct, are available without charge to stockholders            upon written request. Such requests and other investor inquiries should be directed to            Douglas G. Markham, the Company’s Chief Financial Officer, or you can view those            items at*www.booksamillioninc.com*.

 

**Market and Dividend Information**

***Common Stock***

The            Common Stock of Books-A-Million, Inc., is traded in the NASDAQ Global Select Market            under the symbol BAMM. The chart below sets forth the high and low stock prices for            each quarter of the fiscal years ending February 2, 2008 and February 3,            2007.

 

|  

**Quarter Ended** |  

**High** |  

**Low**                      | **Dividends Declared** |
|---------------------------|------------------|--------------------------------------|------------------------|
| **January 2008**          | $13.72           | $10.05                               | $0.09        |
| **October 2007**          | 14.78            | 11.95                                | 0.09         |
| **July 2007**             | 20.37            | 15.03                                | 3.09         |
| **April 2007**            | 19.04            | 13.88                                | 0.09         |
| January 2007              | 22.69       |     18.65   | 0.09         |
| October 2006              | 20.11       |     14.64   | 0.08         |
| July 2006                 | 18.49       |     14.00   | 0.08         |
| April 2006                | 13.45       |     10.62   | 0.08         |

                

The            closing price on March 28, 2008 was $9.05. As of that date Books-A-Million, Inc. had            approximately 6,718 stockholders based on the number of individual participants            represented by security position listings.

 

 

37

2008            Annual Report

 

 

**COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN***

Among Books-A-Million, Inc., The NASDAQ Composite Index and The NASDAQ            Retail Trade Stock Index

 

The            following indexed line graph indicates the Company’s total return to            stockholder’s from January 31, 2003 to February 1, 2008, the last trading day            prior to the Company’s 2008 fiscal year end, as compared to the total return for            the NASDAQ Composite Index and the NASDAQ Retail Trade Stock Index for the same            period.

 

             

             

|                       | **Jan 31,** | **Jan 30,** | **Jan 28,** | **Jan 27,** | **Feb 2,** | **Feb 1,** |
|----------------------------|-------------|-------------|-------------|-------------|------------|------------|
|                       | **2003**    | **2004**    | **2005**    | **2006**    | **2007**   | **2008**   |
| Books-A-Million, Inc.      | $100        | $213        | $306        | $373        | $613       | $454       |
| NASDAQ Composite Index     | $100        | $109        | $107        | $122        | $131       | $183       |
| NASDAQ Retail Trade Stocks | $100        | $119        | $143        | $155        | $168       | $185       |

             

This            graph is being furnished and shall not be deemed “filed” for purposes of            Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange            Act”), or otherwise subject to the liability of that section. This graph shall            not be deemed to be incorporated by reference into any filing under the Securities Act            of 1933 or the Exchange Act, except as otherwise noted in such filing.

 

**ANNUAL MEETING OF STOCKHOLDERS**

The            annual meeting of stockholders will be held on May 29, 2008, at 10:00 a.m. central            time, at the corporate offices of the company, 402 Industrial Lane, Birmingham, Alabama            35211. Stockholders of record as of March 28, 2008, are invited to attend this            meeting.

 

38

2008 Annual Report 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**402 Industrial Lane**

**Birmingham, Alabama 35211**

**www.booksamillioninc.com**

 

39