-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VO9O5HCuV4V+YGmtLH4MluB0o9U/bAGfD7OOU0+u9GNC7WDfwhZqssk9FziIco1i S5uiMWEimm4gDFejTor0cg== 0000950144-04-004421.txt : 20040427 0000950144-04-004421.hdr.sgml : 20040427 20040427161602 ACCESSION NUMBER: 0000950144-04-004421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOKS A MILLION INC CENTRAL INDEX KEY: 0000891919 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 630798460 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20664 FILM NUMBER: 04757221 BUSINESS ADDRESS: STREET 1: 402 INDUSTRIAL LN CITY: BIRMINGHAM STATE: AL ZIP: 35211 BUSINESS PHONE: 2059423737 MAIL ADDRESS: STREET 1: 402 INDUSTRIAL LANE CITY: BIRMINGHAM STATE: AL ZIP: 35211 10-K 1 g88566e10vk.txt BOOKS-A-MILLION, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from_____________________to_____________ Commission File No. 0-20664 BOOKS-A-MILLION, INC. (Exact name of Registrant as specified in its charter) DELAWARE 63-0798460 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 402 INDUSTRIAL LANE BIRMINGHAM, ALABAMA 35211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (205) 942-3737 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] CONTINUED Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the Registrant) as of April 5, 2004 (based on the closing sale price as reported on the NASDAQ National Market on such date), was $63,442,645. The number of shares outstanding of the Registrant's Common Stock as of April 5, 2004 was 16,513,725. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended January 31, 2004 are incorporated by reference into Part II of this report. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 3, 2004 are incorporated by reference into Part III of this report. 2 PART I SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market areas; inflation; economic conditions in general and in the Company's specific market areas; the number of store openings and closings; the profitability of certain product lines, capital expenditures and future liquidity; liability and other claims asserted against the Company; uncertainties related to the Internet and the Company's Internet initiative ; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 1. BUSINESS GENERAL Books-A-Million, Inc. is a leading book retailer in the southeastern United States. The Company, which was founded in 1917, has developed several store formats to address the various market areas it serves. Superstores, the first of which was opened in 1987, range in size from 8,000 to 36,000 square feet and operate under the names "Books-A-Million" and "Books and Co." Traditional bookstores are smaller stores operated under the names "Bookland" and "Books-A-Million". These stores range in size from 2,000 to 7,000 square feet and are located primarily in enclosed malls. We also operate newsstands under the name "Joe Muggs Newsstands". Newsstands range in size from 1,000 to 5,000 square feet and are located in high traffic areas. All store formats, excluding newsstands, offer an extensive selection of best sellers and other hardcover and paperback books, magazines, and newspapers. In addition to the retail store formats, we offer our products over the Internet at Booksamillion.com and Joemuggs.com. We are also a wholesaler of books to bookstores, wholesale clubs, supermarkets, department stores and mass merchandisers. We were originally incorporated under the laws of the State of Alabama in 1964 and were reincorporated in Delaware in September 1992. Our principal executive offices are located at 402 Industrial Lane, Birmingham, Alabama 35211, and our telephone number is (205) 942-3737. Unless the context otherwise requires, references to "we" or "the Company" include our wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale") and American Internet Service, Inc. ("AIS"). Our periodic and current reports filed with the SEC are made available on our website at www.booksamillioninc.com as soon as reasonably practicable. Our corporate governance guidelines, code of conduct and key committee charters are also available on our website. These reports are available free of charge to stockholders upon written request. Such requests should be directed to Richard S. Wallington, the Company's Chief Financial Officer. BUSINESS SEGMENTS We have two reportable segments: retail/wholesale trade and electronic commerce trade. In the retail/wholesale trade segment we are engaged in the retail trade of primarily book merchandise. The retail/wholesale trade segment includes our distribution center operations which predominantly supplies merchandise to our retail stores. In the electronic commerce trade segment we transact business over the Internet primarily. This segment is managed separately due to divergent technology and marketing requirements. For additional information, see Note 9 "Business Segments" in the Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended January 31, 2004, incorporated herein by reference. 3 RETAIL STORES We opened our first Books-A-Million superstore in 1987. We developed superstores to capitalize on the growing consumer demand for the convenience, selection and value associated with the superstore retailing format. Each superstore is designed to be a receptive and open environment conducive to browsing and reading and includes ample space for promotional events open to the public, including book autograph sessions and children's storytelling. We operated 163 superstores as of January 31, 2004. Our superstores emphasize selection, value and customer service. Each of our superstores offer an extensive selection of best sellers and other hardcover and paperback books, magazines, local newspapers and gifts, and also dedicate space to bargain books that are sold at a discount from publishers' originally suggested retail prices. Each superstore has a service center staffed with associates who are knowledgeable about the store's merchandise and who are trained to answer customers' questions, assist customers in locating books within the store and place special orders. The majority of our superstores also include a Joe Muggs cafe, serving Joe Muggs coffee and assorted pastries. Our superstores are conveniently located on major, high-traffic roads and in enclosed malls or strip shopping centers with adequate parking, and generally operate for extended hours up to 11:00 pm local time. Our traditional stores are tailored to the size, demographics and competitive conditions of the particular market area. Traditional stores are located primarily in enclosed malls and feature a wide selection of books, magazines and gift items. We had 35 traditional stores as of January 31, 2004. Our newsstands are concentrated in business and entertainment districts and are tailored to the demographics of the particular market area. Joe Muggs newsstands operate in centers with high traffic. Each newsstand carries an extensive selection of magazines and newspapers, along with hardcover and paperback books. The newsstands also offer Joe Muggs branded coffee drinks and assorted pastries, among other items. We operated 4 newsstands as of January 31, 2004. ACQUISITION OF STORES During fiscal 2002, we acquired the lease rights to and inventory of 18 stores from Crown Books Corporation for $6.5 million. The stores are located in the Chicago, Illinois and Washington, D.C. metropolitan areas. The results of operations for these stores were reflected in the consolidated financial statements beginning in the first quarter of fiscal 2002. MERCHANDISING We employ several value-oriented merchandising strategies. Our best-seller list, which is developed exclusively by us based on the sales and customer demand in our stores, are generally sold in the Company's superstores below publishers' suggested retail prices. In addition, customers can join the Millionaire's Club and save 10% on all purchases in any of our stores, including already discounted best-sellers. Our point-of-sale computer system provides the data necessary to enable us to anticipate consumer demand and customize store inventory selection to reflect local customer interest. MARKETING We promote our bookstores principally through the use of direct mail advertising, as well as point-of-sale materials posted and distributed in the stores. In certain markets, television and newspaper advertising is also used on a selective basis. We also arrange for special appearances and book autograph sessions with recognized authors to attract customers and to build and reinforce customer awareness of our stores. A substantial portion of our advertising expenses are reimbursed from publishers through their cooperative advertising programs. 4 STORE OPERATIONS AND SITE SELECTION In choosing specific store sites within a market area, we apply standardized site selection criteria that takes into account numerous factors, including the local demographics, desirability of available leasing arrangements, proximity to our existing operations and overall level of retail activity. In general, stores are located on major high-traffic roads convenient to customers and have adequate parking. We generally negotiate short-term leases with renewal options. We also periodically review the profitability trends and prospects of each of our stores and evaluate whether or not any underperforming stores should be closed, converted to a different format or relocated to more desirable locations. INTERNET OPERATIONS Through our wholly owned subsidiary, AIS, we sell a broad range of products over the Internet under the names Booksamillion.com and Joemuggs.com. On Booksamillion.com we sell a wide selection of books, magazines and gift items similar to those sold in our Books-A-Million superstores. We also operate an online cafe under the name Joemuggs.com where we offer a wide selection of whole bean coffee, confections and related gift items for purchase over the Internet. Internet development efforts are assisted through a wholly owned subsidiary of AIS, NetCentral, Inc., which is based in Nashville, Tennessee. In addition to providing web development and maintenance for all of our internet sites and networking initiatives, NetCentral also serves several outside customers by offering site development, web hosting and technical services. PURCHASING Our purchasing decisions are made by our merchandising department on a centralized basis. Our buyers negotiate terms, discounts and cooperative advertising allowances for all of our bookstores and decide which books to purchase, in what quantity and for which stores. The buyers use current inventory and sales information provided by our in-store point-of-sale computer system to make reorder decisions. We purchase merchandise from over 500 vendors. We purchase the majority of our collectors' supplies from Anderson Press and substantially all of our magazines from Anderson Media, each of which is a related party. No one vendor accounted for more than 10.0% of our overall merchandise purchases in the fiscal year ended January 31, 2004. In general, in excess of 80% of our inventory may be returned for credit, which substantially reduces our risk of inventory obsolescence. DISTRIBUTION CAPABILITIES American Wholesale receives a substantial portion of its inventory shipments, including substantially all of its books, at its two facilities located in Florence and Tuscumbia, Alabama. Orders from our bookstores are processed by computer and assembled for delivery to the stores on pre-determined weekly schedules. Substantially all deliveries of inventory from American Wholesale's facilities are made by their dedicated transportation fleet. At the time deliveries are made to each of our stores, returns of slow moving or obsolete books are picked up and returned to the American Wholesale returns processing center. American Wholesale then returns these books to publishers for credit. COMPETITION The retail bookstore industry is highly competitive and includes competitors that have substantially greater financial and other resources than we have. We compete directly with national bookstore chains, independent bookstores, booksellers on the Internet and certain mass merchandisers. In recent years, competing bookstore chains have been expanding their businesses and certain leading regional and national chains have developed and opened superstores and Internet web sites. We also compete indirectly with retail specialty stores that offer books in a particular area of specialty. Management believes that the key competitive factors in the retail book industry are convenience of location, selection, customer service and price. 5 SEASONALITY Similar to many retailers, our business is seasonal, with the highest retail sales, gross profit and net income historically occurring in our fourth fiscal quarter. This seasonal pattern reflects the increased demand for books and gifts during the year-end holiday selling season. Working capital requirements are generally at their highest during the third fiscal quarter and the early part of the fourth fiscal quarter due to the seasonality of our business. As a result, our results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse effect on our results of operations for the full year. In addition to seasonality, our results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. Accordingly, the addition of a large number of new stores in a particular fiscal quarter could adversely affect our results of operations for that quarter. TRADEMARKS "Books-A-Million," "BAM!," "Bookland," "Books & Co.," "Millionaire's Club," "Sweet Water Press," "Thanks-A-Million," "Big Fat Coloring Book," "Up All Night Reader," "Read & Save Rebate", "Readables Accessories for Readers", "Kids-A-Million," "Teachers First," "The Write-Price," "Bambeanos," "Book$mart", "BAMM", "BAMM.com", "BOOKSAMILLION.com", "Chillatte", "Joe Muggs Newsstand" and "NetCentral" are the primary registered trademarks of the Company. Management does not believe that these trademarks are materially important to the continuation of our operations. EMPLOYEES As of fiscal year end, we employed approximately 2,700 full-time associates and 2,100 part-time associates. The number of part-time associates employed fluctuates based upon seasonal needs. None of our associates are covered by a collective bargaining agreement. Management believes that relations with our associates are excellent. ITEM 2. PROPERTIES Our bookstores are located either in enclosed malls or strip shopping centers. All of our stores are leased. Generally, these leases have terms ranging from five to ten years and require that we pay a fixed minimum rental fee and/or a rental fee based on a percentage of net sales together with certain customary costs (such as property taxes, common area maintenance and insurance). Our principal executive offices are located in a 20,550 square foot leased building located in Birmingham, Alabama. We also lease a 37,000 square foot building located in Irondale, Alabama for additional corporate office space. Both leases involve related parties. The Birmingham, Alabama office space lease extends to January 31, 2006, and the Irondale, Alabama office space is leased month-to-month. In addition, we lease approximately 4,025 square feet of office space in Nashville, Tennessee for the offices of NetCentral. This lease extends to January 31, 2006. American Wholesale owns its wholesale distribution center located in an approximately 290,000 square foot facility in Florence, Alabama. During fiscal 1995 and 1996, we financed the acquisition and construction of the wholesale distribution facility through loans obtained from the proceeds of an industrial revenue bond, which are secured by a mortgage interest in this facility. We also lease, from a related party, a second 210,000 square foot warehouse facility located in Tuscumbia, Alabama. In addition we lease all of the tractors that pull the company-owned trailers, which comprise our transportation fleet. ITEM 3. LEGAL PROCEEDINGS We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the heading "Market and Dividend Information" on page 29 of the Annual Report to Stockholders for the year ended January 31, 2004 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Selected Consolidated Financial Data" for the years ended January 29, 2000, through January 31, 2004 on page 4 of the Annual Report to Stockholders for the year ended January 31, 2004, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the heading "Management's Discussion & Analysis of Financial Condition & Results of Operations" on pages 5 through 10 of the Annual Report to Stockholders for the year ended January 31, 2004 is incorporated herein by reference. ITEM 7.A. MARKET RISK We are subject to interest rate fluctuations involving our credit facilities. The average amount of debt outstanding under our credit facilities was $57.5 million during fiscal 2004. To manage this exposure, the Company utilizes interest rate swaps to fix the interest rate on variable debt. We entered into two separate $10 million swaps on July 24, 2002. Both expire August 2005 and effectively fix the interest rate on $20 million of variable debt at 5.13%. Also, on May 14, 1996, we entered into a $7.5 million interest rate swap with a ten-year term. The swap effectively fixes the interest rate on $7.5 million of variable rate debt at 7.98% and expires on June 7, 2006. The counter parties to each of these interest rate swaps are parties to our revolving credit facilities. We believe the credit and liquidity risk of the counter parties failing to meet their obligations is remote as we settle our interest position with the banks on a quarterly basis. All of our financial instruments that are sensitive to market risk are entered into for purposes other than trading. To illustrate the sensitivity of the results of operations to changes in interest rates on its debt we estimate that a 66% increase in LIBOR rates would increase interest expense by approximately $70,000 for the year ending January 29, 2005. Likewise, a 66% decrease in LIBOR rates would decrease interest expense by $70,000 for the year ending January 29, 2005. This hypothetical change in LIBOR rates was calculated based on the fluctuation in LIBOR in 2003, which was the maximum LIBOR fluctuation in the last ten years. The estimates also assume a level of debt consistent with the year-ended January 31, 2004 level and do not consider the effect of the potential termination of the interest rate swaps associated with the debt will have on interest expense. The information in note 3 "Debt and Lines of Credit" in the Notes to Consolidated Financial Statements on page 21 of the Annual Report to Stockholders for the year ended January 31, 2003 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant and its subsidiaries included in the Annual Report to Stockholders for the year ended January 31, 2004 are incorporated herein by reference: Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003. Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. 7 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. Notes to Consolidated Financial Statements. Independent Auditors' Report. The information under the heading "Summary of Quarterly Results (Unaudited)" on page 27 of the Annual Report to Stockholders for the Fiscal Years Ended January 31, 2004 and February 1, 2003 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the fiscal quarter covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections under the heading "Proposal I-Election of Directors" entitled "Nominee for Election - Term Expiring 2007", "Incumbent Director - Term Expiring 2005", and "Incumbent Director - Term Expiring 2006" on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004, are incorporated herein by reference for information on the directors of the Registrant. The information under the heading "Information Concerning the Board of Directors" on pages 4 through 7 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 is incorporated herein by reference. 8 EXECUTIVE OFFICERS All of our executive officers are elected annually by and serve at the discretion of the Board of Directors. Our current executive officers are listed below:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Clyde B. Anderson 43 Executive Chairman of the Board Sandra B. Cochran 45 President, Chief Executive Officer and Secretary Terrance G. Finley 50 Executive Vice President of Books-A-Million, Inc. and President of American Internet Service, Inc. Richard S. Wallington 45 Chief Financial Officer
Clyde B. Anderson has served as Executive Chairman of the Board since February 2004 and has served as a director of the Company since August 1987. Mr. Anderson served as the Chairman of the Board from January 2000 until February 2004 and also served as the Chief Executive Officer of the Company from July 1992 until February 2004. Mr. Anderson also served as the President of the Company from November 1987 to August 1999. From November 1987 to March 1994, Mr. Anderson also served as the Company's Chief Operating Officer. Mr. Anderson serves on the Board of Directors and the Compensation Committee of Hibbett Sporting Goods, Inc., a sporting goods retailer. Mr. Anderson is the son of Charles C. Anderson and the brother of Terry C. Anderson, both members of the Company's Board of Directors. Sandra B. Cochran was appointed to the position of Chief Executive Officer in February 2004, in addition to her duties as President and Secretary. Ms. Cochran has served as President of the Company since August 1999 and Secretary since June 1998. Ms. Cochran served as the Executive Vice President from February 1996 to August 1999 and as Chief Financial Officer from September 1993 to August 1999. Ms. Cochran previously served as Vice President and Assistant Secretary of the Company from August 1992 to September 1993. Prior to joining the Company, Ms. Cochran served as a Vice President (as well as in other capacities) of SunTrust Securities, Inc., a subsidiary of SunTrust Banks, Inc. for more than five years Terrance G. Finley has served as Executive Vice President - Merchandising of the Company since October 2001 and as the President of American Internet Service, Inc. since December 1998. Mr. Finley served in various other capacities in the merchandising department from April 1994 to December 1998. Mr. Finley served as the General Manager of Book$mart from February 1992 to April 1994. Prior to joining the Company, Mr. Finley served as the Vice President - Sales for Smithmark Publishers. Richard S. Wallington has served as the Chief Financial Officer of the Company since August 1999. Mr. Wallington served as Vice President and Controller from September 1993 to August 1999. Prior to joining the Company, Mr. Wallington served as the Director of Financial Reporting for Woodward & Lothrop, a retail department store company. The section under the heading "Information Concerning Board of Directors" entitled "Code of Conduct" on page 6 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 is incorporated herein by reference. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors, executive officers and persons who own beneficially more than 10% of the Company's common stock to file reports of ownership and changes in ownership of such stock with the Securities and Exchange Commission (the "SEC") and the NASDAQ Stock Market, Inc. Directors, executive officers and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all such forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, our directors, executive officers and greater than 10% stockholders complied with all applicable Section 16(a) filing requirements during fiscal 2004. 9 ITEM 11. EXECUTIVE COMPENSATION The sections under the heading "Executive Compensation," other than those entitled "Report on Executive Compensation", "Compensation Committee Interlocks and Insider Participation", "Certain Relationships and Related Transactions" and "Performance Graph", on pages 8 through 14 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section under the heading "Information Concerning the Board of Directors" entitled "Beneficial Ownership of Common Stock" on pages 7 and 8 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections under the heading "Executive Compensation" entitled "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" on pages 10 and 11 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The section under the heading "Information Concerning Board of Directors" entitled "Auditor Fees and Services" on page 6 of the Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of Books-A-Million, Inc. and its subsidiaries, included in the Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 2004 are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003. Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. Notes to Consolidated Financial Statements. Independent Auditors' Report. 10 2. Financial Statement Schedule: The following consolidated financial statement schedule of Books-A-Million, Inc. is attached hereto: Independent Auditors' Report on Financial Statement Schedule. Schedule 2 Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. 3. Exhibits
Exhibit Number - -------------- 3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992 (the "S-1 Registration Statement")). 3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the S-1 Registration Statement). 4.1 -- See Exhibits 3.1 and 3.2 hereto incorporated herein by reference to the Exhibits of the same number to the S-1 Registration Statement. 10.1 -- Lease Agreement between First National Bank of Florence, Alabama, as Trustee, and Bookland Stores, Inc. (which is a predecessor of the Registrant), an Alabama corporation, dated January 30, 1991 (incorporated by reference to Exhibit 10.1 to the S-1 Registration Statement). 10.2 -- Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended January 30, 1999, File No. 0-20664, filed on April 30, 1999). 10.3 -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the S-1 Registration Statement). 10.4 -- Amendment to Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended January 29, 1994, File No. 0-20664, filed on April 29, 1994). 10.5 -- 1999 Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended January 29, 2000, File No. 0-20664, filed on April 28, 2000). 10.6 -- 401(k) Plan adopted September 15, 2003, with Suntrust Bank as Trustee. 10.7 -- Shareholders Agreement dated as of September 1, 1992 (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended January 31, 1993, File No. 0-20664, filed May 3, 1993). 10.8 -- Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended January 28, 1995, File No. 0-20664, filed April 28, 1995). 10.19 -- Stock Option Plans for Booksamillion.com, American Internet Service, Inc., Netcentral, Inc. and Faithpoint, Inc. (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended February 3, 2001, File No. 0-20664, filed on May 4, 2001).
11 10.20 -- Credit agreement dated as of July 1, 2002, between the Company and Bank of America, N.A., SunTrust Bank, N.A., Wells Fargo Bank, N.A., SouthTrust Bank N.A. and Amsouth Bank, N.A. (incorporated by reference to Exhibit 10.20 to Form 10-Q for the quarter ended August 3, 2002). 13 -- Portions of the Annual Report to Stockholders for the year ended January 31, 2004 that are expressly incorporated by reference into Part II of this Report. 21 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Annual Report on Form 10-K for the fiscal year ended February 3, 2001, File No. 0-20664, filed May 4, 2001). 23 -- Consent of Deloitte & Touche LLP. 31.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 32.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K.
Reports on Form 8-K None. (c) See Item 15(a) (3), the Exhibit Index and the Exhibits attached hereto. (d) See Item 15(a) (2). 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOOKS-A-MILLION, INC. by: /s/ Clyde B. Anderson ------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 27, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: PRINCIPAL EXECUTIVE OFFICER: /s/ Clyde B. Anderson - -------------------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 27, 2004 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ Richard S. Wallington - -------------------------------------------- Richard S. Wallington Chief Financial Officer Date: April 27, 2004 DIRECTORS: /s/ Clyde B. Anderson - -------------------------------------------- Clyde B. Anderson Date: April 27, 2004 /s/ Charles C. Anderson - -------------------------------------------- Charles C. Anderson Date: April 27, 2004 13 DIRECTORS: /s/ Ronald G. Bruno - -------------------------------------------- Ronald G. Bruno Date: April 27, 2004 /s/ J. Barry Mason - -------------------------------------------- J. Barry Mason Date: April 27, 2004 /s/ Terry C. Anderson - -------------------------------------------- Terry C. Anderson Date: April 27, 2004 /s/ William H. Rogers, Jr. - -------------------------------------------- William H. Rogers, Jr. Date: April 27, 2004 14 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Books-A-Million, Inc.: We have audited the consolidated financial statements of Books-A-Million, Inc. and its subsidiaries (the "Company")as of January 31, 2004 and February 1, 2003 and for each of the three fiscal years in the period ended January 31, 2004, and have issued our report thereon dated April 19, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of new accounting principles as described in Note 1 to the consolidated financial statements); such financial statements and report are included in the Company's 2004 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Books-A-Million, Inc. listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Birmingham, Alabama April 19, 2004 S-1 SCHEDULE 2. BOOKS-A-MILLION, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 1, 2003, AND JANUARY 31, 2004
CHARGED/ BALANCE AT (CREDITED) (DEDUCTIONS)/ BEGINNING TO COSTS RECOVERIES BALANCE AT OF YEAR AND EXPENSES NET END OF YEAR ---------- ------------ ------------- ----------- FOR THE YEAR ENDED FEBRUARY 2, 2002: Allowance for doubtful accounts $ 786,881 $ 567,913 $ (569,902) $ 784,892 FOR THE YEAR ENDED FEBRUARY 1, 2003: Allowance for doubtful accounts $ 784,892 $ 276,459 $ (349,396) $ 711,955 FOR THE YEAR ENDED JANUARY 31, 2004: Allowance for doubtful accounts $ 711,955 $ 534,300 $ (701,010) $ 545,245
S-2 EX-10.6 2 g88566exv10w6.txt EX-10.6 401K PLAN EXHIBIT 10.6 SUNTRUST BANK NONSTANDARDIZED 401(K) PLAN By executing this 401(k) plan Adoption Agreement (the "Agreement") under the SunTrust Bank Prototype Plan, the Employer agrees to establish or continue a 401(k) plan for its Employees. The 401(k) plan adopted by the Employer consists of the Basic Plan Document #02 (the "BPD") and the elections made under this Agreement (collectively referred to as the "Plan"). A Related Employer may jointly co-sponsor the Plan by signing a Co-Sponsor Adoption Page, which is attached to this Agreement. (See Section 22.164 of the BPD for the definition of a Related Employer.) THIS PLAN IS EFFECTIVE AS OF THE EFFECTIVE DATE IDENTIFIED ON THE SIGNATURE PAGE OF THIS AGREEMENT. 1. EMPLOYER INFORMATION a. NAME AND ADDRESS OF EMPLOYER EXECUTING THE SIGNATURE PAGE OF THIS AGREEMENT: Books-A-Million, Inc. 402 Industrial Lane Birmingham, Alabama 35211 b. EMPLOYER IDENTIFICATION NUMBER (EIN) FOR THE EMPLOYER: 63-0798460 c. BUSINESS ENTITY OF EMPLOYER (optional): [X] (1) C-Corporation [ ] (2) S-Corporation [ ] (3) Limited Liability Corporation [ ] (4) Sole Proprietorship [ ] (5) Partnership [ ] (6) Limited Liability Partnership [ ] (7) Government [ ] (8) Other ___________ d. LAST DAY OF EMPLOYER'S TAXABLE YEAR (optional): January 31 e. DOES THE EMPLOYER HAVE ANY RELATED EMPLOYERS (as defined in Section 22.164 of the BPD)? [X] (1) Yes [ ] (2) No f. IF e. IS YES, LIST THE RELATED EMPLOYERS (optional): American Internet Service, Inc. American Wholesale Book Company, Inc. NetCentral, Inc. booksamillion.com, Inc. [NOTE: This Plan will cover Employees of a Related Employer only if such Related Employer executes a Co-Sponsor Adoption Page. Failure to cover the Employees of a Related Employer may result in a violation of the minimum coverage rules under Code Section 410(b). See Section 1.3 of the BPD.] 2. PLAN INFORMATION a. NAME OF PLAN: Books-A-Million, Inc. 401(k) Profit Sharing Plan b. PLAN NUMBER (as identified on the Form 5500 series filing for the Plan): 001 c. TRUST IDENTIFICATION NUMBER (optional): _____________________________ d. PLAN YEAR: [Check (1) or (2). Selection (3) may be selected in addition to (1) or (2) to identify a Short Plan Year.] [X] (1) The calendar year. [ ] (2) The 12-consecutive month period ending _______. [X] (3) The Plan has a Short Plan Year beginning February 1, 2003 and ending December 31, 2003 . 3. TYPES OF CONTRIBUTIONS The following types of contributions are authorized under this Plan. The selections made below should correspond with the selections made under Parts 4A, 4B, 4C, 4D and 4E of this Agreement. [X] a. SECTION 401(k) DEFERRALS (see Part 4A). [X] b. EMPLOYER MATCHING CONTRIBUTIONS (see Part 4B). ? 2001 SunTrust Bank 1 [ ] c. EMPLOYER NONELECTIVE CONTRIBUTIONS (see Part 4C). [ ] d. EMPLOYEE AFTER-TAX CONTRIBUTIONS (see Part 4D). [ ] e. SAFE HARBOR MATCHING CONTRIBUTIONS (see Part 4E, #27). [ ] f. SAFE HARBOR NONELECTIVE CONTRIBUTIONS (see Part 4E, #28). [ ] g. NONE. This Plan is a Frozen Plan Effective ____________ (see Section 2.1(d) of the BPD). PART 1 - ELIGIBILITY CONDITIONS (See Article 1 of the BPD) 4. EXCLUDED EMPLOYEES. [Check a. or any combination of b. - f. for those contributions the Employer elects to make under Part 4 of this Agreement. See Section 1.2 of the BPD for rules regarding the determination of Excluded Employees for Employee After-Tax Contributions, QNECs, QMACs and Safe Harbor Contributions.]
(1) (2) (3) SECTION 401(k) EMPLOYER EMPLOYER DEFERRALS MATCH NONELECTIVE a. [X] [X] [ ] No excluded categories of Employees. b. [ ] [ ] [ ] Union Employees (see Section 22.202 of the BPD). c. [ ] [ ] [ ] Nonresident Alien Employees (see Section 22.124 of the BPD). d. [ ] [ ] [ ] Leased Employees (see Section 1.2(b) of the BPD). e. [ ] [ ] [ ] Highly Compensated Employees (see Section 22.99 of the BPD). f. [ ] [ ] [ ] (Describe Excluded Employees): _____________________________
5. MINIMUM AGE AND SERVICE CONDITIONS FOR BECOMING AN ELIGIBLE PARTICIPANT. [Check a. or check b. and/or any one of c. - e. for those contributions the Employer elects to make under Part 4 of this Agreement. Selection f. may be checked instead of or in addition to any selections under b. - e. See Section 1.4 of the BPD for the application of the minimum age and service conditions for purposes of Employee After - Tax Contributions, QNECs, QMACs and Safe Harbor Contributions. See Part 7 of this Agreement for special service crediting rules.]
(1) (2) (3) SECTION 401 EMPLOYER EMPLOYER (k)DEFERRALS MATCH NONELECTIVE a. [ ] [ ] [ ] None (conditions are met on Employment Commencement Date). b. [X] [X] [ ] Age 21 (cannot exceed age 21). c. [ ] [ ] [ ] One Year of Service. d. [X] [X] [ ] 6 consecutive months (not more than 12) during which the Employee completes at least 1 Hours of Service (cannot exceed 1,000). If an Employee does not satisfy this requirement in the first designated period of months following his/her Employment Commencement Date, such Employee will be deemed to satisfy this condition upon completing a Year of Service (as defined in Section 1.4(b) of the BPD). e. N/A [ ] [ ] Two Years of Service. [Full and immediate vesting must be selected under Part 6 of this Agreement.] f. [ ] [ ] [ ] (Describe eligibility conditions): _____________________________________ [NOTE: Any conditions provided under f. must be described in a manner that precludes Employer discretion and must satisfy the nondiscrimination requirements of Section 1.401(a)(4) of the regulations, and may not cause the Plan to violate the provisions of Code Section 410(a).]
? 2001 SunTrust Bank 2 [ ]6. DUAL ELIGIBILITY. Any Employee (other than an Excluded Employee) who is employed on the date designated under a. or b. below, as applicable, is deemed to be an Eligible Participant as of the later of the date identified under this #6 or the Effective Date of this Plan, without regard to any Entry Date selected under Part 2. See Section 1.4(d)(2) of the BPD. [NOTE: If this #6 is checked, also check a. or b. If this #6 is not checked, the provisions of Section 1.4(d)(1) of the BPD apply.] [ ] a. The Effective Date of this Plan. [ ] b. (Identify date) _______________________________ [NOTE: Any date specified under b. may not cause the Plan to violate the provisions of Code Section 410(a). See Section 1.4 of the BPD.] PART 2 - COMMENCEMENT OF PARTICIPATION (See Section 1.5 of the BPD) 7. ENTRY DATE UPON WHICH PARTICIPATION BEGINS AFTER COMPLETING MINIMUM AGE AND SERVICE CONDITIONS UNDER PART 1, #5 ABOVE. [Check one of a. - e. for those contributions the Employer elects to make under Part 4 of this Agreement. See Section 1.5 of the BPD for determining the Entry Date applicable to Employee After-Tax Contributions, QNECs, QMACs and Safe Harbor Contributions.]
(1) (2) (3) SECTION 401(k) EMPLOYER EMPLOYER DEFERRALS MATCH NONELECTIVE a. [ ] [ ] [ ] The next following Entry Date (as defined in #8 below). b. [X] [X] [ ] The Entry Date (as defined in #8 below) coinciding with or next following the completion of the age and service conditions. c. N/A [ ] [ ] The nearest Entry Date (as defined in #8 below). d. N/A [ ] [ ] The preceding Entry Date (as defined in #8 below). e. [ ] [ ] [ ] The date the age and service conditions are satisfied. [Also check #8.e. below for the same type of contribution(s) checked here.]
8. DEFINITION OF ENTRY DATE. [Check one of a. - e. for those contributions the Employer elects to make under Part 4 of this Agreement. Selection f. may be checked instead of or in addition to a. - e. See Section 1.5 of the BPD for determining the Entry Date applicable to Employee After-Tax Contributions, QNECs, QMACs and Safe Harbor Contributions.]
(1) (2) (3) SECTION 401(k) EMPLOYER EMPLOYER DEFERRALS MATCH NONELECTIVE a. [ ] [ ] [ ] The first day of the Plan Year and the first day of 7th month of the Plan Year. b. [ ] [ ] [ ] The first day of each quarter of the Plan Year. c. [ ] [ ] [ ] The first day of each month of the Plan Year. d. [ ] [ ] [ ] The first day of the Plan Year. [If #7.a. or #7.b. above is checked for the same type of contribution as checked here, see the restrictions in Section 1.5(b) of the BPD.] e. [X] [X] [ ] The date the conditions in Part 1, #5. above are satisfied. [This e. should be checked for a particular type of contribution only if #7.e. above is also checked for that type of contribution.] f. [ ] [ ] [ ] (Describe Entry Date) ______________________ [NOTE: Any Entry Date designated in f. must comply with the requirements of Code Section 410(a)(4) and must satisfy the nondiscrimination requirements under Section 1.401(a)(4) of the regulations. See Section 1.5(a) of the BPD.]
? 2001 SunTrust Bank 3 PART 3 - COMPENSATION DEFINITIONS (See Sections 22.102 and 22.197 of the BPD) 9. DEFINITION OF TOTAL COMPENSATION: [X] a. W-2 Wages. [ ] b. Withholding Wages. [ ] c. Code Section 415 Safe Harbor Compensation. [NOTE: Each of the above definitions is increased for Elective Deferrals (as defined in Section 22.61 of the BPD, for pre-tax contributions to a cafeteria plan or a Code Section 457 plan, and for qualified transportation fringes under Code Section 132(f)(4). See Section 22.197 of the BPD.] 10. DEFINITION OF INCLUDED COMPENSATION for allocation of contributions or forfeitures: [Check a. or b. for those contributions the Employer elects under Part 4 of this Agreement. If b. is selected for a particular contribution, also check any combination of c. through j. for that type of contribution. See Section 22.102 of the BPD for determining Included Compensation for Employee After-Tax Contributions, QNECs, QMACs and Safe Harbor Contributions.]
(1) (2) (3) SECTION 401(k) EMPLOYER EMPLOYER DEFERRALS MATCH NONELECTIVE a. [X] [X] [ ] Total Compensation, as defined in #9 above. b. [ ] [ ] [ ] Total Compensation, as defined in #9 above, with the following exclusions: c. N/A [ ] [ ] Elective Deferrals, pre-tax contributions to a cafeteria plan or a Code Section 457 plan, and qualified transportation fringes under Code Section 132(f)(4) are excluded. See Section 22.102 of the BPD. d. [ ] [ ] [ ] Fringe benefits, expense reimbursements, deferred compensation, welfare benefits are excluded. e. [ ] [ ] [ ] Compensation above $_____ is excluded. f. [ ] [ ] [ ] Bonuses are excluded. g. [ ] [ ] [ ] Commissions are excluded. h. [ ] [ ] [ ] Overtime is excluded. i. [ ] [ ] [ ] Amounts paid for services performed for a Related Employer that does not execute the Co-Sponsor Adoption Page under this Agreement are excluded. j. [ ] [ ] [ ] (Describe modifications to Included Compensation): _____
[NOTE: Unless otherwise provided under j., any exclusions selected under f. through j. above do not apply to Nonhighly Compensated Employees in determining allocations under the Permitted Disparity Method under Part 4C, #21.b. of this Agreement or for purposes of applying the Safe Harbor 401(k) Plan provisions under Part 4E of this Agreement.] [ ] 11. SPECIAL RULES. [ ] a. HIGHLY COMPENSATED EMPLOYEES ONLY. For all purposes under the Plan, the modifications to Included Compensation elected in #10.f. through #10.j. above will apply only to Highly Compensated Employees. [ ] b. MEASUREMENT PERIOD (SEE THE OPERATING RULES UNDER SECTION 2.2(c)(3) OF THE BPD). Instead of the Plan Year, Included Compensation is determined on the basis of the period under (1) or (2) below. [ ] (1) The calendar year ending in the Plan Year. [ ] (2) The 12-month period ending on __________ which ends during the Plan Year. [NOTE: If this selection b. is checked, Included Compensation will be determined on the basis of the period designated in (1) or (2) for all contribution types. If this selection b. is not checked, Included Compensation is based on the Plan Year. See Part 4 for the ability to use partial year Included Compensation.] ? 2001 SunTrust Bank 4 [PRACTITIONER TIP: If #11.b is checked, it is recommended that the Limitation Year for purposes of applying the Annual Additions Limitation under Code Section 415 correspond to the period used to determine Included Compensation. This modification to the Limitation Year may be made in Part 13, #69.a. of this Agreement.] PART 4A - SECTION 401(k) DEFERRALS (See Section 2.3(a) of the BPD) [X] Check this selection and complete the applicable sections of this Part 4A to allow for Section 401(k) Deferrals under the Plan. [X] 12. SECTION 401(k) DEFERRAL LIMIT. 15 % of Included Compensation. [If this #12 is NOT checked, the Code Section 402(g) deferral limit described in Section 17.1 of the BPD and the Annual Additions Limitation under Article 7 of the BPD still apply.] [X] a.APPLICABLE PERIOD. The limitation selected under #12 applies with respect to Included Compensation earned during: [X] (1) the Plan Year. [ ] (2) the portion of the Plan Year in which the Employee is an Eligible Participant. [ ] (3) each separate payroll period during which the Employee is an Eligible Participant. [NOTE: If Part 3, #11.b. is checked, any period selected under this a. will be determined as if the Plan Year were the period designated under Part 3, #11.b. See Section 2.2(c)(3) of the BPD.] [ ] b.LIMIT APPLICABLE ONLY TO HIGHLY COMPENSATED EMPLOYEES. [If this b. is not checked, any limitation selected under #12 applies to all Eligible Participants.] [ ] (1) The limitation selected under #12 applies only to Highly Compensated Employees. [ ] (2) The limitation selected under #12 applies only to Nonhighly Compensated Employees. Highly Compensated Employees may defer up to ____% of Included Compensation (as determined under a. above). [The percentage inserted in this (2) for Highly Compensated Employees must be lower than the percentage inserted in #12 for Nonhighly Compensated Employees.] [X] 13. MINIMUM DEFERRAL RATE: [If this #13 is not checked, no minimum deferral rate applies to Section 401(k) Deferrals under the Plan.] [X] a. 1 % of Included Compensation for a payroll period. [ ] b. $ ___ for a payroll period. [ ] 14. AUTOMATIC DEFERRAL ELECTION. (See Section 2.3(a)(2) of the BPD.) An Eligible Participant will automatically defer ____ % of Included Compensation for each payroll period, unless the Eligible Participant makes a contrary Salary Reduction Agreement election on or after ____. This automatic deferral election will apply to: [ ] a. all Eligible Participants. [ ] b. only those Employees who become Eligible Participants on or after the following date: ________________________________________________________________ [ ] 15. EFFECTIVE DATE. If this Plan is being adopted as a new 401(k) plan or to add a 401(k) feature to an existing plan, Eligible Participants may begin making Section 401(k) Deferrals as of:_____ ? 2001 SunTrust Bank 5 PART 4B - EMPLOYER MATCHING CONTRIBUTIONS (See Sections 2.3(b) and (c) of the BPD) [X] CHECK THIS SELECTION AND COMPLETE THIS PART 4B TO ALLOW FOR EMPLOYER MATCHING CONTRIBUTIONS. Each formula allows for Employer Matching Contributions to be allocated to Section 401(k) Deferrals and/or Employee After-Tax Contributions (referred to as "applicable contributions"). If a matching formula applies to both types of contributions, such contributions are aggregated to determine the Employer Matching Contribution allocated under the formula. If any formula applies to Employee After-Tax Contributions, Part 4D must be completed. [NOTE: Do not check this selection if the only Employer Matching Contributions authorized under the Plan are Safe Harbor Matching Contributions. Instead, complete the applicable elections under Part 4E of this Agreement. If a "regular" Employer Matching Contribution will be made in addition to a Safe Harbor Matching Contribution, complete this Part 4B for the "regular" Employer Matching Contribution and Part 4E for the Safe Harbor Matching Contribution. To avoid ACP Testing with respect to any "regular" Employer Matching Contributions, such contributions may not be based on applicable contributions in excess of 6% of Included Compensation and any discretionary "regular" Employer Matching Contributions may not exceed 4% of Included Compensation.] 16. EMPLOYER MATCHING CONTRIBUTION FORMULA(S): [See the operating rules under #17 below.]
(1) (2) SECTION 401(k) EMPLOYEE DEFERRALS AFTER-TAX a. [ ] [ ] FIXED MATCHING CONTRIBUTION.___ % of each Eligible Participant's applicable contributions. The Employer Matching Contribution does not apply to applicable contributions that exceed: [ ] (a) ___% of Included Compensation. [ ] (b) $___. [NOTE: If neither (a) nor (b) is checked, all applicable contributions are eligible for the Employer Matching Contribution under this formula.] b. [X] [ ] DISCRETIONARY MATCHING CONTRIBUTION. A uniform percentage, as determined by the employer, of each Eligible Participant's applicable contributions. [ ] (a) The Employer Matching Contribution allocated to any Eligible Participant may not exceed____ % of Included Compensation. [X] (b) The Employer Matching Contribution will apply only to a Participant's applicable contributions that do not exceed: [ ] 1. ___% of Included Compensation. [ ] 2. $___. [X] 3. a dollar amount or percentage of Included Compensation that is uniformly determined by the Employer for all Eligible Participants. [NOTE: If none of the selections 1. - 3. is checked, all applicable contributions are eligible for the Employer Matching Contribution under this formula.]
? 2001 SunTrust Bank 6 c. [ ] [ ] TIERED MATCHING CONTRIBUTION. A uniform percentage of each tier of each Eligible Participant's applicable contributions, determined as follows: Tiers of contributions Matching percentage ---------------------- ------------------- (indicate $ or %) (a) First ______________ (b) ______________ (c) Next _______________ (d) ______________ (e) Next _______________ (f) ______________ (g) Next _______________ (h) ______________ [NOTE: Fill in only percentages or dollar amounts, but not both. If percentages are used, each tier represents the amount of the Participant's applicable contributions that equals the specified percentage of the Participant's Included Compensation.] d. [ ] [ ] DISCRETIONARY TIERED MATCHING CONTRIBUTION. The Employer will determine a matching percentage for each tier of each Eligible Participant's applicable contributions. Tiers are determined in increments of: Tiers of contributions ---------------------- (indicate $ or %) (a) First _____________ (b) Next _____________ (c) Next _____________ (d) Next _____________ [NOTE: Fill in only percentages or dollar amounts, but not both. If percentages are used, each tier represents the amount of the Participant's applicable contributions that equals the specified percentage of the Participant's Included Compensation.] e. [ ] [ ] YEAR OF SERVICE MATCHING CONTRIBUTION. A uniform percentage of each Eligible Participant's applicable contributions based on Years of Service with Employer, determined as follows: Years of Service Matching Percentage ---------------- ------------------- (a) ____________ (b) ______________% (c) ____________ (d) ______________% (e) ____________ (f) ______________% [ ] 1. In applying the Year of Service matching contribution formula, a Year of Service is: [If not checked, a Year of Service is 1,000 Hours of Service during the Plan Year.] [ ] a. as defined for purposes of eligibility under Part 7. [ ] b. as defined for purposes of vesting under Part 7. [ ] 2. Special limits on Employer Matching Contributions under the Year of Service formula: [ ] a. The Employer Matching Contribution allocated to any Eligible Participant may not exceed _____% of Included Compensation. [ ] b. The Employer Matching Contribution will apply only to a Participant's applicable contributions that do not exceed: [ ] (1) ___% of Included Compensation. [ ] (2) $___.
? 2001 SunTrust Bank 7 f. [ ] [ ] NET PROFITS. Any Employer Matching Contributions made in accordance with the elections under this #16 are limited to Net Profits. [If this f. is checked, also select (a) or (b) below.] [ ] (a) DEFAULT DEFINITION OF NET PROFITS. For purposes of this selection f., Net Profits is defined in accordance with Section 2.2(a)(2) of the BPD. [ ] (b) MODIFIED DEFINITION OF NET PROFITS. For purposes of this selection f., Net Profits is defined as follows: [NOTE: Any definition of Net Profits under this (b) must be described in a manner that precludes Employer discretion and must satisfy the nondiscrimination requirements of Section 1.401(a)(4) of the regulations and must apply uniformly to all Participants.]
17. OPERATING RULES FOR APPLYING THE MATCHING CONTRIBUTION FORMULAS: a. APPLICABLE CONTRIBUTIONS TAKEN INTO ACCOUNT: (See Section 2.3(b)(3) of the BPD.) The matching contribution formula(s) elected in #16. above (and any limitations on the amount of a Participant's applicable contributions considered under such formula(s)) are applied separately for each: [X] (1) Plan Year. [ ] (2) Plan Year quarter. [ ] (3) calendar month. [ ] (4) payroll period. [NOTE: If Part 3, #11.b. is checked, the period selected under this a. (to the extent such period refers to the Plan Year) will be determined as if the Plan Year were the period designated under Part 3, #11.b. See Section 2.2(c)(3) of the BPD.] b. SPECIAL RULE FOR PARTIAL PERIOD OF PARTICIPATION. If an Employee is an Eligible Participant for only part of the period designated in a. above, Included Compensation is taken into account for: [X] (1) the entire period, including the portion of the period during which the Employee is not an Eligible Participant. [ ] (2) the portion of the period in which the Employee is an Eligible Participant. [ ] (3) the portion of the period during which the Employee's election to make the applicable contributions is in effect. [ ] 18. QUALIFIED MATCHING CONTRIBUTIONS (QMACs): [NOTE: Regardless of any elections under this #18, the Employer may make a QMAC to the Plan to correct a failed ADP or ACP Test, as authorized under Sections 17.2(d)(2) and 17.3(d)(2) of the BPD. Any QMAC allocated to correct the ADP or ACP Test which is not specifically authorized under this #18 will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Section 401(k) Deferrals made during the Plan Year. See Section 2.3(c) of the BPD.] [ ] a. All Employer Matching Contributions are designated as QMACs. [ ] b. Only Employer Matching Contributions described in selection(s) ___ under #16 above are designated as QMACs. [ ] c. In addition to any Employer Matching Contribution provided under #16 above, the Employer may make a discretionary QM AC that is allocated equally as a percentage of Section 401(k) Deferrals made during the Plan Year. The Employer may allocate QMACs only on Section 401(k) Deferrals that do not exceed a specific dollar amount or a percentage of Included Compensation that is uniformly determined by the Employer. QMACs will be allocated to: [ ] (1) Eligible Participants who are Nonhighly Compensated Employees. [ ] (2) all Eligible Participants. 19. ALLOCATION CONDITIONS. An Eligible Participant must satisfy the following allocation conditions for an Employer Matching Contribution: [Check a. or b. or any combination of c. - f. Selection e. may not be checked if b. or d. is checked. Selection g. and/or h. may be checked in addition to b. - f.] [ ] a. NONE. [ ] b. SAFE HARBOR ALLOCATION CONDITION. An Employee must be employed by the Employer on the last day of the Plan Year OR must have more than ____ (not more than 500) Hours of Service for the Plan Year. [X] c. LAST DAY OF EMPLOYMENT CONDITION. An Employee must be employed with the Employer on the last day of the Plan Year. ? 2001 SunTrust Bank 8 [X] d. HOURS OF SERVICE CONDITION. An Employee must be credited with at least 1000 Hours of Service (may not exceed 1,000) during the Plan Year. [ ] e. ELAPSED TIME METHOD. (See Section 2.6(d) of the BPD.) [ ] (1) SAFE HARBOR ALLOCATION CONDITION. An Employee must be employed by the Employer on the last day of the Plan Year OR must have more than ___ (not more than 91) consecutive days of employment with the Employer during the Plan Year. [ ] (2) SERVICE CONDITION. An Employee must have more than ___ (not more than 182) consecutive days of employment with the Employer during the Plan Year. [ ] f. DISTRIBUTION RESTRICTION. An Employee must not have taken a distribution of the applicable contributions eligible for an Employer Matching Contribution prior to the end of the period for which the Employer Matching Contribution is being made (as defined in #17.a. above). See Section 2.6(c) of the BPD. [ ] g. APPLICATION TO A SPECIFIED PERIOD. In applying the allocation condition(s) designated under b. through e. above, the allocation condition(s) will be based on the period designated under #17.a. above. In applying an Hours of Service condition under d. above, the following method will be used: [This g. should be checked only if a period other than the Plan Year is selected under #17.a. above. Selection (1) or (2) must be selected only if d. above is also checked.] [ ] (1) FRACTIONAL METHOD (see Section 2.6(e)(2)(i) of the BPD). [ ] (2) PERIOD-BY-PERIOD METHOD (see Section 2.6(e)(2)(ii) of the BPD). [PRACTITIONER NOTE: If this g. is not checked, any allocation condition(s) selected under b. through e. above will apply with respect to the Plan Year, regardless of the period selected under #17.a. above. See Section 2.6(e) of the BPD for procedural rules for applying allocation conditions for a period other than the Plan Year.] [X] h. The above allocation condition(s) will NOT apply if: [X] (1) the Participant dies during the Plan Year. [X] (2) the Participant is Disabled. [X] (3) the Participant, by the end of the Plan Year, has reached: [X] (a) Normal Retirement Age. [ ] (b) Early Retirement Age. PART 4C - EMPLOYER NONELECTIVE CONTRIBUTIONS (See Sections 2.3(d) and (e) of the BPD) [ ] CHECK THIS SELECTION AND COMPLETE THIS PART 4C TO ALLOW FOR EMPLOYER NONELECTIVE CONTRIBUTIONS. [NOTE: Do not check this selection if the only Employer Nonelective Contributions authorized under the Plan are Safe Harbor Nonelective Contributions. Instead, complete the applicable elections under Part 4E of this Agreement.] [ ] 20. EMPLOYER NONELECTIVE CONTRIBUTION (OTHER THAN QNECs): [ ] a. DISCRETIONARY. Discretionary with the Employer. [ ] b. FIXED UNIFORM PERCENTAGE. ___% of each Eligible Participant's Included Compensation. [ ] c. UNIFORM DOLLAR AMOUNT. [ ] (1) A uniform discretionary dollar amount for each Eligible Participant. [ ] (2) $___ for each Eligible Participant. [ ] d. DAVIS-BACON CONTRIBUTION FORMULA. (See Section 2.2(a)(1) of the BPD for rules regarding the application of the Davis-Bacon Contribution Formula.) The Employer will make a contribution for each Eligible Participant's Davis-Bacon Act Service based on the hourly contribution rate for the Participant's employment classification, as designated under Schedule A of this Agreement. The contributions under this formula will be allocated under the Pro Rata Allocation Formula under #21.a. below, but based on the amounts designated in Schedule A as attached to this Agreement. [If this d. is selected, #21.a. below also must be selected.] ? 2001 SunTrust Bank 9 [ ] (1) The contributions under the Davis-Bacon Contribution Formula will offset the following contributions under the Plan: [Check (a) and/or (b). If this (1) is not checked, contributions under the Davis Bacon Contribution Formula will NOT offset any other Employer Contributions under the Plan.] [ ] (a) Employer Nonelective Contributions [ ] (b) Employer Matching Contributions [ ] (2) The default provisions under Section 2.2(a)(1) are modified as follows: _________________________________ [NOTE: Any modification to the default provisions under (2) must satisfy the nondiscrimination requirements under Section 1.401(a)(4) of the regulations. Any modification under (2) will not allow the offset of any contributions to any other Plan.] [ ] e. NET PROFITS. Check this e. if the contribution selected above is limited to Net Profits. [If this e. is checked, also select (1) or (2) below.] [ ] (1) DEFAULT DEFINITION OF NET PROFITS. For purposes of this subsection e., Net Profits is defined in accordance with Section 2.2(a)(2) of the BPD. [ ] (2) MODIFIED DEFINITION OF NET PROFITS. For purposes of this subsection e., Net Profits is defined as follows: ____________________________ [NOTE: Any definition of Net Profits under this (2) must be described in a manner that precludes Employer discretion, must satisfy the nondiscrimination requirements of Section 1.401(a)(4) of the regulations, and must apply uniformly to all Participants.] [ ] 21. ALLOCATION FORMULA FOR EMPLOYER NONELECTIVE CONTRIBUTIONS (OTHER THAN QNECs): (See Section 2.3(d) of the BPD.) [ ] a. PRO RATA ALLOCATION METHOD. The allocation for each Eligible Participant is a uniform percentage of Included Compensation (or a uniform dollar amount if #20.c. is selected above). [ ] b. PERMITTED DISPARITY METHOD. The allocation for each Eligible Participant is determined under the following formula: [Selection #20.a. above must also be checked.] [ ] (1) Two-Step Formula. [ ] (2) Four-Step Formula. [ ] c. UNIFORM POINTS ALLOCATION. The allocation for each Eligible Participant is determined based on the Eligible Participant's points. Each Eligible Participant's allocation shall bear the same relationship to the Employer Contribution as his/her total points bears to all points awarded. An Eligible Participant will receive: [Check (1) and/or (2). Selection (3) may be checked in addition to (1) and (2). Selection #20.a. above also must be checked.] [ ] (1) ____ points for each ____ year(s) of age (attained as of the end of the Plan Year). [ ] (2) ____ points for each ____ Year(s) of Service, determined as follows: [Check (a) or (b). Selection (c) may be checked in addition to (a) or (b).] [ ] (a) In the same manner as determined for eligibility. [ ] (b) In the same manner as determined for vesting. [ ] (c) Points will not be provided with respect to Years of Service in excess of ____. [ ] (3) ____ points for each $____ (not to exceed $200) of Included Compensation. [ ] d. ALLOCATION BASED ON SERVICE. The Employer Nonelective Contribution will be allocated to each Eligible Participant as: [Check (1) or (2). Also check (a), (b), and/or (c). Selection (3) may be checked in addition to (1) or (2).] [ ] (1) a uniform dollar amount [ ] (2) a uniform percentage of Included Compensation for the following periods of service: [ ] (a) Each Hour of Service. [ ] (b) Each week of employment. [ ] (c) (Describe period) ___________________________ ? 2001 SunTrust Bank 10 [ ] (3) The contribution is subject to the following minimum and/or benefit limitations: [PRACTITIONER NOTE: If #20.b. or #20.c. is checked, the selection in (1) or (2) must conform to the selection made in #20.b. or #20.c. Thus, if #20.b. is checked along with this subsection d., the allocation must be a uniform percentage of Included Compensation under (2). If #20.c. is checked along with this subsection d. the allocation must be a uniform dollar amount under (1).] [ ] e. TOP-HEAVY MINIMUM CONTRIBUTION. In applying the Top-Heavy Plan requirements under Article 16 of the BPD, the top-heavy minimum contribution will be allocated to all Eligible Participants, in accordance with Section 16.2(a) of the BPD. [NOTE: If this e. is not checked, any top-heavy minimum contribution will be allocated only to Non-Key Employees, in accordance with Section 16.2(a) of the BPD.] [ ] 22. QUALIFIED NONELECTIVE CONTRIBUTION (QNEC). The Employer may make a discretionary QNEC that is allocated under the following method. [NOTE: Regardless of any elections under this #22, the Employer may make a QNEC to the Plan to correct a failed ADP or ACP Test, as authorized under Sections 17.2(d)(2) and 17.3(d)(2) of the BPD. Any QNEC allocated to correct the ADP or ACP Test which is not specifically authorized under this #22 will be allocated as a uniform percentage of Included Compensation to all Eligible Participants who are Nonhighly Compensated Employees. See Section 2.3(e) of the BPD.] [ ] a. PRO RATA ALLOCATION METHOD. (See Section 2.3(e)(1) of the BPD.) The QNEC will be allocated as a uniform percentage of Included Compensation to: [ ] (1) all Eligible Participants who are Nonhighly Compensated Employees. [ ] (2) all Eligible Participants. [ ] b. BOTTOM-UP QNEC METHOD. The QNEC will be allocated to Eligible Participants who are Nonhighly Compensated Employees in reverse order of Included Compensation. (See Section 2.3(e)(2) of the BPD.) [ ] c. APPLICATION OF ALLOCATION CONDITIONS. If this c. is checked, QNECs will be allocated only to Eligible Participants who have satisfied the allocation conditions under #24 below. [If this c. is not checked, QNECs will be allocated without regard to the allocation conditions under #24 below.] 23. OPERATING RULES FOR DETERMINING AMOUNT OF EMPLOYER NONELECTIVE CONTRIBUTIONS. a. SPECIAL RULES REGARDING INCLUDED COMPENSATION. (1) APPLICABLE PERIOD FOR DETERMINING INCLUDED COMPENSATION. In determining the amount of Employer Nonelective Contributions to be allocated to an Eligible Participant under this Part 4C, Included Compensation is determined separately for each: [If #21.b. above is checked, the Plan Year must be selected under (a) below.] [ ] (a) Plan Year. [ ] (b) Plan Year quarter. [ ] (c) calendar month. [ ] (d) payroll period. [NOTE: If Part 3, #11.b. is checked, the period selected under this (1) (to the extent such period refers to the Plan Year) will be determined as if the Plan Year were the period designated under Part 3, #11.b. See Section 2.2(c)(3) of the BPD.] [ ] (2) SPECIAL RULE FOR PARTIAL PERIOD OF PARTICIPATION. If an Employee is an Eligible Participant for only part of the period designated under (1) above, Included Compensation is taken into account for the entire period, including the portion of the period during which the Employee is not an Eligible Participant. [If this selection (2) is not checked, Included Compensation is taken into account only for the portion of the period during which the Employee is an Eligible Participant.] [ ] b. SPECIAL RULES FOR APPLYING THE PERMITTED DISPARITY METHOD. [Complete this b. only if #21.b. above is also checked.] [ ] (1) APPLICATION OF FOUR-STEP FORMULA FOR TOP-HEAVY PLANS. If this (1) is checked, the Four-Step Formula applies instead of the Two-Step Formula for any Plan Year in which the Plan is a Top Heavy Plan. [This (1) may only be checked if #21.b.(1) above is also checked.] [ ] (2) EXCESS COMPENSATION UNDER THE PERMITTED DISPARITY METHOD is the amount of Included Compensation that exceeds: [If this selection (2) is not checked, Excess Compensation under the Permitted Disparity Method is the amount of Included Compensation that exceeds the Taxable Wage Base.] [ ] (a) ____% (may not exceed 100%) of the Taxable Wage Base. [ ] 1. The amount determined under (a) is not rounded. ? 2001 SunTrust Bank 11 [ ] 2. The amount determined under (a) is rounded (but not above the Taxable Wage Base) to the next higher: [ ] a. $1. [ ] b. $100. [ ] c. $1,000. [ ] (b) _____________________________(may not exceed the Taxable Wage Base). [NOTE: The maximum integration percentage of 5.7% must be reduced to (i) 5.4% if Excess Compensation is based on an amount that is GREATER than 80% but less than 100% of the Taxable Wage Base or (ii) 4.3% if Excess Compensation is based on an amount that is greater than 20% but less than or equal to 80% of the Taxable Wage Base. See Section 2.2(b)(2) of the BPD.] 24. ALLOCATION CONDITIONS. An Eligible Participant must satisfy the following allocation conditions for an Employer Nonelective Contribution: [Check a. or b. or any combination of c. - e. Selection e. may not be checked if b. or d. is checked. Selection f. and/or g. may be checked in addition to b. - e.] [ ] a. NONE. [ ] b. SAFE HARBOR ALLOCATION CONDITION. An Employee must be employed by the Employer on the last day of the Plan Year OR must have more than ____ (not more than 500) Hours of Service for the Plan Year. [ ] c. LAST DAY OF EMPLOYMENT CONDITION. An Employee must be employed with the Employer on the last day of the Plan Year. [ ] d. HOURS OF SERVICE CONDITION. An Employee must be credited with at least ___ Hours of Service (may not exceed 1,000) during the Plan Year. [ ] e. ELAPSED TIME METHOD. (See Section 2.6(d) of the BPD.) [ ] (1) SAFE HARBOR ALLOCATION CONDITION. An Employee must be employed by the Employer on the last day of the Plan Year OR must have more than ___ (not more than 91) consecutive days of employment with the Employer during the Plan Year. [ ] (2) SERVICE CONDITION. An Employee must have more than ___ (not more than 182) consecutive days of employment with the Employer during the Plan Year. [ ] f. APPLICATION TO A SPECIFIED PERIOD. In applying the allocation condition(s) designated under b. through e. above, the allocation condition(s) will be based on the period designated under #23.a.(1) above. In applying an Hours of Service condition under d. above, the following method will be used: [This f. should be checked only if a period other than the Plan Year is selected under #23.a.(1) above. Selection (1) or (2) must be selected only if d. above is also checked.] [ ] (1) FRACTIONAL METHOD (see Section 2.6(e)(2)(i) of the BPD). [ ] (2) PERIOD-BY-PERIOD METHOD (see Section 2.6(e)(2)(ii) of the BPD). [PRACTITIONER NOTE: If this f. is not checked, any allocation condition(s) selected under b. through e. above will apply with respect to the Plan Year, regardless of the period selected under #23.a.(1) above. See Section 2.6(e) of the BPD for procedural rules for applying allocation conditions for a period other than the Plan Year.] [ ] g. The above allocation condition(s) will NOT apply if: [ ] (1) the Participant dies during the Plan Year. [ ] (2) the Participant is Disabled. [ ] (3) the Participant, by the end of the Plan Year, has reached: [ ] (a) Normal Retirement Age. [ ] (b) Early Retirement Age. ? 2001 SunTrust Bank 12 PART 4D - EMPLOYEE AFTER-TAX CONTRIBUTIONS (See Section 3.1 of the BPD) [ ] CHECK THIS SELECTION TO ALLOW FOR EMPLOYEE AFTER-TAX CONTRIBUTIONS. If Employee After-Tax Contributions will not be permitted under the Plan, do not check this selection and skip the remainder of this Part 4D. [NOTE: The eligibility conditions for making Employee After-Tax Contributions are listed in Part 1 of this Agreement under "Section 401(k) Deferrals."] [ ] 25. MAXIMUM. ___% of Included Compensation for: [ ] a. the entire Plan Year. [ ] b. the portion of the Plan Year during which the Employee is an Eligible Participant. [ ] c. each separate payroll period during which the Employee is an Eligible Participant. [NOTE: If this #25 is not checked, the only limit on Employee After-Tax Contributions is the Annual Additions Limitation under Article 7 of the BPD. If Part 3, #11.b. is checked, any period selected under this #25 will be determined as if the Plan Year were the period designated under Part 3, #11.b. See Section 2.2(c)(3) of the BPD.] [ ] 26. MINIMUM. For any payroll period, no less than: [ ] a. ___% of Included Compensation. [ ] b. $___. PART 4E - SAFE HARBOR 401(k) PLAN ELECTION (See Section 17.6 of the BPD) [ ] CHECK THIS SELECTION AND COMPLETE THIS PART 4E IF THE PLAN IS DESIGNED TO BE A SAFE HARBOR 401(k) PLAN. [ ]27. SAFE HARBOR MATCHING CONTRIBUTION: The Employer will make an Employer Matching Contribution with respect to an Eligible Participant's Section 401(k) Deferrals and/or Employee After-Tax Contributions ("applicable contributions") under the following formula: [Complete selection a. or b. In addition, complete selection c. Selection d. may be checked in addition to a. or b. and c.] [ ] a. BASIC FORMULA: 100% of applicable contributions up to the first 3% of Included Compensation, plus 50% of applicable contributions up to the next 2% of Included Compensation. [ ] b. ENHANCED FORMULA: [ ] (1) ___% (not less than 100%) of applicable contributions up to ___% of Included Compensation (not less than 4% and not more than 6%). [ ] (2) The sum of: [THE CONTRIBUTIONS UNDER THIS (2) MUST NOT BE LESS THAN THE CONTRIBUTIONS THAT WOULD BE CALCULATED UNDER a. AT EACH LEVEL OF APPLICABLE CONTRIBUTIONS.] [ ] (a) ___% of applicable contributions up to the first (b) ___% of Included Compensation, plus [ ] (c) ___% of applicable contributions up to the next (d) ___% of Included Compensation. [NOTE: The percentage in (c) may not be greater than the percentage in (a). In addition, the sum of the percentages in (b) and (d) may not exceed 6%.] c. APPLICABLE CONTRIBUTIONS TAKEN INTO ACCOUNT: (See Section 17.6 (a)(1)(i) of the BPD.) The Safe Harbor Matching Contribution formula elected in a. or b. above (and any limitations on the amount of a Participant's applicable contributions considered under such formula(s)) are applied separately for each: [ ] (1) Plan Year. [ ] (2) Plan Year quarter. [ ] (3) calendar month. [ ] (4) payroll period. [NOTE: If Part 3, #11.b. is checked, any period selected under this #25 will be determined as if the Plan Year were the period designated under Part 3, #11.b. See Section 2.2(c)(3) of the BPD.] [ ] d. DEFINITION OF APPLICABLE CONTRIBUTIONS. Check this d. if the Plan permits Employee After-Tax Contributions but the Safe Harbor Matching Contribution formula selected under a. or b. above does not apply to such Employee After-Tax Contributions. [ ] 28. SAFE HARBOR NONELECTIVE CONTRIBUTION: ___% (no less than 3%) of Included Compensation. ? 2001 SunTrust Bank 13 [ ] a. Check this selection if the Employer will make this Safe Harbor Nonelective Contribution pursuant to a supplemental notice as described in Section 17.6(a)(1)(ii) of the BPD. If this a. is checked, the Safe Harbor Nonelective Contribution will be required only for a Plan Year for which the appropriate supplemental notice is provided. For any Plan Year in which the supplemental notice is not provided, the Plan is not a Safe Harbor 401(k) Plan. [ ] b. Check this selection to provide the Employer with the discretion to increase the above percentage to a higher percentage. [ ] c. Check this selection if the Safe Harbor Nonelective Contribution will be made under another plan maintained by the Employer and identify the plan: _______________________________________________________________ [ ] d. Check this d. if the Safe Harbor Nonelective Contribution offsets the allocation that would otherwise be made to the Participant under Part 4C, #21 above. If the Permitted Disparity Method is elected under Part 4C, #21.b., this offset applies only to the second step of the Two-Step Formula or the fourth step of the Four-Step Formula, as applicable. [ ]29. SPECIAL RULE FOR PARTIAL PERIOD OF PARTICIPATION. If an Employee is an Eligible Participant for only part of a Plan Year, Included Compensation is taken into account for the entire Plan Year, including the portion of the Plan Year during which the Employee is not an Eligible Participant. [If this #29 is not checked, Included Compensation is taken into account only for the portion of the Plan Year in which the Employee is an Eligible Participant.] 30. ELIGIBLE PARTICIPANT. For purposes of the Safe Harbor Contributions elected above, "Eligible Participant" means: [Check a., b. or c. Selection d. may be checked in addition to a., b. or c.] [ ] a. All Eligible Participants (as determined for Section 401(k) Deferrals). [ ] b. All Nonhighly Compensated Employees who are Eligible Participants (as determined for Section 401(k) Deferrals). [ ] c. All Nonhighly Compensated Employees who are Eligible Participants (as determined for Section 401(k) Deferrals) and all Highly Compensated Employees who are Eligible Participants (as determined for Section 401(k) Deferrals) but who are not Key Employees. [ ] d. Check this d. if the selection under a., b. or c., as applicable, applies only to Employees who would be Eligible Participants for any portion of the Plan Year if the eligibility conditions selected for Section 401(k) Deferrals in Part 1, #5 of this Agreement were one Year of Service and age 21. (See Section 17.6(a)(1) of the BPD.) PART 4F - SPECIAL 401(k) PLAN ELECTIONS (See Article 17 of the BPD) 31. ADP/ACP TESTING METHOD. In performing the ADP and ACP tests, the Employer will use the following method: (See Sections 17.2 and 17.3 of the BPD for an explanation of the ADP/ACP testing methods.) [ ] a. Prior Year Testing Method. [X] b. Current Year Testing Method. [PRACTITIONER NOTE: If this Plan is intended to be a Safe-Harbor 401(k) Plan under Part 4E above, the Current Year Testing Method MUST be elected under b. See Section 17.6 of the BPD.] [ ]32. FIRST PLAN YEAR FOR SECTION 401(k) DEFERRALS. (See Section 17.2(b) of the BPD.) Check this selection if this Agreement covers the first Plan Year that the Plan permits Section 401(k) Deferrals. The ADP for the Nonhighly Compensated Employ ee Group for such first Plan Year is determined under the following method: [ ] a. the Prior Year Testing Method, assuming a 3% deferral percentage for the Nonhighly Compensated Employee Group. [ ] b. the Current Year Testing Method using the actual deferral percentages of the Nonhighly Compensated Employee Group. [ ]33. FIRST PLAN YEAR FOR EMPLOYER MATCHING CONTRIBUTIONS OR EMPLOYEE AFTER-TAX CONTRIBUTIONS. (See Section 17.3(b) of the BPD.) Check this selection if this Agreement covers the first Plan Year that the Plan includes either an Employer Matching Contribution formula or permits Employee After-Tax Contributions. The ACP for the Nonhighly Compensated Employee Group for such first Plan Year is determined under the following method: ? 2001 SunTrust Bank 14 [ ] a. the Prior Year Testing Method, assuming a 3% contribution percentage for the Nonhighly Compensated Employee Group. [ ] b. the Current Year Testing Method using the actual contribution percentages of the Nonhighly Compensated Employee Group. PART 5 - RETIREMENT AGES (See Sections 22.57 and 22.126 of the BPD) 34. NORMAL RETIREMENT AGE: [X] a. Age 65 (not to exceed 65). [ ] b. The later of (1) age ____ (not to exceed 65) or (2) the _____ (not to exceed 5th) anniversary of the date the Employee commenced participation in the Plan. [ ] c. __________(may not be later than the maximum age permitted under b.) 35. EARLY RETIREMENT AGE: [Check a. or check b. and/or c.] [X] a. Not applicable. [ ] b. Age _____. [ ] c. Completion of _______ Years of Service, determined as follows: [ ] (1) Same as for eligibility. [ ] (2) Same as for vesting. PART 6 - VESTING RULES (See Article 4 of the BPD) * COMPLETE THIS PART 6 ONLY IF THE EMPLOYER HAS ELECTED TO MAKE EMPLOYER MATCHING CONTRIBUTIONS UNDER PART 4B OR EMPLOYER NONELECTIVE CONTRIBUTIONS UNDER PART 4C. SECTION 401(k) DEFERRALS, EMPLOYEE AFTER-TAX CONTRIBUTIONS, QMACS, QNECS, SAFE HARBOR CONTRIBUTIONS, AND ROLLOVER CONTRIBUTIONS ARE ALWAYS 100% VESTED. (SEE SECTION 4.2 OF THE BPD FOR THE DEFINITIONS OF THE VARIOUS VESTING SCHEDULES.) 36. NORMAL VESTING SCHEDULE: [Check one of a. - f. for those contributions the Employer elects to make under Part 4 of this Agreement.] (1) (2) EMPLOYER EMPLOYER MATCH NONELECTIVE a. [ ] [ ] Full and immediate vesting. b. [ ] [ ] 7-year graded vesting schedule. c. [ ] [ ] 6-year graded vesting schedule. d. [ ] [ ] 5-year cliff vesting schedule. e. [ ] [ ] 3-year cliff vesting schedule. f. [X] [ ] Modified vesting schedule: (1) 20% % after 1 Year of Service (2) 40% % after 2 Years of Service (3) 60% % after 3 Years of Service (4) 80% % after 4 Years of Service (5) 100% % after 5 Years of Service (6) ____ % after 6 Years of Service, and (7) 100% after 7 Years of Service. [NOTE: The percentages selected under the modified vesting schedule must not be less than the percentages that would be required under the 7-year graded vesting schedule, unless 100% vesting occurs after no more than 5 Years of Service.] ? 2001 SunTrust Bank 15 37. VESTING SCHEDULE WHEN PLAN IS TOP-HEAVY: [Check one of a. - d. for those contributions the Employer elects to make under Part 4 of this Agreement.] (1) (2) EMPLOYER EMPLOYER MATCH NONELECTIVE a. [ ] [ ] Full and immediate vesting. b. [ ] [ ] 6-year graded vesting schedule. c. [ ] [ ] 3-year cliff vesting schedule. d. [X] [ ] Modified vesting schedule: (1) 20% % after 1 Year of Service (2) 40% % after 2 Years of Service (3) 60% % after 3 Years of Service (4) 80% % after 4 Years of Service (5) 100% % after 5 Years of Service, and (6) 100% after 6 Years of Service. [NOTE: The percentages selected under the modified vesting schedule must not be less than the percentages that would be required under the 6-year graded vesting schedule, unless 100% vesting occurs after no more than 3 Years of Service.] [ ] 38. SERVICE EXCLUDED UNDER THE ABOVE VESTING SCHEDULE(S): [ ] a. Service before the original Effective Date of this Plan. (See Section 4.5(b)(1) of the BPD for rules that require service under a Predecessor Plan to be counted.) [ ] b. Years of Service completed before the Employee's ____ birthday (cannot exceed the 18th birthday). [X] 39. SPECIAL 100% VESTING. An Employee's vesting percentage increases to 100% if, while employed with the Employer, the Employee: [X] a. dies. [X] b. becomes Disabled (as defined in Section 22.53 of the BPD). [ ] c. reaches Early Retirement Age (as defined in Part 5, #35 above). [ ] 40. SPECIAL VESTING PROVISIONS: ___________________________________________ [NOTE: Any special vesting provision designated in #40 must satisfy the requirements of Code Section 411(a) and must satisfy the nondiscrimination requirements under Section 1.401(a)(4) of the regulations.] PART 7 - SPECIAL SERVICE CREDITING RULES (See Article 6 of the BPD) IF NO MINIMUM SERVICE REQUIREMENT APPLIES UNDER PART 1, #5 OF THIS AGREEMENT AND ALL CONTRIBUTIONS ARE 100% VESTED UNDER PART 6, SKIP THIS PART 7. * YEAR OF SERVICE - ELIGIBILITY. 1,000 Hours of Service during an Eligibility Computation Period. Hours of Service are calculated using the Actual Hours Crediting Method. [To modify, complete #41 below.] * ELIGIBILITY COMPUTATION PERIOD. If one Year of Service is required for eligibility, the Shift-to-Plan-Year Method is used. If two Years of Service are required for eligibility, the Anniversary Year Method is used. [To modify, complete #42 below.] * YEAR OF SERVICE - VESTING. 1,000 Hours of Service during a Vesting Computation Period. Hours of Service are calculated using the Actual Hours Crediting Method. [To modify, complete #43 below.] * VESTING COMPUTATION PERIOD. The Plan Year. [To modify, complete #44 below.] * BREAK IN SERVICE RULES. The Rule of Parity Break in Service rule applies for both eligibility and vesting but the one-year holdout Break in Service rule is NOT used for eligibility or vesting. [To modify, complete #45 below.] ? 2001 SunTrust Bank 16 [ ] 41. ALTERNATIVE DEFINITION OF YEAR OF SERVICE FOR ELIGIBILITY. [ ] a. A Year of Service is ___ Hours of Service (may not exceed 1,000) during an Eligibility Computation Period. [ ] b. Use the Equivalency Method (as defined in Section 6.5(a) of the BPD) to count Hours of Service. If this b. is checked, each Employee will be credited with 190 Hours of Service for each calendar month for which the Employee completes at least one Hour of Service, unless a different Equivalency Method is selected under #46 below. The Equivalency Method applies to: [ ] (1) All Employees. [ ] (2) Employees who are not paid on an hourly basis. For hourly Employees, the Actual Hours Method will be used. [ ] c. Use the Elapsed Time Method instead of counting Hours of Service. (See Section 6.5(b) of the BPD.) [ ] 42. ALTERNATIVE METHOD FOR DETERMINING ELIGIBILITY COMPUTATION PERIODS. (See Section 1.4(c) of the BPD.) [ ] a. ONE YEAR OF SERVICE ELIGIBILITY. Eligibility Computation Periods are determined using the Anniversary Year Method instead of the Shift-to-Plan-Year Method. [ ] b. TWO YEARS OF SERVICE ELIGIBILITY. Eligibility Computation Periods are determined using the Shift-to-Plan-Year Method instead of the Anniversary Year Method. [ ] 43. ALTERNATIVE DEFINITION OF YEAR OF SERVICE FOR VESTING. [ ] a. A Year of Service is ______ Hours of Service (may not exceed 1,000) during a Vesting Computation Period. [ ] b. Use the Equivalency Method (as defined in Section 6.5(a) of the BPD) to count Hours of Service. If this b. is checked, each Employee will be credited with 190 Hours of Service for each calendar month for which the Employee completes at least one Hour of Service, unless a different Equivalency Method is selected under #46 below. The Equivalency Method applies to: [ ] (1) All Employees. [ ] (2) Employees who are not paid on an hourly basis. For hourly Employees, the Actual Hours Method will be used. [ ] c. Use the Elapsed Time Method instead of counting Hours of Service. (See Section 6.5(b) of the BPD.) [ ] 44. ALTERNATIVE METHOD FOR DETERMINING VESTING COMPUTATION PERIODS. Instead of Plan Years, use: [ ] a. Anniversary Years. (See Section 4.4 of the BPD.) [ ] b. (Describe Vesting Computation Period): _______________________ [PRACTITIONER NOTE: Any Vesting Computation Period described in b. must be a 12-consecutive month period and must apply uniformly to all Participants.] [ ] 45. BREAK IN SERVICE RULES. [ ] a. The RULE OF PARITY BREAK IN SERVICE RULE does not apply for purposes of determining eligibility or vesting under the Plan. [If this selection a. is not checked, the Rule of Parity Break in Service Rule applies for purposes of eligibility and vesting. (See Sections 1.6 and 4.6 of the BPD.)] [ ] b. ONE-YEAR HOLDOUT BREAK IN SERVICE RULE. [ ] (1) Applies to determine eligibility for: [Check one or both.] [ ] (a) Employer Contributions (other than Section 401(k) Deferrals). [ ] (b) Section 401(k) Deferrals. (See Section 1.6(c) of the BPD.) [ ] (2) Applies to determine vesting. (See Section 4.6(a) of the BPD.) [ ] 46. SPECIAL RULES FOR APPLYING EQUIVALENCY METHOD. [This #46 may only be checked if #41.b. and/or #43.b. is checked above.] [ ] a. ALTERNATIVE METHOD. Instead of applying the Equivalency Method on the basis of months worked, the following method will apply. (See Section 6.5(a) of the BPD.) [ ] (1) DAILY METHOD. Each Employee will be credited with 10 Hours of Service for each day worked. [ ] (2) WEEKLY METHOD. Each Employee will be credited with 45 Hours of Service for each week worked. ? 2001 SunTrust Bank 17 [ ] (3) SEMI -MONTHLY METHOD. Each Employee will be credited with 95 Hours of Service for each semi-monthly payroll period worked. [ ] b. APPLICATION OF SPECIAL RULES. The alternative method elected in a. applies for purposes of: [Check (1) and/or (2).] [ ] (1) Eligibility. [Check this (1) only if #41.b. is checked above.] [ ] (2) Vesting. [Check this (2) only if #43.b. is checked above.] PART 8 - ALLOCATION OF FORFEITURES (See Article 5 of the BPD) [ ] CHECK THIS SELECTION IF ALL CONTRIBUTIONS UNDER THE PLAN ARE 100% VESTED AND SKIP THIS PART 8. (SEE SECTION 5.5 OF THE BPD FOR THE DEFAULT FORFEITURE RULES IF NO FORFEITURE ALLOCATION METHOD IS SELECTED UNDER THIS PART 8.) 47. TIMING OF FORFEITURE ALLOCATIONS: (1) (2) EMPLOYER EMPLOYER MATCH NONELECTIVE a. [X] [ ] In the same Plan Year in which the forfeitures occur. b. [ ] [ ] In the Plan Year following the Plan Year in which the forfeitures occur. 48. METHOD OF ALLOCATING FORFEITURES: (See the operating rules in Section 5.5 of the BPD.) (1) (2) EMPLOYER EMPLOYER MATCH NONELECTIVE a. [ ] [ ] Reallocate as additional Employer Nonelective Contributions using the allocation method specified in Part 4C, #21 of this Agreement. If no allocation method is specified, use the Pro Rata Allocation Method under Part 4C, #21.a. of this Agreement. b. [ ] [ ] Reallocate as additional Employer Matching Contributions using the discretionary allocation method in Part 4B, #16.b. of this Agreement. c. [X] [ ] Reduce the: [Check one or both.] [X] (a) Employer Matching Contributions [ ] (b) Employer Nonelective Contributions the Employer would otherwise make for the Plan Year in which the forfeitures are allocated. [NOTE: If both (a) and (b) are checked, the Employer may adjust its contribution deposits in any manner, provided the total Employer Matching Contributions and Employer Nonelective Contributions (as applicable) properly take into account the forfeitures used to reduce such contributions for that Plan Year.] [X] 49. PAYMENT OF PLAN EXPENSES. Forfeitures are first used to pay Plan expenses for the Plan Year in which the forfeitures are to be allocated. (See Section 5.5(c) of the BPD.) Any remaining forfeitures are allocated as provided in #48 above. [X] 50. MODIFICATION OF CASH-OUT RULES. The Cash-Out Distribution rules are modified in accordance with Sections 5.3(a)(1)(i)(C) and 5.3(a)(1)(ii)(C) of the BPD to allow for an immediate forfeiture, regardless of any additional allocations during the Plan Year. ? 2001 SunTrust Bank 18 PART 9 - DISTRIBUTIONS AFTER TERMINATION OF EMPLOYMENT (See Section 8.3 of the BPD) * THE ELECTIONS IN THIS PART 9 ARE SUBJECT TO THE OPERATING RULES IN ARTICLES 8 AND 9 OF THE BPD. 51. VESTED ACCOUNT BALANCES IN EXCESS OF $5,000. Distribution is first available as soon as administratively feasible following: [X] a. the Participant's employment termination date. [ ] b. the end of the Plan Year that contains the Participant's employment termination date. [ ] c. the first Valuation Date following the Participant's termination of employment. [ ] d. the Participant's Normal Retirement Age (or Early Retirement Age, if applicable) or, if later, the Participant's employment termination date. [ ] e. (Describe distribution event) _______________________________ [PRACTITIONER NOTE: Any distribution event described in e. will apply uniformly to all Participants under the Plan.] 52. VESTED ACCOUNT BALANCES OF $5,000 OR LESS. Distribution will be made in a LUMP SUM as soon as administratively feasible following: [X] a. the Participant's employment termination date. [ ] b. the end of the Plan Year that contains the Participant's employment termination date. [ ] c. the first Valuation Date following the Participant's termination of employment. [ ] d. (Describe distribution event): _______________________________ [PRACTITIONER NOTE: Any distribution event described in d. will apply uniformly to all Participants under the Plan.] [X] 53. DISABLED PARTICIPANT. A Disabled Participant (as defined in Section 22.53 of the BPD) may request a distribution (if earlier than otherwise permitted under #51 or #52 (as applicable)) as soon as administratively feasible following: [X] a. the date the Participant becomes Disabled. [ ] b. the end of the Plan Year in which the Participant becomes Disabled. [ ] c. (Describe distribution event): _______________________________ [PRACTITIONER NOTE: Any distribution event described in c. will apply uniformly to all Participants under the Plan.] [ ] 54. HARDSHIP WITHDRAWALS FOLLOWING TERMINATION OF EMPLOYMENT. A terminated Participant may request a Hardship withdrawal (as defined in Section 8.6 of the BPD) before the date selected in #51 or #52 above, as applicable. [ ] 55. SPECIAL OPERATING RULES. [ ] a. MODIFICATION OF PARTICIPANT'S CONSENT REQUIREMENT. A Participant must consent to a distribution from the Plan, even if the Participant's vested Account Balance does not exceed $5,000. See Section 8.3(b) of the BPD. [NOTE: If this a. is not checked, the involuntary distribution rules under Section 8.3(b) of the BPD apply.] [ ] b. DISTRIBUTION UPON ATTAINMENT OF NORMAL RETIREMENT AGE (OR AGE 62, IF LATER). A distribution from the Plan will be made without a Participant's consent if such Participant has terminated employment and has attained Normal Retirement Age (or age 62, if later). See Section 8.7 of the BPD. ? 2001 SunTrust Bank 19 PART 10 - IN-SERVICE DISTRIBUTIONS (See Section 8.5 of the BPD) * THE ELECTIONS IN THIS PART 10 ARE SUBJECT TO THE OPERATING RULES IN ARTICLES 8 AND 9 OF THE BPD. 56. PERMITTED IN-SERVICE DISTRIBUTION EVENTS: [Elections under the Section 401(k) Deferrals column also apply to any QNECs, QMACs, and Safe Harbor Contributions unless otherwise specified in 57d. below.] (1) (2) (3) SECTION 401(k) EMPLOYER EMPLOYER DEFERRALS MATCH NONELECTIVE a. [X] [X] [ ] In-service distributions are not available. b. [ ] [ ] [ ] After age ______ . [If earlier than age 59 1/2 age is deemed to be age 59 1/2 for Section 401(k) Deferrals if the selection is checked under that column.] c. [ ] [ ] [ ] A safe harbor Hardship described in Section 8.6(a) of the BPD. [Note: Not applicable to QNECs, QMACs and Safe Harbor Contributions.] d. N/A [ ] [ ] A Hardship described in Section 8.6(b) of the BPD. e. N/A [ ] [ ] After the Participant has participated in the Plan for at least ______ years (cannot be less than 5 years). f. N/A [ ] [ ] At any time with respect to the portion of the vested Account Balance derived from contributions accumulated in the Plan for at least 2 years. g. [ ] [ ] [ ] Upon a Participant becoming Disabled (as defined in Section 22.53). h. [ ] [ ] [ ] Attainment of Normal Retirement Age. [If earlier than age 59 1/2, age is deemed to be 59 1/2 for Section 401(k) Deferrals if the selection is checked under that column.] i. N/A [ ] [ ] Attainment of Early Retirement Age. 57. LIMITATIONS THAT APPLY TO IN-SERVICE DISTRIBUTIONS: [ ] a. Available only if the Account which is subject to withdrawal is 100% vested. (See Section 4.8 of the BPD for special vesting rules if NOT checked.) [ ] b. No more than _____ in-service distribution(s) in a Plan Year. [ ] c. The minimum amount of any in-service distribution will be $ __ (may not exceed $1,000). [ ] d. (Describe limitations on in-service distributions) ___________ [PRACTITIONER NOTE: Any limitations described in d. will apply uniformly to all Participants under the Plan.] ? 2001 SunTrust Bank 20 PART 11 - DISTRIBUTION OPTIONS (See Section 8.1 of the BPD) 58. OPTIONAL FORMS OF PAYMENT AVAILABLE UPON TERMINATION OF EMPLOYMENT: [X] a. Lump sum distribution of entire vested Account Balance. [X] b. Single sum distribution of a portion of vested Account Balance. [ ] c. Installments for a specified term. [ ] d. Installments for required minimum distributions only. [ ] e. Annuity payments (see Section 8.1 of the BPD). [ ] f. (Describe optional forms or limitations on available forms) ____________________ [PRACTITIONER NOTE: Unless specified otherwise in f., a Participant may receive a distribution in any combination of the forms of payment selected in a. - f. Any optional forms or limitations described in f. will apply uniformly to all Participants under the Plan.] 59. APPLICATION OF THE QUALIFIED JOINT AND SURVIVOR ANNUITY (QJSA) AND QUALIFIED PRERETIREMENT SURVIVOR ANNUITY (QPSA) PROVISIONS: (See Article 9 of the BPD.) [X] a. DO NOT APPLY. [NOTE: The QJSA and QPSA provisions automatically apply to any assets of the Plan that were received as a transfer from another plan that was subject to the QJSA and QPSA rules. If this a. is checked, the QJSA and QPSA rules generally will apply only with respect to transferred assets or if distribution is made in the form of life annuity. See Section 9.1(b) of the BPD.] [ ] b. APPLY, with the following modifications: [Check this b. to have all assets under the Plan be subject to the QJSA and QPSA requirements. See Section 9.1(a) of the BPD.] [ ] (1) NO MODIFICATIONS. [ ] (2) MODIFIED QJSA BENEFIT. Instead of a 50% survivor benefit, the normal form of the QJSA provides the following survivor benefit to the spouse: [ ] (a) 100%. [ ] (b) 75%. [ ] (c) 66 2/3%. [ ] (3) MODIFIED QPSA BENEFIT. Instead of a 50% QPSA benefit, the QPSA benefit is 100% of the Participant's vested Account Balance. [ ] c. ONE-YEAR MARRIAGE RULE. The one-year marriage rule under Sections 8.4(c)(4) and 9.3 of the BPD applies. Under this rule, a Participant's spouse will not be treated as a surviving spouse unless the Participant and spouse were married for at least one year at the time of the Participant's death. PART 12 - ADMINISTRATIVE ELECTIONS * Use this Part 12 to identify administrative elections authorized by the BPD. These elections may be changed without reexecuting this Agreement by substituting a replacement of this page with new elections. To the extent this Part 12 is not completed, the default provisions in the BPD apply. 60. Are PARTICIPANT LOANS permitted? (See Article 14 of the BPD.) [ ] a. No [X] b. Yes [ ] (1) Use the default loan procedures under Article 14 of the BPD. [X] (2) Use a separate written loan policy to modify the default loan procedures under Article 14 of the BPD. ? 2001 Sun Trust Bank 21 61. Are Participants permitted to DIRECT INVESTMENTS? (See Section 13.5(c) of the BPD.) [ ] a. No [X] b. Yes [X] (1) Specify Accounts: All Accounts [X] (2) Check this selection if the Plan is intended to comply with ERISA SECTION 404(c). (See Section 13.5(c)(2) of the BPD.) 62. Is any portion of the Plan DAILY VALUED? (See Section 13.2(b) of the BPD.) [ ] a. No [X] b. Yes. Specify Accounts and/or investment options: All Accounts 63. Is any portion of the Plan VALUED PERIODICALLY (other than daily)? (See Section 13.2(a) of the BPD.) [X] a. No [ ] b. Yes [ ] (1) Specify Accounts and/or investment options:______ [ ] (2) Specify valuation date(s):______ [ ] (3) The following special allocation rules apply: [If this (3) is not checked, the Balance Forward Method under Section 13.4(a) of the BPD applies.] [ ] (a) Weighted average method. (See Section 13.4(a)(2)(i) of the BPD.) [ ] (b) Adjusted percentage method, taking into account ___ % of contributions made during the valuation period. (See Section 13.4(a)(2)(ii) of the BPD.) [ ] (c) (Describe allocation rules) ________________ [PRACTITIONER NOTE: Any allocation rules described in (c) must be in accordance with a definite predetermined formula that is not based on compensation, that satisfies the nondiscrimination requirements of Section 1.401(a)(4) of the regulations, and that is applied uniformly to all Participants.] 64. Does the Plan accept ROLLOVER CONTRIBUTIONS? (See Section 3.2 of the BPD.) [ ] a. No [X] b. Yes 65. Are LIFE INSURANCE investments permitted? (See Article 15 of the BPD.) [X] a. No [ ] b. Yes 66. Do the DEFAULT QDRO PROCEDURES under Section 11.5 of the BPD apply? [ ] a. No [X] b. Yes 67. Do the DEFAULT CLAIMS PROCEDURES under Section 11.6 of the BPD apply? [ ] a. No [X] b. Yes PART 13 - MISCELLANEOUS ELECTIONS * THE FOLLOWING ELECTIONS OVERRIDE CERTAIN DEFAULT PROVISIONS UNDER THE BPD AND PROVIDE SPECIAL RULES FOR ADMINISTERING THE PLAN. COMPLETE THE FOLLOWING ELECTIONS TO THE EXTENT THEY APPLY TO THE PLAN. [ ] 68. DETERMINATION OF HIGHLY COMPENSATED EMPLOYEES. [ ] a. The TOP-PAID GROUP TEST applies. [If this selection a. is not checked, the Top-Paid Group Test will NOT apply. See Section 22.99(b)(4) of the BPD.] [ ] b. The CALENDAR YEAR ELECTION applies. [This selection b. may only be chosen if the Plan Year is NOT the calendar year. See Section 22.99(b)(5) of the BPD.] ? 2001 SunTrust Bank 22 [ ] 69. SPECIAL ELECTIONS FOR APPLYING THE ANNUAL ADDITIONS LIMITATION UNDER CODE SECTION 415. [ ] a. The LIMITATION YEAR is the 12-month period ending ____. [If this selection a. is not checked, the Limitation Year is the same as the Plan Year.] [ ] b. Total Compensation includes IMPUTED COMPENSATION for a terminated Participant who is permanently and totally Disabled. (See Section 7.4(g)(3) of the BPD.) [ ] c. OPERATING RULES. Instead of the default provisions under Article 7 of the BPD, the following rules apply: [ ] 70. ELECTION TO USE OLD-LAW REQUIRED BEGINNING DATE. The Old-Law Required Beginning Date (as defined in Section 10.3(a)(2) of the BPD) applies instead of the Required Beginning Date rules under Section 10.3(a)(1) of the BPD. [ ] 71. SERVICE CREDITED WITH PREDECESSOR EMPLOYERS: (See Section 6.7 of the BPD.) [ ] a. (Identify Predecessor Employers) ______ [ ] b. Service is credited with these Predecessor Employers for the following purposes: [ ] (1) The eligibility service requirements elected in Part 1 of this Agreement. [ ] (2) The vesting schedule(s) elected in Part 6 of this Agreement. [ ] (3) The allocation requirements elected in Part 4 of this Agreement. [ ] c. The following service will not be recognized: ________________ [NOTE: If the Employer is maintaining the Plan of a Predecessor Employer, service with such Predecessor Employer must be counted for all purposes under the Plan. This #71 may be completed with respect to such Predecessor Employer indicating all service under selections (1), (2) and (3) will be credited. The failure to complete this #71 where the Employer is maintaining the Plan of a Predecessor Employer will not override the requirement that such predecessor service be credited for all purposes under the Plan. (See Section 6.7 of the BPD.) If the Employer is not maintaining the Plan of a Predecessor Employer, service with such Predecessor Employer will be credited under this Plan ONLY if specifically elected under this #71. If the above crediting rules are to apply differently to service with different Predecessor Employers, attach separately completed elections for this item, using the same format as above but listing only those Predecessor Employers to which the separate attachment relates.] [ ] 72. SPECIAL RULES WHERE EMPLOYER MAINTAINS MORE THAN ONE PLAN. [ ] a. TOP-HEAVY MINIMUM CONTRIBUTION - EMPLOYER MAINTAINS THIS PLAN AND ONE OR MORE DEFINED CONTRIBUTION PLANS. If this Plan is a Top-Heavy Plan, the Employer will provide any required top-heavy minimum contribution under: (See Section 16.2(a)(5)(i) of the BPD.) [ ] (1) This Plan. [ ] (2) The following Defined Contribution Plan maintained by the Employer:________________ [ ] (3) Describe method for providing the top-heavy minimum contribution:____________________________________ _________________ [ ] b. TOP-HEAVY MINIMUM BENEFIT - EMPLOYER MAINTAINS THIS PLAN AND ONE OR MORE DEFINED BENEFIT PLANS. If this Plan is a Top -Heavy Plan, the Employer will provide any required top -heavy minimum contribution or benefit under: (See Section 16.2(a)(5)(ii) of the BPD.) [ ] (1) This Plan, but the minimum required contribution is increased from 3% to 5% of Total Compensation for the Plan Year. [ ] (2) The following Defined Benefit Plan maintained by the Employer:________________ [ ] (3) Describe method for providing the top-heavy minimum contribution:_________________ [ ] c. LIMITATION ON ANNUAL ADDITIONS. This c. should be checked only if the Employer maintains another Defined Contribution Plan in which any Participant is a participant, and the Employer will not apply the rules set forth under Section 7.2 of the BPD. Instead, the Employer will limit Annual Additions in the following manner: ? 2001 SunTrust Bank 23 [X] 73. SPECIAL DEFINITION OF DISABLED. In applying the allocation conditions under Parts 4B and 4C, the special vesting provisions under Part 6, and the distribution provisions under Parts 9 and 10 of this Agreement, the following definition of Disabled applies instead of the definition under Section 22.53 of the BPD: means unable to engage in any substantial gainful activity of Participant's current job duties, or any other available position of comparable pay and benefits with Employer, by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of impairment shall be supported by medical evidence. [NOTE: Any definition included under this #73 must satisfy the requirements of Section 1.401(a)(4) of the regulations and must be applied uniformly to all Participants.] [X] 74. FAIL-SAFE COVERAGE PROVISION. [This selection #74 must be checked to apply the Fail-Safe Coverage Provision under Section 2.7 of the BPD.] [X] a. The Fail-Safe Coverage Provision described in Section 2.7 of the BPD applies without modification. [ ] b. The Fail-Safe Coverage Provisions described in Section 2.7 of the BPD applies with the following modifications: [ ] (1) The special rule for Top-Heavy Plans under Section 2.7(a) of the BPD does not apply. [ ] (2) The Fail-Safe Coverage Provision is based on Included Compensation as described under Section 2.7(d) of the BPD. [ ] 75. ELECTION NOT TO PARTICIPATE (SEE SECTION 1.10 OF THE BPD). An Employee may make a one-time irrevocable election not to participate under the Plan upon inception of the Plan or at any time prior to the time the Employee first becomes eligible to participate under any plan maintained by the Employer. [NOTE: Use of this provision could result in a violation of the minimum coverage rules under Code Section 410(b).] [ ] 76. PROTECTED BENEFITS. If there are any Protected Benefits provided under this Plan that are not specifically provided for under this Agreement, check this #76 and attach an addendum to this Agreement describing the Protected Benefits. ? 2001 SunTrust Bank 24 SIGNATURE PAGE By signing this page, the Employer agrees to adopt (or amend) the Plan which consists of BPD #02 and the provisions elected in this Agreement. The Employer agrees that the Prototype Sponsor has no responsibility or liability regarding the suitability of the Plan for the Employer's needs or the options elected under this Agreement. It is recommended that the Employer consult with legal counsel before executing this Agreement. 77. NAME AND TITLE OF AUTHORIZED REPRESENTATIVE(S): SIGNATURE(S): DATE: Sandra B. Cochran, President _____________ _______ ___________________________________ _____________ _______ ___________________________________ _____________ _______ 78. EFFECTIVE DATE OF THIS AGREEMENT: [ ] a. NEW PLAN. Check this selection if this is a new Plan. Effective Date of the Plan is:_________ [X] b. RESTATED PLAN. Check this selection if this is a restatement of an existing plan. Effective Date of the restatement is: September 15, 2003 (1) Designate the plan(s) being amended by this restatement: Books-A-Million, Inc. 401(k) Profit Sharing Plan (2) Designate the original Effective Date of this Plan (optional): December 31, 1972 [ ] c. AMENDMENT BY PAGE SUBSTITUTION. Check this selection if this is an amendment by substitution of certain pages of this Adoption Agreement. [If this c. is checked, complete the remainder of this Signature Page in the same manner as the Signature Page being replaced.] (1) Identify the page(s) being replaced: _____________________ (2) Effective Date(s) of such changes: _______________________ [ ] d. SUBSTITUTION OF SPONSOR. Check this selection if a successor to the original plan sponsor is continuing this Plan as a successor sponsor, and substitute page 1 to identify the successor as the Employer. (1) Effective Date of the amendment is: ______________________ [X] 79. Check this #79 if any SPECIAL EFFECTIVE DATES apply under Appendix A of this Agreement and complete the relevant sections of Appendix A. 80. PROTOTYPE SPONSOR INFORMATION. The Prototype Sponsor will inform the Employer of any amendments made to the Plan and will notify the Employer if it discontinues or abandons the Plan. The Employer may direct inquiries regarding the Plan or the effect of the Favorable IRS Letter to the Prototype Sponsor or its authorized representative at the following location: a. NAME OF PROTOTYPE SPONSOR (OR AUTHORIZED REPRESENTATIVE): SunTrust Bank b. ADDRESS OF PROTOTYPE SPONSOR (OR AUTHORIZED REPRESENTATIVE): 8515 E. Orchard Rd. Greenwood Village, CO 80111 c. TELEPHONE NUMBER OF PROTOTYPE SPONSOR (OR AUTHORIZED REPRESENTATIVE): 1-800-211-8757 IMPORTANT INFORMATION ABOUT THIS PROTOTYPE PLAN. A failure to properly complete the elections in this Agreement or to operate the Plan in accordance with applicable law may result in disqualification of the Plan. The Employer may rely on the Favorable IRS Letter issued by the National Office of the Internal Revenue Service to the Prototype Sponsor as evidence that the Plan is qualified under Section 401 of the Code, to the extent provided in Announcement 2001-77. The Employer may not rely on the Favorable IRS Letter in certain circumstances or with respect to certain qualification requirements, which are specified in the Favorable IRS Letter issued with respect to the Plan and in Announcement 2001-77. In order to obtain reliance in such circumstances or with respect to such qualification requirements, the Employer must apply to the office of Employee Plans Determinations of the Internal Revenue Service for a determination letter. See Section 22.87 of the BPD. ? 2001 SunTrust Bank 25 TRUSTEE DECLARATION By signing this Trustee Declaration, the Trustee agrees to the duties, responsibilities and liabilities imposed on the Trustee by the BPD #02 and this Agreement. 81. NAME(S) OF TRUSTEE(S): SIGNATURE(S) OF TRUSTEE(S): DATE: SunTrust Bank ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ ______________________ ______________________ _________ 82. EFFECTIVE DATE OF THIS TRUSTEE DECLARATION:____________________________ 83. THE TRUSTEE'S INVESTMENT POWERS ARE: [ ] a. DISCRETIONARY TRUSTEE. The Trustee has discretion to invest Plan assets. This discretion is limited to the extent Participants are permitted to give investment direction, or to the extent the Trustee is subject to direction from the Plan Administrator, the Employer, an Investment Manager or other Named Fiduciary. [X] b. DIRECTED TRUSTEE ONLY. The Trustee may only invest Plan assets as directed by Participants or by the Plan Administrator, the Employer, an Investment Manager or other Named Fiduciary. [ ] c. SEPARATE TRUST AGREEMENT. The Trustee's investment powers are determined under a separate trust document which replaces (or is adopted in conjunction with) the trust provisions under the BPD. [NOTE: The separate trust document is incorporated as part of this Plan and must be attached hereto. The responsibilities, rights and powers of the Trustee are those specified in the separate trust agreement. If this c. is checked, the Trustee need not sign or date this Trustee Declaration under #81 above.] ? 2001 SunTrust Bank 26 CO-SPONSOR ADOPTION PAGE #1 [X] CHECK THIS SELECTION AND COMPLETE THE REMAINDER OF THIS PAGE IF A RELATED EMPLOYER WILL EXECUTE THIS PLAN AS A COSPONSOR. [NOTE: Only a Related Employer (as defined in Section 22.164 of the BPD) that executes this Co-Sponsor Adoption Page may adopt the Plan as a Co-Sponsor. See Article 21 of the BPD for rules relating to the adoption of the Plan by a CoSponsor. If there is more than one Co-Sponsor, each one should execute a separate Co-Sponsor Adoption Page. Any reference to the "Employer" in this Agreement is also a reference to the Co-Sponsor, unless otherwise noted.] 84. NAME OF CO-SPONSOR: American Internet Service, Inc. 85. EMPLOYER IDENTIFICATION NUMBER (EIN) OF THE CO-SPONSOR: 63-1238069 By signing this page, the Co-Sponsor agrees to adopt (or to continue its participation in) the Plan identified on page 1 of this Agreement. The Plan consists of the BPD #02 and the provisions elected in this Agreement. 86. NAME AND TITLE OF AUTHORIZED REPRESENTATIVE(S): SIGNATURE(S): DATE: Sandra B. Cochran, President _____________ _______ ____________________________________ _____________ _______ ____________________________________ _____________ _______ 87. EFFECTIVE DATE OF THIS CO-SPONSOR ADOPTION PAGE: September 15, 2003 [ ] a. Check here if this is the initial adoption of a new Plan by the Co-Sponsor. [ ] b. Check here if this is an amendment or restatement of an existing plan maintained by the Co-Sponsor, which is merging into the Plan being adopted. (1) Designate the plan(s) being amended by this restatement: ______________________ (2) Designate the original Effective Date of the Co-Sponsor's Plan (optional):__________________ [ ] 88. ALLOCATION OF CONTRIBUTIONS. If this #103 is checked, contributions made by the Related Employer signing this CoSponsor Adoption Page (and any forfeitures relating to such contributions) will be allocated only to Participants actually employed by the Related Employer making the contribution and Employees of the Related Employer will not share in an allocation of contributions (or forfeitures relating to such contributions) made by the Employer or any other Related Employer. [NOTE: The selection of this #103 may require additional testing of the Plan. See Section 21.3 of the BPD.] [ ] 89. DESCRIBE ANY SPECIAL EFFECTIVE DATES: _________________________________ ? 2001 SunTrust Bank 27 CO-SPONSOR ADOPTION PAGE #2 [X] CHECK THIS SELECTION AND COMPLETE THE REMAINDER OF THIS PAGE IF A RELATED EMPLOYER WILL EXECUTE THIS PLAN AS A CO-SPONSOR. [NOTE: Only a Related Employer (as defined in Section 22.164 of the BPD) that executes this Co-Sponsor Adoption Page may adopt the Plan as a Co-Sponsor. See Article 21 of the BPD for rules relating to the adoption of the Plan by a Co-Sponsor. If there is more than one Co-Sponsor, each one should execute a separate Co-Sponsor Adoption Page. Any reference to the "Employer" in this Agreement is also a reference to the Co-Sponsor, unless otherwise noted.] 90. NAME OF CO-SPONSOR: American Wholesale Book Company, Inc. 91. EMPLOYER IDENTIFICATION NUMBER (EIN) OF THE CO-SPONSOR: 63-1071940 By signing this page, the Co-Sponsor agrees to adopt (or to continue its participation in) the Plan identified on page 1 of this Agreement. The Plan consists of the BPD #02 and the provisions elected in this Agreement. 92. NAME AND TITLE OF AUTHORIZED REPRESENTATIVE(S): SIGNATURE(S): DATE: Sandra B. Cochran, President _____________ _______ _________________________________ _____________ _______ _________________________________ _____________ _______ 93. EFFECTIVE DATE OF THIS CO-SPONSOR ADOPTION PAGE: September 15, 2003 [ ] a. Check here if this is the initial adoption of a new Plan by the Co-Sponsor. [ ] b. Check here if this is an amendment or restatement of an existing plan maintained by the Co-Sponsor, which is merging into the Plan being adopted. (1) Designate the plan(s) being amended by this restatement: ____________________________ (2) Designate the original Effective Date of the Co-Sponsor's Plan (optional): ____________________ [ ] 94. ALLOCATION OF CONTRIBUTIONS. If this #109 is checked, contributions made by the Related Employer signing this Co-Sponsor Adoption Page (and any forfeitures relating to such contributions) will be allocated only to Participants actually employed by the Related Employer making the contribution and Employees of the Related Employer will not share in an allocation of contributions (or forfeitures relating to such contributions) made by the Employer or any other Related Employer. [NOTE: The selection of this #109 may require additional testing of the Plan. See Section 21.3 of the BPD.] [ ] 95. DESCRIBE ANY SPECIAL EFFECTIVE DATES:__________________________________ ? 2001 SunTrust Bank 28 CO-SPONSOR ADOPTION PAGE #3 [X] CHECK THIS SELECTION AND COMPLETE THE REMAINDER OF THIS PAGE IF A RELATED EMPLOYER WILL EXECUTE THIS PLAN AS A CO-SPONSOR. [NOTE: Only a Related Employer (as defined in Section 22.164 of the BPD) that executes this Co-Sponsor Adoption Page may adopt the Plan as a Co-Sponsor. See Article 21 of the BPD for rules relating to the adoption of the Plan by a Co-Sponsor. If there is more than one Co-Sponsor, each one should execute a separate Co-Sponsor Adoption Page. Any reference to the "Employer" in this Agreement is also a reference to the Co-Sponsor, unless otherwise noted.] 96. NAME OF CO-SPONSOR: NetCentral, Inc. 97. EMPLOYER IDENTIFICATION NUMBER (EIN) OF THE CO-SPONSOR: 62-1596749 By signing this page, the Co-Sponsor agrees to adopt (or to continue its participation in) the Plan identified on page 1 of this Agreement. The Plan consists of the BPD #02 and the provisions elected in this Agreement. 98. NAME AND TITLE OF AUTHORIZED REPRESENTATIVE(S): SIGNATURE(S): DATE: Terrance G. Finley, President _____________ _______ _____________________________________ _____________ _______ _____________________________________ _____________ _______ 99. EFFECTIVE DATE OF THIS CO-SPONSOR ADOPTION PAGE: September 15, 2003 [ ] a. Check here if this is the initial adoption of a new Plan by the Co-Sponsor. [ ] b. Check here if this is an amendment or restatement of an existing plan maintained by the Co-Sponsor, which is merging into the Plan being adopted. (1) Designate the plan(s) being amended by this restatement: ______________________ (2) Designate the original Effective Date of the Co-Sponsor's Plan (optional): _____________________ [ ] 100. ALLOCATION OF CONTRIBUTIONS. If this #116 is checked, contributions made by the Related Employer signing this Co-Sponsor Adoption Page (and any forfeitures relating to such contributions) will be allocated only to Participants actually employed by the Related Employer making the contribution and Employees of the Related Employer will not share in an allocation of contributions (or forfeitures relating to such contributions) made by the Employer or any other Related Employer. [NOTE: The selection of this #116 may require additional testing of the Plan. See Section 21.3 of the BPD.] [ ] 101. DESCRIBE ANY SPECIAL EFFECTIVE DATES: ________________________________ ? 2001 SunTrust Bank 29 CO-SPONSOR ADOPTION PAGE #4 [X] CHECK THIS SELECTION AND COMPLETE THE REMAINDER OF THIS PAGE IF A RELATED EMPLOYER WILL EXECUTE THIS PLAN AS A CO-SPONSOR. [NOTE: Only a Related Employer (as defined in Section 22.164 of the BPD) that executes this Co-Sponsor Adoption Page may adopt the Plan as a Co-Sponsor. See Article 21 of the BPD for rules relating to the adoption of the Plan by a Co-Sponsor. If there is more than one Co-Sponsor, each one should execute a separate Co-Sponsor Adoption Page. Any reference to the "Employer" in this Agreement is also a reference to the Co-Sponsor, unless otherwise noted.] 102. NAME OF CO-SPONSOR: booksamillion.com, Inc. 103. EMPLOYER IDENTIFICATION NUMBER (EIN) OF THE CO-SPONSOR: 63-1263503 By signing this page, the Co-Sponsor agrees to adopt (or to continue its participation in) the Plan identified on page 1 of this Agreement. The Plan consists of the BPD #02 and the provisions elected in this Agreement. 104. NAME AND TITLE OF AUTHORIZED REPRESENTATIVE(S): SIGNATURE(S): DATE: Terrance G. Finley, President _____________ _______ _______________________________________________ _____________ _______ _______________________________________________ _____________ _______ 105. EFFECTIVE DATE OF THIS CO-SPONSOR ADOPTION PAGE: September 15, 2003 [ ] a. Check here if this is the initial adoption of a new Plan by the Co-Sponsor. [ ] b. Check here if this is an amendment or restatement of an existing plan maintained by the Co-Sponsor, which is merging into the Plan being adopted. (1) Designate the plan(s) being amended by this restatement: ____________________________________ (2) Designate the original Effective Date of the Co-Sponsor's Plan (optional): ________________________ [ ]106. ALLOCATION OF CONTRIBUTIONS. If this #123 is checked, contributions made by the Related Employer signing this CoSponsor Adoption Page (and any forfeitures relating to such contributions) will be allocated only to Participants actually employed by the Related Employer making the contribution and Employees of the Related Employer will not share in an allocation of contributions (or forfeitures relating to such contributions) made by the Employer or any other Related Employer. [NOTE: The selection of this #123 may require additional testing of the Plan. See Section 21.3 of the BPD.] [ ]107. DESCRIBE ANY SPECIAL EFFECTIVE DATES: _______________________________ ? 2001 SunTrust Bank 30 APPENDIX A - SPECIAL EFFECTIVE DATES A-1 [X] ELIGIBILITY CONDITIONS. The eligibility conditions specified in Part 1 of this Agreement are effective: January 1, 2004. Prior to January 1, 2004, the minimum age and service conditions for becoming an Eligible Participant were one Year of Service and age 21. A-2 [ ] ENTRY DATE. The Entry Date provisions specified in Part 2 of this Agreement are effective:_________________________________ A-3 [ ] SECTION 401(k) DEFERRALS. The provisions regarding Section 401(k) Deferrals selected under Part 4A of this Agreement are effective:____________________________________________________ A-4 [ ] MATCHING CONTRIBUTION FORMULA. The Employer Matching Contribution formula(s) selected under Part 4B of this Agreement are effective:______________________________________ A-5 [ ] EMPLOYER CONTRIBUTION FORMULA. The Employer Nonelective Contribution formula(s) selected under Part 4C of this Agreement are effective:______________________________________ A-6 [ ] ALLOCATION CONDITIONS FOR RECEIVING AN EMPLOYER MATCHING CONTRIBUTION. The allocation conditions designated under Part 4B, #19 of this Agreement are effective:______________________ A-7 [ ] ALLOCATION CONDITIONS FOR RECEIVING AN EMPLOYER NONELECTIVE CONTRIBUTION. The allocation conditions designated under Part 4C, #24 of this Agreement are effective:______________________ A-8 [ ] SAFE HARBOR 401(k) PLAN PROVISIONS. The Safe Harbor 401(k) Plan provisions under Part 4E of this Agreement are effective: ______________________________________________________________ A-9 [X] VESTING RULES. The vesting schedules selected under Part 6 of this Agreement are effective: January 1, 2004. Prior to January 1, 2004, there was a six-year graded vesting schedule. A-10 [ ] SERVICE CREDITING RULES FOR ELIGIBILITY. The service crediting rules for determining a Year of Service for eligibility purposes under Section 1.4 of the BPD and Part 7 of this Agreement are effective:______________________________________ A-11 [ ] SERVICE CREDITING RULES FOR VESTING. The service crediting rules for determining a Year of Service for vesting purposes under Section 4.5 of the BPD and Part 7 of this Agreement are effective:____________________________________________________ A-12 [ ] FORFEITURE PROVISIONS. The forfeiture provisions selected under Part 8 of this Agreement are effective:_________________ A-13 [ ] DISTRIBUTION PROVISIONS. The distribution options selected under Part 9 of the Agreement are effective for distributions occurring after:______________________________________________ A-14 [ ] IN-SERVICE DISTRIBUTION PROVISIONS. The in-service distribution options selected under Part 10 of the Agreement are effective for distributions occurring after:______________ A-15 [ ] FORMS OF DISTRIBUTION. The optional forms of distribution selected under Part 11 of this Agreement are eligible for distributions occurring after:________________________________ A-16 [ ] SPECIAL EFFECTIVE DATE PROVISIONS FOR MERGED PLANS. If any qualified retirement plans have been merged into this Plan, the provisions of Section 22.59 apply, except as otherwise provided under this A-16:_____________________________________ A-17 [ ] OTHER SPECIAL EFFECTIVE DATES:________________________________ ? 2001 SunTrust Bank 31 APPENDIX B - GUST OPERATIONAL COMPLIANCE [X] Check this selection and complete the remainder of this page if this Plan is being adopted to comply retroactively with the GUST Legislation. An Employer need only check those provisions that apply. If this Plan is not being adopted to comply with the GUST Legislation, this Appendix B need not be completed and may be removed from the Agreement. [ ] B-1. HIGHLY COMPENSATED EMPLOYEE RULES. (See Section 20.2 of the BPD.) [ ] a. TOP-PAID GROUP TEST. The election under Part 13, #68.a. above to use (or to not use) the Top -Paid Group Test did not apply for the following post-1996 Plan Year(s): _____________. [ ] b. CALENDAR YEAR ELECTION. The election under Part 13, #68.b. above to use (or to not use) the Calendar Year Election did not apply for the following post-1996 Plan Year(s): _______________. [ ] c. The OLD-LAW CALENDAR YEAR Election applied for the Plan Year that began in 1997. [ ] B-2. REQUIRED MINIMUM DISTRIBUTIONS. (See Section 10.4 of the BPD.) [ ] a. OPTION TO POSTPONE MINIMUM DISTRIBUTIONS. For calendar year(s) _______________, the Plan permitted Participants (other than Five-Percent Owners) who were still employed with the Employer to postpone minimum distributions in accordance with the Required Beginning Date rules under Section 10.3(a)(1) of the BPD, even though the Plan had not been amended to contain such rules. [ ] b. ELECTION TO STOP REQUIRED MINIMUM DISTRIBUTIONS. Starting in calendar year ______________, a Participant (other than a Five-Percent Owner) who had already started receiving in-service minimum distributions under the Old-Law Required Beginning Date rules may stop receiving such minimum distributions until the Participant's Required Beginning Date under Section 10.3(a)(1) of the BPD. [If this b. is not checked, Participants who began receiving minimum distributions under the Old-Law Required Beginning Date rules must continue to receive such minimum distributions.] [ ] c. APPLICATION OF JOINT AND SURVIVOR ANNUITY RULES. If Employees are permitted to stop their required minimum distributions under b. above and the Joint and Survivor Annuity requirements apply to the Plan under Article 9 of the BPD, the Participant: [ ] (1) will [ ] (2) will not be treated as having a new Distribution Commencement Date when distributions recommence. [NOTE: Do not check this c. if the Plan is not subject to the Joint and Survivor Annuity requirements. See Section 10.4(c) of the BPD for operating rules concerning the application of the Joint and Survivor Annuity rules under this subsection c.] [ ] d. APPLICATION OF PROPOSED REGULATIONS FOR THE 2001 PLAN YEAR. [This d. should be checked only if required minimum distributions made for calendar years beginning on or after January 1, 2001 will be made in accordance with the proposed regulations under Code Section 401(a)(9), which were issued in January 2001. If this d. is checked, required minimum distributions made for calendar years beginning on or after January 1, 2001 may be made in accordance with the proposed regulations, notwithstanding any provision in the Plan to the contrary. An election under this d. applies until the end of the last calendar year beginning before the effective date of final regulations under Code Section 401(a)(9) or such other date specified in guidance published by the Internal Revenue Service. If this d. is not checked, required minimum distributions will continue to be made in accordance with the provisions of Code Section 401(a)(9), without regard to the proposed regulations.] [ ] (1) EFFECTIVE DATE. The election under d. to apply the proposed regulations under Code Section 401(a)(9) applies only for required minimum distributions that are made on or after _______. [In no event may the proposed regulations apply to a required minimum distribution that is made for a calendar year that begins before January 1, 2001.] ? 2001 SunTrust Bank 32 [ ] B-3. SPECIAL EFFECTIVE DATES. [ ] a. INVOLUNTARY DISTRIBUTION THRESHOLD OF $5,000 is first effective under this Plan for distributions made after _______ (no earlier than the first day of the first Plan Year beginning on or after August 5, 1997 and no later than the date the Plan is adopted). [If this a. is not checked, the $5,000 threshold applies to all distributions made on or after the first day of the first Plan Year beginning on or after August 5, 1997, except as provided in an earlier restatement or amendment of the Plan. See Section 20.4 of the BPD.] [ ] b. FAMILY AGGREGATION is repealed for purposes of determining the allocation of Employer Contributions for Plan Years beginning ________ (no earlier than the first Plan Year beginning on or after January 1, 1997 and no later than the date the Plan is adopted). [If this b. is not checked, family aggregation is repealed as of the first Plan Year beginning on or after January 1, 1997. See Section 20.5 of the BPD.] [ ] c. QUALIFIED TRANSPORTATION FRINGES. The inclusion of qualified transportation fringes in the definition of Total Compensation (and Included Compensation) is applicable for years beginning on or after __________ (no earlier than January 1, 1998 and no later than January 1, 2001). [If this c. is not checked, the inclusion of qualified transportation fringes is effective for years beginning on or after January 1, 2001. An earlier date should be entered under this c. only if the Plan was operated to include qualified transportation fringes in Total Compensation (and Included Compensation) during such period.] [ ] B-4. CODE SECTION 415 LIMITATION. Complete this B-4 if for any Limitation Year in which the Code Section 415(e) limitation was applicable under Section 7.5 of the BPD, the Code Section 415(e) limitations were applied in a manner other than that described in Section 7.5(b) of the BPD. Any alternative method described in this B-4 that is used to comply with the Code Section 415(e) limitation must be consistent with Plan operation. [ ] B-5. SPECIAL 401(k) PLAN ELECTIONS. (See Article 17 of the BPD) [ ] a. ADP/ACP TESTING METHODS DURING GUST REMEDIAL AMENDMENT PERIOD. Check this a. if, in any Plan Year beginning after December 31, 1996, but before the adoption of this Agreement, the ADP Test or ACP Test was performed using a different testing method than the one selected under Part 4F, #31.a. or Part 4F, #31.b. and specify the Plan Year(s) in which the other testing method was used: [ ] (1) ADP TEST: ____________ [ ] (2) ACP TEST: ____________ [ ] b. APPLICATION OF SAFE HARBOR 401(k) PLAN PROVISIONS. Check this b. if, prior to the adoption of this Agreement, the Plan was operated in accordance with the Safe Harbor 401(k) Plan provisions, and this Agreement is conforming the document to such operational compliance for the period prior to the adoption of this Agreement. [NOTE: This b. should be checked only if this Agreement is executed within the remedial amendment period applicable to the GUST Legislation. See Article 20 of the BPD.] [ ] (1) GUST EFFECTIVE DATE. The Safe Harbor 401(k) Plan provisions under Part 4E are effective for the Plan Year beginning __________ (may not be earlier than the first Plan Year beginning on or after January 1, 1999). [ ] (2) MODIFICATIONS TO PART 4E. Describe here, if applicable, any Safe Harbor 401(k) Plan provisions applied in operation that are not described or are inconsistent with the selections under Part 4E: [NOTE: The Safe Harbor 401(k) Plan provisions under Part 4E of this Agreement will apply for all Plan Years beginning on or after January 1, 1999 or the GUST effective date designated under (1) above unless specifically modified under this (2).] ? 2001 SunTrust Bank 33 EX-13 3 g88566exv13.txt EX-13 PORTIONS OF THE ANNUAL REPORT BOOKS-A-MILLION 2004 Annual Report COMPANY PROFILE Books-A-Million is one of the nation's leading book retailers and sells on the Internet at www.booksamillion.com. The Company presently operates more than 200 stores in 18 states and the District of Columbia. The Company operates three distinct store formats, including large superstores operating under the names Books-A-Million and Books & Co., traditional bookstores operating under the names Books-A-Million and Bookland, and Joe Muggs Newsstands. The Company's wholesale operations include American Wholesale Book Company and Book$mart, both based in Florence, Alabama. FIVE-YEAR HIGHLIGHTS
FOR THE FISCAL YEAR ENDED ------------------------------------------------------------------- (In thousands, except per share amounts) 1/31/04 (1) 2/1/03 (2) 2/2/02 2/3/01 1/29/00 (3) - ---------------------------------------- ----------- ----------- ----------- ----------- ----------- 52 WEEKS 52 weeks 52 weeks 53 weeks 52 weeks STATEMENT OF OPERATIONS DATA Net sales $ 460,159 $ 438,215 $ 437,583 $ 412,876 $ 397,188 Income before cumulative effect of a change in accounting principle (2) 7,201 2,602 3,919 2,980 5,851 Net income 7,201 1,401 3,919 2,980 5,851 Earnings per share - diluted, before cumulative effect of a change in accounting principle (2) 0.43 0.16 0.23 0.17 0.32 Earnings per share - diluted 0.43 0.08 0.23 0.17 0.32 Weighted average shares - diluted 16,789 16,566 16,945 17,991 18,250 Capital investment 9,008 17,042 11,709 12,417 13,462 BALANCE SHEET DATA Property and equipment, net $ 49,177 $ 57,146 $ 56,716 $ 60,659 $ 64,232 Total assets 285,679 307,718 294,858 292,199 287,327 Long-term debt 20,640 44,942 38,846 41,526 35,936 Stockholders' equity 131,250 122,868 121,338 122,259 120,520 OTHER DATA Working capital $ 104,420 $ 112,596 $ 105,483 $ 103,153 $ 92,987 Debt to total capital ratio 0.14 0.27 0.24 0.25 0.23 OPERATIONAL DATA Total number of stores 202 207 204 185 180 Number of superstores 163 163 157 145 135 Number of traditional stores 35 37 40 37 43 Number of Joe Muggs newsstands 4 7 7 3 2
(1) Effective February 2, 2003, the Company changed its method of accounting for inventories to the last-in, first-out method, as discussed in Note 1 to the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 to the Consolidated Financial Statements. (3) During the fiscal year ended February 1, 2003, the Company restated its consolidated financial statements for the fiscal year ended January 29, 2000. As a result, financial information for the year ended January 29, 2000 is unaudited. 1 BOOKS-A-MILLION 2004 Annual Report LETTER TO STOCKHOLDERS: Fiscal year 2004 was a successful one for Books-A-Million. After the difficult retail environment of the past two years and a weak first quarter influenced by the onset of the war in Iraq, sales rebounded and remained strong throughout the year. June brought the publication of Harry Potter And The Order Of The Phoenix, an event that led to record breaking sales and provided strong momentum for our entire industry. Sales trends in our core book business were encouraging with several standout categories. Diet and health, driven by the low carbohydrate diet phenomenon, led the way. Religion and inspiration, children's books, politics, movie tie-ins and graphic novels also produced strong sales increases. We had several media driven blockbuster bestsellers such as The South Beach Diet, The Da Vinci Code, Harry Potter And The Order Of The Phoenix, Hillary Clinton's memoir Living History and The Purpose Driven Life. These titles not only sold at record levels but also spawned spin-offs, non-book product sales and increased sales of related titles. During the year we gave renewed focus to our proprietary publishing and import programs. The trend toward increased custom publishing was pronounced in the industry last year and we plan to continue to be competitive in this arena. Our cafe business continued to grow with several new lines of drinks. The positive sales environment in the latter part of the year allowed us to pursue a less expensive marketing strategy. We also increased the membership price of the Millionaire's Club program and continued our efforts in cost control to produce improved margins and profitability. Our store remodel program continued with an additional 36 stores converted to our new layout and design criteria. Approximately half of all stores have now completed our remodel program. In addition we opened four new stores during the year, relocated one store and closed nine underperforming stores. 2 BOOKS-A-MILLION 2004 Annual Report Our overall strategy of focusing on top line sales while pursuing improvements in inventory management and expense control led to positive results. We plan to build on the progress we have made to deliver improved sales, margin and profits in the year to come. Sandy Cochran was named Chief Executive Officer, in addition to her responsibilities as President, effective February 1, 2004. Together, we will strive to build on this year's solid results and to add value for both our shareholders and our associates. Thank you for your continued interest and support. /s/ Clyde B. Anderson /s/ Sandra B. Cochran Clyde B. Anderson Sandra B. Cochran Executive Chairman of the Board President, Chief Executive Officer, and Secretary FINANCIAL HIGHLIGHTS
Fiscal Year Ended ------------------------------- (In thousands, except per share amounts) 1/31/04 (1) 2/1/03 (2) ---------------------------------------- ------------ ----------- Net sales $ 460,159 $438,215 Operating profit 15,220 9,285 Income before cumulative effect of change in accounting principle 7,201 2,602 Net income 7,201 1,401 Income per share - diluted, before cumulative effect of change in 0.43 0.16 accounting principle Net income per share 0.43 0.08
As of ------------------------------- (In thousands) 1/31/04 (1) 2/1/03 (2) -------------- ----------- ---------- Working capital $ 104,420 $ 112,596 Total assets 285,679 307,718 Stockholders' equity 131,250 122,868
(1) Effective February 2, 2003, the Company changed its method of accounting for inventories to the last-in, first-out method, as discussed in Note 1 to the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 to the Consolidated Financial Statements. 3 BOOKS-A-MILLION 2004 Annual Report SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended -------------------------------------------------------------- (In thousands, except per share data) 1/31/04 (1) 2/1/03 (2) 2/2/02 2/3/01 1/29/00 (3) ------------------------------------- ----------- ---------- ------ ------ ----------- STATEMENT OF OPERATIONS DATA: 52 WEEKS 52 weeks 52 weeks 53 weeks 52 weeks Net sales $ 460,159 $ 438,215 $ 437,583 $ 412,876 $ 397,188 Cost of products sold, including warehouse distribution and store occupancy costs 334,697 320,704 315,556 299,875 287,649 --------- --------- --------- --------- --------- Gross profit 125,462 117,511 122,027 113,001 109,539 Operating, selling and administrative expenses 94,530 92,178 95,870 88,853 82,783 Depreciation and amortization 15,712 16,048 15,296 14,499 13,530 --------- --------- --------- --------- --------- Operating profit 15,220 9,285 10,861 9,649 13,226 Interest expense, net 2,909 4,171 4,429 4,804 4,211 --------- --------- --------- --------- --------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 12,311 5,114 6,432 4,845 9,015 Provision for income taxes 4,678 1,943 2,444 1,841 3,425 --------- --------- --------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle 7,633 3,171 3,988 3,004 5,590 Discontinued operations: Loss from discontinued operations (including impairment charges) (696) (917) (111) (39) 421 Income tax benefit (provision) 264 348 42 15 (160) --------- --------- --------- --------- --------- Income (loss) from discontinued operations (432) (569) (69) (24) 261 --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle 7,201 2,602 3,919 2,980 5,851 Cumulative effect of change in accounting principle, net of income taxes (2) -- (1,201) -- -- -- --------- --------- --------- --------- --------- Net income $ 7,201 $ 1,401 $ 3,919 $ 2,980 $ 5,851 ========= ========= ========= ========= ========= Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.47 $ 0.20 $ 0.24 $ 0.17 $ 0.32 Income (loss) from discontinued operations (0.03) (0.04) -- -- 0.01 --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting 0.44 0.16 0.24 0.17 0.33 principle Cumulative effect of change in accounting principle (2) -- (0.07) -- -- -- --------- --------- --------- --------- --------- Net income per share $ 0.44 $ 0.09 $ 0.24 $ 0.17 $ 0.33 ========= ========= ========= ========= ========= Weighted average number of shares outstanding - basic 16,279 16,190 16,667 17,955 17,981 ========= ========= ========= ========= ========= DILUTED: Income from continuing operations before cumulative effect of change in accounting principle $ 0.45 $ 0.19 $ 0.24 $ 0.17 $ 0.31 Income (loss) from discontinued operations (0.02) (0.03) (0.01) -- 0.01 --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle 0.43 0.16 0.23 0.17 0.32 Cumulative effect of change in accounting principle (2) -- (0.08) -- -- -- --------- --------- --------- --------- --------- Net income per share $ 0.43 $ 0.08 $ 0.23 $ 0.17 $ 0.32 ========= ========= ========= ========= ========= Weighted average number of shares outstanding - diluted 16,789 16,566 16,945 17,991 18,250 ========= ========= ========= ========= ========= Pro forma amounts assuming the change in accounting principle was applied retroactively: (2) Net income N/A N/A $ 3,866 $ 2,728 $ 5,772 Net income per share - basic N/A N/A 0.23 0.15 0.32 Net income per share - diluted N/A N/A 0.23 0.15 0.32 BALANCE SHEET DATA: Property and equipment, net $ 49,177 $ 57,146 $ 56,716 $ 60,659 $ 64,232 Total assets 285,679 307,718 294,858 292,199 287,327 Long-term debt 20,640 44,942 38,846 41,526 35,936 Stockholders' equity 131,250 122,868 121,338 122,259 120,520 OTHER DATA: Working capital $ 104,420 $ 112,596 $ 105,483 $ 103,153 $ 92,987
(1) Effective February 2, 2003, the Company changed its method of accounting for inventories to the last-in, first-out method, as discussed in Note 1 to the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 to the Consolidated Financial Statements. (3) During the fiscal year ended February 1, 2003, the Company restated its consolidated financial statements for the fiscal year ended January 29, 2000. As a result, financial information for the year ended January 29, 2000 is unaudited. 4 BOOKS-A-MILLION 2004 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS GENERAL The Company was founded in 1917 and currently operates 202 retail bookstores concentrated primarily in the southeastern United States. Of the 202 stores, 163 are superstores which operate under the names Books-A-Million and Books & Co., 35 are traditional stores which operate under the Bookland and Books-A-Million names and four are newsstands which operate under the name Joe Muggs Newsstand. In addition to the retail store formats, the Company offers its products over the Internet at www.booksamillion.com and www.joemuggs.com. As of January 31, 2004, the Company employed approximately 4,800 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, or converting stores to different formats. With the Company's focus on superstores, the number of traditional stores has decreased over the years as new superstores are opened nearby and the traditional stores are closed. During fiscal 2004, the Company opened four stores, closed nine stores and relocated one store. In fiscal 2002, the Company began an extensive remodeling program to bring a consistent look to each store and also to update equipment. Certain stores completed a major remodeling, including new flooring, resetting the fixtures and / or relocating the cafe. Other stores completed a minor remodeling which was limited to resetting fixtures, new signage and paint. Over the past two years, the remodeled stores have outpaced the chain in comparable store sales. During fiscal 2004, the Company remodeled 36 stores. Approximately 50 percent of the Company's stores have been remodeled to date as part of this remodel program. The Company's performance is partially measured based on comparable store sales, which is similar to most retailers. Comparable store sales are determined each fiscal quarter during the year based on all stores that have been open at least 12 full months as of the first day of the fiscal quarter. Any stores closed during a fiscal quarter are excluded from comparable store sales as of the first day of the quarter in which they close. CRITICAL ACCOUNTING POLICIES Inventories Inventory counts are taken throughout the fiscal period. Store inventory counts are performed by an independent inventory service while warehouse inventory counts are performed internally. All physical inventory counts are reconciled to the Company's records. The Company accrues for inventory shortages based upon historical inventory shortage results. Cost is assigned to store and warehouse inventories using the retail inventory method. Using this method, store and warehouse inventories are valued by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail method is an averaging method that is widely used within the retail industry. Inventory costing also requires certain significant management estimates and judgments involving markdowns, the allocation of vendor allowances and shrinkage. These practices affect ending inventories at cost as well as the resulting gross margins and inventory turnover ratios. Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change is preferable in that it achieves a more appropriate matching of revenues and expenses. The impact of this accounting change was to increase "Costs of Products Sold" in the consolidated statements of operations by $0.7 million for the fiscal year ended January 31, 2004. This resulted in an after-tax decrease to net income of $0.4 million or a decrease in net income per diluted share of $0.02. The cumulative effect of a change in accounting principle from the FIFO method to LIFO method is not determinable. Accordingly, such change has been accounted for prospectively. In addition, pro forma amounts from retroactively applying the change cannot be reasonably estimated and have not been disclosed. Vendor Allowances The Company receives allowances from its vendors related to 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 sales of the related inventory. The charge for the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.08 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. 5 BOOKS-A-MILLION 2004 Annual Report Impairment of Long-Lived Assets The Company reviews property and equipment and intangibles periodically to determine whether events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. The Company's long-lived assets are retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores' projected undiscounted cash flows. If an impairment is indicated, an impairment loss is generally recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 2004, 2003 and 2002, impairment losses of $983,000, $241,000 and $232,000, respectively, were recorded in selling, general and administrative costs. For all years presented, the impairment losses related to the retail trade business segment. Accrued Expenses On a monthly basis, certain material expenses are estimated and accrued to properly record those expenses in the period incurred. Such estimates include those made for payroll and employee benefits costs, occupancy costs and advertising expenses among other items. Certain estimates are made based upon analysis of historical results. Differences in management's estimates and assumptions could result in accruals that are materially different from the actual results. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. RESULTS OF OPERATIONS The following table sets forth statement of operations data expressed as a percentage of net sales for the periods presented.
Fiscal Year Ended ---------------------------- 1/31/04 2/1/03 2/2/02 ------- ------ ------ Net sales 100.0% 100.0% 100.0% Gross profit 27.3% 26.8% 27.9% Operating, selling, and administrative expenses 20.6% 21.0% 21.9% Depreciation and amortization 3.4% 3.7% 3.5% Operating profit 3.3% 2.1% 2.5% Interest expense, net 0.6% 0.9% 1.0% Income from continuing operations before income taxes and cumulative effect of change in accounting principle 2.7% 1.2% 1.5% Provision for income taxes 1.0% 0.5% 0.6% Income from continuing operations before cumulative effect of change in accounting principle 1.7% 0.7% 0.9% Loss from discontinued operations (including impairment charges), net of tax -0.1% -0.1% 0.0% Income before cumulative effect of change in accounting principle 1.6% 0.6% 0.9% Cumulative effect of a change in accounting principle 0.0% -0.3% 0.0% Net income 1.6% 0.3% 0.9%
FISCAL 2004 COMPARED TO FISCAL 2003 Consolidated net sales increased $22.0 million to $460.2 million in fiscal 2004 from $438.2 million in fiscal 2003. Comparable store sales increased 3.3% when compared to the same 52-week period last year. The increase in comparable store sales was due to an improving economy, as well as strong sales in categories such as Children's, Fiction and Diet & Health. The Company opened four new stores during fiscal 2004 and closed nine underperforming stores. Net sales for the retail trade segment increased $21.1 million, or 4.9%, to $454.0 million in fiscal 2004 from $432.9 million in fiscal 2003. The increase in sales was due to an improving economy, as well as strong sales in categories such as Children's, Fiction and Diet & Health. Net sales for the electronic commerce segment increased $2.2 million, or 9.3%, to $25.5 million in fiscal 2004 from $23.3 million in fiscal 2003. This increase was primarily due to growth in business-to-business sales volume during fiscal 2004. 6 BOOKS-A-MILLION 2004 Annual Report The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing programs, pricing strategies, store operations and competition. Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $8.0 million, or 6.8%, to $125.5 million in fiscal 2004 from $117.5 million in fiscal 2003. Gross profit as a percentage of net sales increased to 27.3% in fiscal 2004 from 26.8% in fiscal 2003, primarily due to improved sales mix, less promotional discounting and lower occupancy costs as a percentage of net sales. Operating, selling and administrative expenses increased $2.3 million, or 2.6%, to $94.5 million in fiscal 2004 from $92.2 million in fiscal 2003. Operating, selling and administrative expenses as a percentage of net sales decreased to 20.6% in fiscal 2004 from 21.0% in fiscal 2003, primarily due to the impact of higher comparable store sales as well as strong expense controls. Depreciation and amortization decreased $0.3 million, or 2.1% to $15.7 million in fiscal 2004 from $16.0 million in fiscal 2003. Depreciation and amortization as a percentage of net sales decreased to 3.4% in fiscal 2004 from 3.7% in fiscal 2003, due to lower capital expenditures in fiscal 2004. Consolidated operating profit was $15.2 million for fiscal 2004 compared to $9.3 million in fiscal 2003. Operating profit for the retail trade segment was $14.3 million in fiscal 2004 versus $8.8 million in fiscal 2003. This increase was primarily attributable to the higher comparable store sales during fiscal 2004. The operating profit for the electronic commerce segment was $0.3 million compared to the fiscal 2003 operating loss of $0.5 million. The improvement in operating results was due to improved gross margin as a result of increased sales, as well as lower operating costs as a percent to sales. Net interest expense decreased $1.3 million, or 30.3%, to $2.9 million in fiscal 2004 from $4.2 million in fiscal 2003, primarily due to lower average debt levels and lower average interest rates during fiscal 2004. Income taxes were calculated at an effective rate of 38.0% for both fiscal 2004 and 2003. Loss from discontinued operations was $0.7 million in fiscal 2004 compared to $0.9 million in fiscal 2003. The income tax benefit on the loss from discontinued operations was $0.3 million in fiscal 2004 and in fiscal 2003. Loss from discontinued operations, net of tax, was $0.4 million in fiscal 2004 compared to $0.6 million in fiscal 2003. These losses represent the results of four stores that were closed in fiscal 2004 in markets where the Company does not expect to retain the closed stores' customers at another store. FISCAL 2003 COMPARED TO FISCAL 2002 Consolidated net sales increased $0.6 million to $438.2 million in fiscal 2003 from $437.6 million in fiscal 2002. Comparable store sales decreased 2.6% when compared to the same 52-week period last year. The primary reasons for the decrease were weak comparable store sales in book categories and lower music sales (a discontinued line of merchandise). The Company opened six new stores during fiscal 2003 and closed three underperforming stores (these stores were not discontinued operations). Net sales for the retail trade segment increased $2.2 million, or 0.5%, to $432.9 million in fiscal 2003 from $430.7 million in fiscal 2002. The slight increase in sales was due to the six new stores opened during fiscal year 2003. Net sales for the electronic commerce segment increased $1.1 million, or 4.6%, to $23.3 million in fiscal 2003 from $22.2 million in fiscal 2002. This increase was primarily due to growth in business-to-business sales volume during fiscal 2003. The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing programs, pricing strategies, store operations and competition. Gross profit decreased $4.5 million, or 3.7%, to $117.5 million in fiscal 2003 from $122.0 million in fiscal 2002. Gross profit as a percentage of net sales decreased to 26.8% in fiscal 2003 from 27.9% in fiscal 2002, primarily due to higher occupancy costs as a percentage of sales combined with more promotional discount activity during fiscal 2003. Gross profit includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues). Operating, selling and administrative expenses decreased $3.7 million, or 3.9%, to $92.2 million in fiscal 2003, from $95.9 million in fiscal 2002. Operating, selling and administrative expenses as a percentage of net sales decreased to 21.0% in fiscal 2003 from 21.9% in fiscal 2002, primarily due to lower corporate expenses. Depreciation and amortization increased $0.7 million, or 4.9% to $16.0 million in fiscal 2003 from $15.3 million in fiscal 2002. Depreciation and amortization as a percentage of net sales increased to 3.7% in fiscal 2003 from 3.5% in fiscal 2002, due to the increased number of superstores operated by the Company combined with capital improvements made to existing stores during fiscal 2003. Consolidated operating profit was $9.3 million for fiscal 2003 compared to $10.9 million in fiscal 2002. Operating profit for the retail trade segment was $8.8 million in fiscal 2003 versus $11.2 million in fiscal 2002. This decrease was primarily attributable to the lower comparable store sales during fiscal 2003. The operating loss for the electronic commerce segment was $0.5 million compared to the fiscal 2002 loss of $1.7 million. The improvement in operating results was due to improved gross margin as a percent of sales, as well as lower operating costs as a percent to sales. 7 BOOKS-A-MILLION 2004 Annual Report Net interest expense decreased $0.2 million, or 5.8%, to $4.2 million in fiscal 2003 from $4.4 million in fiscal 2002, primarily due to lower average interest rates during fiscal 2003. Income taxes were calculated at an effective rate of 38.0% for both fiscal 2003 and 2002. Loss from discontinued operations was $0.9 million in fiscal 2003 compared to $0.1 million in fiscal 2002. The income tax benefit on the loss from discontinued operations was $0.3 million in fiscal 2003 compared to $42,000 in fiscal 2002. Loss from discontinued operations, net of tax, was $0.6 million in fiscal 2003 compared to $69,000 in fiscal 2002. These losses represent the results of four stores that were closed in fiscal 2004 in markets where the Company does not expect to retain the closed stores' customers at another store. Effective February 3, 2002, the Company adopted 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. The adoption of this accounting principle resulted in a cumulative after-tax reduction to net income of $1.2 million, or $0.08 per diluted share. Additional information is included in Note 1 to the consolidated financial statements. 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 during the year-end holiday selling season. Working capital requirements are generally highest during the third fiscal quarter and the early part of the fourth fiscal quarter due to the seasonality of the Company's business. The Company's results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse impact on the Company's results of operations for the full year. In addition, the Company's results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. New stores require the Company to incur pre-opening expenses and often require several months of operation before generating acceptable sales volumes. Accordingly, the addition of a large number of new stores in a particular quarter could adversely affect the Company's results of operations for that quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flows from operations, including credit terms from vendors, and borrowings under its credit facilities. The Company has an unsecured revolving credit facility that allows borrowings up to $100.0 million, for which no principal repayments are due until the facility expires in July 2005. The credit facility has certain financial and non-financial covenants, the most restrictive of which is the maintenance of a minimum fixed charge coverage ratio. As of January 31, 2004 and February 1, 2003, $13.1 and $37.4 million, respectively, was outstanding under this credit facility. The maximum and average outstanding balances during fiscal 2004 were $77.6 million and $57.5 million, respectively. Outstanding borrowings as of January 31, 2004 had annual interest rates of 2.75%. Additionally, as of January 31, 2004 and February 1, 2003, the Company had outstanding borrowings under an industrial revenue bond totaling $7.5 million, which is secured by certain property. The Company's capital expenditures totaled $9.0 million in fiscal 2004. These expenditures were primarily used for new store openings, renovation and improvements to existing stores, upgrades and expansion of warehouse distribution facilities and investment in management information systems. Management estimates that capital expenditures for fiscal 2005 will be approximately $14.7 million and that such amounts will be used for purposes similar to fiscal 2004. Management believes that existing cash balances and net cash from operating activities, together with borrowings under the Company's credit facilities, will be adequate to finance the Company's planned capital expenditures and to meet the Company's working capital requirements for fiscal 2005. Financial Position During fiscal 2004, the Company opened four new stores and closed nine stores. The store closings, combined with strong inventory management, resulted in decreased inventory and accounts payable balances at January 31, 2004, as compared to February 1, 2003. Net property and equipment decreased due to lower capital expenditures in fiscal 2004. Additionally, long-term debt balances decreased as of January 31, 2004 compared to February 1, 2003 due to improved earnings, lower inventory balances and lower capital expenditures. 8 BOOKS-A-MILLION 2004 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 January 31, 2004:
Payments Due Under Contractual Obligations ------------------------------------------ (in thousands) Total FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Thereafter -------------- ----- ------- ------- ------- ------- ------- ---------- Long-term debt - revolving credit facility $ 13,140 $ $ 13,140 $ -- $ -- $ -- $ -- Long-term debt - industrial revenue bond 7,500 -- 7,500 -- -- -- -- Operating leases 116,533 27,561 24,834 19,429 15,910 11,426 17,373 --------- -------- -------- -------- -------- ------- -------- Total of obligations $ 137,173 $ 27,561 $ 45,474 $ 19,429 $ 15,910 $11,426 $ 17,373 ========= ======== ======== ======== ======== ======= ========
Guarantees From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company's request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not incurred significant costs related to performance under these types of indemnities. No liabilities have been recorded for these obligations on the Company's balance sheet at January 31, 2004, as such liabilities are considered de minimus. Cash Flows Operating activities provided cash of $33,284,000, $10,850,000 and $24,559,000 in fiscal 2004, 2003 and 2002, respectively, and included the following effects: - - Cash provided by inventories in fiscal 2004 of $12,428,000 was primarily the result of increased sales and improved inventory management during the year. Cash used by inventories in fiscal 2003 of $15,103,000 was primarily the result of expanding the store title base in existing stores. Cash provided by inventories in fiscal 2002 was $1,047,000. - - Cash used by accounts payable in fiscal 2004 of $11,895,000 was a result of lower inventory levels for fiscal 2004. Cash provided by accounts payable in fiscal 2003 was $5,472,000 due to higher inventory levels. Accounts payable cash flow changes were an insignificant amount in fiscal 2002. - - Depreciation and amortization expenses were $15,880,000, $16,331,000 and $15,575,000 in fiscal 2004, 2003 and 2002, respectively. The decrease in fiscal 2004 was due to decreased capital expenditures during fiscal 2004, while the increases in fiscal 2003 and 2002 were due to increased capital expenditures in each of the fiscal years. - - Cash provided by accrued expenses was $5,074,000, $348,000 and $319,000 in fiscal 2004, 2003 and 2002, respectively. The increase in fiscal 2004 was primarily due to increases in deferred revenue related to the Company's discount card and higher bonus accruals due to the Company's improved earnings performance in fiscal 2004. Cash used in investing activities in fiscal 2004, 2003 and 2002 reflected a net use of cash of $8,969,000, $16,982,000 and $18,206,000, respectively. Cash was used primarily to fund capital expenditures for new store openings, acquisitions of stores, renovation and improvements to existing stores, warehouse distribution purposes and investments in management information systems. Financing activities used cash of $23,944,000 in fiscal 2004 to repay debt under the credit facility. Financing activities in fiscal 2003 provided cash of $5,897,000 from borrowings under the credit facility. In fiscal 2002, cash used in financing activities was $6,265,000, which was used to repurchase 1,412,000 shares of the Company's common stock and to repay debt under the credit facility. 9 BOOKS-A-MILLION 2004 Annual Report Outlook For fiscal 2005, the Company currently expects to open approximately six to eight new superstores, relocate or remodel approximately 20 to 25 stores and close approximately two to four stores. Management estimates that capital expenditures for fiscal 2005 will be approximately $14.7 million and that such amounts will be used primarily for new store openings, renovations and improvements to existing stores, upgrades and expansion of warehouse distribution facilities and investment in management information systems. NEW ACCOUNTING STANDARDS In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this statement are effective for financial statements for fiscal years ending after December 15, 2002, and are included herein. The Company has not adopted the fair value method of recording stock options under SFAS No. 123. The FASB has now determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an accounting standard that would become effective in fiscal 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's financial position, results of operations or cash flows. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), was issued in January 2003. This interpretation requires consolidation of variable interest entities ("VIE"), also formerly referred to as "special purpose entities," if certain conditions are met. The interpretation applies immediately to VIE's created after January 31, 2003 and to interests obtained in VIE's after January 31, 2003. Beginning after June 15, 2003, the interpretation also applies to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities--An Interpretation of ARB 51" (revised December 2003) ("FIN 46R"), which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN 46R includes revised transition dates for public entities. The Company is now required to adopt the provisions of FIN 46R no later than the first quarter of fiscal 2005. The adoption of this interpretation is not expected to have a material effect on the Company's financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. The provisions of SFAS 149 require that contracts with comparable characteristics be accounted for similarly. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The requirements of SFAS No. 149 did not have a material impact on the Company's financial position, results of operations or cash flows. RELATED PARTY ACTIVITIES As discussed in Note 6 of Notes to Consolidated Financial Statements, the Company conducts business with other entities in which certain officers, directors and principal stockholders of the Company have controlling ownership interests. The most significant related party transactions include inventory purchases from, and sales to, related parties. Related party inventory purchases were essentially flat in fiscal 2004 when compared to fiscal 2003. Related party sales transactions increased in fiscal 2004 due to higher sales of book product. The Company leases certain office, retail and warehouse space from related parties of which the rents have remained relatively unchanged. Management believes the terms of these related party transactions are substantially equivalent to those available from unrelated parties. 10 BOOKS-A-MILLION 2004 Annual Report DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market areas; inflation; economic conditions in general and in the Company's specific market areas; the number of store openings and closings; the profitability of certain product lines; capital expenditures and future liquidity; liability and other claims asserted against the Company; uncertainties related to the Internet and the Company's Internet operations; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, stockholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events or developments. 11 BOOKS-A-MILLION 2004 Annual Report CONSOLIDATED BALANCE SHEETS
As Of ----- (Dollars in thousands, except per share amounts) 1/31/04 2/1/03 ------------------------------------------------ ------- ------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,348 $ 4,977 Accounts receivable, net of allowance for doubtful accounts of $545 and $712, respectively 7,271 7,799 Related party receivables 351 437 Inventories 211,591 224,019 Prepayments and other 5,890 5,380 Deferred income taxes 4,446 6,130 -------- --------- Total Current Assets 234,897 248,742 -------- --------- PROPERTY AND EQUIPMENT: Land 628 628 Buildings 6,130 6,118 Equipment 67,418 62,193 Furniture and fixtures 44,815 44,260 Leasehold improvements 47,282 45,899 Construction in process 193 270 -------- --------- Gross Property and Equipment 166,466 159,368 Less accumulated depreciation and amortization 117,289 102,222 -------- --------- Net Property and Equipment 49,177 57,146 -------- --------- OTHER ASSETS: Goodwill, net 1,368 1,368 Other 237 462 -------- --------- Total Other Assets 1,605 1,830 -------- --------- Total Assets $285,679 $ 307,718 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable: Trade $ 87,984 $ 99,585 Related party 8,777 9,071 Accrued expenses 30,189 24,790 Accrued income taxes 3,527 2,530 Current portion of long-term debt -- 170 -------- --------- Total Current Liabilities 130,477 136,146 -------- --------- LONG-TERM DEBT 20,640 44,942 DEFERRED INCOME TAXES 1,805 1,703 OTHER LONG-TERM LIABILITIES 1,507 2,059 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, 18,465,387 and 18,211,706 shares issued at January 31, 2004 and February 1, 2003, respectively 185 182 Additional paid-in capital 71,799 70,849 Treasury stock at cost (2,010,050 shares at January 31, 2004 and February 1, 2003) (5,271) (5,271) Deferred compensation (284) -- Accumulated other comprehensive loss, net of tax (707) (1,219) Retained earnings 65,528 58,327 -------- --------- Total Stockholders' Equity 131,250 122,868 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $285,679 $ 307,718 ======== =========
The accompanying notes are an integral part of these consolidated statements. 12 BOOKS-A-MILLION 2004 Annual Report CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended ----------------- (In thousands, except per share data) 1/31/04 2/1/03 2/2/02 ------------------------------------- ------- ------ ------ 52 WEEKS 52 weeks 52 weeks Net sales $ 460,159 $ 438,215 $ 437,583 Cost of products sold, including warehouse distribution and store occupancy costs(1) 334,697 320,704 315,556 --------- --------- --------- GROSS PROFIT 125,462 117,511 122,027 Operating, selling and administrative expenses 94,530 92,178 95,870 Depreciation and amortization 15,712 16,048 15,296 --------- --------- --------- OPERATING PROFIT 15,220 9,285 10,861 Interest expense, net 2,909 4,171 4,429 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 12,311 5,114 6,432 Provision for income taxes 4,678 1,943 2,444 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,633 3,171 3,988 Discontinued operations: Loss from discontinued operations (including impairment charges) (696) (917) (111) Income tax benefit 264 348 42 --------- --------- --------- Loss from discontinued operations (432) (569) (69) --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,201 2,602 3,919 Cumulative effect of change in accounting principle, net of deferred income tax benefit of $ 736 -- (1,201) -- --------- --------- --------- NET INCOME $ 7,201 $ 1,401 $ 3,919 ========= ========= ========= Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.47 $ 0.20 $ 0.24 Loss from discontinued operations (0.03) (0.04) -- --------- --------- --------- Income before cumulative effect of change in accounting principle 0.44 0.16 0.24 Cumulative effect of change in accounting principle -- (0.07) -- --------- --------- --------- Net income per share $ 0.44 $ 0.09 $ 0.24 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC 16,279 16,190 16,667 ========= ========= ========= DILUTED: Income from continuing operations before cumulative effect of change in accounting principle $ 0.45 $ 0.19 $ 0.24 Loss from discontinued operations (0.02) (0.03) (0.01) --------- --------- --------- Income before cumulative effect of change in accounting principle 0.43 0.16 0.23 Cumulative effect of change in accounting principle -- (0.08) -- --------- --------- --------- Net income per share $ 0.43 $ 0.08 $ 0.23 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED 16,789 16,566 16,945 ========= ========= ========= Pro forma amounts assuming the change in accounting principle was applied retroactively: NET INCOME N/A N/A $ 3,866 NET INCOME PER SHARE - BASIC N/A N/A $ 0.23 NET INCOME PER SHARE - DILUTED N/A N/A $ 0.23
(1) Inventory purchases from related parties were $30,380, $30,212 and $29,679, respectively, for the years presented above. The accompanying notes are an integral part of these consolidated statements. 13 BOOKS-A-MILLION 2004 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Common Stock Additional Treasury Stock Other Total -------------- Paid-In ---------------- Deferred Retained Comprehensive Stockholders (In thousands) Shares Amount Capital Shares Amount Compensation Earnings Income (Loss) Equity -------------- ------ ------ ------- ------ ------ ------------ -------- ------------- ------ BALANCE, FEBRUARY 3, 2001 18,092 $ 181 $ 70,634 598 $ (1,563) $ -- $ 53,007 $ -- $ 122,259 Net income 3,919 3,919 Cumulative effect of accounting change for derivative instruments, net of tax benefit of $285 (465) (465) Unrealized loss on accounting for derivative instruments, net of tax benefit of $461 (752) (752) ------------ Subtotal of comprehensive income 2,702 ------------ Purchase of treasury stock 1,412 (3,708) (3,708) Issuance of stock for employee stock purchase plan 46 -- 83 83 Exercise of stock options 1 2 2 ------ ------ ---------- ------ -------- ------------ -------- ------------- ------------ BALANCE, FEBRUARY 2,2002 18,139 181 70,719 2,010 (5,271) -- 56,926 (1,217) 121,338 ====== ====== ========== ====== ======== ============ ======== ============= ============ Net income 1,401 1,401 Unrealized loss on accounting for derivative instruments (2) (2) ------------ Subtotal comprehensive income 1,399 ------------ Issuance of stock for employee stock purchase plan 47 1 85 86 Exercise of stock options 26 45 45 ------ ------ ---------- ------ -------- ------------ -------- ------------- ------------ BALANCE, FEBRUARY 1, 2003 18,212 182 70,849 2,010 (5,271) -- 58,327 (1,219) 122,868 ====== ====== ========== ====== ======== ============ ======== ============= ============ Net income 7,201 7,201 Unrealized gain on accounting for derivative instruments, net of tax provision of $139 228 228 Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $ 174 284 284 ------------ Subtotal comprehensive income 7,713 ------------ Issuance of restricted stock 34 284 (284) -- Issuance of stock for employee stock purchase plan 42 83 83 Exercise of stock options 177 3 442 445 Tax benefit from exercise of stock options 141 141 ------ ------ ---------- ------ -------- ------------ -------- ------------- ------------ BALANCE, JANUARY 31, 2004 18,465 $ 185 $ 71,799 2,010 $ (5,271) $ (284) $ 65,528 $ (707) $ 131,250 ====== ====== ========== ====== ======== ============ ======== ============= ============
The accompanying notes are an integral part of these consolidated statements. 14 BOOKS-A-MILLION 2004 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended --------------------------------- (In thousands) 1/31/04 2/1/03 2/2/02 -------------- ------- ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,201 $ 1,401 $ 3,919 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax -- 1,201 -- Depreciation and amortization 15,880 16,331 15,575 Loss on impairment of assets 1,211 382 232 Loss on sale of property 73 136 110 Deferred income tax provision (benefit) 1,786 (4) (134) Tax benefit of exercise of stock options 141 -- -- Reclassification of unrealized loss from de-designation of cash flow hedge 284 -- -- (Increase) decrease in assets, net of effect of acquisition in fiscal 2002: Accounts receivable 528 241 (402) Related party receivables 86 530 1,391 Inventories 12,428 (15,103) 1,047 Prepayments and other (510) 59 (1,173) Increase (decrease) in liabilities: Accounts payable (11,601) 2,062 3,454 Related party payables (294) 3,410 (1,843) Accrued income taxes 997 (144) 2,064 Accrued expenses 5,074 348 319 --------- -------- -------- Total adjustments 26,083 9,449 20,640 --------- -------- -------- Net cash provided by operating activities 33,284 10,850 24,559 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,008) (17,042) (11,709) Acquisition of stores -- -- (6,532) Proceeds from sale of property and equipment 39 60 35 --------- -------- -------- Net cash used in investing activities (8,969) (16,982) (18,206) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facilities 192,490 203,378 186,004 Repayments under credit facilities (216,790) (197,283) (188,197) Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan 528 131 85 Purchase of treasury stock -- -- (3,708) Repayments of other debt (172) (329) (449) --------- -------- -------- Net cash provided by (used in) financing activities (23,944) 5,897 (6,265) --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 371 (235) 88 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,977 5,212 5,124 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,348 $ 4,977 $ 5,212 ========= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 3,133 $ 4,084 $ 4,128 ========= ======== ======== Income taxes, net of refunds $ 1,694 $ 1,388 $ 955 ========= ======== ========
The accompanying notes are an integral part of these consolidated statements. 15 BOOKS-A-MILLION 2004 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Books-A-Million, Inc. and its subsidiaries (the "Company") are principally engaged in the sale of books, magazines and related items through a chain of retail bookstores. The Company presently operates 202 bookstores in 18 states and the District of Columbia, which are predominantly located in the southeastern United States. The Company also operates a retail Internet website. The Company presently consists of Books-A-Million, Inc., and its two wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American Wholesale") and American Internet Service, Inc. ("AIS"). All significant inter-company balances and transactions have been eliminated in consolidation. For a discussion of the Company's business segments, see Note 9. Fiscal Year The Company operates on a 52-53 week year, with the fiscal year ending on the Saturday closest to January 31. Fiscal years 2004, 2003 and 2002 were all 52-week periods. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. The Company sells its Millionaire's Club Card, which entitles the customer to receive a ten percent discount on all purchases made during the twelve-month membership period, for a non-refundable fee. The Company recognizes this revenue over the twelve-month membership period based upon historical customer usage patterns. Related deferred revenue is included in accrued expenses. Vendor Allowances The Company receives allowances from its vendors from a variety of programs and arrangements, including placement and co-operative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in costs of goods sold upon the sale of the related inventory. The charge for the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.08 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. Inventories Inventories are valued at the lower of cost or market, using the retail method. Market is determined based on the lower of replacement cost or estimated realizable value. Using the retail method, store and warehouse inventories are valued by applying a calculated cost to retail ratio to the retail value of inventories. Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change was preferable in that it achieves a more appropriate matching of revenues and expenses. The impact of this accounting change was to increase "Costs of Products Sold" in the consolidated statements of operations by $0.7 million for the fiscal year ended January 31, 2004. This resulted in an after-tax decrease to fiscal 2004 net income of $0.4 million or a decrease in net income per diluted share of $0.02. The cumulative effect of a change in accounting principle from the FIFO method to LIFO method is not determinable. Accordingly, such change has been accounted for prospectively. In addition, pro forma amounts from retroactively applying the change cannot be reasonably estimated and have not been disclosed. 16 BOOKS-A-MILLION 2004 Annual Report Physical inventory counts are taken throughout the course of the fiscal period and reconciled to the Company's records. Accruals for inventory shortages are estimated based upon historical shortage results. Inventories were:
Fiscal Year Ended ------------------------------ January 31, February 1, (In thousands) 2004 2003 ------------- ----------- -------------- Inventories (at FIFO) $ 212,251 $ 224,019 LIFO reserve (660) -- ----------- -------------- Net inventories $ 211,591 $ 224,019 =========== ==============
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 is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from 10 to 40 years) or, if applicable, the periods of the leases. 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. Impairment of Long-Lived Assets The Company reviews property and equipment and intangibles periodically to determine whether events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. The Company's long-lived assets are retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores' projected undiscounted cash flows. If impairment is indicated, an impairment loss is generally recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 2004, 2003 and 2002, impairment losses of $983,000, $241,000 and $232,000, respectively, were recorded in selling, general and administrative costs (also see Note 8 for impairment losses included in discontinued operations). For all years presented, the impairment losses related to the retail trade business segment. Loss from Discontinued Operations The Company periodically closes under-performing stores. The Company believes that a store is a component under Statement of Financial Accounting Standards ("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 a surrounding Company store(s) within the same market area. Management evaluates certain factors in determining whether a closed store's operations could be absorbed by a 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 8 for discontinued operations disclosures. Store Opening Costs Non-capital expenditures incurred in preparation for opening new retail stores are expensed as incurred. Store Closing Costs The Company continually evaluates the profitability of its stores. When the Company closes or relocates a store, the Company incurs unrecoverable costs, including 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 2004, 2003 and 2002, the Company recognized store closing costs of $219,000, $22,000 and $119,000, respectively. Advertising Costs The costs of advertising are expensed as incurred. Advertising costs, net of applicable vendor reimbursements, are charged to operating, selling and administrative expenses, and totaled $2,995,000, $4,204,000 and $7,192,000 for fiscal years 2004, 2003 and 2002, respectively. 17 BOOKS-A-MILLION 2004 Annual Report Insurance Accruals The Company is subject to large deductibles under its workers' compensation and health insurance policies. Amounts are accrued currently for the estimated cost of claims incurred, both reported and unreported. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Receivables Receivables represent customer (both wholesale and retail), landlord and other receivables due within one year and are net of any allowance for doubtful accounts. Net receivables were $7,622,000 and $8,236,000 at January 31, 2004 and February 1, 2003, respectively. Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. Earnings Per Share Basic net income per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options granted to employees are exercised and resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS has been computed based on the average number of shares outstanding including the effect of outstanding stock options, if dilutive, in each respective year. A reconciliation of the weighted average shares for basic and diluted EPS is as follows:
Fiscal Year Ended ----------------------------- (In thousands) 1/31/04 2/1/03 2/2/02 - ------------------------------------------------ ------- ------ ------ Weighted average shares outstanding: Basic 16,279 16,190 16,667 Dilutive effect of stock options outstanding 510 376 278 ------- ------ ------ Diluted 16,789 16,566 16,945 ======= ====== ======
Weighted options outstanding of 801,000, 1,577,000 and 1,368,000 for the years ended January 31, 2004, February 1, 2003 and February 2, 2002, respectively, were not included in the table above as they were anti-dilutive in those periods. Disclosure of Fair Value of Financial Instruments Based upon the Company's variable rate debt and the short-term nature of its other financial instruments, the estimated fair values of the Company's financial instruments recognized on the balance sheet at January 31, 2004 and February 1, 2003 approximate their carrying values at those dates. Stock-Based Compensation At January 31, 2004 and February 1, 2003, the Company had one stock option plan that is described more fully in Note 5. The Company accounts for the plan under the recognition and measurement principles of Accounting Pronouncements Bulletin (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transaction and Disclosure - An Amendment of FASB Statement No. 123," to stock-based employee compensation: 18 BOOKS-A-MILLION 2004 Annual Report
Fiscal Year Ended --------------------------- (In thousands, except per share amounts) 1/31/04 2/1/03 2/2/02 ---------------------------------------- ------- -------- -------- Net income, as reported $ 7,201 $ 1,401 $ 3,919 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects 1,362 1,315 1,133 ------- -------- -------- Pro forma net income $ 5,839 $ 86 $ 2,786 ======= ======== ======== Net income per common share: Basic - as reported $ 0.44 $ 0.09 $ 0.24 Basic - pro forma $ 0.36 $ 0.01 $ 0.17 Diluted - as reported $ 0.43 $ 0.08 $ 0.23 Diluted - pro forma $ 0.35 $ 0.01 $ 0.16
The fair value of the options granted under the Company's stock option plan during fiscal 2004, 2003 and 2002 was estimated on their date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 1.06%, 1.01% and 1.21%, respectively; risk free interest rates of 3.87% to 4.90%, 3.63% to 5.10% and 3.76% to 5.71%, respectively; and expected lives of six or ten years. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities," and SFAS No. 149, "Amendment of SFAS No. 133 on Derivative and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The adoption of hedge accounting provided for in these statements, on February 4, 2001, resulted in a cumulative after-tax increase to other comprehensive loss, pertaining to years prior to fiscal 2002, of $465,000. At January 31, 2004 and February 1, 2003, liabilities related to derivatives are classified as other long-term liabilities totaling $1,507,000 and $2,059,000, respectively. Shareholders' Equity In fiscal 2000, the Board of Directors authorized a common stock repurchase program for up to $6.0 million of the Company's outstanding shares. At January 31, 2003 and February 1, 2002, the Company had repurchased 2,010,050 shares for a cost of $5,271,000. Those shares are held in treasury. This repurchase program was discontinued in March 2004. In March 2004, the Board of Directors authorized a new common stock repurchase program for up to an additional 1.6 million shares, or 10% of the outstanding stock. 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 as explained in Note 3. Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this statement are effective for financial statements for fiscal years ending after December 15, 2002, and are included herein. The Company has not adopted the fair value method of recording stock options under SFAS No. 123. The FASB has now determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an accounting standard that would become effective in fiscal 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's financial position, results of operations or cash flows. 19 BOOKS-A-MILLION 2004 Annual Report FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46"), was issued in January 2003. This interpretation requires consolidation of variable interest entities ("VIE"), also formerly referred to as "special purpose entities," if certain conditions are met. The interpretation applies immediately to VIE's created after January 31, 2003 and to interests obtained in VIE's after January 31, 2003. Beginning after June 15, 2003, the interpretation also applies to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities--An Interpretation of ARB 51," (revised December 2003) ("FIN 46R"), which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN 46R includes revised transition dates for public entities. The Company is now required to adopt the provisions of FIN 46R no later than the first quarter of fiscal 2005. The adoption of this interpretation is not expected to have a material effect on the Company's financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS 149"). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. The provisions of SFAS 149 require that contracts with comparable characteristics be accounted for similarly. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The requirements of SFAS No. 149 did not have a material impact on the Company's financial position, results of operations or cash flows. Prior Year Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 2. INCOME TAXES A summary of the components of the income tax provision is as follows (in thousands):
Fiscal Year Ended ------------------------------------ 1/31/04 2/1/03 2/2/02 --------- ---------- --------- Current: Federal $ 2,916 $ 1,567 $ 2,450 State 25 32 86 --------- ---------- --------- $ 2,941 $ 1,599 $ 2,536 --------- ---------- --------- Deferred: Federal 1,609 $ (3) $ (132) State (136) (1) (2) --------- ---------- --------- 1,473 (4) (134) --------- ---------- --------- Provision for income taxes $ 4,414 $ 1,595 $ 2,402 ========= ========== =========
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Fiscal Year Ended ---------------------------------- 1/31/04 2/1/03 2/2/02 ------- ------ ------ Federal statutory income tax rate 34.0% 34.0% 34.0% State income tax provision 0.2% 1.0% 1.3% Nondeductible meals and entertainment expense 0.6% 2.7% 1.0% Other 3.2% 0.3% 1.7% ---- ---- ---- Effective income tax rate 38.0% 38.0% 38.0% ==== ==== ====
Temporary differences (in thousands) which created deferred tax assets (liabilities) at January 31, 2004 and February 1, 2003, are as follows:
As of 1/31/04 As of 2/1/03 --------------------------- ------------------------- CURRENT NONCURRENT Current Noncurrent ---------- ------------ -------- ------------ Depreciation $ -- $ (2,521) $ $ (2,082) Accruals 3,172 -- 2,736 -- Interest rate swap 434 -- 747 -- Inventory 637 -- 2,318 -- State net operating loss carryforwards -- 831 -- 441 Other 203 (115) 329 (62) ---------- ------------ -------- ------------ Deferred tax asset (liability) $ 4,446 $ (1,805) $ 6,130 $ (1,703) ========== ============ ======== ============
20 BOOKS-A-MILLION 2004 Annual Report At January 31, 2004, the Company had state net operating loss carryforwards of approximately $20,308,000 that expire beginning in 2006 through 2024. No valuation allowance for net deferred income tax assets is deemed necessary, as the realization of recorded deferred tax assets is considered more likely than not. 3. DEBT AND LINES OF CREDIT The Company refinanced its credit facility during fiscal 2003. The new facility allows for unsecured borrowings up to $100 million for which no principal payments are due until the facility expires in July 2005. Interest on borrowing is determined based upon applicable LIBOR rates and the Company's rate spread, which varies depending on the maintenance of certain covenants. The credit facility has certain financial and non-financial covenants. The most restrictive financial covenant is the maintenance of a minimum fixed charge coverage ratio. As of January 31, 2004 and February 1, 2003, $13.1 million and $37.4 million, respectively, were outstanding under this credit facility. The maximum and average outstanding balances during fiscal 2004 were $77.6 million and $57.5 million, respectively. The outstanding borrowings as of January 31, 2004, had annual interest rates of 2.75%. The Company is subject to interest rate fluctuations involving its credit facility. To manage this exposure, the Company utilizes interest rate swaps to fix the interest rate on variable debt. The Company entered into two separate $10.0 million interest rate swaps on July 24, 2002. Both swaps expire in August 2005 and effectively fix the interest rate on $20.0 million of variable debt at 5.13%, except during the fourth quarter of fiscal 2003, during which neither swap was in effect. The counter parties to the interest rate swaps are two of the Company's primary banks. The Company believes the credit and liquidity risk of the counter parties failing to meet their obligation is remote as the Company settles its interest position with the banks on a quarterly basis. During fiscal 1996 and fiscal 1995, the Company acquired and constructed certain warehouse and distribution facilities with the proceeds of loans made pursuant to an industrial development revenue bond (the "Bond"), which are secured by a mortgage interest in these facilities. As of January 31, 2004 and February 1, 2003, there were $7.5 million of borrowings outstanding under these arrangements, which bear interest at variable rates. The net book value of the collateral property securing the Bond was $5,179,000 as of January 31, 2004. The Bond has a maturity date of December 1, 2019, with a purchase provision obligating the Company to repurchase the Bond on May 11, 2005, unless extended by the bondholder. Such an extension may be renewed annually by the bondholder, at the Company's request, to a date no more than five years from the renewal date. The Company maintains a $7.5 million interest rate swap that effectively fixes the interest rate on the Bond at 7.98%. The swap was entered into in May 1996 and has a term of ten years. The Company's hedges are generally 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, amounts held in accumulated other comprehensive income (loss) will be reclassified to earnings when the hedge transaction affects earnings. The Company's interest rate swaps were reported as a liability classified in other long-term liabilities in the accompanying consolidated balance sheets at their fair value of $1.5 million and $2.1 million as of January 31, 2004 and February 1, 2003, respectively. For the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002, adjustments of $228,000, $(2,000) and $(752,000) were recorded as unrealized gains (losses) in accumulated other comprehensive income (loss), after-tax. During the fourth quarter of fiscal 2004, one interest rate swap no longer qualified for hedge accounting under SFAS No. 133. Therefore, the Company de-designated the hedge resulting in an expense of approximately $284,000. 4. LEASES The Company leases the premises for its retail bookstores under operating leases, which expire in various years through the year 2014. 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. 21 BOOKS-A-MILLION 2004 Annual Report Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of January 31, 2004 are as follows (in thousands):
Future Minimum Fiscal Year Rent ----------- -------------- 2005 $ 27,561 2006 24,834 2007 19,429 2008 15,910 2009 11,426 Subsequent years 17,373 -------------- Total $ 116,533 ==============
Rental expense for all operating leases consisted of the following (in thousands):
FISCAL YEAR ENDED ---------------------------------------- 1/31/04 2/1/03 2/2/02 ---------- ------------ ------------- Minimum rentals $ 30,519 $ 30,157 $ 28,880 Contingent rentals 684 552 595 ---------- ------------ ------------- Total $ 31,203 $ 30,709 $ 29,475 ========== ============ =============
5. EMPLOYEE BENEFIT PLANS 401(k) Profit-Sharing Plan The Company and its subsidiaries maintain a 401(k) plan covering all employees who have completed 6 months of service and who are at least 21 years of age, and permit participants to contribute from 2% to 15% of compensation to the plan. Company matching and supplemental contributions are made at management's discretion. The expense under this plan was $467,000, $437,000 and $417,000 in fiscal 2004, 2003 and 2002, respectively. Stock Option Plan The Company maintains a stock option plan reserving 3,800,000 shares of the Company's common stock for grants to executive officers, directors, and key employees. Prior to January 9, 2001, all options granted to employees become exercisable in equal annual increments over a five-year period and expire on the sixth anniversary of the date of grant. On January 9, 2001, the Compensation Committee of the Board of Directors approved an amendment to the Stock Option Plan that allows all options granted on or after that date to vest in equal annual increments over a three-year period and expire on the tenth anniversary of the date of the grant. All stock options have exercise prices equal to the fair market value of the common stock on the date of grant. A summary of the status of the Company's stock option plan is as follows:
Fiscal Year Ended --------------------------------------------------------------------- JANUARY 31, 2004 February 1, 2003 February 2, 2002 ------------------- ------------------- -------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise (Shares in thousands) SHARES PRICE Shares Price Shares Price --------------------- ------ ---------- ------ ---------- ------ ---------- Outstanding at beginning of year 2,576 $ 4.90 2,469 $ 5.30 2,210 $ 5.76 Granted 278 6.45 386 2.41 410 3.03 Exercised (177) 2.51 (26) 1.74 (1) 1.69 Forfeited (369) 5.24 (253) 5.30 (150) 5.89 ------ ---------- ------ ---------- ------ ---------- Outstanding at end of year 2,308 $ 5.22 2,576 $ 4.90 2,469 $ 5.30 ------ ---------- ------ ---------- ------ ---------- Exercisable at end of year 1,525 $ 5.52 1,468 $ 5.60 1,108 $ 6.14 ------ ---------- ------ ---------- ------ ---------- Weighted average fair value of options granted $ 5.97 $ 2.20 $ 2.90 ====== ========== ====== ========== ====== ==========
During fiscal years 2004, 2003 and 2002, the Company recognized tax benefits related to the exercise of stock options in the amount of $141,000, $6,000 and $0, respectively. The tax benefits were credited to paid-in capital in the respective years. 22 BOOKS-A-MILLION 2004 Annual Report The following table summarizes information about stock options outstanding at January 31, 2004 (shares in thousands):
Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------- Weighted Number Average Number Outstanding at Remaining Weighted Exercisable at Weighted Range of January 31, Contractual Average January 31, Average Exercise Price 2004 Life (Years) Exercise Price 2004 Exercise Price - -------------- -------------- ------------ -------------- -------------- -------------- $1.38 - $ 2.37 817 7.63 $ 1.95 603 $ 1.80 $2.39 - $ 7.69 1,055 6.30 $ 5.57 517 $ 5.91 $8.19 - $13.00 436 1.23 $ 10.50 405 $ 10.58 ----- ----- Totals 2,308 5.81 $ 5.22 1,525 $ 5.52 ===== ==== ============== ===== ==============
The Company also maintains separate option plans for its subsidiaries. A total of 40,000 shares of common stock is authorized under these plans and all 40,000 shares were available for issuance as of January 31, 2004. 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, 224,305 shares have been purchased as of January 31, 2004. Executive Incentive Plan The Company maintains an Executive Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for awards to certain executive officers of both cash and shares of restricted stock. Issuance of awards under the Incentive Plan is based on the Company achieving pre-established performance goals during a three consecutive fiscal year performance period. Awards issued under the Incentive Plan vest based on the grantee's employment at the end of a three year restriction period which commences at the end of the performance period for which the awards were issued. Awards under the Incentive Plan are expensed ratably over the period from the date that the issuance of such awards becomes probable through the end of the restriction period. Awards granted under the Incentive Plan for the three year performance period ended January 31, 2004 totaled $284,000. No awards were issued under the Incentive Plan for the three year performance periods ended February 1, 2003 and February 2, 2002. 6. RELATED PARTY TRANSACTIONS Certain stockholders and directors (including certain officers) of the Company have controlling ownership interests in other entities with which the Company conducts business. Transactions between the Company and these various other entities ("related parties") are summarized in the following paragraphs. The Company purchases a substantial portion of its magazines as well as certain of their seasonal music and newspapers from Anderson Media Corporation ("Anderson Media"), an affiliate through common ownership. During fiscal 2004, 2003 and 2002, purchases of these items from Anderson Media totaled $28,160,000, $27,736,000 and $27,934,000, respectively. The Company purchases certain of its collectibles and books from Anderson Press, Inc. ("Anderson Press"), an affiliate through common ownership. During fiscal 2004, 2003 and 2002, such purchases from Anderson Press totaled $853,000, $1,153,000 and $440,000, 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 2004, 2003 and 2002 were $265,000, $460,000 and $368,000, respectively. The Company purchases certain magazine subscriptions from Magazines.com, an affiliate through common ownership. During fiscal 2004, 2003 and 2002, purchases of these items were $89,000, $59,000 and $58,000, respectively. The Company purchases content for publication from Publication Marketing Corporation, an affiliate through common ownership. During fiscal 2004, 2003 and 2002, purchases of these items were $72,000, $56,000 and $38,000, respectively. The Company purchases various gift products from American Promotional Events, Inc. ("American Promotional Events"), an affiliate through common ownership. These items totaled $29,000, $18,000 and $80,000 during fiscal 2004, 2003 and 2002, 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 $910,000, $729,000 and $761,000 for fiscal 2004, 2003 and 2002, respectively. These amounts paid to Anco Far East primarily included the actual cost of the product, as well as duty, freight and fees for consolidation and sourcing. All costs other than the sourcing & consolidation service fees were passed through from other vendors. Anco Far East fees, net of the pass through, were $77,000, $73,000 and $76,000, respectively. 23 BOOKS-A-MILLION 2004 Annual Report The Company sold books to (received returns from) Anderson Media in the amounts of $443,000, $(116,000) and $(31,000) in fiscal 2004, 2003 and 2002, respectively. The Company's sales to Anderson Media significantly decreased in fiscal 2003 and 2002; however, returns were still being processed from previous years, and as a result, net returns were recorded for those years. During fiscal 2004, 2003 and 2002, the Company provided $226,000, $131,000 and $128,000, respectively, of internet services to Magazines.com. The Company provided internet services to American Promotional Events of $50,000, $55,000 and $73,000 in fiscal 2004, 2003 and 2002, 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 member of the Board of Directors. The lease extends to January 31, 2006. During fiscal 2004, 2003 and 2002, the Company paid rent of $137,000 in each year to the trust under this lease. Anderson & Anderson LLC ("A&A"), which is an affiliate through common ownership, also leases three buildings to the Company. During fiscal 2004, 2003 and 2002, the Company paid A&A a total of $447,000, $455,000 and $515,000, respectively, in connection with such leases. Total minimum future rental payments under all four of these leases are $275,000 at January 31, 2004. The Company subleases certain property to Hibbett Sporting Goods, Inc. ("Hibbett"), a sporting goods retailer in the southeastern United States. The Company's Executive Chairman, Clyde B. Anderson, is a member of Hibbett's board of directors. During fiscal 2004, 2003 and 2002, the Company received $191,000, $161,000 and $161,000, respectively, in rent payments from Hibbett. The Company also purchased logistics services from Clark Distribution, a distribution company affiliated through common ownership, which amounted to $0, $0 and $64,000 in fiscal 2004, 2003 and 2002, respectively. The Company incurred expenses related to professional services from A&A and Charles C. Anderson, a member of the Board of Directors, which amounted to $0 in fiscal 2004 and $144,000 in each of fiscal 2003 and 2002. 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 the approximate cost of usage. The total amounts received from affiliated companies for use of the plane in fiscal 2004, 2003 and 2002 were $275,000, $269,000 and $198,000, respectively. The cost of operating the plane during these years was approximately the same as the revenue received. Likewise, the Company occasionally rents a plane from A&A at prices that approximate the cost of usage. The amounts paid to A&A for plane rental were $44,000, $48,000 and $84,000 for fiscal 2004, 2003 and 2002, respectively. 7. ACQUISITION OF STORES During March 2001, the Company acquired inventory and lease-rights of 18 stores from Crown Books Corporation for $6.5 million (which was allocated predominantly to inventories). The stores are located in the Chicago and Washington, D.C. metropolitan areas. The results of operations for these stores are reflected in the consolidated financial statements beginning in the first quarter of fiscal 2002. 8. LOSS FROM DISCONTINUED OPERATIONS Discontinued operations represent the fiscal 2004 closure of four retail stores in markets located in Georgia (two stores), Louisiana and North Carolina where the Company does not expect another of its existing stores to absorb the closed store's customers. These stores had sales of $2,457,000, $4,445,000 and $5,172,000 and pretax operating losses of $696,000, $917,000 and $111,000 for fiscal 2004, 2003 and 2002, respectively. Included in the loss on discontinued operations are impairment losses of $228,000, $141,000 and $0 for fiscal 2004, 2003 and 2002, respectively. Also included in the loss on discontinued operations are store closing costs of $64,000, $178,000, and $0 for fiscal 2004, 2003 and 2002, respectively. 24 BOOKS-A-MILLION 2004 Annual Report 9. BUSINESS SEGMENTS The Company has two reportable segments: retail trade and electronic commerce trade. The retail trade segment is a strategic business segment that is engaged in the retail trade of mostly book merchandise and includes the Company's distribution center operations, which predominantly supplies merchandise to the Company's retail stores. The electronic commerce trade segment is a strategic business segment that transacts business over the Internet and is managed separately due to divergent technology and marketing requirements. The Company evaluates performance of the segments based on profit and loss from operations before interest and income taxes. Certain intersegment cost allocations have been made based upon consolidated and segment revenues.
Fiscal Year Ended --------------------------------------- Segment information (in thousands) 1/31/04 2/1/03 2/2/02 ---------------------------------- ----------- ---------- ----------- NET SALES Retail / Wholesale Trade $ 454,000 $ 432,865 $ 430,742 Electronic Commerce Trade 25,451 23,277 22,247 Intersegment Sales Elimination (19,292) (17,927) (15,406) ----------- ---------- ----------- Net Sales $ 460,159 $ 438,215 $ 437,583 =========== ========== =========== OPERATING PROFIT Retail / Wholesale Trade $ 14,346 $ 8,787 $ 11,199 Electronic Commerce Trade 332 (490) (1,718) Intersegment Elimination of Certain Costs 542 988 1,380 ----------- ---------- ----------- Total Operating Profit $ 15,220 $ 9,285 $ 10,861 =========== ========== =========== ASSETS Retail / Wholesale Trade $ 284,718 $ 306,542 Electronic Commerce Trade 1,527 1,752 Intersegment Sales Elimination (566) (576) ----------- ---------- Total Assets $ 285,679 $ 307,718 =========== ==========
10. COMMITMENTS AND CONTINGENCIES The Company is a party to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect the financial position or results of operations or cash flows of the Company. From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company's request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not incurred significant costs related to performance under these types of indemnities. No liabilities have been recorded for these obligations on the Company's balance sheet at January 31, 2004, as such liabilities are considered de minimus. 25 BOOKS-A-MILLION 2004 Annual Report INDEPENDENT AUDITORS' REPORT To Books-A-Million, Inc.: We have audited the accompanying consolidated balance sheets of Books-A-Million, Inc. (a Delaware corporation) (the "Company"), and its subsidiaries as of January 31, 2004 and February 1, 2003 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Books-A-Million, Inc. and its subsidiaries as of January 31, 2004 and February 1, 2003 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the Consolidated Financial Statements, effective February 3, 2002, the Company changed its method of accounting for vendor allowances and, effective February 2, 2003, the Company changed its method of accounting for inventories. DELOITTE & TOUCHE LLP Birmingham, Alabama April 19, 2004 26 BOOKS-A-MILLION 2004 Annual Report SUMMARY OF QUARTERLY RESULTS (Unaudited)
FISCAL YEAR ENDED JANUARY 31, 2004 -------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL (In thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR ---------------------------------------- ---------- ---------- --------- --------- ----------- Net sales $ 98,505 $ 113,081 $ 102,724 $ 145,849 $ 460,159 Gross profit 24,937 30,815 26,412 43,298 125,462 Operating profit (loss) (674) 3,238 (232) 12,888 15,220 Net income (loss) (1,042) 1,361 (755) 7,637 7,201 Net income (loss) per share - basic (0.06) 0.08 (0.05) 0.47 0.44 Net income (loss) per share - diluted (1) (0.06) 0.08 (0.05) 0.45 0.43
Fiscal Year Ended February 1, 2003 (2) -------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL (In thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR ---------------------------------------- ---------- ---------- --------- --------- ----------- Net sales $ 100,273 $ 103,550 $ 96,280 $ 138,112 $ 438,215 Gross profit 27,380 27,989 22,718 39,424 117,511 Operating profit (loss) 871 470 (2,965) 10,909 9,285 Income (loss) before cumulative effect of change in accounting principle (111) (425) (2,755) 5,893 2,602 Income (loss) per share - basic before cumulative effect of change in accounting principle (1) (0.01) (0.03) (0.17) 0.36 0.16 Income (loss) per share - diluted before cumulative effect of change in accounting principle (1) (0.01) (0.03) (0.17) 0.36 0.16 Net income (loss) (1,312) (425) (2,755) 5,893 1,401 Net income (loss) per share - basic (1) (0.08) (0.03) (0.17) 0.36 0.09 Net income (loss) per share - diluted (0.08) (0.03) (0.17) 0.36 0.08
(1) The sum of quarterly per share amounts are different from the annual per share amounts because of differences in the weighted average number of common and common equivalent shares used in the quarterly and annual computations. (2) Certain reclassifications were made to the quarterly amounts for fiscal 2003 to appropriately reflect discontinued operations. 27 BOOKS-A-MILLION 2004 Annual Report DIRECTORS AND CORPORATE OFFICERS BOARD OF DIRECTORS CLYDE B. ANDERSON Executive Chairman of the Board CHARLES C. ANDERSON Retired Chairman TERRY C. ANDERSON Chief Executive Officer and President, American Promotional Events, Inc. RONALD G. BRUNO President, Bruno Capital Management Corporation DR. J. BARRY MASON Dean, Culverhouse College of Commerce The University of Alabama WILLIAM H. ROGERS, JR. Executive Vice President, SunTrust Banks, Inc. CORPORATE OFFICERS CLYDE B. ANDERSON Executive Chairman of the Board SANDRA B. COCHRAN President, Chief Executive Officer and Secretary TERRANCE G. FINLEY Executive Vice President of Books-A-Million, Inc. and President, American Internet Service, Inc. RICHARD S. WALLINGTON Chief Financial Officer 28 BOOKS-A-MILLION 2004 Annual Report CORPORATE INFORMATION CORPORATE OFFICE Books-A-Million, Inc. 402 Industrial Lane Birmingham, Alabama 35211 (205) 942-3737 TRANSFER AGENT Bank of New York (800) 524-4458 STOCKHOLDER INQUIRIES: Stockholder Relations Department - 11E P.O. Box 11258, Church Street Station New York, New York 10286 E-Mail address: shareowner-svcs@bankofny.com Bank of New York's Stock Transfer Website: http://stock.bankofny.com CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO: Receive and Deliver Department - 11W P.O. Box 11002, Church Street Station New York, New York 10286 INDEPENDENT PUBLIC ACCOUNTANTS Deloitte & Touche LLP Birmingham, Alabama FORM 10-K AND INVESTOR CONTACT A copy of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2004, as filed with the Securities and Exchange Commission, as well as key committee charters, corporate governance guidelines and code of conduct, are available without charge to stockholders upon written request. Such requests and other investor inquiries should be directed to Richard S. Wallington, the Company's Chief Financial Officer, or you can view the those items at www.booksamillioninc.com. MARKET AND DIVIDEND INFORMATION Common Stock The Common Stock of Books-A-Million, Inc., is traded in the Nasdaq National Market under the symbol BAMM. The chart below sets forth the high and low stock prices for each quarter of the fiscal years ending January 31, 2004 and February 1, 2003.
Quarter Ended High Low - ------------- ----- ----- JANUARY 2004 $7.02 $4.41 OCTOBER 2003 5.00 2.80 JULY 2003 3.34 2.07 APRIL 2003 2.45 2.05 January 2003 2.77 2.27 October 2002 3.70 2.53 July 2002 4.26 3.22 April 2002 5.12 3.02
The closing price on April 5, 2004, was $6.68. No cash dividends have been declared since completion of the Company's initial public offering in 1992. As of April 5, 2004, Books-A-Million, Inc., had approximately 10,500 stockholders based on the number of individual participants represented by security position listings. ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held on June 3, 2004, at 10:00 a.m. central time at The Harbert Center, 2019 Fourth Avenue North, Birmingham, Alabama 35203. Stockholders of record as of April 5, 2004, are invited to attend this meeting. 29 EX-23 4 g88566exv23.txt EX-23 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23 Consent of Deloitte & Touche LLP, independent public accountants INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-71812 and 33-86980 of Books-A-Million, Inc. (the "Company") on Form S-8 of our report dated April 19, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of new accounting principles as described in Note 1 to the consolidated financial statements), incorporated by reference in this Annual Report on Form 10-K for the year ended January 31, 2004, and of our report on the financial statement schedule, dated April 19, 2004, appearing in this Annual Report on Form 10-K for the year ended January 31, 2004. DELOITTE & TOUCHE LLP Birmingham, Alabama April 19, 2004 EX-31.1 5 g88566exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CHAIRMAN Exhibit 31.1 CERTIFICATIONS I, Clyde B. Anderson, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 /s/ Clyde B. Anderson ------------------------ Clyde B. Anderson Executive Chairman of the Board EX-31.2 6 g88566exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO Exhibit 31.2 CERTIFICATIONS I, Richard S. Wallington, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 /s/ Richard S. Wallington --------------------------- Richard S. Wallington Chief Financial Officer EX-31.3 7 g88566exv31w3.txt EX-31.3 SECTION 302 CERTIFICATION OF THE CEO EXHIBIT 31.3 CERTIFICATIONS I, Sandra B. Cochran, certify that: 1. I have reviewed this annual report on Form 10-K of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 /s/ Sandra B. Cochran --------------------- Sandra B. Cochran President and Chief Executive Officer EX-32.1 8 g88566exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CHAIRMAN Exhibit 32.1 CERTIFICATION OF EXECUTIVE CHAIRMAN OF THE BOARD Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 27, 2004 /s/ Clyde B. Anderson ------------------------------- Clyde B. Anderson Executive Chairman of the Board EX-32.2 9 g88566exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 27, 2004 /s/ Richard S. Wallington ---------------------------------- Richard S. Wallington Chief Financial Officer EX-32.3 10 g88566exv32w3.txt EX-32.3 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 32.3 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or Section(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 27, 2004 /s/ Sandra B. Cochran --------------------- Sandra B. Cochran President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----