-----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, A2ALhKyd2EbhsagoEPtT/BiTjkS6FGV/pBWStE0NhY3xfqEPhTJzR8owjpkPLvqX gKQcU9aSJ5YOwtHZLlWjPA== 0000950144-05-004458.txt : 20050428 0000950144-05-004458.hdr.sgml : 20050428 20050427183035 ACCESSION NUMBER: 0000950144-05-004458 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20050428 DATE AS OF CHANGE: 20050427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOKS A MILLION INC CENTRAL INDEX KEY: 0000891919 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 630798460 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20664 FILM NUMBER: 05777737 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/A 1 g94757e10vkza.txt BOOKS-A-MILLION, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A AMENDMENT NO. 1 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 August 2, 2003 (based on the closing sale price as reported on the NASDAQ National Market on such date), was $26,923,550. 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 EXPLANATORY NOTE: As previously disclosed in a Form 8-K filed on March 22, 2005, following a detailed review of its lease-related accounting policies, Books-A-Million, Inc. (the "Company") determined to restate prior financial statements (the "Restatement") to correct errors in those financial statements relating to the computation of depreciation, rent holiday, straight-line rent expense and the related deferred liability. Historically, the Company depreciated leasehold improvements over a period of ten years, regardless of the term of the lease for the store. The Company has corrected its depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease. When calculating the straight-line rent expense per store, the Company previously used the store opening date as the starting date for the rent expense calculation. The Company has corrected this calculation to start straight-line rent expense on the date when the Company takes possession and has the right to control use of the leased premises. Also, the Company has corrected its method of classification of landlord construction allowances. For certain new stores, the Company receives funding from landlords for the construction of leasehold improvements. Historically, landlord construction allowances were classified as a reduction of property and equipment on the Company's balance sheet and as a reduction in capital expenditures in the Company's statements of cash flows. However, the Company will now classify landlord allowances as a deferred rent liability on the balance sheet and as an operating activity in the statement of cash flows. The resulting change in classification for landlord construction allowances will increase leasehold improvements (Property and Equipment, asset) and increase other long-term liabilities by a corresponding amount on the balance sheet. As a result, the accompanying consolidated financial statements have been restated from the amounts previously reported to incorporate the effects of these corrections. See Note 11 to the consolidated financial statements. This amendment No. 1 on Form 10-K/A to the Company's annual report on Form 10-K for the fiscal year ended January 31, 2004, initially filed with the Securities and Exchange Commission ("SEC") on April 27, 2004 ("Original Filing"), is being filed to reflect restatements of the Company's consolidated balance sheets at January 31, 2004 and February 1, 2003 and the Company's consolidated statements of operations, and consolidated cash flows for the fifty two weeks ended January 31, 2004, February 1, 2003, February 2, 2002 and the notes related thereto. For a more detailed description of these restatements, see Note 11, "Restatement of Financial Statements" to the accompanying consolidated financial statements. For the convenience of the reader, this Form 10-K/A includes the Original Filing in its entirety. However, this Form 10-K/A only amends and restates Items 1 and 2 of Part I, Items 6, 7, 8, and 9A of Part II and Item 15 of Part IV of the Original Filing for the effects of the restatement and no other material information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. Information on events occurring after the date of the original filing are included in the Company's Forms 10-Q/A and 8-K's as amended. In addition, pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer , as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Executive Chairman of the Board, Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 31.3, 32.1, 32.2 and 32.3, respectively. Concurrently with the filing of this Form 10-K/A, we are filing amended quarterly reports on Form 10-Q/A for the quarters ended May 1, 2004, July 31, 2004 and October 30, 2004. We have not amended and do not intend to amend our previously filed Annual Reports on Form 10-K other than the 2004 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to January 31, 2004. For this reason, the consolidated financial statements, auditors' reports and related financial information for all affected periods contained in any prior reports should no longer be relied upon. 3 PART I SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company's specific market areas; inflation; economic conditions in general and in the Company's specific market areas; the number of store openings and closings; the profitability of certain product lines, capital expenditures and future liquidity; liability and other claims asserted against the Company; uncertainties related to the Internet and the Company's Internet initiative ; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 1. BUSINESS GENERAL Books-A-Million, Inc. is a leading book retailer in the southeastern United States. The Company was founded in 1917 and operates both superstores and traditional bookstores. Superstores, the first of which was opened in 1987, range in size from 8,000 to 36,000 square feet and operate under the names "Books-A-Million" and "Books and Co." Traditional bookstores are smaller stores operated under the names "Bookland" and "Books-A-Million". These stores range in size from 2,000 to 7,000 square feet and are located primarily in enclosed malls. We also operate newsstands under the name "Joe Muggs Newsstands". Newsstands range in size from 1,000 to 5,000 square feet and are located in high traffic areas. All store formats, excluding newsstands, offer an extensive selection of best sellers and other hardcover and paperback books, magazines, and newspapers. In addition to the retail store formats, we offer our products over the Internet at Booksamillion.com and Joemuggs.com. We were 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 trade and electronic commerce trade. In the retail trade segment we are engaged in the retail trade of primarily book merchandise. The retail trade segment includes our distribution center operations which predominantly supplies merchandise to our retail stores. In the electronic commerce trade segment we transact business over the Internet primarily. This segment is managed separately due to divergent technology and marketing requirements. For additional information, see Note 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. 4 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 four branded coffee drinks and assorted pastries, among other items. We operated four newsstands as of January 31, 2004. ACQUISITION OF STORES During the first quarter of 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. 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. 5 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. Management recognizes web development and maintenance revenue at the time maintenance is provided or non-returnable product (web development) is delivered. Revenue from web development and maintenance is less than .01% of the Company's total revenues. 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. 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. 6 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 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 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. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the heading "Market and Dividend Information" on page 31 of the Amended 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 Amended 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 11 of the Amended 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, prior to the payoff of the debt, effectively fix the interest rate on $20 million of variable debt at 5.13%. Also, on May 14, 1996, we entered into a $7.5 million interest rate swap with a ten-year term. The swap effectively fixes the interest rate on $7.5 million of variable rate debt at 7.98% and expires on June 7, 2006. The counter parties to each of these interest rate swaps are parties to our revolving credit facilities. We believe the credit and liquidity risk of the counter parties failing to meet their obligations is remote as we settle our interest position with the banks on a quarterly basis. All of our financial instruments that are sensitive to market risk are entered into for purposes other than trading. To illustrate the sensitivity of the results of operations to changes in interest rates on its debt we estimate that a 66% increase in LIBOR rates would increase interest expense by approximately $70,000 for the year ending January 31, 2004. Likewise, a 66% decrease in LIBOR rates would decrease interest expense by $70,000 for the year ending January 31, 2004. 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 Amended Annual Report to Stockholders for the year ended January 31, 2004 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 Amended Annual Report to Stockholders for the year ended January 31, 2004 are incorporated herein by reference: Consolidated Balance Sheets as of January 31, 2004 (as restated) and February 1, 2003 (as restated). Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). Notes to Consolidated Financial Statements (as restated) 8 Report of Independent Registered Public Accounting Firm. The information under the heading "Summary of Quarterly Results (Unaudited)" on page 27 of the Amended Annual Report to Stockholders for the Fiscal Years Ended January 31, 2004 (as restated) and February 1, 2003 (as restated) 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 period covered by this amended report. In performing this evaluation, in light of the pronouncement on February 7, 2005 by the Office of the Chief Accountant of the SEC in a letter to the AICPA, management focused on our lease accounting practices. Specifically, as further discussed in Note 11 to the accompanying consolidated financial statements, we determined that: (i) our practice of depreciating leasehold improvements over a period of ten years was incorrect, which we corrected by changing the depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease; (ii) our practice of using the store opening date as the starting date for the rent expense calculation was incorrect, which we corrected by changing the calculation of leasehold expense so that straight-line rent expense begins on the date we take possession and have the right to control use of the leased premises; and (iii) our practice of classifying landlord allowances as a reduction of property and equipment on our balance sheet and as a reduction in capital expenditures in our statements of cash flows was incorrect, which we corrected by changing our method of classification so that landlord allowances are classified as a deferred rent credit on our balance sheet and as an operating activity in our statement of cash flows. Funds received from the landlord intended to reimburse the Company for the cost of leasehold improvements will be recorded as a deferred rent credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. Further, after consulting with the Audit Committee and our independent registered public accounting firm we determined to restate our financial statements for fiscal year ending January 31, 2004 and for the first three quarters of fiscal 2005 and to file a Form 10-K/A amending our Annual Report on Form 10-K for our fiscal year ended January 31, 2004 with restated consolidated financial statements and Forms 10-Q/A amending our interim condensed consolidated financial statements for the first three quarters of fiscal 2005. The restatement is further discussed in "Explanatory Note" in the forepart of this Form 10-K/A and in Note 11, "Restatement of Financial Statements," to the accompanying consolidated financial statements. We do not consider the impact of correcting the previously issued financial statements to be material with respect to any individual reporting period. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this 10-K/A and Annual Report, the Company's disclosure controls and procedures were effective at the reasonable assurance level. In concluding that our disclosure controls and procedures were effective as of January 31, 2004, our management considered, among other things, the circumstances that resulted in the restatement of our previously issued financial statements. We also considered the materiality of the restatement adjustments on our consolidated balance sheet and statement of operations (as more fully set forth in Note 11, "Restatement of Financial Statements," to the accompanying consolidated financial statements) and that these non-cash adjustments have no effect on historical or future cash flows or the timing of payments under our operating leases. There was no change in the Company's internal controls over financial reporting during the Company's fiscal quarter covered by this amended report that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. However, as a result of the review of our lease accounting policies described above, during the first quarter of fiscal 2006 we made changes in internal controls over financial reporting to implement additional review processes over our leasing arrangements to ensure the collection and communication of information necessary for the proper accounting for each lease in accordance with generally accepted accounting principles. The Company implemented the following accounting changes: 9 (i) we changed depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease, (ii) we changed the calculation to start straight-line rent expense on the date when the Company takes possession and has the right to control use of the leased premises, and (iii) we changed method of classification of landlord allowances. As explained above, the Company will now classify landlord allowances as a deferred rent credit on the balance sheet and as an operating activity in the statement of cash flows. Funds received from the landlord intended to reimburse the Company for the cost of leasehold improvements will be recorded as a deferred rent credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. Management believes that these control changes have fully remediated the issues described above. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections under the heading "Proposal I-Election of Directors" entitled "Nominees for Election - Term Expiring 2007", "Incumbent Director - Term Expiring 2005", and "Incumbent Directors - 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. 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. 11 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. 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 (as restated) and February 1, 2003 (as restated). Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004 (as restated), February 1, 2003 (as restated), and February 2, 2002 (as restated). 12 Notes to Consolidated Financial Statements (as restated). Report of Independent Registered Public Accounting Firm. 2. Financial Statement Schedule. The following consolidated financial statement schedule of Books-A-Million, Inc. is attached hereto: Report of Independent Registered Public Accounting Firm on Financial Statement Schedule. Schedule 2 Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. 3. Exhibits Exhibit Number 3.1 -- Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-52256, originally filed September 21, 1992 (the "S-1 Registration Statement")). 3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the S-1 Registration Statement). 4.1 -- See Exhibits 3.1 and 3.2 hereto incorporated herein by reference to the Exhibits of the same number to the S-1 Registration Statement. 10.1 -- Lease Agreement between First National Bank of Florence, Alabama, as Trustee, and Bookland Stores, Inc. (which is a predecessor of the Registrant), an Alabama corporation, dated January 30, 1991 (incorporated by reference to Exhibit 10.1 to the S-1 Registration Statement). 10.2 -- Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended January 30, 1999, File No. 0-20664, filed on April 30, 1999). 10.3 -- Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the S-1 Registration Statement). 10.4 -- Amendment to Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended January 29, 1994, File No. 0-20664, filed on April 29, 1994). 10.5 -- 1999 Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended January 29, 2000, File No. 0-20664, filed on April 28, 2000). 10.6 -- 401(k) Plan adopted September 15, 2003, with Suntrust Bank as Trustee (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended January 31, 2004, File No.l 0-20664, filed on April 27, 2004). 10.7 -- Shareholders Agreement dated as of September 1, 1992 (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended January 31, 1993, File No. 0-20664, filed May 3, 1993). 10.8 -- Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended January 28, 1995, File No. 0-20664, filed April 28, 1995). 13 10.19 -- Stock Option Plans for Booksamillion.com, American Internet Service, Inc., Netcentral, Inc. and Faithpoint, Inc. (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended February 3, 2001, File No. 0-20664, filed on May 4, 2001). 10.20 -- Credit agreement dated as of July 1, 2002, between the Company and Bank of America, N.A., SunTrust Bank, N.A., Wells Fargo Bank, N.A., SouthTrust Bank N.A. and Amsouth Bank, N.A. (incorporated by reference to Exhibit 10.20 to Form 10-Q for the quarter ended August 3, 2002). 13 -- Portions of the amended 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 Independent Registered Public Accounting Firm. 31.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 31.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K. 32.1 -- Certification of Clyde B. Anderson, Executive Chairman of the Board of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.2 -- Certification of Richard S. Wallington, Chief Financial Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. 32.3 -- Certification of Sandra B. Cochran, President and Chief Executive Officer of Books-A-Million, Inc., pursuant to 18 U.S.C. Section 1350, filed under Exhibit 32 of Item 601 of Regulation S-K. Reports on Form 8-K None. (c) See Item 15(a) (3), the Exhibit Index and the Exhibits attached hereto. (d) See Item 15(a) (2). 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOOKS-A-MILLION, INC. by: /s/ Clyde B. Anderson ------------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: PRINCIPAL EXECUTIVE OFFICER: /s/ Clyde B. Anderson - ---------------------------------------- Clyde B. Anderson Executive Chairman of the Board Date: April 28, 2005 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ Richard S. Wallington - ---------------------------------------- Richard S. Wallington Chief Financial Officer Date: April 28, 2005 DIRECTORS: /s/ Clyde B. Anderson - ---------------------------------------- Clyde B. Anderson Date: April 28, 2005 15 DIRECTORS: /s/ Ronald G. Bruno - ---------------------------------------- Ronald G. Bruno Date: April 28, 2005 /s/ J. Barry Mason - ---------------------------------------- J. Barry Mason Date: April 28, 2005 /s/ Terry C. Anderson - ---------------------------------------- Terry C. Anderson Date: April 28, 2005 /s/ William H. Rogers, Jr. - ---------------------------------------- William H. Rogers, Jr. Date: April 28, 2005 16 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Books-A-Million, Inc.: We have audited the consolidated financial statements of Books-A-Million, Inc. and its subsidiaries (the "Company") as of January 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 (April 25, 2005 as to the effects of the restatement discussed in Note 11), (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the adoption of new accounting principles as described in Note 1 and the restatement described in Note 11 to the consolidated financial statements); such financial statements and report are included in the Company's 2004 amended 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 (April 25, 2005 as to the effects of the restatement discussed in Note 11) 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
BALANCE AT CHARGED BEGINNING TO COSTS (DEDUCTIONS) 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-13 2 g94757exv13.txt PORTIONS OF THE AMENDED ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 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 stores formats, including large superstores operating under the names Books-A-Million and Books & Co., traditional bookstores operating under the names Books-A-Million and Bookland, and Joe Muggs Newsstands. FIVE-YEAR HIGHLIGHTS
For the Fiscal Year Ended (In thousands, except per share amounts) 1/31/04 (1)(3) 2/1/03 (2)(3) 2/2/02(3) 2/3/01 (3) 1/29/00 (3) - -------------------------------------------------------------------------------------------------------------------------------- (AS RESTATED) (as restated) (as restated) (as restated) (as restated) 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 Income before cumulative effect of a change in accounting principle (1) 7,126 2,554 3,944 3,012 5,829 Net income 7,126 1,353 3,944 3,012 5,829 Earnings per share - diluted, before cumulative effect of a change in accounting principle (1) 0.42 0.15 0.23 0.17 0.32 Earnings per share - diluted 0.42 0.08 0.23 0.17 0.32 Weighted average shares - diluted 16,789 16,566 16,945 17,991 18,250 Capital investment 10,402 19,836 12,688 17,065 13,904 BALANCE SHEET DATA Property and equipment, net $ 59,892 $ 68,912 $ 67,941 $ 72,870 $ 73,438 Total assets 296,398 319,484 306,083 304,410 296,533 Long-term debt 20,640 44,942 38,846 41,526 35,936 Stockholders' equity 131,001 122,694 121,212 122,108 120,336 OTHER DATA Working capital $ 104,723 $ 112,810 $ 105,638 $ 103,338 $ 93,209 Debt to total capital ratio 0.14 0.27 0.24 0.26 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 of the Consolidated Financial Statements. (3) The Company has restated its financial statements as discussed in Note 11 to the Consolidated Financial Statements. 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)(3) 2/1/03 (2)(3) - ----------------------------------------------------------------------------------------------------------------------------- Net sales $ 460,159 $ 438,215 Operating profit 15,099 9,207 Income before cumulative affect of change in accounting principle 7,126 2,554 Net income 7,126 1,353 Income per share - diluted, before cumulative effect of change in accounting principle 0.42 0.15 Net income per share 0.42 0.08
As of ------------------------------ (In thousands) 1/31/04 (1)(3) 2/1/03 (2)(3) - ----------------------------------------------------------------------------------------------------------------------------- Working capital $ 104,723 $ 112,810 Total assets 296,398 319,484 Stockholders' investment 131,001 122,694
(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) The Company has restated its financial statements as discussed in Note 11 to the Consolidated Financial Statements. 3 BOOKS-A-MILLION 2004 Annual Report SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended 1/31/04(1)(3) 2/1/03(2)(3) 2/2/02(3) 2/3/01(3) 1/29/00(3) (AS (as (as (as (as (In thousands, except per share data) RESTATED) restated) restated) restated) restated) 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 332,373 318,529 313,551 298,180 286,373 Gross profit 127,786 119,686 124,032 114,696 110,815 Operating, selling and administrative expenses 94,530 92,178 95,870 88,853 82,783 Depreciation and amortization 18,157 18,301 17,261 16,142 14,842 Operating profit 15,099 9,207 10,901 9,701 13,190 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 12,190 5,036 6,472 4,897 8,979 Provision for income taxes 4,632 1,913 2,459 1,861 3,411 Income from continuing operations before cumulative effect of change in accounting principle 7,558 3,123 4,013 3,036 5,568 Discontinued operations: Loss from discontinued operations (including impairment charge) (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 7,126 2,554 3,944 3,012 5,829 Cumulative effect of change in accounting principle, net of income taxes(2) - (1,201) - - - Net income $ 7,126 $ 1,353 $ 3,944 $ 3,012 $ 5,829 Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.47 $ 0.19 $ 0.24 $ 0.17 $ 0.31 Income (loss) from discontinued operations (0.03) (0.04) - - 0.01 Income before cumulative effect of change in accounting principle 0.44 0.15 0.24 0.17 0.32 Cumulative effect of change in accounting principle (2) - (0.07) - - - Net income per share $ 0.44 $ 0.08 $ 0.24 $ 0.17 $ 0.32 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 $ 0.18 $ 0.24 $ 0.17 $ 0.31 Income (loss) from discontinued operations (0.03) (0.03) (0.01) - 0.01 Income before cumulative effect of change in accounting principle 0.42 0.15 0.23 0.17 0.32 Cumulative effect of change in accounting principle (2) - (0.07) - - - Net income per share $ 0.42 $ 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 $ 3,891 $ 2,760 $ 5,750 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 59,892 68,912 67,941 72,870 73,438 Total assets 296,398 319,484 306,083 304,410 296,533 Long-term debt 20,640 44,942 38,846 41,526 35,936 Stockholders' investment 131,001 122,694 121,212 122,108 120,336 OTHER DATA: Working capital $ 104,723 $ 112,810 $ 105,638 $103,338 $ 93,209
(1) Effective February 2, 2003, the Company changed its method of account for inventories to the last-in, fist out method, as discussed in Note 1 to the Consolidated Financial Statements. (2) Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, as discussed in Note 1 of the Consolidated Financial Statements. (3) The Company has restated its financial statements as discussed in Note 11 to the Consolidated Financial Statements. 4 BOOKS-A-MILLION 2004 Annual Report MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS The following Management's Discussion & Analysis gives effect to the restatement discussed in Note 11 to the Consolidated Financial Statements. 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 the remodel program. The Company's performance is partially measured based on comparable store sales, which is similar to most retailers. Comparable store sales are determined each fiscal quarter during the year based on all stores that have been open at least 12 full months as of the first day of the fiscal quarter. Any stores closed during a fiscal quarter are excluded from comparable store sales as of the first day of the quarter in which they close. As previously disclosed in a Form 8-K filed on March 22, 2005, following a review of its lease-related accounting policies, Books-A-Million, Inc. (the "Company") determined to restate its prior financial statements (the "Restatement") to correct errors in those financial statements relating to the computation of depreciation, rent holiday, straight-line rent expense and the related deferred liability. See Note 11 in the Notes to the Consolidated Financial Statements beginning on page 25. CRITICAL ACCOUNTING POLICIES General Management's Discussion and Analysis of Financial Condition and Results of Operations discuss the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company believes that the likelihood is remote that materially different amounts will be reported related to actual results for the estimates and judgments described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Other Long-Lived Assets Property and equipment are recorded at cost. Depreciation on equipment and furniture and fixtures is provided on the straight-line method over the estimated service lives, which range from three to seven years. Depreciation of buildings and amortization of leasehold improvements, including remodels, is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from 5 to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and, other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs are capitalized to property accounts and depreciated using applicable annual rates. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income. 5 BOOKS-A-MILLION 2004 Annual Report Impairment of Long-Lived Assets The Company reviews property and equipment and amortizable intangibles when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Circumstances that are considered in determining impairment are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future cash flows, indications that an asset no longer has an economically useful life, or other factors that would indicate a store cannot be profitable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows at the lowest level of independent cash flows, which is generally at the individual store level. Future events could cause the Company to conclude that impairment indicators exist and those long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. The Company's long-lived assets are principally retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores projected undiscounted cash flows. If impairment is indicated, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 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. Closed Store Expenses Management considers several factors in determining when to close or relocate a store. Some of these factors are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future net cash flows, indications that an asset no longer has an economically useful life, remaining term of an individual store lease, or other factors that would indicate a store in the current location cannot be profitable. When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements, lease termination costs, costs to transfer inventory and usable fixtures, other costs in connection with vacating the leased location, and a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $219,000, $22,000, and $119,000 during fiscal 2004, 2003 and 2002, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of operations. Inventories Inventories are taken throughout the fiscal period. Store inventory counts are performed by an independent inventory service while warehouse inventory counts are performed internally. All physical inventory counts are reconciled to the Company's records. The Company's accrual for inventory shortages is based upon historical inventory shortage results. Cost is assigned to store and warehouse inventories using the retail inventory method. Using this method, store and warehouse inventories are valued by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail method is an averaging method that is widely used within the retail industry. Inventory costing also requires certain significant management estimates and judgments involving markdowns, the allocation of vendor allowances and shrinkage. These practices affect ending inventories at cost as well as the resulting gross margins and inventory turnover ratios. Effective February 2, 2003, the Company changed from the first-in, first-out (FIFO) method of accounting for inventories to the last-in, first-out (LIFO) method. Management believes this change 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 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 the 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. The difference between replacement and current cost of inventory over stated LIFO value is $0.7 million whereas inventory before LIFO, at FIFO value is $212 million. The estimated replacement cost of inventory is the current FIFO value of $212 million. The LIFO value did not include any layer liquidation since the LIFO method was adopted in fiscal 2004. Vendor Allowances The Company receives allowances from its vendors from a variety of programs and arrangements, including merchandise placement and cooperative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in cost of products sold upon the sales of the related inventory. The charge of the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.07 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. 6 BOOKS-A-MILLION 2004 Annual Report Accrued Expenses On a monthly basis, certain material expenses are estimated and accrued to properly record those expenses in the period incurred. Such estimates include those made for payroll and employee benefits costs, occupancy costs and advertising expenses among other items. Certain estimates are made based upon analysis of historical results. Differences in management's estimates and assumptions could result in accruals that are materially different from the actual results. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference 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 -------------------------------- (AS (as (as RESTATED) restated) restated) Net sales 100.0% 100.0% 100.0% Gross profit 27.8% 27.3% 28.3% Operating, selling, and administrative expenses 20.5% 21.0% 21.9% Depreciation and amortization 4.0 % 4.2% 3.9% Operating profit 3.3% 2.1% 2.5% Interest expense, net 0.6% 1.0% 1.0% Income from continuing operations before income taxes and cumulative effect of change in 2.7% 1.1% 1.5% accounting principle Provision for income taxes 1.0% 0.4% 0.6% Income from continuing operations before cumulative effect of change in accounting 1.7% 0.7% 0.9% principle Loss from discontinued operations (including impairment charge), 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, or 5.0%, 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 primarily attributable to an increase in book sales and an increase in cafe sales. The book sales increase was due to strong sales performance in categories such as: Children's, with strong sales of Harry Potter; Fiction, with strong best sellers such as The DaVinci Code; and Diet & Health, with successful titles in the low-carb diet category. The cafe sales increase was due to strong performance in the frappe line of drinks. The Company opened four new stores during fiscal 2004 resulting in partial year sales of $5.7 million and closed nine stores during fiscal 2004 with partial year sales of $4.7 million. Additional detail is discussed in the footnotes regarding Impairment of Long-Lived Assets, Closed Store Expenses and Discontinued Operations. Net sales for the retail trade segment increased $21.1 million, or 4.9%, to $454.0 million in fiscal 2004 from $432.9 million in fiscal 2003. The increase in sales was primarily due to strong sales performance in categories such as: Children's, with strong sales of Harry Potter; Fiction, with strong best sellers such as The DaVinci Code; and Diet & Health, with successful titles in the low-carb diet category. Net sales for the electronic commerce segment increased $2.2 million, or 9.3%, to $25.5 million in fiscal 2004 from $23.3 million in fiscal 2003. This increase was primarily due to growth in business-to-business sales volume during fiscal 2004. The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company's marketing programs, pricing strategies, store operations and competition. Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $8.1 million, or 6.8%, to $127.8 million in fiscal 2004 from $119.7 million in fiscal 2003. Gross profit as a percentage of net sales increased to 27.8% in fiscal 2004 from 27.3% in fiscal 2003, primarily due to improved sales mix, less promotional discounting and lower occupancy costs as a percentage of net sales. 7 BOOKS-A-MILLION 2004 Annual Report 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 20.5% in fiscal 2004 from 21.0% in fiscal 2003, primarily due to the impact of higher comparable store sales as well as strong expense controls. Depreciation and amortization decreased $0.1 million, or 0.8% to $18.2 million in fiscal 2004 from $18.3 million in fiscal 2003. Depreciation and amortization as a percentage of net sales decreased to 4.0% in fiscal 2004 from 4.2% in fiscal 2003, due to lower capital expenditures in fiscal 2004. Consolidated operating profit was $15.1 million for fiscal 2004 compared to $9.2 million in fiscal 2003. Operating profit for the retail trade segment was $14.2 million in fiscal 2004 versus $8.7 million in fiscal 2003. This increase was primarily attributable to the higher comparable store sales during fiscal 2004. The operating profit for the electronic commerce segment was $0.3 million compared to the fiscal 2003 loss of $0.5 million. The improvement in operating results was due to improved gross margin as a result of increased sales, as well as lowering operating costs as a percent to sales. Income taxes were calculated at an effective rate of 38.0% for both fiscal 2004 and 2003. 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. 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 $4.3 million, or 3.5%, to $119.7 million in fiscal 2003 from $124.0 million in fiscal 2002. Gross profit as a percentage of net sales decreased to 27.3% in fiscal 2003 from 28.3% 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 $1.0 million, or 6.0% to $18.3 million in fiscal 2003 from $17.3 million in fiscal 2002. Depreciation and amortization as a percentage of net sales increased to 4.2% in fiscal 2003 from 3.9% 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 $9.2 million for fiscal 2003 compared to $10.9 million in fiscal 2002. Operating profit for the retail trade segment was $8.7 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. 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 $0.07 per diluted share. Additional information is included in Note 1 to the consolidated financial statements. 8 BOOKS-A-MILLION 2004 Annual Report SEASONALITY AND QUARTERLY RESULTS Similar to many retailers, the Company's business is seasonal, with its highest retail sales, gross profit and net income historically occurring in the fourth fiscal quarter. This seasonal pattern reflects the increased demand for books and gifts experienced during the year-end holiday selling season. Working capital requirements are generally highest during the third fiscal quarter and the early part of the fourth fiscal quarter due to the seasonality of the Company's business. The Company's results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse impact on the Company's results of operations for the full year. In addition, the Company's results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. New stores require the Company to incur pre-opening expenses and often require several months of operation before generating acceptable sales volumes. Accordingly, the addition of a large number of new stores in a particular quarter could adversely affect the Company's results of operations for that quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flows from operations, including credit terms from vendors, and borrowings under its credit facilities. The Company has an unsecured revolving credit facility that allows borrowings up to $100.0 million, for which no principal repayments are due until the facility expires in July 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 interest rates of 2.75%. Additionally, as of January 31, 2004 and February 1, 2003, the Company has outstanding borrowings under an industrial revenue bond totaling $7.5 million, which is secured by certain property. The Company's capital expenditures totaled $10.4 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 $16.0 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. 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. 9 BOOKS-A-MILLION 2004 Annual Report 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 minimis. Cash Flows Operating activities provided cash of $34,678,000, $13,644,000 and $25,538,000 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 is 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 $18,325,000, $18,584,000 and $17,540,000 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 (used) by accrued expenses was $4,144,000, $967,000, and $(707,000) in fiscal 2004, 2003 and 2002, respectively. The increase in fiscal 2004 was primarily due to increases in deferred revenues related to the Company's discount card, deferred rent related to leasehold allowances 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 $10,363,000, $19,776,000 and $19,185,000, 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. Outlook For fiscal 2005, the Company currently expects to open approximately six to eight new stores, 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 $16.0 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," 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 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 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 ("FIN") No. 46, "Consolidation of Variable Interest Entities," was issued in January 2003. This interpretation requires consolidation of variable interest entities ("VIE"), also formerly referred to as "special purpose entities," if certain conditions are met. The interpretation 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 applies also to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities--an interpretation of ARB 51" (revised December 2003) ("FIN 46R"), which includes significant amendments to 10 BOOKS-A-MILLION 2004 Annual Report 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." 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. 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 ------------- ------------- (SEE NOTE 11) (see Note 11) 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 4,450 6,130 --------- --------- Total Current Assets 234,901 248,742 --------- --------- 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 70,777 68,000 Construction in process 193 270 --------- --------- Gross Property and Equipment 189,961 181,469 Less accumulated depreciation and amortization 130,069 112,557 --------- --------- Net Property and Equipment 59,892 68,912 --------- --------- OTHER ASSETS: Goodwill 1,368 1,368 Other 237 462 --------- --------- Total Other Assets 1,605 1,830 --------- --------- Total Assets $ 296,398 $ 319,484 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable: Trade $ 87,984 $ 99,585 Related party 8,777 9,071 Accrued expenses 30,191 24,790 Accrued income taxes 3,226 2,316 Current portion of long-term debt - 170 --------- --------- Total Current Liabilities 130,178 135,932 --------- --------- LONG-TERM DEBT 20,640 44,942 DEFERRED INCOME TAXES 1,957 1,810 OTHER LONG-TERM LIABILITIES 12,622 14,106 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 2, 2002, 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) Unvested restricted stock (34,620 shares at January 31, 2004) (284) - Accumulated other comprehensive loss, net of tax (707) (1,219) Retained earnings 65,279 58,153 --------- --------- Total Stockholders' Equity 131,001 122,694 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 296,398 $ 319,484 ========= =========
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 ------------- ------------- ------------- (see Note 11) (see Note 11) (see Note 11) ------------- ------------- ------------- 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) 332,373 318,529 313,551 --------- --------- --------- GROSS PROFIT 127,786 119,686 124,032 Operating, selling and administrative expenses 94,530 92,178 95,870 Depreciation and amortization 18,157 18,301 17,261 --------- --------- --------- OPERATING PROFIT 15,099 9,207 10,901 Interest expense, net 2,909 4,171 4,429 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 12,190 5,036 6,472 Provision for income taxes 4,632 1,913 2,459 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,558 3,123 4,013 Discontinued operations: Loss from discontinued operations (including impairment charge) (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 7,126 2,554 3,944 Cumulative effect of change in accounting principle, net of deferred income tax benefit of $736 - (1,201) - --------- --------- --------- NET INCOME $ 7,126 $ 1,353 $ 3,944 ========= ========= ========= Net income per common share: BASIC: Income from continuing operations before cumulative effect of change in accounting principle $ 0.47 $ 0.19 $ 0.24 Loss from discontinued operations (0.03) (0.04) -- --------- --------- --------- Income before cumulative effect of change in accounting principle 0.44 0.15 0.24 Cumulative effect of change in accounting principle - (0.07) -- --------- --------- --------- Net income per share $ 0.44 $ 0.08 $ 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 $ 0.18 $ 0.24 Loss from discontinued operations (0.03) (0.03) (0.01) --------- --------- --------- Income before cumulative effect of change in accounting principle 0.42 0.15 0.23 Cumulative effect of change in accounting principle - (0.07) - --------- --------- --------- Net income per share $ 0.42 $ 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 $ 3,891 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 periods 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 (as restated)
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 (AS PREVIOUSLY REPORTED) 18,092 $181 $70,634 598 $(1,563) $ - $ 53,007 $ - $ 122,259 CUMULATIVE ADJUSTMENT (SEE NOTE 11) 151 151 ------ ---- ------- ----- ------- ----------- -------- ------------- ------------ BALANCE, FEBRUARY 3, 2001 (AS RESTATED, SEE NOTE 11) 18,092 $181 $70,634 598 $(1,563) $ - $ 52,856 $ - $ 122,108 ====== ==== ======= ===== ======= =========== ======== ============= ============ Net Income (as restated, see Note 11) 3,944 3,944 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 2,727 ------------ 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 (AS RESTATED, SEE NOTE 11) 18,139 181 70,719 2,010 (5,271) 56,800 (1,217) 121,212 ====== ==== ======= ===== ======= =========== ======== ============= ============ Net income (as restated, see Note 11) 1,353 1,353 Unrealized loss on accounting for derivative instruments (2) (2) ------------ Subtotal comprehensive income 1,351 ------------ Issuance of stock for employee stock purchase plan 47 1 85 86 Exercise of stock options 26 39 39 Tax benefit from exercise of stock options 6 6 ------ ---- ------- ----- ------- ----------- -------- ------------- ------------ BALANCE, FEBRUARY 1, 2003 (AS RESTATED, SEE NOTE 11) 18,212 $182 $70,849 2,010 $(5,271) $ 58,153 (1,219) $ 122,694 ====== ==== ======= ===== ======= =========== ======== ============= ============ Net income (as restated, see Note 11) 7,126 7,126 Unrealized gain on accounting for derivative instruments, net of tax provision of $139 228 228 Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $174 284 284 ------------ Subtotal comprehensive income 7,638 ------------ Issuance of unvested 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 (AS RESTATED, SEE NOTE 11) 18,465 $185 $71,799 2,010 $(5,271) (284)$ 65,279 (707) $ 131,001 ====== ==== ======= ===== ======= =========== ======== ============= ============
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 ------------- ------------- ------------- (SEE NOTE 11) (see Note 11) (see Note 11) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,126 $ 1,353 $ 3,944 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 18,325 18,584 17,540 Loss on impairment of assets 1,211 382 232 Loss on sale of property 73 136 110 Deferred income tax provision (benefit) 1,934 104 (56) Tax benefits of exercise of stock options 141 6 -- Unrealized loss from cash flow hedge 284 -- -- (Increase) decrease in assets, net of effect of acquisition in 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 803 (282) 2,001 Accrued expenses 4,144 967 (707) --------- --------- --------- Total adjustments 27,552 12,297 21,594 --------- --------- --------- Net cash provided by operating activities 34,678 13,650 25,538 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (10,402) (19,836) (12,688) Acquisition of stores -- -- (6,532) Proceeds from sale of property and equipment 39 60 35 --------- --------- --------- Net cash used in investing activities (10,363) (19,776) (19,185) --------- --------- --------- 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 528 125 85 Purchase of treasury stock -- -- (3,708) Repayments of other debt (172) (329) (449) --------- --------- --------- Net cash provided by (used in) financing activities (23,944) 5,891 (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 inter-company balances and transactions have been eliminated in consolidation. For a discussion of the Company 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 In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company believes that the likelihood is remote that materially different amounts will be reported related to actual results for the estimates and judgments described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold and the customer takes delivery. Sales returns are recognized at the time the merchandise is returned and processed. At each period end, an estimate of sales returns is recorded. Sales return reserves are based on historical returns percentage is applied to the sales for which returns are projected to be received after period end. The estimated returns percentage and return dollars have not materially changed in the last several years. The Company sells its Millionaire's Club Card, which entitles the customer to receive a ten percent discount on all purchases made during the twelve-month membership period, for a non-refundable fee. The Company recognizes this revenue over the twelve-month membership period based upon historical customer usage patterns. Related deferred revenue is included in accrued expenses. Management recognizes web development and maintenance revenue at the time maintenance is provided or non-returnable product/service (web development) is delivered. Revenue from web development and maintenance is less than .01% of the Company's total revenues. Vendor Allowances The Company receives allowances from its vendors from a variety of programs and arrangements, including placement and co-operative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in costs of goods sold upon the sale of the related inventory. The charge of the adoption of EITF No. 02-16 at the beginning of fiscal 2003 is reflected as a cumulative effect of a change in accounting principle of approximately $1.2 million (net of income tax benefit of $736,000), or $0.07 per diluted share. Prior to fiscal 2003, the Company recognized these vendor allowances over the period covered by the vendor arrangement. Inventories Inventories are valued at the lower of cost or market, using the retail method. Market is determined based on the lower of replacement cost or estimated realizable value. Using the retail method, store and warehouse inventories are values by applying a calculated cost to retail ratio to the retail value of inventories. As of 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 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 retroactively applying the change cannot be reasonably estimated and have not been disclosed. The difference between replacement and current cost of inventory over stated LIFO value is $0.7 million whereas inventory before LIFO, at FIFO value is $212 million. The estimated replacement cost of inventory is the current FIFO value of $212 million. The LIFO value did not include any layer liquidation since the LIFO method was adopted in fiscal 2004. 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, including remodels, is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from 5 to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and, other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs, which extend the useful life of an asset, are capitalized to property accounts and depreciated over the expected remaining life. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income. Impairment of Long-Lived Assets The Company reviews property and equipment and amortizable intangibles when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Circumstances that are considered in determining impairment are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future cash flows, indications that an asset no longer has an economically useful life, or other factors that would indicate a store cannot be profitable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows at the lowest level of independent cash flows, which is generally at the individual store level. Future events could cause the Company to conclude that impairment indicators exist and those long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. The Company's long-lived assets are principally retail store leasehold improvements, lease-rights intangibles and goodwill. The Company assesses recoverability based upon several factors, including management's intention with respect to its stores and those stores projected undiscounted cash flows. If impairment is indicated, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the present value of their projected cash flows. Impairment losses from continuing operations are included in selling, general and administrative costs. For fiscal 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. Deferred Rent The Company recognizes rent expense by the straight-line method over the lease term, including lease renewal option periods that can be reasonably assured at the inception of the lease. The lease term commences on the date when the Company takes possession and has the right to control use of the leased premises. Also, funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and are amortized over the lease term as a reduction of rent expense. Loss from Discontinued Operations The Company periodically closes under-performing stores. The Company believes that a store is a component under Statement of Financial Accounting Standard ("SFAS") No. 144. Therefore, each store closure would result in the reporting of discontinued operations unless the operations and cash flows from the closed store could be absorbed in some part by surrounding Company stores(s) within the same market area. Management evaluates certain factors in determining whether a closed store's operations could be absorbed by surrounding store(s); the primary factor considered is the distance to the next closest Books-A-Million store. When a closed store results in a discontinued operation, the results of operations of the closed store include store closing costs and any related asset impairments. See Note 8 for discontinued operations disclosures. Store Opening Costs Non-capital expenditures incurred in preparation for opening new retail stores are expensed as incurred. 17 BOOKS-A-MILLION 2004 Annual Report 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 leasing 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. Insurance Accruals The Company is subject to large deductibles under its workers' compensation and health insurance policies. Amounts are accrued currently for the estimated cost of claims incurred, both reported and unreported. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Receivables Receivables represent customer, landlord and other receivables due within one year and are net of any allowance for doubtful accounts. Net receivables were $7,622,000 and $8,236,000 for January 31, 2004 and February 1, 2003, respectively. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. Stockholders' Equity Basic net income per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution 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. 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. 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. 18 BOOKS-A-MILLION 2004 Annual Report 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:
Fiscal Year Ended ------------------------------ 1/31/04 2/1/03 2/2/02 ------- ------ ------ Net income, as reported $7,126 $1,353 $3,944 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects 1,346 1,299 1,111 ------ ------ ------ Pro forma net income: $5,780 $ 54 $2,833 ====== ====== ====== Net income per common share Basic - as reported $ 0.44 $ 0.08 $ 0.24 Basic - pro forma $ 0.36 - $ 0.17 Diluted - as reported $ 0.42 $ 0.08 $ 0.23 Diluted - pro forma $ 0.34 - $ 0.17
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 stock price volatility rate 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 Derivatives and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The adoption of hedge accounting provided for in these statements, on February 4, 2001, resulted in a cumulative after-tax increase to other comprehensive loss, pertaining to years prior to fiscal 2002, of $465,000. At January 31, 2004 and February 1, 2003, liabilities related to derivatives are classified as other long-term liabilities of $1,507,000 and $2,059,000, respectively. Comprehensive Income (Loss) Comprehensive income (loss) is net income or loss, plus certain other items that are recorded directly to shareholders' equity. The only such items currently applicable to the Company are the unrealized gains (losses) on the derivative instruments explained in Note 3. Recent Accounting Pronouncements In December 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," 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 2005. The Company will continue to monitor 19 BOOKS-A-MILLION 2004 Annual Report 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 applies also to VIE's created or interests obtained in VIE's before January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB 51," (revised December 2003) ("FIN 46R"), which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN 46R includes revised transition dates for public entities. The Company is now required to adopt the provisions of FIN 46 R 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 No. 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 $1,566 $2,450 State 25 32 86 ------ ------ ------ $2,941 $1,598 $2,536 ====== ====== ====== Deferred: Federal $1,558 $ (35) $ (125) State (131) 2 6 ------ ------ ------ 1,427 (33) (119) ------ ------ ------ Provision for income taxes $4,368 $1,565 $2,417 ====== ====== ======
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 ----------------------------- ---------------------------- (AS RESTATED) (AS RESTATED) (as restated) (as restated) CURRENT NONCURRENT Current Noncurrent ------------- ------------- ------------- ------------- Depreciation $ - $ (6,589) $ - $ (6,549) Accruals 3,174 3,916 2,736 4,360 Interest rate swap 434 747 - Inventory 639 - 2,318 - State net operating loss carryforwards - 831 - 441 Other 203 (115) 329 (62) ------- --------- ------ --------- Deferred tax asset (liability) $ 4,450 $ (1,957) $6,130 $ (1,810) ======= ======== ====== ========
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 interest rates of 2.75%. The Company is subject to interest rate fluctuations involving its credit facility. To manage this exposure, the Company is subject to interest rate swaps to fix the interest rate on variable debt. The Company entered into two separate $10.0 million swaps on July 24, 2002. Both expire in August 2005 and 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 effective. 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 was $7.5 million of borrowings outstanding under these arrangements, which bear interest at variable rates. The net book value of the collateral property securing the Bond was $5,179,000 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 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. 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 if the hedge transaction becomes ineffective. The Company's interest rate swaps were reported as a liability classified in other long-term liabilities in the accompanying consolidating balance sheets at their fair value of $1.5 million and $2.1 million as of January 31, 2004 and February 1, 2003, respectively. For the fiscal years ending 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. 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 ========
21 BOOKS-A-MILLION 2004 Annual Report 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 $28,194 $27,982 $26,875 Contingent rentals 684 552 595 ------- ------- ------- Total $28,878 $28,534 $27,470 ======= ======= =======
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. 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 options 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. 22 BOOKS-A-MILLION 2004 Annual Report 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 Inventive 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 period 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 their collectibles, gifts 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 fee for sourcing and consolidation services. All other costs other than the sourcing and consolidation service fees were passed through from other vendors. Anco Far East fees, net of the passed-through costs, were $77,000, $73,000 and $76,000, respectively. The Company sold books to Anderson Media in the amounts of $383,000, $58,000 and $1,457,000 in fiscal 2004, 2003 and 2002, respectively. The Company 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 year 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 good 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 rates that cover all the variable cost and a portion of the fixed cost. 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 Company also occasionally rents a plane from 23 BOOKS-A-MILLION 2004 Annual Report A&A as well. 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 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. 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. Shipping income related to internet sales is included in net sales and shipping expense is included in cost of sales.
Fiscal Year Ended --------------------------------------------------- Segment information (in thousands) 1/31/04 2/1/03 2/2/02 - ---------------------------------- ------------- ------------- ------------- (AS RESTATED) (as restated) (as restated) Net Sales Retail 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 Trade $ 14,225 $ 8,709 $ 11,239 Electronic Commerce Trade 332 (490) (1,718) Intersegment Elimination of Certain Costs 542 988 1,380 --------- --------- --------- Total Operating Profit $ 15,099 $ 9,207 $ 10,901 ========= ========= ========= Assets Retail Trade $ 295,437 $ 318,308 Electronic Commerce Trade 1,527 1,752 Intersegment Sales Elimination (566) (576) --------- --------- Total Assets $ 296,398 $ 319,484 ========= =========
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 24 BOOKS-A-MILLION 2004 Annual Report lessors for claims arising from the Company's use of the property, and (d) agreements with the Company's directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy's conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles. The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of obligations cannot be reasonably estimated. Historically, the Company has not incurred significant costs related to performance under these types of indemnities. No liabilities have been recorded for these obligations on the Company's balance sheet at January 31, 2004, as such liabilities are considered de minimis. 11. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of the Company's fiscal 2004 consolidated financial statements the Company under went a detailed review of its lease-related accounting policies, and determined to restate its prior financial statements to correct errors relating to the computation of depreciation, rent holidays, straight-line rent expense and the related deferred rent liability. Historically, the Company depreciated leasehold improvements over a period of ten years, regardless of the term of the lease for the store. When calculating the straight-line rent expense per store, the Company previously used the store opening date as the starting date for the rent expense calculation. For certain new stores, the Company receives funding from landlords for the construction of leasehold improvements. Historically, these landlord allowances were been classified as a reduction of property and equipment on the Company's balance sheet and as a reduction in capital expenditures in the Company's statements of cash flows. The Company has corrected its depreciable life for leasehold improvements to the lesser of the economic useful life of the asset or the term of the lease. The Company has corrected the calculation to start straight-line rent expense on the date when the Company takes possession and has the right to control use of the leased premises. Also, the Company has corrected its method of classification of landlord allowances. The Company will now classify landlord allowances as a deferred rent credit on the balance sheet and as an operating activity in the statement of cash flows. Funds received from the landlord intended to reimburse the Company for the cost of leasehold improvements will be recorded as a deferred rent credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense. As a result, the consolidated financial statements have been restated from the amounts previously reported to incorporate the effects of these restatements. The following is a summary of the impact of the Restatement on the consolidated balance sheets at January 31, 2004 and February 1, 2003, and the consolidated statements of operations for the fifty-two week periods ended January 31, 2004, February 1, 2003, and February 1, 2002.
As of January 31, 2004 As of February 1, 2003 ---------------------------------------------------------------------------------- As Previously As Previously CONSOLIDATED BALANCE SHEET Reported Adjustment As Restated Reported Adjustment As Restated - -------------------------- ---------- ---------- ----------- ------------- ---------- ----------- Deferred income taxes (asset) $ 4,446 $ 4 $ 4,450 $ 6,130 $ - $ 6,130 Total current assets 234,897 4 234,901 248,742 - 248,742 Gross property and equipment 166,466 23,495 189,961 159,368 22,101 181,469 Accumulated depreciation 117,289 12,780 130,069 102,222 10,335 112,557 Net property and equipment 49,177 10,715 59,892 57,146 11,766 68,912 Total assets 285,679 10,719 296,398 307,718 11,766 319,484 Accrued expenses 30,189 2 30,191 24,790 - 24,790 Accrued income taxes 3,527 (301) 3,226 2,530 (214) 2,316 Total current liabilities 130,477 (299) 130,178 136,146 (214) 135,932 Deferred income taxes (liability) 1,805 152 1,957 1,703 107 1,810 Other long-term liabilities 1,507 11,115 12,622 2,059 12,047 14,106 Total non-current liabilities 23,952 11,267 35,219 48,704 12,154 60,858 Retained earnings 65,528 (249) 65,279 58,327 (174) 58,153 Total stockholders' equity 131,250 (249) 131,001 122,868 (174) 122,694 Total liabilities and stockholders' equity $285,679 $ 10,719 $296,398 $307,718 $ 11,766 $319,484
25 BOOKS-A-MILLION 2004 Annual Report
Fiscal Year Ended January 31, 2004 Fiscal Year Ended February 1, 2003 -------------------------------------- --------------------------------------- As As Previously Previously CONSOLIDATED STATEMENTS OF OPERATIONS Reported Adjustment As Restated Reported Adjustment As Restated - ------------------------------------- ---------- ---------- ----------- ---------- ---------- ----------- Cost of products sold $ 334,697 $ (2,324) $ 332,373 $ 320,704 $ (2,175) $ 318,529 Gross profit 125,462 2,324 127,786 117,511 2,175 119,686 Depreciation and amortization 15,712 2,445 18,157 16,048 2,253 18,301 Operating profit 15,220 (121) 15,099 9,285 (78) 9,207 Income from continuing operations before income taxes and cumulative effect of change in accounting principle 12,311 (121) 12,190 5,114 (78) 5,036 Income taxes 4,678 (46) 4,632 1,943 (30) 1,913 Income from continuing operations before cumulative effect of change in accounting principle 7,633 (75) 7,558 3,171 (48) 3,123 Income before cumulative effect of change in accounting principle 7,201 (75) 7,126 2,602 (48) 2,554 Net income $ 7,201 $ (75) $ 7,126 $ 1,401 $ (48) $ 1,353 Basic income from continuing operations before cumulative effect of change in accounting principle, per common share $ 0.47 - $ 0.47 $ 0.20 $ (0.01) $ 0.19 Basic income before cumulative effect of change in accounting principle, per common share $ 0.44 - $ 0.44 $ 0.16 $ (0.01) $ 0.15 Basic net income per common share $ 0.44 - $ 0.44 $ 0.09 $ (0.01) $ 0.08 Diluted income from continuing operations before cumulative effect of change in accounting principle, per common share $ 0.45 - $ 0.45 $ 0.19 $ (0.01) $ 0.18 Diluted income before cumulative effect of change in accounting principle, per common share $ 0.43 $ (0.01) $ 0.42 $ 0.16 $ (0.01) $ 0.15 Diluted net income per share $ 0.43 $ (0.01) $ 0.42 $ 0.08 - $ 0.08
Fiscal Year Ended February 2, 2002 ----------------------------------------- As Previously CONSOLIDATED STATEMENTS OF OPERATIONS Reported Adjustment As Restated - ------------------------------------------------------------------------------- ------------- ---------- ----------- Cost of products sold $315,556 $ (2,005) $ 313,551 Gross profit 122,027 2,005 124,032 Depreciation and amortization 15,296 1,965 17,261 Operating profit 10,861 40 10,901 Income from continuing operations before income taxes and cumulative effect of change in accounting principle 6,432 40 6,472 Income taxes 2,444 15 2,459 Income from continuing operations before cumulative effect of change in accounting principle 3,988 25 4,013 Income before cumulative effect of change in accounting principle 3,919 25 3,944 Net income 3,919 25 3,944 Basic income from continuing operations before cumulative effect of change in accounting principle, per common share $ 0.24 - $ 0.24 Basic income before cumulative effect of change in accounting principle, per common share $ 0.24 - $ 0.24 Basic net income per common share $ 0.24 - $ 0.24 Diluted income from continuing operations before cumulative effect of change in accounting principle, per common share $ 0.24 - $ 0.24 Diluted income before cumulative effect of change in accounting principle, per common share $ 0.23 - $ 0.23 Diluted net income per share $ 0.23 - $ 0.23
26 BOOKS-A-MILLION 2004 Annual Report
Fiscal Year Ended January 31, 2004 Fiscal Year Ended February 1, 2003 (1) ------------------------------------ -------------------------------------- As As Previously Previously CONSOLIDATED STATEMENTS OF CASH FLOWS Reported Adjustment As Restated Reported Adjustment As Restated - ----------------------------------------- ---------- ---------- ----------- ---------- ---------- ----------- Net income $ 7,201 $ (75) $ 7,126 $ 1,401 $ (48) $ 1,353 Depreciation and amortization 15,880 2,445 18,325 16,331 2,253 18,584 Deferred income tax provision (benefit) 1,786 148 1,934 (4) 108 104 Accrued income taxes 997 (194) 803 (144) (138) (282) Accrued expenses 5,074 (930) 4,144 348 619 967 Total adjustments 26,083 1,469 27,552 9,449 2,848 12,297 Net cash provided by operating activities 33,284 1,394 34,678 10,850 2,800 13,650 Capital expenditures (9,008) (1,394) (10,402) (17,042) (2,794) (19,836) Net cash used in investing activities (8,969) (1,394) (10,363) (16,982) (2,794) (19,776)
Fiscal Year Ended February 2, 2002 -------------------------------------- As Previously CONSOLIDATED STATEMENTS OF CASH FLOWS Reported Adjustment As Restated - ----------------------------------------- ---------- ---------- ----------- Net income $ 3,919 $ 25 $ 3,944 Depreciation and amortization 15,575 1,965 17,540 Deferred income tax provision (benefit) (134) 78 (56) Accrued income taxes 2,064 (63) 2,001 Accrued expenses 319 (1,026) (707) Total adjustments 20,640 954 21,594 Net cash provided by operating activities 24,559 979 25,538 Capital expenditures (11,709) (979) (12,688) Net cash used in investing activities (18,206) (979) (19,185)
(1) Cash flows from financing activities have been adjusted by $6 to reflect the tax benefit of the exercise of stock options in fiscal year 2003. 27 BOOKS-A-MILLION 2004 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 2, 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. As discussed in Note 11, the Consolidated Financial Statements have been restated. DELOITTE & TOUCHE LLP Birmingham, Alabama April 19, 2004 (April 25, 2005 as to the effects of the restatement discussed in Note 11 to the Consolidated Financial Statements) 28 BOOKS-A-MILLION 2004 Annual Report SUMMARY OF QUARTERLY RESULTS (Unaudited)
FISCAL YEAR ENDED JANUARY 31, 2004 (1)(2) --------------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL (In thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR - -------------------------------------------------------------- ------------- ------------- ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) Net sales $ 98,505 $ 113,081 $102,724 $145,849 $ 460,159 Gross profit (as previously reported) 24,937 30,815 26,412 43,298 125,462 Gross profit (as restated, see Note 11) 25,511 31,396 26,991 43,888 127,786 Operating profit (loss) (as previously reported) (674) 3,238 (232) 12,888 15,220 Operating profit (loss) (as restated, see Note 11) (689) 3,213 (265) 12,840 15,099 Net income (loss) (as previously reported) (1,042) 1,361 (755) 7,637 7,201 Net income (loss) (as restated, see Note 11) (1,052) 1,346 (775) 7,607 7,126 Net income (loss) per share - basic (as previously reported) (0.06) 0.08 (0.05) 0.47 0.44 Net income (loss) per share - basic (as restated, see Note 11) (0.06) 0.08 (0.05) 0.47 0.44 Net income (loss) per share - diluted (as previously reported) (0.06) 0.08 (0.05) 0.45 0.43 (3) Net income (loss) per share - diluted (as restated, see Note (0.06) 0.08 (0.05) 0.45 0.42 11)
Fiscal Year Ended January 31, 2003 (1)(2) --------------------------------------------------------------------- First Second Third Fourth Total (In thousands, except per share amounts) Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------- ------------- ------------- ------------- ------------- ------------- (as restated) (as restated) (as restated) (as restated) (as restated) Net sales $100,273 $ 103,550 $ 96,280 $ 138,112 $ 438,215 Gross profit (as previously reported) 27,380 27,989 22,718 39,424 117,511 Gross profit (as restated, see Note 11) 27,929 28,536 23,242 39,979 119,686 Operating profit (loss) (as previously reported) 871 470 (2,965) 10,909 9.285 Operating profit (loss) (as restated, see Note 11) 884 462 (3,006) 10,867 9,207 Income (loss) before cumulative effect of change in accounting principle (as previously reported) (111) (425) (2,755) 5,893 2,602 Income (loss) before cumulative effect of change in accounting principle (as restated, see Note 11) (103) (430) (2,780) 5,867 2,554 Income (loss) per share - basic before cumulative effect of change in accounting principle (as previously reported) (3) (0.01) (0.03) (0.17) 0.36 0.16 Income (loss) per share - basic before cumulative effect of change in accounting principle (as restated, see Note 11) (0.01) (0.03) (0.17) 0.36 0.15 Income (loss) per share - diluted before cumulative effect of change in accounting principle (as previously reported) (3) (0.01) (0.03) (0.17) 0.36 0.16 Income (loss) per share - diluted before cumulative effect of change in accounting principle (as restated, see Note 11) (0.01) (0.03) (0.17) 0.36 0.15 Net income (loss) (as previously reported) (1,312) (425) (2,755) 5,893 1,401 Net income (loss) (as restated, see Note 11) (1,304) (430) (2,780) 5,867 1,353 Net income (loss) per share - basic (as previously reported) (3) (0.08) (0.03) (0.17) 0.36 0.09 Net income (loss) per share - basic (as restated, see Note 11) (0.08) (0.03) (0.17) 0.36 0.08 Net income (loss) per share - diluted (as previously reported) (0.08) (0.03) (0.17) 0.36 0.08 Net income (loss) per share - diluted (as restated, see Note 11) (0.08) (0.03) (0.17) 0.36 0.08
(1) Certain reclassifications were made to the quarterly amounts for fiscal 2004 and 2003 to appropriately reflect discontinued operations. (2) As restated, see Note 11 of the Consolidated Financial Statements. (3) 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. 29 BOOKS-A-MILLION 2004 Annual Report DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS CORPORATE OFFICERS CLYDE B. ANDERSON CLYDE B. ANDERSON Executive Chairman of the Board Executive Chairman of the Board CHARLES C. ANDERSON SANDRA B. COCHRAN Retired Chairman President, Chief Executive Officer and Secretary TERRY C. ANDERSON TERRANCE G. FINLEY Chief Executive Officer and President, Executive Vice President of Books-A- American Promotional Events, Inc. Million, Inc. and President, American Internet Service, Inc. RONALD G. BRUNO RICHARD S. WALLINGTON President, Chief Financial Officer 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.
30 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, NY 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, NY 10286 REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Birmingham, Alabama FORM 10-K/A AND INVESTOR CONTACT A copy of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004, as filed with the Securities and Exchange Commission, as well as key committee charters, and code of conduct, are available without charge to stockholders upon written request. Such requests and other investor inquiries should be directed to Richard S. Wallington, the Company's Chief Financial Officer, or you can view those items at www.booksamillioninc.com. MARKET AND DIVIDEND INFORMATION Common Stock The Common Stock of Books-A-Million, Inc., is traded in the Nasdaq National Market under the symbol BAMM. The chart below sets forth the high and low stock prices for each quarter of the fiscal years ending January 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. 31 EX-23 3 g94757exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23 Consent of Deloitte & Touche LLP, independent registered public accounting firm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 33-71812 and 33-86980 of Books-A-Million, Inc. (the "Company") on Form S-8 of our report dated April 19, 2004 (April 25, 2005 as to the effects of the restatement discussed in Note 11), (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the adoption of new accounting principles as described in Note 1 and the restatement described in Note 11 to the consolidated financial statements), incorporated by reference in this Annual Report on Form 10-K/A 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/A for the year ended January 31, 2004. DELOITTE & TOUCHE LLP Birmingham, Alabama April 28, 2005 EX-31.1 4 g94757exv31w1.txt CERTIFICATION OF CLYDE B. ANDERSON, EXECUTIVE CHAIRMAN OF THE BOARD Exhibit 31.1 CERTIFICATIONS I, Clyde B. Anderson, certify that: 1. I have reviewed this annual report on Form 10-K/A of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Clyde B. Anderson ------------------------------ Clyde B. Anderson Executive Chairman of the Board EX-31.2 5 g94757exv31w2.txt CERTIFICATION OF RICHARD S WALLINGTON, CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATIONS I, Richard S. Wallington, certify that: 1. I have reviewed this annual report on Form 10-K/A of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Richard S. Wallington --------------------------------- Richard S. Wallington Chief Financial Officer EX-31.3 6 g94757exv31w3.txt CERTIFICATION OF SANDRA B. COCHRAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Exhibit 31.3 CERTIFICATIONS I, Sandra B. Cochran, certify that: 1. I have reviewed this annual report on Form 10-K/A of Books-A-Million, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 28, 2005 /s/ Sandra B. Cochran -------------------------------------- Sandra B. Cochran President and Chief Executive Officer EX-32.1 7 g94757exv32w1.txt CERTIFICATION OF CLYDE B. ANDERSON, EXECUTIVE CHAIRMAN OF THE BOARD Exhibit 32.1 CERTIFICATION OF EXECUTIVE CHAIRMAN OF THE BOARD Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Books-A-Million, Inc. (the "Company") hereby certifies, to the best of such officer's knowledge, that: (i) the accompanying Annual Report on Form 10-K/A 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 28, 2005 /s/ Clyde B. Anderson ------------------------------ Clyde B. Anderson Executive Chairman of the Board EX-32.2 8 g94757exv32w2.txt CERTIFICATION OF RICHARD S WALLINGTON, CHIEF FINANCIAL OFFICER 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/A 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 28, 2005 /s/ Richard S. Wallington ------------------------------- Richard S. Wallington Chief Financial Officer EX-32.3 9 g94757exv32w3.txt CERTIFICATION OF SANDRA B. COCHRAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 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/A 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 28, 2005 /s/ Sandra B. Cochran -------------------------------------- Sandra B. Cochran President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----