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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-4095
THOMAS NELSON, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-0679364
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
501 Nelson Place, Nashville, Tennessee 37214-1000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 889-9000
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 [ ]
At November 13, 2002, the Registrant had outstanding 13,343,765 shares
of Common Stock and 1,024,795 shares of Class B Common Stock.
Thomas Nelson, Inc. and Subsidiaries
Consolidated Balance Sheets
(000's omitted, except per share data)
(unaudited)
September 30, March 31, September 30,
2002 2001 2001
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 363 $ 535 $ 33
Accounts receivable, less allowances
of $7,425/$6,389/$6,133,
respectively 55,700 61,600 60,103
Inventories 41,236 39,195 48,893
Prepaid expenses 15,597 17,571 17,922
Assets held for sale 2,500 2,500 2,500
Refundable income taxes 7,266 7,800 6,023
Deferred income tax benefits 7,966 7,966 12,876
Net assets of discontinued operations - - 30,259
------------- ------------- -------------
Total current assets 130,628 137,167 178,609
Property, Plant and Equipment, net 9,582 9,242 11,887
Other Assets 7,845 7,541 5,901
Deferred Charges 1,992 2,135 1,518
Goodwill 29,304 29,304 29,304
------------- ------------- -------------
Total Assets $179,351 $185,389 $227,219
============= ============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 23,772 $ 22,258 $ 23,855
Accrued expenses 13,067 15,603 23,097
Deferred revenue 8,981 11,222 10,378
Income taxes currently payable 1,825 500 -
Current portion of long-term debt 3,322 3,322 4,845
------------- ------------- -------------
Total current liabilities 50,967 52,905 62,175
Long term debt 44,641 53,052 87,145
Deferred income taxes 792 792 1,866
Other liabilities 898 1,064 1,185
Minority interest 38 - 56
Shareholders' equity:
Preferred stock, $1.00 par value,
authorized 1,000,000 shares;
none issued - - -
Common stock, $1.00 par value,
authorized 20,000,000 shares;
issued 13,343,765, 13,329,759 and
13,285,827 shares, respectively 13,344 13,330 13,286
Class B stock, $1.00 par value,
authorized 5,000,000 shares;
issued 1,024,795, 1,036,801 and
1,057,401 shares, respectively 1,025 1,037 1,057
Additional paid-in capital 44,023 44,008 43,844
Retained earnings 23,623 19,201 16,605
------------- ------------- -------------
Total shareholders' equity 82,015 77,576 74,792
------------- ------------- -------------
Total Liabilities and Shareholders'
Equity $179,351 $185,389 $227,219
============= ============= =============
Thomas Nelson, Inc. and Subsidiaries
Consolidated Statements of Operations
(000's omitted, except per share data)
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues $ 62,074 $ 58,710 $103,243 $104,124
Costs and expenses:
Cost of goods sold 37,656 35,540 62,594 62,926
Selling, general and
administrative 16,795 15,942 30,988 31,753
Depreciation and amortization 588 662 1,123 1,270
-------- -------- -------- --------
Total expenses 55,039 52,144 94,705 95,949
-------- -------- -------- --------
Operating income 7,035 6,566 8,538 8,175
Other expense 18 - 27 -
Interest expense 536 1,290 1,488 2,049
-------- -------- -------- --------
Income from continuing operations
before income taxes 6,481 5,276 7,023 6,126
Provision for income taxes 2,365 1,926 2,563 2,236
Minority interest 16 56 38 56
-------- -------- -------- --------
Income from continuing operations 4,100 3,294 4,422 3,834
Discontinued operations:
Operating loss, net of applicable
taxes - (532) - (766)
Loss on disposal, net of applicable
taxes - (14,707) - (14,707)
-------- -------- -------- --------
Total loss from discontinued
operations - (15,239) - (15,473)
Cumulative effect of change in
accounting principle - (40,433) - (40,433)
-------- -------- -------- --------
Net income $ 4,100 $(52,378) $ 4,422 $(52,072)
======== ======== ======== ========
Weighted average number of shares
Basic 14,369 14,343 14,368 14,343
======== ======== ======== ========
Diluted 14,649 14,373 14,665 14,373
======== ======== ======== ========
Net income (loss) per share, Basic:
Income from continuing operations $ 0.29 $ 0.23 $ 0.31 $ 0.27
Loss from discontinued operations - (1.06) - (1.08)
Cumulative effect of change in
accounting principle - (2.82) - (2.82)
-------- -------- -------- --------
Net income (loss) per share $ 0.29 $(3.65) $ 0.31 $(3.63)
======== ======== ======== ========
Net income (loss) per share, Diluted:
Income from continuing operations $ 0.28 $ 0.23 $ 0.30 $ 0.27
Loss from discontinued operations - (1.06) - (1.08)
Cumulative effect of change in
accounting principle - (2.81) - (2.81)
-------- -------- -------- --------
Net income (loss) per share $ 0.28 $(3.64) $ 0.30 $(3.62)
======== ======== ======== ========
Thomas Nelson, Inc. and Subsidiaries
Statement of Cash Flows
(000's omitted)
(unaudited)
Six Months Ended
September 30,
2002 2001
--------- ---------
Cash Flows From Operating Activities:
Net income from continuing operations $ 4,422 $ 3,834
Adjustments to reconcile income to net cash
provided by (used in) operations:
Minority interest 38 56
Depreciation and amortization 1,416 1,405
Loss on sale of fixed assets 141 19
Changes in assets and liabilities:
Accounts receivable, net 5,900 (2,254)
Inventories (2,041) 2,515
Prepaid expenses 1,974 (3,231)
Accounts payable and accrued expenses 1,675 7,014
Deferred revenues (2,241) (1,294)
Deferred income taxes - 634
Income taxes currently payable 1,325 1,004
Change in other assets and liabilities
and deferred charges (611) 511
--------- ---------
Net cash provided by continuing operations 11,998 10,213
--------- ---------
Discontinued Operations
Loss from discontinued operations - (766)
Loss on disposal - (14,707)
Change in discontinued net assets (2,163) 18,459
--------- ---------
Net cash provided by (used in) discontinued
operations (2,163) 2,986
--------- ---------
Net cash provided by operating activities 9,835 13,199
--------- ---------
Cash Flows From Investing Activities:
Property plant and equipment expenditures (1,582) (834)
Proceeds from sale of fixed assets and
assets held for sale 24 7,235
--------- ---------
Net cash provided by (used in) investing activities (1,558) 6,401
--------- ---------
Cash Flows From Financing Activities:
Payments under credit agreement, net (6,543) (6,764)
Payments on long-term debt (1,868) (13,046)
Dividends paid - (1,148)
Proceeds from issuance of common stock 13 -
Other financing activities (51) (743)
--------- ---------
Net cash used in financing activities (8,449) (21,701)
--------- ---------
Net decrease in cash and cash equivalents (172) (2,101)
--------- ---------
Cash and cash equivalents at beginning of period 535 2,134
--------- ---------
Cash and cash equivalents at end of period $ 363 $ 33
========= =========
Supplemental cash flow information:
Interest paid, net $ 1,484 $ 4,000
Income taxes paid (received), net $ 3,242 $ 5,498
THOMAS NELSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
reflect all adjustments (which are of a normal recurring nature) that are, in
the opinion of management, necessary for a fair statement of the results for
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to Securities and
Exchange Commission rules and regulations. The statements should be read in
conjunction with the Summary of Significant Accounting Policies and notes to
the consolidated financial statements included in the Company's annual report
for the year ended March 31, 2002.
The consolidated balance sheet and related information in these notes as
of March 31, 2002 have been derived from the audited consolidated financial
statements as of that date. Certain reclassifications of prior period amounts
have been made to conform to the current year's presentation.
Note B - New Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
141 supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations" and requires all business combinations to be accounted for using
the purchase method of accounting. In addition, SFAS 141 requires that
identifiable intangible assets be recognized apart from goodwill based on
meeting certain criteria.
SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets" and
addresses how intangible assets and goodwill should be accounted for at and
subsequent to their acquisition. SFAS No. 142 requires that goodwill will no
longer be amortized, but tested for impairment by comparing net book carrying
values to fair market values upon adoption and periodically thereafter. The
Company decided to early adopt the provisions of SFAS No. 142 effective
April 1, 2001. The Company completed its measurement of this potential
impairment loss during fiscal 2002. The transition impairment loss relating
to the goodwill and other net assets of the gift segment was $40.4 million.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The
FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provide a single accounting model for long-lived assets to be
disposed of. The Company adopted the Statement effective April 1, 2002. Such
adoption did not have a material impact on the Company's financial condition
or results of operations.
During July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No.
146 replaces EITF Issue No. 94-3. The new standard is effective for exit or
restructuring activities initiated after December 31, 2002, although earlier
application is encouraged.
Note C - Inventories
Components of inventories consisted of the following (in thousands):
September 30, March 31, September 30,
2002 2002 2001
------------- ------------- -------------
Finished goods $39,535 $36,736 $43,276
Raw materials and work in process 1,701 2,459 5,617
------------- ------------- -------------
$41,236 $39,195 $48,893
============= ============= =============
Note D - Cash Dividend
On August 24, 2001, the Company's board of directors determined that it
was in the best interest of the Company to use cash for current working capital
needs that had previously been used to pay dividends. The board of directors
will review the Company's dividend policy from time to time in the future.
Note E - Operating Segments
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," the Company reports information about its
operating segments. The Company is organized and managed based upon its
products and services.
Subsequent to the sale of the Company's gift division during fiscal 2002,
the Company has reassessed its segment reporting and has identified two
reportable business segments: publishing and conferences. The publishing
segment primarily creates and markets Bibles, inspirational books and videos.
The conference segment hosts inspirational and motivational conferences across
North America.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column consists of
items related to discontinued operations (in thousands).
For the Six Months Ended Publishing Conferences Other Total
======================== ========== =========== ======== ========
September 30, 2002:
- -------------------
Net Revenues $ 84,321 $18,922 - $103,243
Operating Income 5,261 3,277 - 8,538
September 30, 2001:
- ------------------
Net Revenues $ 87,146 $16,978 - $104,124
Operating Income 7,292 883 - 8,175
For the Three Months Ended
==========================
September 30, 2002:
- -------------------
Net Revenues $ 50,017 $12,057 - $ 62,074
Operating Income 4,785 2,250 - 7,035
September 30, 2001:
- -------------------
Net Revenues $ 48,376 $10,334 - $ 58,710
Operating Income 5,648 918 - 6,566
Fiscal Year Ended March 31, 2002:
=================================
Net Revenues $187,859 $27,693 - $215,552
Operating Income 15,252 936 - 16,188
As of September 30, 2002:
- -------------------------
Identifiable Assets $145,787 $21,798 $11,766 $179,351
As of September 30, 2001:
- -------------------------
Identifiable Assets $165,655 $20,782 $40,782 $227,219
As of March 31, 2002:
- ---------------------
Identifiable Assets $149,825 $23,264 $12,300 $185,389
Note F - Discontinued Operations
On October 11, 2001, the Company announced that it had entered into a
definitive agreement by which the Company would sell and CRG Acquisition Corp.
("CRG") would purchase the Company's gift business, including substantially all
of the assets of the Company's wholly-owned subsidiary, The C.R. Gibson Company
"Gibson"). The purchase was consummated on November 7, 2001 by CRG with an
effective date of October 31, 2001 at a purchase price of $30.5 million plus
the assumption of certain liabilities. This sale resulted in a loss on
disposal of $15.3 million. The Company also recognized a $40.4 million
cumulative effect of a change in accounting principle charge to write-off
goodwill associated with Gibson. The Company utilized the net proceeds from
the sale to pay down existing debt. The financial statements reflect the gift
business segment as discontinued operations for all periods presented.
During December 2000, the Company determined it would dispose of its
Ceres candles operation, formerly a division of its gift business segment. The
sale was completed in August 2001 for approximately $1.5 million. This sale
resulted in a loss on disposal of $0.5 million in fiscal 2002 and $7.3 million
in fiscal 2001.
Effective April 1, 2001, Remuda Ranch Center for Anorexia and Bulimia,
Inc., ("Remuda Ranch") which operates therapeutic centers in Arizona for women
with eating disorders, was reflected as a discontinued operation. For periods
prior to April 1, 2001, Remuda Ranch net assets are reflected as assets held
for sale in accordance with Emerging Issues Task Force Issue No. 87-11,
"Allocation of Purchase Price to Assets to be Sold." Remuda Ranch was a wholly
owned subsidiary of New Life Treatment Center, Inc., acquired during fiscal
2000, and was considered as an asset held for sale from the acquisition date
through March 31, 2001. The Company closed the sale of the Remuda Ranch assets
in July 2001 for approximately $7.2 million in cash and a $2 million note
receivable. This sale resulted in a loss on disposal of $0.3 million during
fiscal 2002.
Note G - Depreciation and Amortization
This caption on the accompanying consolidated statements of operations
includes all depreciation and amortization related to publishing rights and
property, plant and equipment.
Note H - Debt
The Company's bank credit facility consists of a $65 million Senior
Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit
Facility bears interest at either the lenders' base rate or, at the Company's
option, the LIBOR plus a percentage, based on certain financial ratios. The
Credit Facility has a term of three years and matures on June 28, 2005. At
September 30, 2002, the Company had outstanding borrowings of $37.6 million
under the Credit Agreement and had $27.4 million available for borrowing. Due
to the seasonality of the Company's business, borrowings under the Credit
Agreement will typically peak during the third quarter of the fiscal year.
At September 30, 2002, the Company had outstanding approximately $9.5
million of unsecured senior notes ("Senior Notes"). The Senior Notes bear
interest at rates from 6.68% to 8.31% due through fiscal 2006.
Under the terms of the Credit Facility and the Senior Notes, the Company
has agreed to limit the payment of dividends and to maintain certain financial
ratios and tangible net worth, which are similarly calculated for each debt
agreement. At September 30, 2002, the Company was in compliance with all
covenants of these debt agreements.
Note I - Royalty Advances
At September 30, 2002, March 31, 2002 and September 30, 2001, prepaid
expenses include $10.7 million, $12.1 million and $11.4 million, respectively,
of royalty advances for products that have released to the market or are
expected to release within the next twelve months. At September 30, 2002,
March 31, 2002 and September 30, 2001, other assets include $2.8 million,
$3.1 million and $1.9 million, respectively, for royalty advances for products
not expected to release to the market within the next twelve months.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
NOTE ON FORWARD-LOOKING STATEMENTS
The following discussion includes certain forward-looking statements.
Actual results could differ materially from those in the forward-looking
statements, and a number of factors may affect future results, liquidity and
capital resources. These factors include, but are not limited to, softness in
the general retail environment, the timing of products being introduced to the
market, the level of product returns experienced, the level of margins
achievable in the marketplace, the collectibility of accounts receivable,
recoupment of royalty advances, effects of acquisitions or dispositions,
financial condition of our customers and suppliers, realization of inventory
values at carrying amounts, access to capital and realization of income tax
and intangible assets. Future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its business strategy. The
Company disclaims any intent or obligation to update forward-looking
statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon 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 requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company bases
its estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. These policies are common with industry
practice and are applied consistently from period to period.
Revenue Recognition: The Company has four primary revenue sources:
sales of publishing product, attendance fees and product sales from its
conferences, royalty income from licensing copyrighted material to third
parties and billed freight. Revenue from the sale of publishing product is
recognized upon shipment to the customer. A reserve for sales returns is
recorded where return privileges exist. The returns reserve is determined by
using a 12-month rolling average return rate, multiplied by gross sales
occurring over the previous four-month period by sales channel. Historical
experience reflects that product is generally returned from and credited to
customers' accounts within the first 120 days of the original sale. The
Company's current analysis indicates that its experience changed during fiscal
2002 from 90 days to 120 days. The full amount of the returns reserve, net of
inventory and royalty costs (based on current gross margin rates), is shown as
a reduction of accounts receivable in the accompanying consolidated financial
statements. Returns of publishing products from customers are accepted in
accordance with standard industry practice. Generally, products that are
designated as out-of-print are not returnable 180 days after notice of out-of-
print status is given to the customer. Also, certain sales are not
returnable. Revenue from conferences is recognized as the conferences take
place. Cash received in advance of conferences is included in the
accompanying financial statements as deferred revenue. Royalty income from
licensing the Company's publishing rights is recorded as revenue when earned
under the terms of the applicable license, net of amounts due to authors.
Billed freight consists of shipping and handling charges billed to customers
and is recorded as revenue upon shipment of product.
Allowance for Doubtful Accounts: The Company records an estimated
reserve for bad debts as a reduction to accounts receivable in the
accompanying consolidated financial statements. The reserve for bad debts
has two components: an unallocated reserve and a specific reserve. The
unallocated reserve is calculated using a 10-year rolling bad debt history
applied to the accounts receivable balance, less specific reserves. The
Company's credit department management identifies specific reserves for each
customer which we deem to be a collection risk or files for bankruptcy
protection.
Inventories: Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) valuation method. The FIFO method of
accounting for inventory was selected to value our inventory at the lower of
market or current cost because the Company continuously introduces new
products, eliminates existing products and redesigns products. Therefore,
inflation does not have a material effect on the valuation of inventory.
Costs of producing publishing products are included in inventory and charged
to operations when product is sold or otherwise disposed. These costs include
paper, printing, binding, outside editorial, international freight and duty
costs, when applicable. The Company policy is to expense all internal
editorial, typesetting, production, warehousing and domestic freight-in costs
as incurred, except for certain indexing, stickering and assembly costs, which
are capitalized into inventory. Costs of abandoned publishing projects are
charged to operations when identified. The Company also maintains a reserve
for excess and obsolete inventory as a reduction to inventory in the
accompanying consolidated financial statements. This reserve is based on
historical liquidation recovery rates applied to inventory quantities
identified in excess of a twenty-four month supply on hand for each category
of product.
Royalty Advances/Pre-Production Costs: Royalty advances are typically
paid to authors at contract execution, as is standard in the publishing
industry. These advances are either recorded as prepaid assets or other
(long-term) assets in the accompanying consolidated financial statements,
depending on the expected publication date (availability for shipment) of the
product. Author advances for trade books are generally amortized over five
months beginning when the product is first sold into the market. The
Company's historical experience is that typically 80% of book product sales
occur within the first five months after release into the market. Reference
and video royalty advances are generally amortized over a twelve-month period
beginning with the first sale date of the product, as these products typically
have a longer sales cycle than books. Royalty advances for significant new
Bible products are amortized on a straight-line basis for a period not to
exceed five years (as determined by management).
When royalty advances are earned through product sales at a faster pace
than the amortization period, the amortization expense is accelerated to match
the royalty earnings. Outstanding advances are reviewed monthly for abandoned
projects or titles that appear to have unrecoverable advances. All abandoned
projects and advances that management does not expect to fully recover are
charged to operations when identified.
For authors with multiple book/product contracts, the advance is
amortized over a period that encompasses the publication of all products,
generally not to exceed 24 months or the actual recovery period, whichever is
shorter. Advances to our most important authors are typically expensed as
they are recovered through sales. These authors generally have multiple year
and multiple book contracts, as well as strong sales history of backlist
titles (products published during preceding fiscal years and prior) that can
be used to recover advances over long periods of time.
Many Bible, reference and video products require significant development
costs prior to the actual printing or production of the saleable product.
These products also typically have a longer life cycle. All video pre-
production costs are amortized over 12 months on a straight-line basis. Bible
and reference products typically have the longest life cycle. Pre-production
costs for significant Bible and reference products are recorded as other
assets in the accompanying consolidated financial statements and are amortized
on a straight-line basis, for a period not to exceed five years (as determined
by management).
Goodwill and Intangible Assets: In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill no longer be amortized, but tested for impairment by comparing net
book carrying values to fair market values upon adoption and periodically
thereafter. The Company has adopted the provisions of SFAS No. 142 as of
April 1, 2001. The election of SFAS No. 142 resulted in a $40.4 million
cumulative effect of a change in accounting principle charge to write-off
goodwill associated with the Company's gift division, which was discontinued
and sold during fiscal 2002. In accordance with SFAS No. 142, goodwill was
tested for impairment by the Company's reporting units: Publishing,
Conferences and Gift. The fair value for the assets of the Publishing and
Conferences reporting units was evaluated using discounted expected cash flows
and current market multiples, and it was determined that no impairment existed
during fiscal 2002. The fair value of the Gift assets was determined by the
actual sales price for that division. Goodwill will be tested for impairment
annually during the fourth quarter.
OVERVIEW
The following table sets forth for the periods indicated certain selected
statements of operations data of the Company expressed as a percentage of net
revenues and the percentage change in dollars in such data from the prior
fiscal year.
Six Months Ended Fiscal Year-to-Year
September 30, Increase
2002 2001 (Decrease)
------ ------ -------------------
(%) (%) (%)
Net revenues 100.0 100.0 (0.8)
Expenses
Cost of goods sold 60.6 60.4 (0.5)
Selling, general and administrative 30.0 30.5 (2.4)
Depreciation and amortization 1.1 1.2 (11.6)
------ ------ -------------------
Total expenses 91.7 92.1 (1.3)
------ ------ -------------------
Operating income 8.3 7.9 4.4
------ ------ -------------------
Net income from continuing operations 4.3 3.7 15.3
------ ------ -------------------
Loss from discontinued operations,
net of tax - (0.7) n/a
Loss on disposal, net of tax - (14.1) n/a
Cumulative change in accounting principle - (38.8) n/a
====== ====== ===================
Net income 4.3 (50.0) n/a
====== ====== ===================
The Company's net revenues fluctuate seasonally, with net revenues in the
first fiscal quarter historically being lower than those for the remainder of
the year. This seasonality is the result of increased consumer purchases of
the Company's products during the traditional holiday periods. In addition,
the Company's quarterly operating results may fluctuate significantly due to
the seasonality of new product introductions, the timing of selling and
marketing expenses and changes in sales and product mixes.
Results of Operations
- ---------------------
Consolidated Results - Second Quarter of Fiscal 2003
Compared with Second Quarter of Fiscal 2002
- ----------------------------------------------------
Net revenues for the three months ended September 30, 2002 increased
$3.4 million, or 6% over the same period in fiscal 2002. Net revenues from
publishing products increased $1.6 million or 3%, primarily due to the timing
of new product releases. Net revenues from conferences increased $1.7 million
or 17%, primarily due to the timing of conference events. Price increases did
not have a material effect on net revenues during the period.
The Company's cost of goods sold increased for the three months ended
September 30, 2002 by $2.1 million, or 6% from the same period in fiscal 2002
and, as a percentage of net revenues, remained essentially unchanged at 61%.
A slight decline in publishing segment gross margins, due to a higher level of
royalty advance write-offs and free freight given to customers, was offset by
improved gross margins in the conference segment, due to improved attendance
at the events in this year's period, compared to the prior year events.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the three months ended September 30, 2002 increased $0.9
million, or 5%, from the same period in fiscal 2002. These expenses,
expressed as a percentage of net revenues, remained essentially unchanged at
27%. Increased expenditures in advertising for publishing products and general
overhead were offset by overhead reductions in the conference segment
operations. The increased spending in advertising for publishing products is
due to the soft market conditions and timing of new releases. The Company has
streamlined the conference segment operations and consolidated some of its
"back-office" functions with those of the publishing segment. These actions
are expected to continue to produce net savings for future periods.
Depreciation and amortization for the three months ended September 30,
2002 decreased $0.1 million from the same period in fiscal 2002, primarily due
to lower levels of fixed assets.
Interest expense for the three months ended September 30, 2002 was
$0.5 million, a decrease of $0.8 million from the same period in the prior
fiscal year. This reduction is a result of debt reduction and improved
interest rates.
The provision for income taxes remains consistent with the prior year at
an effective rate of 36.5%.
The net loss from discontinued operations for the three months ended
September 30, 2001 was related to the decision to sell the Company's gift
division, along with the sale of the net assets of Remuda Ranch and Ceres
Candles. The Company also recognized a $40.4 million cumulative effect of a
change in accounting principle charge to write-off goodwill associated with
the gift division.
Consolidated Results - First Six Months of Fiscal 2003
Compared with First Six Months of Fiscal 2002
- ------------------------------------------------------
Net revenues for the first six months of fiscal 2003 decreased
$0.9 million, less than 1%, from the same period in fiscal 2002. Publishing
product net revenues decreased $2.8 million, or 3%, primarily due to timing of
new releases and the fact that we believe that our primary markets are flat to
down over the previous year. Net revenues from conferences increased $1.9
million, or 11%, primarily due to the timing of conference events. Price
increases did not have a material effect on net revenues during the period.
The Company's cost of goods sold decreased $0.3 million, less than 1%,
over the same period in fiscal 2002 and, as a percentage of net revenues,
remained essentially unchanged. A slight decline in publishing segment gross
margins, due to a higher level of royalty advance write-offs and free freight
given to customers, was offset by improved gross margins in the conference
segment, due to improved attendance at the events in this year's period,
compared to the prior year events.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the six months ended September 30, 2002 decreased by $0.8
million, or 2% from the same period in the prior fiscal year. These expenses,
expressed as a percentage of net revenues, remained essentially the same.
Increased expenditures in advertising for publishing products and general
overhead were offset by overhead reductions in the conference segment
operations. The increased spending in advertising for publishing products is
due to the soft market conditions and timing of new releases. The Company has
streamlined the conference segment operations and consolidated some of its
"back-office" functions with those of the publishing segment. These actions
are expected to continue to produce net savings for future periods.
Depreciation and amortization for fiscal 2003 decreased $0.1 million
from fiscal 2002, primarily due to lower levels of fixed assets.
Interest expense for fiscal 2003 decreased $0.6 million from fiscal 2002
due to lower debt levels and lower interest rates.
The provision for income taxes remains consistent with the prior year at
an effective rate of 36.5%.
The net loss from discontinued operations for the six months ended
September 30, 2001 was related to the decision to sell the Company's gift
division, along with the sale of the net assets of Remuda Ranch and Ceres
Candles. The Company also recognized a $40.4 million cumulative effect of a
change in accounting principle charge to write-off goodwill associated with
the gift division.
Liquidity and Capital Resources
- -------------------------------
At September 30, 2002, the Company had approximately $0.4 million in cash
and cash equivalents. The primary sources of liquidity to meet the Company's
future obligations and working capital needs are cash generated from
operations, an expected tax refund and borrowings available under bank credit
facilities. At September 30, 2002, the Company had working capital of
$79.7 million.
Net cash provided by continuing operations was $12.0 million for the six
months ended September 30, 2002 and $10.2 million for the same period last
year. Cash provided by continuing operations during the six months ended
September 30, 2002 was principally attributable to income from continuing
operations and collections of accounts receivable, partially offset by
increases in inventories.
Fiscal year-to-date, capital expenditures have totaled approximately
$1.6 million, primarily consisting of warehousing, building improvements and
computer software and equipment. During the remainder of fiscal 2003, the
Company anticipates capital expenditures of approximately $3.3 million,
primarily consisting of warehousing, building improvements and computer
software and equipment. The Company is also obligated to pay $2.5 million to
repurchase its former Beacon Falls Distribution Center under the terms of a
"put option" from the Asset Purchase Agreement between CRG Acquisition Corp.
and Thomas Nelson for the sale of C.R. Gibson. The Company has engaged the
services of a commercial real estate broker to list the property for sale.
The Company's bank credit facility consists of a $65 million Senior
Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit
Facility bears interest at either the lenders' base rate or, at the Company's
option, the LIBOR plus a percentage, based on certain financial ratios. The
Credit Facility has a term of three years and matures on June 28, 2005. At
September 30, 2002, the Company borrowed $37.6 million under the Credit
Agreement and had $27.4 million available for borrowing. Due to the
seasonality of the Company's business, borrowings under the Credit Agreement
have historically peaked during the third quarter of the fiscal year.
At September 30, 2002, the Company had outstanding approximately
$9.5 million of unsecured senior notes ("Senior Notes"). The Senior Notes
bear interest at rates from 6.68% to 8.31% due through fiscal 2006.
Under the terms of the Credit Facility and the Senior Notes, the Company
has agreed to limit the payment of dividends and to maintain certain financial
ratios and tangible net worth. At September 30, 2002, the Company was in
compliance with all covenants of these debt agreements.
Management believes cash generated by operations, an expected tax refund
and borrowings available under the Credit Facilities will be sufficient to fund
anticipated working capital requirements for existing operations through the
remainder of fiscal 2003. The Company's current cash commitments include
current maturities of debt and operating lease obligations that are disclosed
in the Company's Annual Report on Form 10-K as of and for the year ended
March 31, 2002, as well as the $2.5 million purchase of the Beacon Falls
Distribution Center. The Company also has current inventory purchase and
royalty advance commitments in the ordinary course of business that require
cash payments as vendors and authors fulfill their requirements to the Company
in the form of delivering satisfactory product orders and manuscripts,
respectively. The Company has no off-balance sheet commitments or
transactions with any special purpose entities (SPE's). Management also is
not aware of any undisclosed material related party transactions or
relationships with management, officers or directors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's investment
strategies, types of financial instruments held or the risks associated with
such instruments which would materially alter the market risk disclosures made
in the Company's Annual Report on Form 10-K as of and for the year ended
March 31, 2002.
Item 4. Controls and Procedures
The Chief Executive Officer and Chief financial Officer have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to the Exchange Act Rule 13A-14, as of November 13, 2002. Based on that
evaluation, the chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that
matieral information required to be filed in this quartelry report has been
made known to them in a timely fashion. There have been no significant changes
in internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the chief Executive OFficer and Chief
Financial Officer completed their evaluation.
PART II
Item 2. Changes in Securities and Use of Proceeds.
The Company's new Credit Facility contains restrictions on its ability to
pay cash dividends to shareholders, based on a percentage of the Company's net
income.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on August 22, 2002
(the "Annual Meeting"). At the Annual Meeting, the stockholders of the Company
voted to elect three Class Three directors, Jesse T. Correll, Brownlee O.
Currey, Jr. and W. Lipscomb Davis, Jr., for three-year terms and until their
successors are duly elected and qualified. The following table sets forth the
number of votes cast for, withheld/abstained and against with respect to each
of the nominees:
Withheld/
Nominee For Abstained Against
- -------------------------- ---------- --------- --------
Jesse T. Correll 16,202,905 60,000 3,950
Brownlee O. Currey, Jr. 16,197,311 65,227 4,317
W. Lipscomb Davis, Jr. 16,194,960 67,945 3,950
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number
-------
11 - Statement re Computation of Per Share Earnings
99.1 - Certification of President and Chief Executive Officer
relating to Form 10-Q for period ending September 30, 2002
99.2 - Certification of Chief Financial Officer relating to
Form 10-Q for period ending September 30, 2002
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on August 9, 2002,
as amended by Form 8-K/A on August 13, 2002, to announce its change
in independent accountants and to announce the date and times of its
earnings release and conference call for the first quarter of FY2003.
The Company filed a current report on Form 8-K on August 14, 2002,
in which the certifications of the Company's Chief Executive
Officer and Chief Financial Officer were filed, relating to Form
10-Q for the period ended June 30, 2002, as required pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Thomas Nelson, Inc.
(Registrant)
November 14, 2002 BY /s/ Joe L. Powers
- ------------------- ---------------------
Joe L. Powers
Executive Vice President
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Sam Moore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas Nelson, Inc.;
2. Based on my knowledge, this quarterly 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 period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Sam Moore
---------------------------
Sam Moore
Chairman, Chief Executive Officer
and President
CERTIFICATIONS
I, Joe L. Powers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thomas Nelson, Inc.;
2. Based on my knowledge, this quarterly 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 period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Joe L. Powers
---------------------------
Joe L. Powers
Executive Vice President
and Secretary
INDEX TO EXHIBITS
Exhibit
Number
- -------
11 -- Statement re Computation of Per Share Earnings
99.1 -- Certification of President and Chief Executive Officer relating to
Form 10-Q for period ending September 30, 2002
99.2 -- Certification of Chief Financial Officer relating to Form 10-Q for
period ending September 30, 2002