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UNITED STATES
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, 2003
[ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
TRANSITION SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13788
THOMAS NELSON, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-0679364
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At November 13, 2003, the Registrant had outstanding 13,386,162 shares
of Common Stock and 1,016,195 shares of Class B Common Stock.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Thomas Nelson, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(000's omitted, except share amounts)
September 30, March 31, September 30,
2003 2003 2002
------------- ------------- ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,909 $ 1,707 $ 363
Accounts receivable, less
allowances of $7,798, $7,311
and $7,425, respectively 56,501 56,806 55,700
Inventories 39,623 33,637 41,236
Prepaid expenses 13,294 13,521 15,597
Assets held for sale 1,615 1,785 2,500
Refundable income taxes - - 7,266
Deferred tax assets 5,085 5,085 7,966
------------- ------------- ------------
Total current assets 121,027 112,541 130,628
Property, plant and equipment, net 11,961 11,630 9,582
Other assets 7,611 7,358 7,333
Deferred charges 2,421 1,695 1,992
Intangible assets 861 527 512
Goodwill,net 29,304 29,304 29,304
------------- ------------- ------------
Total Assets $173,185 $163,055 $179,351
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,773 $ 20,218 $ 23,772
Accrued expenses 10,247 13,835 13,067
Deferred revenue 9,435 11,493 8,981
Dividends payable 576 - -
Income taxes currently payable 5,243 2,379 1,825
Current portion of long-term debt 3,022 3,622 3,322
------------- ------------- ------------
Total current liabilities 52,296 51,547 50,967
Long-term debt, less current portion 3,461 22,330 44,641
Deferred tax liabilities 721 721 792
Other liabilities 21,578 590 898
Minority interest 46 43 38
Commitments and contingencies - - -
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 13,373,396, 13,350,431 and
13,343,765 shares, respectively 13,373 13,350 13,344
Class B stock, $1.00 par value,
aughorized 5,000,000 shares;
Issued 1,024,795 shares 1,025 1,025 1,025
Additional paid-in capital 44,201 44,064 44,023
Retained earnings 36,484 29,385 23,623
------------- ------------- ------------
Total sharesholders' equity 95,083 87,824 82,015
------------- ------------- ------------
Total Liabilities and
Shareholders' Equity $173,185 $163,055 $179,351
============= ============= ============
See Notes to Condensed Consolidated Financial Statements
THOMAS NELSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's omitted, unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- -------- --------
Net revenues $63,829 $62,074 $105,660 $103,243
Costs and expenses:
Cost of goods sold 36,176 37,656 62,051 62,594
Selling, general & administrative 15,984 16,795 29,649 30,988
Depreciation & amortization 558 588 1,118 1,123
------- ------- -------- --------
Total costs and expenses 52,718 55,039 92,818 94,705
------- ------- -------- --------
Operating income 11,111 7,035 12,842 8,538
Other expense (income) 12 18 (179) (74)
Interest expense 243 536 487 1,589
------- ------- -------- --------
Income from continuing operations
before income taxes 10,856 6,481 12,534 7,023
Provision for income taxes 4,071 2,365 4,700 2,563
Minority interest 11 16 3 38
------- ------- -------- --------
Income from continuing operations 6,774 4,100 7,831 4,422
Discontinued operations:
Loss on disposal, net of taxes (156) - (156) -
------- ------- -------- --------
Net income $ 6,618 $ 4,100 $ 7,675 $ 4,422
======= ======= ======== ========
Weighted average number of shares
outstanding:
Basic 14,393 14,369 14,387 14,368
======= ======= ======== ========
Diluted 14,761 14,649 14,667 14,665
======= ======= ======== ========
Net income per share, Basic:
Income from continuing operations $ 0.47 $ 0.29 $ 0.54 $ 0.31
Loss from discontinued operations (0.01) - (0.01) -
------- ------- -------- --------
Net income per share $ 0.46 $ 0.29 $ 0.53 $ 0.31
======= ======= ======== ========
Net income per share, Diluted:
Income from continuing operations $ 0.46 $ 0.28 $ 0.53 $ 0.30
Loss from discontinued operations (0.01) - (0.01) -
------- ------- -------- --------
Net income per share $ 0.45 $ 0.28 $ 0.52 $ 0.30
======= ======= ======== ========
See Notes to Condensed Consolidated Financial Statements
Thomas Nelson, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(000's omitted)
(unaudited)
Six Months Ended
September 30,
----------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net income from continuing operations $ 7,831 $ 4,422
Adjustments to reconcile income to net cash
provided by (used in) operations:
Depreciation and amortization 1,118 1,123
Amortization of deferred financing fees 105 293
Loss on sale of fixed assets and
assets held for sale 15 141
Minority interest 3 38
Changes in assets and liabilities,
net of acquisitions and disposals:
Accounts receivable, net (361) 5,900
Inventories (1,835) (2,041)
Prepaid expenses 261 1,974
Accounts payable and accrued expenses (2,000) 1,675
Deferred revenue (2,058) (2,241)
Income taxes currently payable 2,864 1,325
Change in other assets and liabilities and
deferred charges 178 (611)
---------- ----------
Net cash provided by continuing operations 6,121 11,998
Discontinued Operations:
Loss from discontinued operations (156) -
Federal income tax receivable (payable) 20,883 -
Change in discontinued net assets 186 (2,163)
---------- ----------
Net cash provided by (used in)
discontinued operations 20,913 (2,163)
---------- ----------
Net cash provided by operating activities 27,034 9,835
---------- ----------
Cash Flows From Investing Activities:
Capital expenditures (1,471) (1,582)
Net proceeds from sales of property, plant
and equipment and assets held for sale 30 24
Purchase of net assets of acquired company (2,708) -
Acquisition of publishing rights (375) (500)
---------- ----------
Net cash provided by (used in) investing activities (4,524) (2,058)
---------- ----------
Cash Flows From Financing Activities:
Payments under revolving credit facility (17,000) (6,543)
Payments on long-term debt (2,469) (1,868)
Proceeds from issuance of common stock 161 13
Other financing activities - (51)
---------- ----------
Net cash provided by (used in) financing activities (19,308) (8,449)
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,202 (172)
Cash and cash equivalents at beginning of period 1,707 535
---------- ----------
Cash and cash equivalents at end of period $ 4,909 $ 363
---------- ----------
Supplemental cash flow information:
Dividends accrued and unpaid $ 576 $ -
Interest paid, net $ 683 $ 1,484
Income taxes paid (refunded), net $(19,146) $ 3,242
See Notes to Condensed Consolidated Financial Statements
THOMAS NELSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated 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 the 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, 2003.
The condensed consolidated balance sheets and related information in
these notes as of March 31, 2003 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.
Total comprehensive income and net income are the same for all periods
presented.
Note B - Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equities. SFAS No. 150 requires issuers to classify as
liabilities (or assets, in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. Generally, SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not expect the adoption
of SFAS No. 150 to have a material impact on its consolidated financial
statements.
Note C - Stock-Based Compensation
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March 2000,
to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding and unvested awards in each period.
Three Months Ended Six Months Ended
September 30, September 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (in thousands):
As reported $6,618 $4,100 $7,675 $4,422
Less: additional stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects 495 390 875 720
======== ======== ======== ========
Pro forma $6,123 $3,710 $6,800 $3,702
======== ======== ======== ========
Net income per share:
Basic -- As reported $ 0.46 $ 0.29 $ 0.53 $ 0.31
======== ======== ======== ========
Pro forma $ 0.43 $ 0.26 $ 0.47 $ 0.26
======== ======== ======== ========
Diluted -- As reported $ 0.45 $ 0.28 $ 0.52 $ 0.30
======== ======== ======== ========
Pro forma $ 0.41 $ 0.25 $ 0.46 $ 0.25
======== ======== ======== ========
On June 11, 2003, the Company issued 604,000 options to purchase shares.
Three hundred four thousand options for shares of Common Stock were granted
under the 1992 Employee Stock Incentive Plan with an exercise price of $12.07,
the closing market price that day. Three hundred thousand options were granted
under the 2003 Stock Incentive Plan, exercisable for either shares of Common or
Class B Common Stock. The exercise price of this grant is $12.33, representing
the fair value of Class B Common Stock on the grant date. Vesting under both
plans are at a rate of 33-1/3% on the first through third anniversaries of the
grant date, subject to certain performance goals, and vest in full if the
employee is employed on the third anniversary of the grant, regardless of
whether such goals are met.
The fair value of each option on its date of grant has been estimated
for pro forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
September 30, 2003 September 30, 2002
------------------ ------------------
Expected annual future dividend payment $0.16 per share -
Expected stock price volatility 40.31% 39.26%
Risk free interest rate 5.35% 5.77%
Expected life of options 9 years 9 years
Note D - Inventories
Components of inventories consisted of the following (in thousands):
September 30, March 31, September 30,
2003 2003 2002
------------- ------------- -------------
Finished goods $37,759 $31,298 $39,535
Raw materials and work in process 1,864 2,339 1,701
------------- ------------- -------------
$39,623 $33,637 $41,236
============= ============= =============
Note E - Operating Segments
The Company is organized and managed based upon its products and services.
The Company 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 Three Months Ended Publishing Conferences Other Total
- -------------------------- ----------- ----------- ----------- --------
September 30, 2003:
Net Revenues $ 53,754 $10,075 $ - $ 63,829
Operating Income 9,960 1,151 - 11,111
Capital Expenditures 1,064 37 - 1,101
Depreciation and Amortization 493 65 - 558
September 30, 2002:
Net Revenues $ 50,167 $11,907 $ - $ 62,074
Operating Income 4,934 2,101 - 7,035
Capital Expenditures 1,203 28 - 1,231
Depreciation and Amortization 525 63 - 588
For the Six Months Ended
- ------------------------
September 30, 2003:
Net Revenues $ 89,757 $15,903 $ - $105,660
Operating Income 11,852 990 - 12,842
Identifiable Assets 148,086 21,483 3,616 173,185
Capital Expenditures 1,396 75 - 1,471
Depreciation and Amortization 989 129 - 1,118
September 30, 2002:
Net Revenues $ 84,568 $18,675 $ - $103,243
Operating Income 5,507 3,031 - 8,538
Identifiable Assets 145,787 21,798 11,766 179,351
Capital Expenditures 1,551 31 - 1,582
Depreciation and Amortization 995 128 - 1,123
Fiscal Year Ended March 31, 2003:
- ---------------------------------
Net Revenues $187,599 $29,618 $ - $217,217
Operating Income 14,684 4,242 - 18,926
Identifiable Assets 136,786 22,484 3,785 163,055
Capital Expenditures 4,493 103 - 4,596
Depreciation and Amortization 1,808 253 - 2,061
Note F - Other Liabilities
Other liabilities at September 30, 2003 include a non-current tax
liability, which resulted from a tax refund of $18.7 million received in
April 2003. This tax refund was related to the disposal of the Company's
C.R. Gibson gift division and was used to pay down existing debt. Further,
it is expected that the Company will reduce its current year income tax
payments by approximately $2.2 million related to additional tax credits
generated by the tax loss realized on the disposal of C.R. Gibson. Until such
time that the Company can conclude that the position taken on its income tax
returns will ultimately be sustained by the taxing authorities, the refund and
the tax credits will be recorded as a non-current tax liability. If the
Company's position is sustained,the Company will recognize the refund as income
from discontinued operations.
Note G - 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, 2003, the Company had no outstanding borrowings under the Credit
Facility.
At September 30, 2003, the Company had outstanding approximately $6.5
million in 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, 2003, the Company was in compliance with all
covenants of these debt agreements.
Note H - Royalty Advances
At September 30, 2003, March 31, 2003 and September 30, 2002, prepaid
expenses include $8.8 million, $8.4 million and $10.7 million, respectively, of
royalty advances for products that have been released to the market or are
expected to be released within the next twelve months. At September 30, 2003,
March 31, 2003 and September 30, 2002, other assets include $3.2 million, $2.9
million and $2.8 million, respectively, for royalty advances for products not
expected to be released to the market within the next twelve months.
Note I - Acquisitions
On September 19, 2003, the Company purchased substantially all of the
assets of World Bible Publishers ("World") from RiversideWorld, Inc., which is
a customer and competitor of the Company, for approximately $5.2 million. As
of September 30, 2003, the Company had paid cash in the amount of $2.7 million
and issued credit against accounts receivable from RiversideWorld in the amount
of $0.7 million. The remaining $1.8 million, which was recorded as a current
liability at September 30, 2003, was paid in cash during October 2003. World
primarily publishes Bibles and Christian books and was headquartered in Iowa
Falls, Iowa. The purchase price has been preliminarily allocated to the
net assets acquired, based on their estimated fair values (inventory of
$4.2 million and development cost for publication of Bibles of $1 million,
which will be amortized over a five-year period).
Note J - Cash Dividend
On August 21, 2003, the Company's Board of Directors declared a cash
dividend of $0.04 per share of Common and Class B Common Stock. The dividend
was paid on October 20, 2003 to shareholders of record on October 6, 2003.
Note K - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share amounts):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 6,618 $ 4,100 $ 7,675 $ 4,422
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Weighted average shares
outstanding 14,393 14,369 14,387 14,368
======== ======== ======== ========
Net income per share $ 0.46 $ 0.29 $ 0.53 $ 0.31
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Basic weighted average shares
outstanding 14,393 14,369 14,387 14,368
Dilutive stock options -
based on treasury stock
method using the average
market price 368 280 280 297
-------- -------- -------- --------
Total weighted average diluted
shares 14,761 14,649 14,667 14,665
======== ======== ======== ========
Net income per share $ 0.45 $ 0.28 $ 0.52 $ 0.30
======== ======== ======== ========
Options which are not dilutive were excluded from the diluted weighted
average share calculation and totaled approximately 510,000 and 1,158,000 for
the quarter and fiscal year-to-date periods ended September 30, 2003,
respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 disclosures 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. In accordance with Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 regarding revenue
recognition, we recognize revenue only when all of the following criteria are
met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the seller's price to the buyer is fixed or
determinable; and collectibility is reasonably assured. An allowance for sales
returns is recorded where return privileges exist. The returns allowance is
determined by using a 12-month rolling average return rate, multiplied by gross
sales occurring over the previous four-month period by market 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 full amount of the returns allowance, net of inventory and royalty costs
(based on current gross margin rates) is shown as a reduction of accounts
receivable in the accompanying condensed 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 90 days after notice of out-of-print status is
given to the customer. Also, certain high discount 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 charges billed to customers and is recorded as revenue upon shipment
of product.
Allowance for Doubtful Accounts: The Company records an allowance for bad
debts as a reduction to accounts receivable in the accompanying condensed
consolidated financial statements. The valuation allowance has a specific
component related to accounts with known collection risks and a component which
is calculated using a 5-year rolling bad debt history applied as a percentage
of the accounts receivable balance, less the specific component of the
allowance. In fiscal 2003, the Company changed from a 10-year rolling bad
debt history to a 5-year history to compute the allowance in order to better
reflect the current economic environment. This change did not have a material
impact on the allowance balance. Our credit department identifies specific
allowances for each customer who is deemed to be a collection risk, may have
filed for bankruptcy protection or may have disputed amounts with the Company.
Inventories: Inventories are stated at the lower of cost or market value
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 value 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 and design, typesetting, artwork,
international freight and duty costs, when applicable. The Company policy is
to expense all internal editorial, production, warehousing and domestic
freight-in costs as incurred, except for certain indexing, stickering,
typesetting and assembly costs, which are capitalized into inventory. Costs of
abandoned publishing projects are charged to operations when identified. The
Company also maintains an allowance for excess and obsolete inventory as a
reduction to inventory in the accompanying condensed consolidated financial
statements. This allowance 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, as is standard in the publishing industry. These advances are
either recorded as prepaid assets or other (long-term) assets in the
accompanying condensed 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. Unamortized 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) 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. Pre-
production costs for significant Bible and reference products are recorded as
deferred charges in the accompanying condensed 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. In accordance with SFAS No. 142, goodwill is tested for
impairment by the Company's reporting units: Publishing and Conferences. The
fair value for the assets of the Publishing and Conferences reporting units
is evaluated using discounted expected cash flows and current market multiples.
Unless circumstances dictate an earlier analysis, we will conduct our annual
goodwill impairment test in our fourth fiscal quarter.
OVERVIEW
The following table sets forth for the periods indicated certain selected
statements of income 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
September 30, Fiscal Year-to-Year
---------------- Increase
2003 2002 (Decrease)
------- ------- -------------------
(%) (%) (%)
Net revenues:
Publishing 84.9 81.9 6.4
Conferences 15.1 18.1 (16.0)
------- ------- -------------------
Total net revenues 100.0 100.0 2.3
Expenses:
Cost of goods sold 58.7 60.6 (0.9)
Selling, general and administrative 28.1 30.0 (4.3)
Depreciation and amortization 1.1 1.1 (0.4)
------- ------- -------------------
Total expenses 87.9 91.7 (2.0)
------- ------- -------------------
Operating income 12.1 8.3 50.4
------- ------- -------------------
Net income 7.3 4.3 73.6
======= ======= ===================
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.
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 and acceptance 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, the effects of acquisitions or
dispositions, the financial condition of our customers and suppliers, the
realization of inventory values at carrying amounts, our access to capital and
realization of income tax (including the outcome of any future Internal
Revenue Service audits) 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.
Results of Operations
Consolidated Results -
Second Quarter of Fiscal 2004 Compared with Second Quarter of Fiscal 2003
- -------------------------------------------------------------------------
Net revenues for the three months ended September 30, 2003 increased
$1.8 million, or 3%, from the same period in the prior year. Net revenues
from publishing products increased $3.6 million, or 7%. The increase in
publishing revenues is primarily due to strong book product releases in the
quarter. Net revenues from conferences decreased $1.8 million or 15%,
primarily due to there being one less conference this year compared to the
prior year's quarter. Price increases did not have a material effect on net
revenues.
The Company's cost of goods sold decreased for the three months ended
September 30, 2003 by $1.5 million, or 4% from the same period in the prior
year, and as a percentage of net revenues, decreased to 57% from 61% in the
prior year. This decrease as a percentage of net revenues is primarily
attributable to strong-performing publishing products with the increase in
sales occurring in a higher margin product and market mix.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the three months ended September 30, 2003 decreased $0.8
million, or 4.8% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, decreased to 25% from 27% in the
prior year. This reduction is primarily attributable to planned reductions in
advertising expenditures.
Depreciation and amortization for the three months ended September 30,
2003, as compared to the three months ended September 30, 2002, were relatively
unchanged.
Interest expense for the three months ended September 30, 2003 was $0.2
million, a decrease of $0.3 million from the same period in the prior year due
to lower debt levels.
The provision for income taxes has been increased from 36.5% to 37.5%
for the current fiscal year due to increased business activity in states with
higher income tax rates without the benefit of state net operating loss carry
forwards that existed in prior periods and accruals for other tax items.
Consolidated Results -
First Six Months of Fiscal 2004 Compared with the First Six Months of Fiscal
2003
- ----------------------------------------------------------------------------
Net revenues for the six months ended September 30, 2003 increased $2.4
million, or 2%, from the same period in the prior year. Net revenues from
publishing products increased $5.4 million, or 6%, primarily due to a strong
performance by the book divisions. Net revenues from conferences decreased
$3.0 million or 16%, primarily due to lower attendance levels compared to the
prior year. We believe the lower attendance levels are primarily due to the
war in Iraq and venue of conferences, compared to the prior year period.
The same number of conferences were held this year compared to the prior
year's period. Price increases did not have a material effect on net
revenues.
The Company's cost of goods sold decreased for the six months ended
September 30, 2003 by $0.5 million, or 1% from the same period in the prior
year, and as a percentage of net revenues, decreased to 59% from 61% in the
prior year. This decrease as a percentage of net revenues is primarily
attributable to strong-performing publishing products with larger print runs,
partially offset by lower attendance levels at conference events with fixed
costs.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the six months ended September 30, 2003 decreased $1.3
million, or 4% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, decreased to 28% from 30% in the
prior year period. This reduction is primarily attributable to curtailed
advertising expenses and lower lease expense due to fewer leased facilities.
Depreciation and amortization for the six months ended September 30,
2003, as compared to the six months ended September 30, 2002, were relatively
unchanged.
Interest expense for the six months ended September 30, 2003 was $0.5
million, a decrease of $1.0 million from the same period in the prior year due
to lower debt levels.
The provision for income taxes has been increased from 36.5% to 37.5%
for the current fiscal year due to increased business activity in states with
higher income tax rates without the benefit of state net operating loss carry
forwards that existed in prior periods, and accruals for other tax items.
Liquidity and Capital Resources
- -------------------------------
At September 30, 2003, the Company had approximately $4.9 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
and borrowings available under bank credit facilities. At September 30, 2003,
the Company had working capital of $69.3 million.
Net cash provided by continuing operations was $6.1 million for the six
months ended September 30, 2003 and $12.0 million for the same period last
year. Cash provided by continuing operations during the six months ended
September 30, 2003 was principally attributable to net income from continuing
operations. Cash provided by continuing operations during the six months ended
September 30, 2002 was principally attributable to income from continuing
operations and the collection of accounts receivable.
In April 2003, the Company received a tax refund of $18.7 million. This
tax refund was related to the recognition of a loss on disposal of the Company's
C.R. Gibson gift division and was used to pay down debt. Further, it is
expected that the Company will reduce its current year income tax payments by
approximately $2.2 million related to additional tax credits generated by the
tax loss realized on the disposal of C.R. Gibson. Until such time that the
Company can conclude that the position taken on its income tax returns will
ultimately be sustained by the taxing authorities, the refund and the tax
credits will be recorded as a non-current tax liability. If the Company's
position is sustained,the Company will recognize the refund as income from
discontinued operations.
Fiscal year-to-date capital expenditures have totaled approximately $1.5
million, primarily consisting of building improvements, computer software and
equipment. During the remainder of fiscal 2004, the Company anticipates
capital expenditures of approximately $2.5 million, primarily consisting of
building improvements and computer software and equipment.
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, 2003, the Company had no outstanding borrowings under the Credit
Agreement.
At September 30, 2003, the Company had outstanding approximately $6.5
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, 2003, the Company was in
compliance with all covenants of these debt agreements.
Management believes cash generated by operations and borrowings available
under the Credit Facility will be sufficient to fund anticipated working
capital requirements for existing operations through the remainder of fiscal
2004. 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, 2003. 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 variable interest
entities (VIE's). Management also is not aware of any undisclosed material
related party transactions or relationships with management, officers or
directors.
Contractual Payments Due by Fiscal Year
Commitments ------------------------------------------------------------
(in 000's) Year 1 Year 2 Year 3 Year 4 Thereafter Total
- ------------------ -------- -------- -------- -------- ---------- --------
Long-term debt $ 3,022 $ 3,461 $ - $ - $ - $ 6,483
Inventory purchases 3,905 6,407 5,000 5,000 5,834 26,146
Operating leases 1,609 1,106 648 402 1,102 4,867
Royalty advances 5,387 1,494 1,273 295 46 8,495
-------- -------- -------- -------- ---------- --------
Total obligations $13,923 $12,468 $6,921 $5,697 $6,982 $45,991
======== ======== ======== ======== ========== ========
On August 21, 2003, the Company's Board of Directors declared a cash
dividend of $0.04 per share of Common and Class B Common Stock. The dividend
was paid on October 20, 2003 to shareholders of record on October 6, 2003.
Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equities.
SFAS No. 150 requires issuers to classify as liabilities (or assets, in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The Company does not expect the adoption of SFAS No. 150
to have a material impact on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of and for the period ended September 30, 2003, 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 for the fiscal year ended March 31, 2003.
Item 4. Controls and Procedures
The President and Chief Executive Officer and the Executive Vice
President and Secretary (Principal Financial and Accounting Officer) have
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of
the period covered by this quarterly report. Based on that evaluation, the
President and Chief Executive Officer and the Executive Vice President and
Secretary (Principal Financial and Accounting Officer) concluded that, as of
the end of the period covered by this quarterly report, the Company's
disclosure controls and procedures are effective in ensuring that all material
information required to be disclosed in the Company's reports that it files or
submits to the SEC under the Securities Exchange Act of 1934 has been made
known to them in a timely fashion. There have been no changes in the
Company's internal control over financial reporting that occurred during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II
OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on August 21, 2003
(the "Annual Meeting"). At the Annual Meeting, the shareholders of the Company
voted to elect two directors in Class Two to serve for a term of three years
and until their respective successors are elected and take office or until
their earlier resignation; and to elect one director in Class One to serve for
a term of one year, in place of a board member who retired. Shares of Class B
Common Stock voted with the Common Stock. Each share of Class B Common Stock
is entitled to ten (10) votes per share. 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
- ----------------- ---------- --------- ---------
Ronald W. Blue 17,624,826 352,989 5,167
S. Joseph Moore 17,624,706 352,848 5,287
Millard V. Oakley 17,623,449 405,586 6,544
At the Annual Meeting, the shareholders of the Company also voted to
consider and act upon a proposal to adopt the Company's 2003 Stock Incentive
Plan. The following table sets forth the number of votes cast for,
withheld/abstained and against the plan:
Withheld/
For Abstained Against
---------- --------- ---------
11,995,059 45,998 4,054,802
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number
-------
31.1 - Certifications of the President and Chief Executive
Officer and the Executive Vice President and Secretary
(Principal Financial and Accounting Officer) of the
Company pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certifications of the President and Chief Executive
Officer and the Executive Vice President and Secretary
(Principal Financial and Accounting Officer) of the
Company Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
- On August 6, 2003, the Company furnished a current report on
Form 8-K to announce the date and time of the conference call
regarding the financial results of the first quarter of fiscal
2004.
- On August 13, 2003, the Company furnished a current report on
Form 8-K to announce the results and financial condition for
the first quarter of fiscal 2004.
- On August 22, 2003, the Company furnished a current report on
Form 8-K to announce the results of the shareholder election
and the decision of the Board of Directors to resume the
payment of dividends.
- On October 29, 2003, the Company furnished a current report on
Form 8-K to announce the date and time of the conference call
regarding the financial results of the second quarter of fiscal
2004.
- On November 5, 2003, the Company furnished a current report on
Form 8-K to announce the results and financial condition for
the second quarter of fiscal 2004.
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)
Date: November 13, 2003 By: /s/ Joe L. Powers
------------------- ------------------------
Joe L. Powers
Executive Vice President
(Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number
- -------
31.1 - Certifications of the President and Chief Executive Officer and the
Executive Vice President and Secretary (Principal Financial and
Accounting Officer) of the Company pursuant to Rule 13a-14 or 15d-14
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certifications of the President and Chief Executive Officer and the
Executive Vice President and Secretary (Principal Financial and
Accounting Officer) of the Company Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002