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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 December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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
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 [ ]
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 February 13, 2004, the Registrant had outstanding 13,453,425 shares of
Common Stock and 983,595 shares of Class B Common Stock.
Thomas Nelson, Inc. and Subsidiaries
Consolidated Balance Sheets
(000's omitted, except per share data)
(unaudited)
December 31, March 31, December 31,
2003 2003 2002
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,319 $ 1,707 $ 1,959
Accounts receivable, less allowances
of $9,459, $7,311, and $8,863,
respectively 55,552 56,806 54,873
Inventories 35,557 33,637 37,987
Prepaid expenses 12,828 13,521 13,423
Assets held for sale 1,615 1,785 2,500
Deferred income tax benefits 5,085 5,085 7,966
------------ ------------ ------------
Total current assets 116,956 112,541 118,708
Property, plant and equipment, net 12,188 11,630 11,203
Deferred Charges 2,080 1,695 1,727
Goodwill, net 29,304 29,304 29,304
Other intangible assets 840 527 531
Other Assets 6,440 7,358 7,890
------------ ------------ ------------
Total Assets $167,808 $163,055 $169,363
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,305 $ 20,218 $ 23,318
Accrued expenses 9,991 13,835 9,453
Deferred revenue 7,171 11,493 6,805
Dividends payable 576 - -
Income taxes currently payable 3,452 2,379 3,330
Current portion of long-term debt 3,022 3,622 3,322
------------ ------------ ------------
Total current liabilities 44,517 51,547 46,228
Long term debt 2,308 22,330 36,930
Deferred income taxes 721 721 792
Other liabilities 21,705 590 863
Minority interest 9 43 49
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 13,411,661, 13,350,431 and
13,343,765 shares, respectively 13,412 13,350 13,344
Class B stock, $1.00 par value,
authorized 5,000,000 shares;
issued 999,195, 1,024,795 and
1,025,795 shares, respectively 999 1,025 1,025
Additional paid-in capital 44,279 44,064 44,023
Retained earnings 39,858 29,385 26,109
------------ ------------ ------------
Total shareholders' equity 98,548 87,824 84,501
------------ ------------ ------------
Total Liabilities and Shareholders'
Equity $167,808 $163,055 $169,363
============ ============ ============
(See Notes to Condensed Consolidated Financial Statements)
Thomas Nelson, Inc. and Subsidiaries
Consolidated Statements of Income
(000's omitted, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenues $56,045 $53,774 $161,705 $157,020
Costs and expenses:
Cost of goods sold 32,200 36,646 94,251 95,240
Selling, general and administrative 16,352 15,986 45,999 46,974
Depreciation and amortization 563 444 1,683 1,567
-------- -------- -------- --------
Total expenses 49,115 49,076 141,933 143,781
-------- -------- -------- --------
Operating income 6,930 4,698 19,772 13,239
Other income 439 (27) 260 (102)
Interest expense 229 792 716 2,382
-------- -------- -------- --------
Income from continuing operations
before income taxes 6,262 3,933 18,796 10,959
Provision for income taxes 2,349 1,436 7,049 4,000
Minority interest (37) 11 (34) 49
-------- -------- -------- --------
Income from continuing operations 3,950 2,486 11,781 6,910
Discontinued operations:
Loss on disposal, net of taxes - - (156) -
-------- -------- -------- --------
Net income $ 3,950 $ 2,486 $ 11,625 $ 6,910
======== ======== ======== ========
Weighted average number of shares
Basic 14,403 14,369 14,393 14,368
======== ======== ======== ========
Diluted 15,140 14,475 14,777 14,613
======== ======== ======== ========
Net income per share, Basic:
Income from continuing operations $ 0.27 $ 0.17 $ 0.82 $ 0.48
Loss from discontinued operations - - (0.01) -
-------- -------- -------- --------
Net income per share $ 0.27 $ 0.17 $ 0.81 $ 0.48
======== ======== ======== ========
Net income per share, Diluted:
Income from continuing operations $ 0.26 $ 0.17 $ 0.80 $ 0.47
Loss from discontinued operations - - (0.01) -
-------- -------- -------- --------
Net income per share $ 0.26 $ 0.17 $ 0.79 $ 0.47
======== ======== ======== ========
(See Notes to Condensed Consolidated Financial Statements)
Thomas Nelson, Inc. and Subsidiaries
Statement of Cash Flows
(000's omitted)
(unaudited)
Nine Months Ended
December 31,
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net income from continuing operations $ 11,781 $ 6,910
Adjustments to reconcile income to net cash
provided by (used in) operations:
Depreciation and amortization 1,683 1,567
Amortization of deferred financing fees 157 325
Loss on sale of fixed assets and
assets held for sale 21 45
Minority interest (34) 49
Changes in assets and liabilities,
net of acquisitions and disposals:
Accounts receivable, net 588 6,727
Inventories 2,231 1,208
Prepaid expenses 727 4,148
Accounts payable and accrued expenses (3,882) 455
Deferred revenues (4,322) (4,417)
Income taxes currently payable 1,073 2,830
Change in other assets and liabilities
and deferred charges 1,763 (1,176)
---------- ----------
Net cash provided by continuing operations 11,786 18,671
---------- ----------
Discontinued Operations
Loss from discontinued operations (156) -
Federal income tax receivable (payable) 20,884 7,800
Change in discontinued net assets 195 (5,297)
---------- ----------
Net cash provided by (used in) discontinued
operations 20,923 2,503
---------- ----------
Net cash provided by operating activities 32,709 21,174
---------- ----------
Cash Flows From Investing Activities:
Capital expenditures (2,261) (3,669)
Net proceeds from sales of proeprty, plant and
equipment and assets held for sale 45 24
Purchase of net assets of acquired company (4,559) -
Acquisition of publishing rights (375) -
---------- ----------
Net cash provided by (used in) investing
activities (7,150) (3,645)
---------- ----------
Cash Flows From Financing Activities:
Payments under credit agreement, net (17,000) (13,100)
Payments on long-term debt (3,622) (3,022)
Proceeds from issurance of common stock 251 17
Other financing acitivities (576) -
---------- ----------
Net cash provided by (used in)
financing activities (20,947) (16,105)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 4,612 1,424
Cash and cash equivalents at beginning of period 1,707 535
---------- ----------
Cash and cash equivalents at end of period $ 6,319 $ 1,959
========== ==========
Supplemental cash flow information:
Dividends accrued and unpaid $ 576 $ -
Interest paid, net $ 1,025 $ 2,461
Income taxes paid (refunded), net $(12,840) $ (6,630)
(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 adoption of SFAS No. 150
did not have a material impact on the Company's 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 Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (in thousands):
As reported $3,950 $2,486 $11,625 $6,910
======== ======== ======== ========
Less: additional stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects 524 387 1,396 1,103
======== ======== ======== ========
Pro forma $3,426 $2,099 $10,229 $5,807
======== ======== ======== ========
Net income per share:
Basic -- As reported $ 0.27 $ 0.17 $ 0.81 $ 0.48
======== ======== ======== ========
Pro forma $ 0.24 $ 0.15 $ 0.71 $ 0.40
======== ======== ======== ========
Diluted -- As reported $ 0.26 $ 0.17 $ 0.79 $ 0.47
======== ======== ======== ========
Pro forma $ 0.23 $ 0.15 $ 0.69 $ 0.40
======== ======== ======== ========
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:
December 31, 2003 December 31, 2002
------------------ ------------------
Expected annual future dividend payment $0.16 per share -
Expected stock price volatility 40.24% 38.87%
Risk free interest rate 5.35% 5.91%
Expected life of options 9 years 9 years
Note D - Inventories
Components of inventories consisted of the following (in thousands):
December 31, March 31, December 31,
2003 2003 2002
------------- ------------- -------------
Finished goods $33,461 $31,298 $35,821
Raw materials and work in process 2,096 2,339 2,166
------------- ------------- -------------
$35,557 $33,637 $37,987
============= ============= =============
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
- -------------------------- ----------- ----------- ----------- --------
December 31, 2003:
Net Revenues $ 46,912 $ 9,133 $ - $ 56,045
Operating Income 5,892 1,038 - 6,930
Capital Expenditures 784 6 - 790
Depreciation and Amortization 497 66 - 563
December 31, 2002:
Net Revenues $ 46,216 $ 7,558 $ - $ 53,774
Operating Income 3,467 1,231 - 4,698
Capital Expenditures 2,052 35 - 2,087
Depreciation and Amortization 381 63 - 444
For the Nine Months Ended
- ------------------------
December 31, 2003:
Net Revenues $136,669 $25,036 $ - $161,705
Operating Income 17,745 2,027 - 19,772
Identifiable Assets 143,029 21,164 3,615 167,808
Capital Expenditures 2,180 81 - 2,261
Depreciation and Amortization 1,486 195 - 1,681
December 31, 2002:
Net Revenues $130,787 $26,233 $ - $157,020
Operating Income 8,977 4,262 - 13,239
Identifiable Assets 144,566 20,297 4,500 169,363
Capital Expenditures 3,603 66 - 3,669
Depreciation and Amortization 1,376 191 - 1,567
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 December 31, 2003 include a liability which resulted
from an income 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, the Company has reduced 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 and the tax credits 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
December 31, 2003, the Company had no outstanding borrowings under the Credit
Facility.
At December 31, 2003, the Company had outstanding approximately $5.3
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 December 31, 2003, the Company was in compliance with all
covenants of these debt agreements.
Note H - Royalty Advances
At December 31, 2003, March 31, 2003 and December 31, 2002, prepaid
expenses include $9.1 million, $8.4 million and $9.2 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 December 31, 2003,
March 31, 2003 and December 31, 2002, other assets include $2.3 million, $2.9
million and $3.5 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 December 31, 2003, the Company had paid cash in the amount of $4.5 million
and issued credit against accounts receivable from RiversideWorld in the amount
of $0.7 million. 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.
On November 20, 2003, the Company's board of directors declared a cash
dividend of $.04 per share of Common and Class B Common Stock. The dividend
was paid on January 19, 2004 to shareholders of record on January 5, 2004.
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 Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 3,950 $ 2,486 $11,625 $ 6,910
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Weighted average shares
outstanding 14,403 14,369 14,393 14,368
======== ======== ======== ========
Net income per share $ 0.27 $ 0.17 $ 0.81 $ 0.48
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Basic weighted average shares
outstanding 14,403 14,369 14,393 14,368
Dilutive stock options -
based on treasury stock
method using the average
market price 737 106 384 245
-------- -------- -------- --------
Total weighted average diluted
shares 15,140 14,475 14,777 14,613
======== ======== ======== ========
Net income per share $ 0.26 $ 0.17 $ 0.79 $ 0.47
======== ======== ======== ========
Options that are not dilutive were excluded from the diluted weighted
average share calculation and totaled approximately 95,184 for the fiscal
year-to-date period ended December 31, 2003 and 51,000 for the quarter ended
December 31, 2003.
Note L - Commitments and Contingencies
On February 3, 2004, the Company received letter from one of its former
customers that has filed for Chapter 11 bankruptcy. It indicated that the
Company may have received preference transfers, in the form of cash and
returned books, totaling approximately $1.7 million. We are evaluating the
notice and intend to vigorously defend the matter. While resolution of this
matter is not expected to materially affect the Company's liquidity, if all or
a portion of these amounts were to be repaid, it would reduce the Company's
net income in the amount of the repayment, net of tax.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
--------------------------------------------------------------------
Executive Summary
- -----------------
Thomas Nelson, Inc. publishes Bibles and books and hosts inspirational
conferences, designed to appeal to the Christian and family-oriented lifestyle
segments of the population. The Company's business strategy is to publish
high-quality products and offer related conference services for the Christian
and general retail markets. Thomas Nelson's Common Stock and Class B Common
Stock are listed on the New York Stock Exchange under the symbols TNM and TNMB,
respectively. More information can be found in our Annual Report on Form 10-K.
With a 4% increase in Revenues for the fiscal third quarter ended
December 31, 2003, the Company posted a 59% increase in Net Income. On a
fiscal year-to-date basis, we had a 3% increase in sales and achieved a 68%
increase in Net Income. Our publishing product segment has enjoyed a very
successful period of publishing a number of best-selling books. Six of our
books have appeared on the New York Times bestseller list in the past 12-month
period. Our conference segment had a good quarter from a revenue standpoint,
but is behind our expectations for the fiscal year-to-date period. We believe
the war in Iraq and the smaller venues for the earlier events in this fiscal
year were the primary reasons for the decline in ticket sales. However,
conference revenues were up 20% in the current quarter over last years'
comparable period, driven by higher attendance levels and product sales.
We are ahead of the prior year in pre-selling tickets for the next conference
theme, which changes on a calendar year basis.
We have experienced higher gross margin percentages over the past few
quarters. We believe these improvements are primarily due to the following
matters. First, we have published a number of products that have been well
received in the marketplace, including the general trade and mass markets
outside our core channels. Second, we have incurred less obsolescence costs
associated with lower inventory levels and the end of the "Word" trademark
license as of December 31, 2002. Third, we have achieved an improved
percentage of earnings against royalty advances driven by the strong
performance of some of our recent publishing offerings. Fourth, we have
experienced a slight shift in product mix to higher margin book products from
lower margin Bible products. While we expect to maintain these higher gross
margin percentages, we are mindful of the uncertainties inherent in our
business, as well as the need to continue to develop products that will be
widely accepted in the marketplace, to maintain an appropriate product mix
and to pursue new opportunities. Please refer to the Cautionary Note on
Forward Looking Statements.
We are experiencing a difficult business environment in the Christian
Bookselling Association (CBA) retail market, our historical "core" market.
Based on information that we receive from our customers, salespeople and other
market sources, we believe that this market will produce another year of
flat-to-down sales. We believe there are shifts within this market where the
larger chains continue to grow at the expense of the sole-proprietors. Also,
we believe this market is losing sales to the general trade and mass
merchandisers. Notwithstanding this environment, on a year to date basis,
we have maintained our sales levels in the CBA market. Accordingly, we believe
that we have actually gained market share in the CBA. We will continue
striving to gain market share in the CBA; however, it appears that the
Company's highest growth potential lies in the general markets and school fund
raising programs. Some of our efforts in these areas include a new Nelson
Business imprint, a new Christian fiction imprint (WestBow Press) and our
Cool Springs Press state-by-state gardening book line.
This summary should be read together with the complete Management's
Discussion and Analysis and the related financial statements and notes thereto.
Cautionary Note On Forward-Looking Statements
- ---------------------------------------------
Management's discussion and analysis 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 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, the realization of income tax assets
(including the outcome of any future Internal Revenue Service audits), and the
realization or impairment of 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.
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.
Nine Months Ended
December 31, Fiscal Year-to-Year
---------------- Increase
2003 2002 (Decrease)
------- ------- -------------------
(%) (%) (%)
Net revenues:
Publishing 84.5 83.3 4.5
Conferences 15.5 16.7 (4.6)
------- ------- -------------------
Total net revenues 100.0 100.0 3.0
Expenses:
Cost of goods sold 58.3 60.7 (1.0)
Selling, general and administrative 28.5 30.0 (2.1)
Depreciation and amortization 1.0 1.0 (7.3)
------- ------- -------------------
Total expenses 87.8 91.7 (1.3)
------- ------- -------------------
Operating income 12.2 8.3 49.3
------- ------- -------------------
Net income 7.0 4.4 72.6
======= ======= ===================
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.
Results of Operations
- ---------------------
Consolidated Results - Third Quarter of Fiscal 2004
Compared with Third Quarter of Fiscal 2003
- -----------------------------------------------------------------
Net revenues for the three months ended December 31, 2003 increased
$2.3 million, or 4%, from the same period in the prior year. Net revenues from
publishing products increased $0.7 million, or 2%. The increase in publishing
revenues is primarily due to increased sales from the World Publishing
acquisition. Net revenues from conferences increased $1.6 million or 21%,
primarily due to slightly higher attendance per event and increased product
sales. Price increases did not have a material effect on net revenues.
The Company's cost of goods sold decreased for the three months ended
December 31, 2003 by $0.4 million, or 1% 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 attributable to
strong-performing publishing product sales occurring in a higher margin
product and market mix. Also, the prior year's cost of goods sold was higher
than normal due to a higher level of royalty advance write-offs, free freight
given to customers and obsolescence charges from liquidating inventory
produced under the imprint with the "Word" name, as the Company's licensing
agreement using the "Word" name expired. The "Word" name was licensed for use
in fiscal 1998 in conjunction with the sale of the Company's former Word Music
division.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the three months ended December 31, 2003 increased $0.4
million, or 2.3% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, decreased to 29% from 30% in the
prior year. This reduction is primarily attributable to planned reductions in
advertising expenditures. The Company's avertising strategy emphasizes
advertising fewer products and focusing on products management believes may
enjoy widespread acceptance in the marketplace.
Depreciation and amortization for the three months ended December 31,
2003, as compared to the three months ended December 31, 2002, were relatively
unchanged.
Interest expense for the three months ended December 31, 2003 was $0.2
million, a decrease of $0.6 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 Nine Months of Fiscal 2004
Compared with the First Nine Months of Fiscal 2003
- -------------------------------------------------------------------------
Net revenues for the nine months ended December 31, 2003 increased
$4.7 million, or 3%, from the same period in the prior year. Net revenues
from publishing products increased $5.9 million, or 4%, primarily due to a
strong performance by the book divisions and increased revenues from the World
Publishing acquisition, despite continued softness in the CBA channel. Net
revenues from conferences decreased $1.2 million or 5%, primarily due to lower
attendance levels earlier in the fiscal year compared to the prior year.
We believe the lower attendance levels were primarily due to the war in Iraq
and the smaller venues of the early 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 nine months ended
December 31, 2003 by $1.0 million, or 1.0% from the same period in the prior
year, and as a percentage of net revenues, decreased to 58% 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, partially offset by
lower attendance levels at conference events with fixed costs. Also, the
prior year's cost of goods sold, as a percentage of net revenues, was slightly
higher than normal due to higher levels of royalty advance and obsolescence
losses noted previously.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the nine months ended December 31, 2003 decreased $1.0
million, or 2% 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 nine months ended December 31, 2003,
as compared to the nine months ended December 31, 2002, were relatively
unchanged.
Interest expense for the nine months ended December 31, 2003 was $0.7
million, a decrease of $1.7 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 December 31, 2003, the Company had approximately $6.3 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 December 31, 2003,
the Company had working capital of $72.4 million.
Net cash provided by continuing operations was $11.8 million for the
nine months ended December 31, 2003 and $18.7 million for the same period last
year. Cash provided by continuing operations during the nine months ended
December 31, 2003 was principally attributable to net income from continuing
operations. Cash provided by continuing operations during the nine months
ended December 31, 2002 was principally attributable to income from continuing
operations and the collection of accounts receivable.
In April 2003, the Company received an income 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,
the Company has reduced 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 we conclude that
the position taken on our 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 and the tax credits as income from
discontinued operations.
Fiscal year-to-date capital expenditures have totaled approximately $2.3
million, primarily consisting of building improvements, computer software and
equipment. During the remainder of fiscal 2004, the Company anticipates
capital expenditures of approximately $1.7 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
December 31, 2003, the Company had no outstanding borrowings under the Credit
Agreement.
At December 31, 2003, the Company had outstanding approximately $5.3
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 December 31, 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 $ 2,308 $ - $ - $ - $ 5,330
Inventory purchases 5,860 5,703 5,000 5,000 4,583 26,146
Operating leases 1,462 1,002 525 402 1,001 4,392
Royalty advances 3,112 3,681 1,550 928 189 9,460
-------- -------- -------- -------- ---------- --------
Total obligations $13,456 $12,694 $7,075 $6,330 $5,773 $45,328
======== ======== ======== ======== ========== ========
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.
On November 20, 2003, the Company's board of directors declared a cash
dividend of $.04 per share of Common and Class B Common Stock. The dividend
was paid on January 19, 2004 to shareholders of record on January 5, 2004.
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 adoption of SFAS No. 150
did not have a material impact on the Company's consolidated financial
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
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of and for the period ended December 31, 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 Chairman and Chief Executive Officer (principal 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 Chairman and Chief Executive Officer and the Executive
Vice President and Secretary 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 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 Chairman 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 Chairman 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 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.
- On November 20, 2003, the Company furnished a curent report on
Form 8-K to announce the Board's declaration of a cash
dividend to be paid on January 19, 2004.
- On February 12, 2004, the Company furnished a current report
on Form 8-K to announce the results and financial condition
for the third 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: February 13, 2004 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 Chairman 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 Chairman 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