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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, 2004
or
[ ] TRANSITION 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 8, 2004, the Registrant had outstanding 13,808,201 shares of
Common Stock and 927,340 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, unaudited)
September 30, March 31, September 30,
2004 2004 2003
------------- ------------- ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,344 $ 22,780 $ 4,909
Accounts receivable, less
allowances of $7,383, $7,951
and $7,798, respectively 49,755 56,275 56,501
Inventories 39,153 30,341 39,623
Prepaid expenses 17,467 14,018 13,294
Assets held for sale - - 1,615
Deferred tax assets 4,923 4,923 5,085
------------- ------------- ------------
Total current assets 133,642 128,337 121,027
Property, plant and equipment, net 13,117 13,039 11,961
Deferred charges 1,486 1,754 2,421
Intangible assets 814 860 861
Goodwill 29,304 29,304 29,304
Other assets 9,665 6,425 7,611
------------- ------------- ------------
Total Assets $188,028 $179,719 $173,185
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,859 $ 19,753 $ 23,773
Accrued expenses 9,284 13,278 10,247
Deferred revenue 9,429 11,758 9,435
Dividends payable 734 579 576
Income taxes currently payable 5,176 2,419 5,243
Current portion of long-term debt 2,308 3,022 3,022
------------- ------------- ------------
Total current liabilities 50,790 50,809 52,296
Long-term debt, less current portion 1,154 2,308 3,461
Long-term taxes payable 21,290 21,290 20,884
Deferred tax liabilities 1,021 1,021 721
Other liabilities 844 1,300 694
Minority interest 11 9 46
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 13,758,371; 13,502,855 and
13,373,396 shares, respectively 13,758 13,503 13,373
Class B stock, $1.00 par value,
aughorized 5,000,000 shares;
Issued 927,339; 963,195 and
1,024,795 shares, respectively 927 963 1,025
Additional paid-in capital 47,435 44,697 44,201
Retained earnings 50,798 43,819 36,484
------------- ------------- ------------
Total sharesholders' equity 112,918 102,982 95,083
------------- ------------- ------------
Total Liabilities and
Shareholders' Equity $188,028 $179,719 $173,185
============= ============= ============
(See Notes to Condensed Consolidated Financial Statements)
THOMAS NELSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's omitted, except per share data, unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- -------- --------
Net revenues $61,902 $63,829 $110,910 $105,660
Costs and expenses:
Cost of goods sold 35,133 36,176 64,071 62,051
Selling, general and administrative 15,541 15,984 31,826 29,649
Depreciation and amortization 626 558 1,215 1,118
------- ------- -------- --------
Total costs and expenses 51,300 52,718 97,112 92,818
------- ------- -------- --------
Operating income 10,602 11,111 13,798 12,842
Other income (expense) 82 (12) 149 179
Interest expense 182 243 402 487
------- ------- -------- --------
Income from continuing operations
before income taxes 10,502 10,856 13,545 12,534
Provision for income taxes 4,044 4,071 5,215 4,700
Minority interest 1 11 2 3
------- ------- -------- --------
Income from continuing operations 6,457 6,774 8,328 7,831
Discontinued operations:
Loss on disposal,
net of applicable taxes (33) (156) (33) (156)
------- ------- -------- --------
Net income $ 6,424 $ 6,618 $ 8,295 $ 7,675
======= ======= ======== ========
Weighted average number
of shares outstanding
Basic 14,619 14,393 14,679 14,387
======= ======= ======== ========
Diluted 15,056 14,761 15,175 14,667
======= ======= ======== ========
Net income per share, Basic:
Income from continuing operations $ 0.44 $ 0.47 $ 0.57 $ 0.54
Loss from discontinued operations - (0.01) - (0.01)
------- ------- -------- --------
Net income per share $ 0.44 $ 0.46 $ 0.57 $ 0.53
======= ======= ======== ========
Net income per share, Diluted:
Income from continuing operations $ 0.43 $ 0.46 $ 0.55 $ 0.53
Loss from discontinued operations - (0.01) - (0.01)
------- ------- -------- --------
Net income (loss) per share $ 0.43 $ 0.45 $ 0.55 $ 0.52
======= ======= ======== ========
(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,
-------------------
2004 2003
-------- --------
Cash Flows From Operating Activities:
Net income from continuing operations $ 8,328 $ 7,831
Adjustments to reconcile income to net cash
provided by (used in) operations:
Depreciation and amortization 1,215 1,118
Amortization of deferred charges 99 105
Gain/loss on sale of fixed assets and assets
held for sale 9 15
Minority interest 2 3
Changes in assets and liabilities,
net of acquisitions and disposals:
Accounts receivable, net 6,520 (361)
Inventories (8,812) (1,835)
Prepaid expenses (3,449) 261
Accounts payable and accrued expenses 100 (2,000)
Deferred revenue (2,329) (2,058)
Income taxes currently payable 2,757 2,864
Change in other assets and liabilities and
deferred charges (3,385) 178
Tax benefit of non-qualified stock options
exercised, credited to additional paid-in capital 1,020 -
-------- --------
Net cash provided by continuing operations 2,075 6,121
-------- --------
Discontinued Operations:
Loss from discontinued operations (33) (156)
Federal income tax receivable/payable - 20,883
Change in discontinued net assets 12 186
-------- --------
Net cash provided by (used in) discontinued operations (21) 20,913
-------- --------
Net cash provided by operating activities 2,054 27,034
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (1,285) (1,471)
Net proceeds from sales of property, plant
and equipment and assets held for sale - 30
Purchase of net assets of acquired company - (2,708)
Acquisition of publishing rights - (375)
-------- --------
Net cash used in investing activities (1,285) (4,524)
-------- --------
Cash Flows From Financing Activities:
Payments under revolving credit facility - (17,000)
Payments on long-term debt (1,868) (2,469)
Dividends paid (1,161) -
Proceeds from issuance of common stock 1,937 161
Debt issuance costs (113) -
-------- --------
Net cash used in financing activities (1,205) (19,308)
-------- --------
Net increase (decrease) in cash and cash equivalents (436) 3,202
Cash and cash equivalents at beginning of period 22,780 1,707
-------- --------
Cash and cash equivalents at end of period $22,344 $ 4,909
-------- --------
Supplemental cash flow information:
Interest paid $ 417 $ 683
Income taxes paid (refunded), net $ 2,404 ($19,146)
Dividends accrued and unpaid $ 734 $ 576
(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 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, 2004.
The condensed consolidated balance sheets and related information in these
notes as of March 31, 2004 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 period's presentation.
Total comprehensive income and net income are the same for all periods
presented.
Note B - 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," extablished 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
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (in thousands):
As reported $6,424 $6,618 $8,295 $7,675
======== ======== ======== ========
Less: additional stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects 264 495 473 875
======== ======== ======== ========
Pro forma $6,160 $6,123 $7,822 $6,800
======== ======== ======== ========
Net income per share:
Basic -- As reported $ 0.44 $ 0.46 $ 0.57 $ 0.53
======== ======== ======== ========
Pro forma $ 0.42 $ 0.43 $ 0.53 $ 0.47
======== ======== ======== ========
Diluted -- As reported $ 0.43 $ 0.45 $ 0.55 $ 0.52
======== ======== ======== ========
Pro forma $ 0.41 $ 0.41 $ 0.52 $ 0.46
======== ======== ======== ========
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, 2004 September 30, 2003
------------------ ------------------
Expected annual future dividend payment $0.16 per share $0.16 per share
Expected stock price volatility 46.05% 40.31%
Risk free interest rate 4.53% 5.35%
Expected life of options 9 years 9 years
Note C - Inventories
Components of inventories consisted of the following (in thousands):
September 30, March 31, September 30,
2004 2004 2003
------------- ------------- -------------
Finished goods $36,996 $28,000 $37,759
Raw materials and work in process 2,157 2,341 1,864
------------- ------------- -------------
$39,153 $30,341 $39,623
============= ============= =============
Note D - 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 and family oriented 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, 2004:
Net Revenues $ 50,179 $11,723 $ 61,902
Operating Income 9,215 1,387 10,602
Capital Expenditures 631 48 679
Depreciation and Amortization 569 57 626
September 30, 2003:
Net Revenues $ 53,754 $10,075 $ 63,829
Operating Income 9,550 1,561 11,111
Capital Expenditures 1,064 37 1,101
Depreciation and Amortization 493 65 558
For the Six Months Ended
- ------------------------
September 30, 2004:
Net Revenues $ 91,433 $19,477 $110,910
Operating Income 11,795 2,003 13,798
Goodwill 14,169 15,135 29,304
Assets Excluding Goodwill 151,818 4,906 $ 2,000 158,724
Total Assets 165,987 20,041 2,000 188,028
Capital Expenditures 1,215 70 1,285
Depreciation and Amortization 1,102 113 1,215
September 30, 2003:
Net Revenues $ 89,757 $15,903 $105,660
Operating Income 11,266 1,576 12,842
Goodwill 14,169 15,135 29,304
Assets Excluding Goodwill 136,099 4,166 $ 3,616 143,881
Total Assets 150,268 19,301 3,616 173,185
Capital Expenditures 1,396 75 1,471
Depreciation and Amortization 989 129 1,118
Fiscal Year Ended March 31, 2004:
- ---------------------------------
Net Revenues $193,161 $29,458 $222,619
Operating Income 24,823 2,317 27,140
Goodwill 14,169 15,135 29,304
Assets Excluding Goodwill 143,510 4,905 $ 2,000 150,415
Total Assets 157,679 20,040 2,000 179,719
Capital Expenditures 3,569 97 3,666
Depreciation and Amortization 2,028 259 2,287
Conferences net revenues include event ticket sales of $14.2 million,
$12.4 million and $21.9 million for the six months ended September 30, 2004
and 2003 and the fiscal year ended March 31, 2004, respectively.
Note E - Long-Term Taxes Payable
Long-term taxes payable at September 30, 2004 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 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 F - Debt
The Company's bank credit facility, as amended, consists of a $50 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, and
matures on October 15, 2008. At September 30, 2004, the Company had no
outstanding borrowings under the Credit Facility.
At September 30, 2004, the Company had outstanding approximately
$3.5 million in unsecured senior notes ("Senior Notes"). The Senior Notes bear
interest at 6.68% and are 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, 2004, the Company was in compliance with all
covenants of these debt agreements.
Note G - Royalty Advances
At September 30, 2004, March 31, 2004 and September 30, 2003, prepaid
expenses include $11.6 million, $9.2 million and $8.8 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, 2004,
March 31, 2004 and September 30, 2003, other assets include $5.5 million,
$2.3 million and $3.2 million, respectively, for royalty advances for products
not expected to be released to the market within the next twelve months.
Note H - Common Stock
Declaration of dividends is within the discretion of the Board of
Directors of the Company. The Board considers the payment of dividends on a
quarterly basis, taking into account the Company's earnings and capital
requirements, as well as financial and other conditions at the time. Certain
covenants of the Company's Credit Facility and Senior Notes limit the amount
of cash dividends payable based on the Company's cumulative consolidated net
income.
The following table indicates dividend activity for the six-month period
ended September 30, 2004. Dividends relate to both Common Stock and Class B
Common Stock.
Declaration Date Dividend Per Share Record Date Payment Date
---------------- ------------------ --------------- ----------------
May 20, 2004 $0.04 July 5, 2004 July 19, 2004
August 19, 2004 $0.05 October 7, 2004 October 21, 2004
Class B Common Stock carries ten votes per share, compared to one vote per
share for Common Stock, and is convertible to Common Stock on a one-to-one
ratio at the election of the holder. The Class B and Common Stock are
identical in all other material respects.
Note I - 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,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income $ 6,424 $ 6,618 $ 8,295 $ 7,675
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Weighted average shares
outstanding 14,619 14,393 14,679 14,387
======== ======== ======== ========
Net income per share $ 0.44 $ 0.46 $ 0.57 $ 0.53
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Basic weighted average shares
outstanding 14,619 14,393 14,679 14,387
Dilutive stock options -
based on treasury stock
method using the average
market price 437 368 496 280
-------- -------- -------- --------
Total weighted average diluted
shares 15,056 14,761 15,175 14,667
======== ======== ======== ========
Net income per share $ 0.43 $ 0.45 $ 0.55 $ 0.52
======== ======== ======== ========
For the three months ended September 30, 2004, there were 137,000
anti-dilutive options outstanding; and for the three months and six months
ended September 30, 2003, there were 509,500 anti-dilutive options outstanding.
As of September 30, 2004, there were no other securities outstanding that could
potentially dilute basic earnings per share in the future.
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.
Net revenues for the quarter ending September 30, 2004 were down 3% in
comparison to the comparable quarter in the prior year. Publishing net
revenues were down 7%, partially offset by a 16% increase in Conferences net
revenue. The increase in Conferences net revenues were primarily attributable
to hosting one additional conference in this year's period compared to the
prior year number of events. The decline in Publishing net revenues are
attributable to several factors. First, our new-product release schedule
is weighted more toward the second half of this fiscal year. The second
factor relates to a soft retail environment during the current quarter.
U.S. Census Bureau data suggests that retail sales in bookstores were down
in both July and August (September data was unavailable prior to filing
this 10-Q). We also experienced higher return levels in the quarter compared
to the prior year, which may have been related to the soft retail environment.
We believe we have a strong line-up of new products scheduled to release in
the second half of the fiscal year that will help us achieve revenue growth
for the remaining six months of this fiscal year.
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
- ---------------------------------------------
The following discussion includes certain forward-looking statements
(all statements other than those made solely with respect to historical fact)
and the actual results may differ materially from those contained in the
forward-looking statements due to known and unknown risks and uncertainties.
Any one or more of several risks and uncertainties could account for
differences between the forward-looking statements that are made today and the
actual results, including with respect to our sales, profits, liquidity and
capital position. These factors include, but are not limited to: risks
relating to our ability to satisfy regulatory requirements with respect to our
internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002, which requires us to perform an evaluation of our
internal control over financial reporting and have our auditor attest to such
evaluation; softness in the general retail environment or in the markets for
our products; 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; the
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 outcome of
any future Internal Revenue Service audits; and the realization of income tax
and intangible assets. These conditions cannot be predicted reliably and the
Company may adjust its strategy in light of changed conditions or new
information. Thomas Nelson disclaims any 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.
Six Months Ended
September 30, Fiscal Year-to-Year
---------------- Increase
2004 2003 (Decrease)
------- ------- -------------------
(%) (%) (%)
Net revenues:
Publishing 82.4 84.9 1.9
Conferences 17.6 15.1 22.5
------- ------- -------------------
Total net revenues 100.0 100.0 5.0
Expenses:
Cost of goods sold 57.8 58.7 3.3
Selling, general and administrative 28.7 28.1 7.3
Depreciation and amortization 1.1 1.1 8.7
------- ------- -------------------
Total expenses 87.6 87.9 19.3
------- ------- -------------------
Operating income 12.4 12.1 7.4
------- ------- -------------------
Net income 7.5 7.3 8.1
======= ======= ===================
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, the timing and size of the venues for conference events
and changes in sales and product mixes.
Results of Operations
Consolidated Results -
Second Quarter of Fiscal 2005 Compared with Second Quarter of Fiscal 2004
- -------------------------------------------------------------------------
Net revenues for the three months ended September 30, 2004 decreased
$1.9 million, or 3%, from the same period in the prior year. Net revenues
from publishing products decreased $3.6 million, or 7%. The decline in
publishing net revenues is primarily attributable to a higher level of returns
and timing of new product releases, partially offset by the World Publishing
acqusition on September 19, 2003. We believe the weak retail environment
during the quarter was the primary cause of the returns. Also, new product
releases are weighted more toward the second half of this fiscal year. Net
revenues from conferences increased $1.6 million or 16%, compared to the prior
year. This improvement relates primarily to hosting one additional conference
in this year's period compared to the prior year. 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, 2004 by $1.0 million, or 3% from the same period in the prior
year, and as a percentage of net revenues, remained consistent for both periods
at 57%. An increase in cost of goods as a percentage of net revenues
attributable to a planned increase for conference products to attempt to
increase volume and total profit was offset by a reduction in cost of product
percentage for publishing product. The improvement for publishing products was
primarily attributable to improved recovery on sales of excess inventories and
improved recovery of royalty advances.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the three months ended September 30, 2004 decreased
$0.4 million, or 3% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, remained consistent at 25% for both
periods.
Depreciation and amortization and interest expense were relatively
consistent with the prior year quarter.
The provision for income taxes has been increased from 37.5% to 38.5%
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 2005 Compared with the First Six Months of Fiscal 2004
- ----------------------------------------------------------------
Net revenues for the six months ended September 30, 2004 increased
$5.3 million, or 5%, from the same period in the prior year. Net revenues from
publishing products increased $1.7 million, or 2%. The increased revenue
performance for publishing products primarily relates to the World Publishing
acquisition on September 19, 2003, partially offset by higher levels of
publishing product returns and timing of new releases. Net revenues from
conferences increased $3.6 million or 23%, compared to the prior year. This
improvement relates primarily to hosting one additional conference in this
year's period compared to the prior year and a mix of larger venues this fiscal
year compared to the prior period. The first quarter of last fiscal year was
also an unusually weak period for conference attendance, which we believe was
partially attributable to the beginning of the war in Iraq. Price increases
did not have a material effect on net revenues.
The Company's cost of goods sold increased for the six months ended
September 30, 2004 by $2.0 million, or 3%, from the same period in the prior
year, and as a percent of net revenue, declined to 58% compared to 59% in the
prior year. This improvement in cost of goods sold as a percentage of net
revenue is attributable to publishing products partially offset by the planned
higher percentage for conferences. The cost improvement for publishing
products was primarily attributable to improved recovery on sales of excess
inventories and improved recovery of royalty advances. The planned increase
in cost of goods sold as a percentage of net revenues for conferences primarily
relates to new product sales strategies designed to increase volume and total
profit.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the six months ended September 30, 2004 increased
$2.2 million, or 7%, from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, were 29% in the current period vs.
28% in the prior year. The increase in dollars and percentage over the prior
year is primarily attributable to the acquisition of World Publishing on
September 19, 2003, additional expenditures required for compliance with the
Sarbanes-Oxley Act, planned increases in advertising, and variable expenses
that increased in relation to net revenues.
Depreciation and amortization totaled $1.2 million in the current period
compared to $1.1 million in the prior year. This slight increase is primarily
attributable to the office renovations that were completed at the end of the
prior year fiscal year.
Interest expense declined to $0.4 million in the current period compared
to $0.5 million in the prior year. This slight decline is primarily
attributable to lower debt levels.
The provision for income taxes has been increased from 37.5% to 38.5% 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, 2004, the Company had approximately $22.3 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 September 30, 2004,
the Company had working capital of $82.9 million.
Net cash provided by continuing operations was $2.1 million for the six
months ended September 30, 2004 and $6.1 million for the same period last year.
Cash provided by continuing operations during the six months ended September 30,
2004 was principally attributable to net income and collections of accounts
receivable offset by an increase in inventory and royalty advances. The
increase in inventory is due to the seasonality of our business, and the
increase in royalty advances relates to the resigning of key authors.
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. 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 will be recorded
as a non-current tax liability. If sustained, the Company will record the
refund as income from discontinued operations.
Fiscal year-to-date capital expenditures have totaled approximately
$1.3 million, primarily consisting of building improvements, computer software
and equipment. During the remainder of fiscal 2005, the Company anticipates
capital expenditures of approximately $2.7 million, primarily consisting of
computer software and equipment.
The Company's bank credit facility, as amended, consists of a $50 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 matures on October 15, 2008. At September 30, 2004, the
Company had no outstanding borrowings under the Credit Agreement.
At September 30, 2004, the Company had outstanding approximately
$3.5 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear
interest at a rate of 6.68% 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, 2004, the Company was in
compliance with all covenants of these debt agreements.
On February 3, 2004, the Company received a 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.
Management believes cash on hand, 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 2005. 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, 2004. 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.
Payments Due by Fiscal Year
Contractual ------------------------------------------------------------
Commitments Remainder 2009 and
(in 000's) of 2005 2006 2007 2008 Thereafter Total
- ------------------ -------- -------- -------- -------- ---------- --------
Long-term debt $ 2,308 $ 1,154 $ - $ - $ - $ 3,462
Inventory purchases 2,279 5,000 5,000 5,000 3,333 20,612
Operating leases 807 1,089 478 424 886 3,684
Royalty advances 4,804 3,795 1,793 820 2,493 13,705
-------- -------- -------- -------- ---------- --------
Total obligations $10,198 $11,038 $7,271 $6,244 $6,712 $41,463
======== ======== ======== ======== ========== ========
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 condensed 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 or when title passes. In accordance with Securities
and Exchange Commission's Staff Accounting Bulletin No. 104 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 condensed
consolidated 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. 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's 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 (non-current) 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 75% to 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. 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 are 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 September 30, 2004, 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.
The Company invoices and collects all foreign sales and makes purchases
from overseas in U.S. dollars. Accordingly, the Company's customers and
vendors bear all material currency exchange risks.
Item 4. Controls and Procedures
- --------------------------------
The Chairman and Chief Executive Officer and the Executive Vice President,
Secretary and Chief Financial 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, Secretary and Chief Financial 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 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
The Company held its Annual Meeting of Shareholders on August 19, 2004
(the "Annual Meeting"). At the Annual Meeting, the shareholders of the
Company voted to elect three directors in Class One to serve for a term of
three years and until their respective successors are elected and take office
or until their earlier resignation. 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
- ----------------- ---------- ---------
Sam Moore 20,008,048 116,422
Ronald W. Blue 19,921,706 202,764
Michael S. Hyatt 19,936,282 188,188
Item 6. Exhibits
- -----------------
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number
- -------
31.1 -- Certification of Sam Moore, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Thomas Nelson, Inc.
(Registrant)
Date: November 9, 2004 By: /s/ Joe L. Powers
----------------- ------------------------
Joe L. Powers
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
- -------
31.1 -- Certification of Sam Moore, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002