EX-13 3 0003.txt SELECTED FINANCIAL DATA
YEARS ENDED March 31, 2000 1999 1998 1997 1996(a) (Dollars in thousands, except per share data) ----------------------------------------------------------------------------- OPERATING RESULTS (b): Net revenues $261,822 $261,645 $252,958 $243,436 $219,838 ================================================= Operating income $ 20,667 $ 20,549 $ 24,780 $ 22,954 $ 5,887 ================================================= Income (loss) from continuing operations $ 9,941 $ 8,855 $ 12,673 $ 9,522 ($ 923) Income (loss) from discontinued operations (c,d) -- -- -- 16,555 ( 9,991) ------------------------------------------------- Net income (loss) $ 9,941 $ 8,855 $ 12,673 $ 26,077 ($ 10,914) ================================================= EBITDA from continuing operations $ 28,188 $ 29,573 $ 34,926 $ 31,980 $ 13,745 ================================================= ----------------------------------------------------------------------------- FINANCIAL POSITION: Total assets $298,230 $255,330 $287,442 $301,571 $355,083 Working capital 138,117 118,794 141,342 131,852 197,127 Long-term debt and other non-current liabilities 104,441 85,392 85,217 89,233 185,019 Shareholders' equity 131,732 125,649 156,396 146,812 122,065 Long-term debt to total capitalization 45.0% 40.5% 35.3% 37.8% 60.3% ----------------------------------------------------------------------------- PER SHARE DATA (b): Income (loss) per share from continuing operations $ 0.70 $ 0.58 $ 0.74 $ 0.56 ($0.06) Income (loss) per share from discontinued operations (c,d) -- -- -- 0.96 ( 0.64) ------------------------------------------------- Net income (loss) per share $ 0.70 $ 0.58 $ 0.74 $ 1.52 ($0.70) ================================================= Dividends declared per share $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16 Book value per share 9.26 8.73 9.14 8.58 7.13 Weighted average number of shares outstanding (in thousands) (e) 14,242 15,279 17,113 17,119 15,580 ----------------------------------------------------------------------------- (a) Includes C.R. Gibson operations subsequent to acquisition on October 31, 1995. (b) For fiscal years 1996 and 1997, operating results and per share data have been restated for discontinued operations and, for fiscal 1999, includes pre-tax restructuring and other related charges of $4.7 million pertaining primarily to severance and reserves for inventory to be liquidated. (c) In fiscal 1996, the Company recorded a loss on disposal and results of operations for its Christianlifestyle magazines and the radio networks of the Royal Media division. (d) On January 6, 1997, the Company consummated a transaction to sell certain assets of the music division, net of certain liabilities assumed, and the gain on disposal and results of operations for this discontinued operation are included herein. (e) Represents basic weighted average number of shares outstanding in accordance with SFAS 128.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's net revenues have grown in recent years as a result of increased sales in existing product lines, through the development of new product lines and through acquisitions in fiscal 2000. In fiscal 1999, the Company decided to phase out manufacturing operations at its C.R. Gibson subsidiary ("Gibson") and recorded a pre-tax charge for restructuring and other related costs of $4.7 million pertaining primarily to severance and reserves for inventory to be liquidated. The following table sets forth for the periods indicated certain selected statements of operations data of the Company expressed as a percentage of net revenues and the percentage change in dollars of such data from the prior fiscal year.
Fiscal Year-to-Year Years Ended March 31, Increase (Decrease) --------------------------------------------------- 2000 1999 1998 1999 to 2000 1998 to 1999 --------------------------------------------------- (%) (%) (%) (%) (%) Net revenues: Publishing 66.4 64.3 64.6 3.4 3.0 Gift 33.6 35.7 35.4 (5.9) 4.3 ------------------------ Total net revenues 100.0 100.0 100.0 0.1 3.4 Expenses: Cost of goods sold 56.6 55.1 54.7 2.7 4.2 Selling, general and administrative expenses 34.9 35.7 34.8 (2.1) 6.2 Restructuring charges -- 0.7 -- -- -- Amortization of goodwill and non-compete agreements 0.6 0.6 0.7 (0.3) (12.2) ----------------------- Total expenses 92.1 92.1 90.2 -- 5.7 ----------------------- Operating income 7.9 7.9 9.8 0.6 (17.1) ======================= Net income 3.8 3.4 5.0 12.3 (30.1) =======================
The Company's net revenues fluctuate seasonally, with revenues in the first quarter historically being less than the remaining quarters of the year. The typical seasonality is the result of increased consumer purchases of the Company's products during the traditional calendar year-end holidays. Due to this seasonality, the Company has historically incurred a loss or recognized only a small profit during the first quarter of each fiscal year. In addition, the Company's quarterly operating results may fluctuate significantly due to new product introductions, the timing of selling and marketing expenses and changes in sales and product mixes. In fiscal 2000 and 1999, timing of new product releases and acquisitions caused an atypical pattern of revenue results by quarter, which is not expected to be repeated in the foreseeable future. See Note P of Notes to Consolidated Financial Statements. The following discussion includes certain forward-looking statements. Actual results could differ materially from those in the forward-looking statements and a number of factors may affect future results, liquidity and capital resources. These factors include, but are not limited to, softness in the general retail environment, the timing of products being introduced to the market, the level of returns experienced by the operating divisions, the level of margins achievable in the marketplace and the ability to minimize operating expenses. Although the Company believes it has the business strategy and resources needed for improved operations, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its business strategy during the 2001 fiscal year. The Company disclaims any intent or obligation to update forward-looking statements. RESULTS OF OPERATIONS Fiscal 2000 compared to Fiscal 1999. Net revenues in fiscal 2000 were essentially flat as compared to fiscal 1999. Net revenues from publishing products increased from fiscal 1999 to fiscal 2000 by $5.6 million, or 3.4%, primarily due to favorable acceptance of new product offerings and the effect of current year acquisitions, offset partially by an increase in product returns. Net revenues from gift products decreased by $5.5 million, or 5.9%, primarily due to the restructuring of the division, offset partially by the addition of the Ceres candle business. See Notes B and C of Notes to Consolidated Financial Statements. Price increases did not have amaterial effect on net revenues. The Company's cost of goods sold for fiscal 2000 increased $3.9 million, or 2.7%, and, as a percentage of net revenues, increased from 55.1% to 56.6%. The increase in cost of goods sold as a percentage of net revenues resulted primarily from an aggressive attempt to sell overstock books that resulted from increased return levels, increased competitive activity in certain markets, as well as additional one-time costs relating to the outsourcing of gift product manufacturing. Selling, general and administrative expenses for fiscal 2000 decreased $2.0 million over the comparable period in fiscal 1999. These expenses, expressed as a percentage of net revenues, decreased from 35.7% for fiscal 1999 to 34.9% for fiscal 2000, primarily as a result of the gift division restructuring. Interest expense decreased by $0.5 million, or 7.2%, for fiscal 2000. The reduction in interest expense compared to the prior year was primarily related to the Company incurring approximately $0.3 million in premium charges in the prior fiscal year relating to the redemption of $39.9 million of Convertible Subordinated Notes. The Company's effective tax rate in fiscal 2000 was 32.5% compared to 36.5% for fiscal 1999. This decrease is due to a tax benefit received in the fourth quarter relating to the closure of a foreign subsidiary. See Note O of Notes to Consolidated Financial Statements. The Company earned net income $9.9 million for fiscal 2000. Fiscal 1999 compared to Fiscal 1998. Net revenues for fiscal 1999 increased $8.7 million, or 3.4%, over fiscal 1998. Net revenues from publishing products increased for fiscal 1999 from fiscal 1998 by $4.9 million, or 3.0%, primarily due to favorable acceptance of new product offerings. Publishing results would have been more favorable were it not for absence of revenues from certain agreements which had expired April 1, 1998, whereby the Company acted as a distributor of publishing products. The Company does not plan to enter into any material distribution agreements in the near future. Net revenues from gift products increased by $3.8 million, or 4.3%, primarily due to the increased sales of a special selection of products, including scrapbooks, to mass merchandisers. Price increases did not have a material effect on net revenues. The Company's cost of goods sold for fiscal 1999 increased $5.8 million, or 4.2%, and, as a percentage of net revenues, increased from 54.7% to 55.1%. The increase in cost of goods sold, as a percentage of net revenues, resulted primarily from the portion of the fiscal 1999 one-time restructuring charge related to reserves in the gift division for inventory to be liquidated in the amount of $2.8 million, or 1.1% of net revenues. The absence of revenues from the above mentioned publishing distribution agreements, which carry a higher cost of sales percentage, somewhat offset other increases in the cost of sales percentage. Selling, general and administrative expenses for fiscal 1999 increased $5.4 million over the comparable period in fiscal 1998. These expenses, expressed as a percentage of net revenues, increased from 34.8% for fiscal 1998 to 35.7% for fiscal 1999 primarily as a result of increased marketing costs in the Company's direct-to-consumer market. In addition, the increase is due to a decline in fees charged for operations services provided to the purchaser of the Company's Music Business, which was sold in January 1997. The fees for these services were credited to selling, general and administrative expenses and have declined as certain services were discontinued. All services were discontinued as of December 31, 1998. The operating expenses restructuring charge for fiscal 1999 was $1.9 million. This charge relates to costs for discontinuation of manufacturing and certain administrative functions at Gibson. The costs primarily include employee severance benefits reduced by a gain on the sale of the manufacturing equipment. Interest expense increased by $0.6 million, or 9.6%, for fiscal 1999. The Company's effective tax rate in fiscal 1999 was 36.5% compared to 37.5% for fiscal 1998. See Note O of Notes to Consolidated Financial Statements. The Company earned net income of $8.9 million for fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had $0.8 million in cash and cash equivalents, primarily cash generated from operations. 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 March 31, 2000, the Company had working capital of $138.1 million. Under its two bank credit facilities, at March 31, 2000, the Company had $84.5 million of borrowings outstanding, and $25.5 million available for borrowing. Net cash provided by operating activities was $8.1 million, $1.6 million and $7.0 million in fiscal 2000, 1999 and 1998, respectively. The cash provided by operations during fiscal 2000 was principally attributable to net income with an offsetting increase in inventory. The $9.0 million increase in inventory is attributable to approximately $5.0 million from current year acquisitions and approximately $4.0 million in the Gift Division. The Gift Division increased its inventory levels to allow for longer manufacturing lead times resulting from outsourcing the manufacturing operations. During fiscal 2000, capital expenditures totaled approximately $3.6 million. The capital expenditures were primarily for computer, warehousing and manufacturing equipment. In fiscal 2001, the Company anticipates capital expenditures of approximately $4.0 million, consisting primarily of additional computer and warehousing equipment. The Company acquired three businesses during fiscal 2000. See Note B of Notes to Consolidated Financial Statements. The Company paid approximately $23.8 million in cash, primarily funded from existing credit agreements, and assumed certain liabilities in relation to these acquisitions. The Company's bank credit facilities are unsecured and consist of a $100 million credit facility and a $10 million credit facility (collectively, the "Credit Agreements"). The $100 million credit facility bears interest at either the prime rate or, at the Company's option, the London Interbank Offered Rate ("LIBOR") plus a percentage, subject to adjustment based on certain financial ratios. The $100 million credit facility was amended on November 30, 1998, to increase the aggregate amount available for borrowing from $75 million to $100 million and to extend the maturity from December 13, 2002 to December 13, 2005. The $10 million credit facility bears interest at LIBOR plus a percentage, subject to adjustment based on certain financial ratios, and matures on July 31, 2001. Due to the seasonality of the Company's business, borrowings under the Credit Agreements typically peak during the third quarter of the fiscal year. The Company has outstanding $17.4 million of senior notes ("Senior Notes") which are unsecured. The Senior Notes bear interest at rates from 6.68% to 9.50% and are due through fiscal 2006. Under the terms of the Credit Agreements and Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain interest coverage and debt-to-total-capital ratios which are similarly calculated for each debt agreement. At March 31, 2000, the Company was in compliance with all covenants of these debt agreements. The Company expects to be in compliance with all of its covenants for each quarter of fiscal 2001, although no assurance can be given that such compliance will be maintained. Management believes cash generated by operations and borrowings available under the Credit Agreements will be sufficient to fund anticipated working capital and capital expenditure requirements for existing operations through fiscal 2001. On June 10, 1998, the Company announced its intention to repurchase up to three million shares of common stock and/or Class B common stock from time to time in the open market or through privately negotiated transactions. At March 31, 2000, the Company had repurchased approximately 2.9 million shares of common stock at an aggregate cost to the Company of $39.2 million. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities. The exposure relates primarily to the credit agreements, which expire in fiscal 2006. In the event that interest rates associated with these credit agreements were to increase 100 basis points, the impact on the future cash flows would be approximately $0.8 million, assuming current debt levels are maintained. YEAR 2000 ISSUES The Company did not experience any significant problems with its information and other systems relating to the Year 2000. The Company expensed approximately $15,000 in costs during fiscal 2000, primarily for staff coordination related to being year 2000 compliant. The Company's expenditures have been consistent with expectations, and the Company does not anticipate that it will incur significant additional costs in connection with its information or other systems and their ability to process dates in the year 2000 or thereafter. Also, the Company does not believe issues relating to the Year 2000 will have a material effect on the Company's results of operations, liquidity or financial condition. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
Years ended March 31, ------------------------------- 2000 1999 1998 ------------------------------- Net revenues $261,822 $261,645 $252,958 Cost of goods sold 148,147 144,221 138,389 -------------------------------- Gross profit 113,675 117,424 114,569 Selling, general and administrative 91,398 93,394 87,950 Restructuring charge - 1,866 - Amortization of goodwill and non-compete agreements 1,610 1,615 1,839 -------------------------------- Operating income 20,667 20,549 24,780 Other income 230 59 1,569 Interest expense 6,171 6,653 6,073 -------------------------------- Income before income taxes 14,726 13,955 20,276 Provision for income taxes 4,785 5,100 7,603 -------------------------------- NET INCOME $ 9,941 $ 8,855 $ 12,673 ================================ Weighted average number of shares outstanding 14,242 15,279 17,113 ================================ NET INCOME PER SHARE: Basic-- Net income per share $ 0.70 $ 0.58 $ 0.74 ================================ Diluted-- Net income per share $ 0.70 $ 0.58 $ 0.73 ================================ See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) (CAPTION> March 31, ------------------- 2000 1999 ------------------- ASSETS Current assets: Cash and cash equivalents $ 814 $ 609 Accounts receivable, less allowances of $7,171 and $6,982, respectively 79,052 77,298 Inventories 74,809 65,805 Prepaid expenses 13,652 12,656 Assets held for sale 22,168 - Deferred tax assets 9,679 6,715 -------------------- Total current assets 200,174 163,083 Property, plant and equipment, net 17,423 25,557 Other assets 9,904 10,260 Deferred charges 959 1,421 Goodwill, less accumulated amortization of $7,971 and $6,361, respectively 69,770 55,009 -------------------- TOTAL ASSETS $298,230 $255,330 ===================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,350 $ 16,355 Accrued expenses 22,695 19,720 Dividends payable 569 576 Income taxes payable 3,851 2,793 Current portion of long-term debt 7,592 4,765 Current portion of capital lease obligations - 80 -------------------- Total current liabilities 62,057 44,289 Long-term debt 100,359 79,542 Deferred tax liabilities 2,606 4,432 Other liabilities 1,476 1,418 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 13,144,776 and 13,286,860 shares, respectively 13,145 13,287 Class B common stock, $1.00 par value, authorized 5,000,000 shares; issued 1,085,819 and 1,103,524 shares, respectively 1,086 1,104 Additional paid-in capital 43,126 44,537 Retained earnings 74,375 66,721 -------------------- Total shareholders' equity 131,732 125,649 -------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $298,230 $255,330 ==================== See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
Class B Additional Common Common Paid-In Retained Stock Stock Capital Earnings Total ---------------------------------------------------- Balance at April 1, 1997 $16,001 $ 1,112 $ 79,409 $50,290 $146,812 Net income 12,673 12,673 Common stock issued: Retirement of stock awards -- 3,888 common shares (4) 4 - Stock offering adjustment (360) (360) Dividends declared - $0.16 per share (2,739) (2,739) Incentive plan stock awards -- 5,380 common shares 6 4 10 ----------------------------------------------------- Balance at March 31, 1998 $16,003 $ 1,112 $ 79,057 $60,224 $156,396 ===================================================== Net income 8,855 8,855 Class B stock converted to common 8 (8) - Common stock issued: Option plans -- 14,449 common shares 15 239 254 Convertible notes converted -- 1,470 common shares 1 24 25 Common stock repurchased -- 2,741,911 common shares (2,742) (34,803) (37,545) Dividends declared - $0.16 per share (2,358) (2,358) Incentive plan stock awards -- 1,635 common shares 2 20 22 ----------------------------------------------------- Balance at March 31, 1999 $13,287 $ 1,104 $44,537 $66,721 $125,649 ===================================================== Net income 9,941 9,941 Class B stock converted to common 18 (18) - Common stock issued: Option plans -- 3,132 common shares 3 57 60 Common stock repurchased -- 165,400 common shares (165) (1,483) (1,648) Dividends declared - $0.16 per share (2,287) (2,287) Incentive plan stock awards -- 1,635 common shares 2 15 17 ----------------------------------------------------- Balance at March 31, 2000 $13,145 $ 1,086 $43,126 $74,375 $131,732 ===================================================== See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended March 31, -------------------------- 2000 1999 1998 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,941 $ 8,855 $12,673 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 7,291 8,695 8,577 Deferred income taxes (1,803) (2,371) 4,758 Gain on sale of fixed assets (240) - - Changes in assets and liabilities, net of acquisitions and disposals: Accounts receivable, net 1,138 (11,883) (789) Inventories (4,062) 4,785 960 Prepaid expenses (490) (4,479) 1,244 Accounts payable and accrued expenses (4,416) 1,684 (3,034) Income taxes payable 1,058 (1,493) (15,688) --------------------------- Net cash provided by continuing operations 8,417 4,063 8,701 --------------------------- Discontinued operations: Changes in discontinued net assets (281) (2,492) 488 Cash used in discontinued operations - - (2,191) --------------------------- Net cash used in discontinued operations (281) (2,492) (1,703) --------------------------- Net cash provided by operating activities 8,136 1,571 6,998 ---------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,641) (4,173) (4,815) Proceeds from sales of property, plant and equipment 1,857 5,346 - Purchase of net assets of acquired companies - net of cash received (23,842) - - Changes in other assets and deferred charges (2,062) (2,114) 160 ---------------------------- Net cash used in investing activities (27,688) (941) (4,655) ---------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit, net 33,084 59,800 - Payments under capital lease obligations (80) (246) (308) Payments on long-term debt (9,440) (58,702) (2,975) Dividends paid (2,279) (2,467) (2,739) Changes in other liabilities 43 (853) (89) Proceeds from issuance of common stock 77 279 14 Common stock retired (1,648) (37,545) (4) ---------------------------- Net cash provided by (used in) financing activities 19,757 (39,734) (6,101) ---------------------------- Net increase (decrease) in cash and cash equivalents 205 (39,104) (3,758) Cash and cash equivalents at beginning of year 609 39,713 43,471 ---------------------------- Cash and cash equivalents at end of year $ 814 $ 609 $39,713 ============================ Supplemental disclosures of noncash investing and financing activities: Dividends accrued and unpaid $ 569 $ 576 $ 685 See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS: Thomas Nelson, Inc. (a Tennessee corporation) and subsidiaries (the "Company"), is a publisher, producer and distributor of Bibles and books emphasizing Christian, inspirational and family value themes, as well as a host of inspirational seminars for women. The Company also designs and markets a broad line of gift and stationery products. The principal markets for the Company's products are Christian bookstores, general bookstores, mass merchandisers, gift stores and direct marketing to consumers in English-speaking countries. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements consist of the accounts of the Company including its subsidiaries, Worthy, Incorporated (formerly Word, Incorporated), The C.R. Gibson Company ("Gibson") and New Life Treatment Centers, Inc. ("NLTC"). All intercompany transactions and balances have been eliminated. NLTC has minority shareholders that own approximately 30% of the outstanding equity shares of NLTC. Minority interest will be presented as a reduction of net income on the consolidated statements of income and as a separate caption between liabilities and shareholders' equity on the consolidated balance sheets. At the time of acquisition, NLTC had a net deficit in shareholders' equity, and postacquisition operations were approximately breakeven for fiscal 2000. REVENUE RECOGNITION: Revenue from publishing and gift product sales is recognized upon shipment to the customer. Provision is made for the estimated effect of sales returns where right-of-return privileges exist. Returns of products from customers are accepted in accordance with standard industry practice. The full amount of the returns allowance (estimated returns to be received net of inventory and royalty costs) is shown, along with the allowance for doubtful accounts, as a reduction of accounts receivable in the accompanying consolidated financial statements. Revenue for seminars is recognized as the seminars take place. Deferred revenue relating to cash received in advance of seminars is included in the accompanying consolidated financial statements as accrued expenses. INVENTORIES: Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method. Costs of the production and publication of products are included in inventory and charged to operations when sold or when otherwise disposed. Costs of abandoned publishing projects and appropriate provisions for inventory obsolescence and decreases in market value are charged to operations on a current basis. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation and amortization are provided for, principally on the straight-line method over the estimated useful lives of the individual assets. GOODWILL: Goodwill is being amortized on a straight-line basis over periods ranging from 25 to 40 years. Subsequent to acquisitions, the Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. In the evaluation of possible impairment, the Company uses the most appropriate method of evaluation given the circumstances surrounding the particular acquisition, which has generally been an estimate of the related business unit's undiscounted cash flows from operations before interest and taxes over the expected remaining life of the goodwill. PREPAID EXPENSES: Prepaid expenses consist primarily of royalty advances. These costs are expensed over the expected benefit periods. DEFERRED CHARGES: Deferred charges consist primarily of loan issuance costs which are being amortized over the average life of the related debt and publication costs that are expected to be of significant benefit to future periods and other deferred charges, all of which are amortized over periods not to exceed 60 months. OTHER ASSETS: Other assets consist primarily of prepaid royalty costs for works and projects which are not expected to be released within the next fiscal year. STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" , encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for employee stock-based compensation using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related Interpretations. Under APB Opinion No. 25, no compensation cost related to employee stock options has been recognized because all options are issued with exercise prices equal to or greater than the fair market value at the date of grant. See Note L for further discussion. INCOME TAXES: Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes are provided for temporary differences between the financial statement and income tax bases of assets and liabilities. COMPUTATION OF NET INCOME PER SHARE: Basic net income per share is computed by dividing net income by the weighted average number of common and Class B common shares outstanding during the year. Diluted earnings per share reflects the dilutive effect of stock options outstanding during the period and common shares contingently issuable upon conversion of convertible debt securities in periods in which such exercise would cause dilution and the effect on net income of converting the debt securities. These convertible debt securities were fully redeemed by March 1, 1999, and are excluded from all calculations from that date forward. STATEMENT OF CASH FLOWS: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less as cash equivalents. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEWLY ISSUED ACCOUNTING STANDARD: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective, as amended, for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires all derivatives to be recognized in the statement of financial position and to be measured at fair value. The Company anticipates adopting the provisions of SFAS No. 133 effective April 1, 2001 and is continuing to determine the effects of SFAS No. 133 on the Company's financial statements. RECLASSIFICATIONS: Certain reclassifications of prior period amounts have been made to conform to the current year's presentation. NOTE B - ACQUISITIONS On June 24, 1999, the Company acquired substantially all of the assets of Ceres LLC ("Ceres") for approximately $6.2 million which included the assumption of certain liabilities. Ceres manufactures and markets high quality candles to specialty and department store markets and is headquartered in San Francisco, California. The purchase price was allocated to the net assets acquired based on their estimated fair values, including identified intangible assets related to trademarks and customer lists in the amount of approximately $1 million. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $6.3 million and is being amortized on a straight-line basis over 40 years. Trademarks and customer lists are being amortized over 5 years. On December 30, 1999, the Company acquired substantially all of the assets of Rutledge Hill Press for approximately $4.5 million including the assumption of certain liabilities. Rutledge Hill Press is a Nashville, Tennessee-based publisher that specializes in cooking, quilting, regional interest and Civil War titles. The purchase price was allocated to the net assets acquired based on their estimated fair values, including identified intangible assets related to trademarks and customer lists in the amount of approximately $0.1 million. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $0.5 million and is being amortized on a straight line basis over 40 years. Trademarks and customer lists are being amortized over 5 years. On January 28, 2000, the Company acquired approximately 70% of the outstanding shares of NLTC from a group of investors for approximately $15.4 million in cash. NLTC, headquartered in Dallas, Texas, operates two primary businesses. One hosts inspirational conferences for women at venues throughout the United States, and the other operates therapeutic centers in Arizona for women with eating disorders. At the date of acquisition, the Company declared its intent to sell certain healthcare related assets of NLTC. Accordingly, the accompanying consolidated financial statements reflect these assets as held for sale (see Note F) in accordance with Emerging Issue Task Force Issue 87-11, "Allocation of Purchase Price to Assets to Be Sold," ("EITF 87-11"). The purchase price for NLTC was allocated to the net assets acquired based on their estimated fair values, including identified intangible assets related to trademarks and customer lists in the amount of $1 million. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $9.6 million and is being amortized on a straight-line basis over 25 years. Trademarks and customer lists are being amortized over 5 years. The accompanying consolidated financial statements reflect the preliminary allocation of purchase price for these acquisitions. The allocations have not been finalized due to the pending sale of assets held for sale and certain pre-acquisition contingencies identified by the Company relating to impairment of assets and contingent liabilities. Accordingly, in fiscal 2001, goodwill associated with these acquisitions may change. The fiscal 2000 acquisitions described above were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenues or expenses related to these acquisitions prior to the respective closing dates. The cash portions of these acquisitions were financed through borrowings from the Company's line of credit. Following are the Company's unaudited pro forma results for fiscal years 2000 and 1999, assuming the acquisitions occurred on April 1, 1998 (in thousands):
2000 1999 ------------------- Net Revenues $294,270 $304,670 Net Income 10,473 9,419 Earnings Per Share 0.74 0.62
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the combinations been in effect on April 1, 1998, or of future results of operations. NOTE C - RESTRUCTURING CHARGE During fiscal 1999, the Company recorded a restructuring charge, including related asset write-downs of $4.7 million ($3 million or $0.19 per basic share, after-tax). The restructuring initiatives involved the Company's gift manufacturing operations located in Connecticut and included two plant closings and reduction of certain administrative functions. During fiscal 1999, management decided to cease all manufacturing activities in Connecticut. The restructuring resulted in workforce reductions of approximately 300 employees. The products formerly produced at these manufacturing facilities have continued to be designed and distributed by the Company, but are now being manufactured by outside vendors. This restructuring charge was recorded in the accompanying 1999 consolidated statements of income as cost of goods sold ($2.8 million) and operating expenses ($1.9 million). The remaining liability as of March 31, 1999 ($3.1 million) was recorded in the accompanying consolidated balance sheets as accrued expenses. The restructuring liability was fully utilized during fiscal 2000, and the restructuring is now complete. The restructuring charge and its utilization are summarized as follows (in thousands):
1999 1999 Utilized 2000 Original ------------- Balance at Utilized Balance at Accrual Cash Noncash Mar. 31, 1999 Cash Mar. 31, 2000 ------------------------------------------------------------- Employee severance and termination $2,777 $ 727 $ -- $2,050 ($2,050) $ -- Gain on sale of long-lived assets (1,928) (1,928) -- -- -- -- Other facility shutdown costs 1,017 -- -- 1,017 (1,017) -- ------------------------------------------------------------ Operating expenses 1,866 (1,201) -- 3,067 (3,067) Inventory write-down 2,800 -- 2,800 -- -- -- ------------------------------------------------------------ Total charge $4,666 ($1,201) $2,800 $3,067 ($3,067) $ -- ============================================================
For plants and buildings that were closed, the tangible assets have been recorded at the lesser of their net book value or their estimated fair value, less cost of disposal. The remaining assets relating to the restructuring are expected to be sold during fiscal 2001 and are reflected as assets held for sale in the accompanying consolidated balance sheets (see Note F). NOTE D - INVENTORIES Inventories consisted of the following at March 31 (in thousands):
2000 1999 ----------------------- Finished goods $66,261 $56,610 Work in process and raw materials 8,548 9,195 ----------------------- $74,809 $65,805 =======================
NOTE E - PREPAID EXPENSES Prepaid expenses consisted of the following at March 31 (in thousands):
2000 1999 ----------------------- Royalties $10,040 $10,124 Prepaid production costs 1,382 248 Other 2,230 2,284 ----------------------- $13,652 $12,656 =======================
NOTE F - ASSETS HELD FOR SALE Assets held for sale at March 31, 2000 include land and buildings previously used in the Gift Division manufacturing operations (see Note C) and certain assets of NLTC (see Note B), which the Company expects to sell by March 31, 2001. In accordance with EITF 87-11, the expected net proceeds from the sale, the expected cash flows from operations during the period from acquisition to disposal and an interest expense allocation were allocated to the NLTC assets held for sale. Any difference between the actual and expected sales price will result in an adjustment to goodwill, unless the adjustment results from a post-acquisition event. NOTE G - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at March 31 (in thousands):
2000 1999 ---------------------- Land $ 1,358 $ 3,798 Buildings 12,154 18,170 Machinery and equipment 20,332 23,216 Furniture and fixtures 6,142 3,604 Other 1,356 616 ---------------------- 41,342 49,404 Less allowance for depreciation and amortization ( 23,919) ( 23,847) ---------------------- $17,423 $25,557 ======================
NOTE H - OTHER ASSETS Other assets consisted of the following at March 31 (in thousands):
2000 1999 ---------------------- Prepaid royalties $3,313 $ 5,740 Cash surrender value of life insurance policies 1,429 1,030 Intangible assets, net 1,975 115 Other 3,187 3,375 ---------------------- $9,904 $10,260 ======================
NOTE I - ACCRUED EXPENSES Accrued expenses consisted of the following at March 31 (in thousands):
2000 1999 ----------------------- Accrued royalties $ 4,013 $ 5,210 Accrued payroll 3,911 5,623 Deferred revenue 6,553 263 Accrued commissions 937 1,031 Accrued interest 1,070 700 Accrued sales tax 234 25 Net liability of discontinued operations 2,424 2,705 Restructuring reserve - 3,067 Accrued group insurance 912 735 Other 2,641 361 ----------------------- $22,695 $19,720 =======================
Cash payments for interest were $6.2 million in 2000, $7.5 million in 1999 and $6.1 million in 1998. NOTE J - LONG-TERM DEBT Long-term debt consisted of the following at March 31 (in thousands):
2000 1999 ------------------------ Credit Agreements $ 84,500 $ 59,800 Industrial Revenue Bonds 1,325 1,525 Loan Agreement 1,000 1,667 Senior Notes 17,422 21,285 Other 3,704 30 ----------------------- 107,951 84,307 Less current portion ( 7,592) ( 4,765) ----------------------- $100,359 $ 79,542 =======================
The Company has Credit Agreements with borrowing limits totaling $110 million as of March 31, 2000. On November 30, 1998, the primary credit facility ("Credit Facility") was amended to increase the aggregate amount available for borrowing from $75 million to $100 million and to extend the maturity from December 13, 2002 to December 13, 2005. The Credit Facility bears interest at either the lender's prime rate or, at the Company's option, the LIBOR plus a percentage, based on certain financial ratios. The average interest rate for the Credit Facility was approximately 6.81% at March 31, 2000. The Credit Facility is guaranteed by all of the Company's material subsidiaries and the Company has agreed, among other things, to limit the payment of cumulative cash dividends and to maintain certain interest coverage and debt-to total-capital ratios. The maximum dividends which the Company may pay for fiscal 2001 are $21.4 million. Additionally, the Company has a $10 million credit facility which matures July 31, 2001, and bears interest at LIBOR plus a percentage, for a total rate of 7.26% at March 31, 2000. At March 31, 2000, the Company was in compliance with all covenants of the Credit Agreements. At March 31, 2000, the Company had $25.5 million available for borrowing under its Credit Agreements. The Company has outstanding Industrial Revenue Bonds, which bear interest at rates from 7.35% to 7.60% and are due through 2005. At March 31, 2000, the Industrial Revenue Bonds were secured by property, plant and equipment with a net book value of approximately $1.4 million. The Company has outstanding indebtedness of $1.0 million under a loan agreement which is secured by property, plant and equipment related to the Company's Nashville warehouse and distribution center expansion completed in June 1992. Interest payable monthly is at LIBOR plus 1.25% per annum, for a total rate of 7.38% at March 31, 2000. Semi-annual principal payments are due through March 2002. The Company has outstanding $17.4 million of Senior Notes, which bear interest at rates from 6.68% to 9.50% and are due through fiscal 2006. Under the terms of the Senior Notes, the Company has agreed, among other things, to limit the payment of cash dividends and to maintain certain interest coverage and debt-to-total-capital ratios. The maximum dividends which the Company may pay for fiscal 2001 are $21.4 million. At March 31, 2000, the Company was in compliance with all covenants of the Senior Notes. On March 1, 1999, the Company redeemed the remaining outstanding $39.9 million of 5.75% Convertible Subordinated Notes due November 30, 1999. The Convertible Subordinated Notes were redeemed at $1,008.20 per $1,000 principal amount, together with accrued and unpaid interest. During the first nine months of fiscal 1999, the Company purchased $15.1 million in principal amount of the Convertible Subordinated Notes. Maturities of long-term debt for the years ending March 31 are as follows (in thousands):
2001 $ 7,592 2002 3,585 2003 3,322 2004 3,322 2005 3,322 2006 and thereafter 86,808 ------- $107,951 ======= NOTE K - LEASES Total rental expense for all operating leases, including short-term leases of less than a year, amounted to approximately $5.0 million in 2000, $4.3 million in 1999 and $4.0 million in 1998. Generally, the leases provide that, among other things, the Company shall pay for utilities, insurance, maintenance and property taxes in excess of base year amounts. Minimum rental commitments under non-cancelable leases for the years ending March 31 are as follows (in thousands):
Operating Leases --------- 2001 $ 4,117 2002 3,707 2003 2,037 2004 1,522 2005 1,255 2006 and thereafter 200 --------- Total minimum lease payments $12,838 ====== NOTE L - STOCK PLANS 1992 EMPLOYEE STOCK INCENTIVE PLAN: The Company has adopted the 1992 Amended and Restated Employee Stock Incentive Plan (the "Stock Incentive Plan"), which is administered by the Company's Compensation Committee. Stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and other stock-based awards may be granted to employees under this plan. In addition, 140,000 shares of common stock have been authorized for issuance under this plan for annual stock option grants to each of the Company's outside directors for the purchase of 2,000 shares of common stock. Stock options have been granted under this plan as indicated in the table below. The options in the Stock Incentive Plan vest over one to three year periods beginning on the first or fourth anniversary date of the option grant, and at March 31, 2000, there were options to purchase 336,169 shares of common stock and 1,240,000 shares of Class B common stock exercisable. The weighted average life of the options outstanding in the Stock Incentive Plan at March 31, 2000, was four years.
Remaining Weighted Weighted Shares Outstanding Optioned Shares Average Average Reserved Common Class B Exercise Fair For Grant Stock Stock Price Value --------------------------------------------------------- April 1, 1997 1,301,976 307,500 450,000 $17.91 Options canceled 80,000 ( 70,000) ( 10,000) 14.00 Options granted (1,319,000) 319,000 1,000,000 14.60 $4.64 Stock incentive issued( 580) -- -- ------------------------------------ March 31, 1998 62,396 556,500 1,440,000 15.88 Options canceled 151,500 ( 91,500) ( 60,000) 15.55 Options granted ( 74,000) 49,000 25,000 14.29 $6.01 Options exercised -- ( 7,000) -- 11.25 Stock incentive reversed 2,395 -- -- ------------------------------------- March 31, 1999 142,29 507,000 1,405,000 15.86 Options canceled 68,000 ( 63,000) ( 5,000) 12.16 Options granted ( 12,000) 12,000 -- 10.00 $4.82 ------------------------------------- March 31, 2000 198,291 456,000 1,400,000 15.89 =====================================
1989 NLTC STOCK INCENTIVE PLAN: NLTC has a stock option plan that provides for granting to officers and key employees non qualified options to purchase its common stock. Options shall not be priced at less than 85% of the fair value at the date of grant or be granted for terms of greater than ten years. Options outstanding generally vest after four years of employment, or at 25% per year. At March 31, 2000, there were options to purchase approximately 1.4 million shares outstanding under this plan, of which approximately 0.9 million were exercisable. The weighted average exercise price on outstanding options and exercisable options was approximately $0.69 per share and $0.77 per share, respectively, and the weighted average life was six years. STOCK-BASED COMPENSATION PLANS: The Company accounts for options issued to employees and directors under APB Opinion No. 25. All options are granted with exercise prices equal to or greater than market value of the Company's common stock on the date of grant. As a result, no compensation cost has been recognized. SFAS No. 123 established new financial accounting and reporting standards for stock-based compensation plans. The Company has adopted the disclosure-only provision of SFAS No. 123. As a result, no compensation cost has been recognized for the Company's employee stock option plans. Had compensation cost for the employee stock option plans been determined based on the fair value at the grant date for awards in fiscal 2000, 1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the following pro forma amounts for the 2000, 1999 and 1998 fiscal years:
2000 1999 1998 -------------------------------- Net income: As reported $9,941 $8,855 $12,673 ================================ Pro forma $9,750 $6,445 $10,967 ================================ Net income per share: Basic -- As reported $ 0.70 $ 0.58 $ 0.74 ================================ Pro forma $ 0.68 $ 0.42 $ 0.64 ================================ Diluted -- As reported $ 0.70 $ 0.58 $ 0.73 ================================ Pro forma $ 0.68 $ 0.42 $ 0.64 ================================
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 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:
2000 1999 1998 ------------------------------- Expected dividend payment $ 0.16 $ 0.16 $ 0.16 Expected stock price volatility 11.83% 33.17% 53.69% Risk free interest rate 5.45% 5.43% 6.29% Expected life of options 4 years 5 years 6 years
1997 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS: The Company adopted the 1997 Deferred Compensation Plan for Non Employee Directors (the "Deferred Compensation Plan"), which is administered by the Compensation Committee. The Deferred Compensation Plan is a non-qualified plan that allows eligible nonemployee members of the Company's Board of Directors to elect to defer receipt of all or any portion of annual base fees payable to them for services rendered to the Company as Directors. The participating Directors are awarded performance units of the Company's Common Stock at fair market value on the deferral dates and dividend payment dates. Distributions at age 65 or 70 are paid in cash, based on the value of the performance units at the time of distribution, payable in a lump sum or in installments. Compensation expense is recognized on deferral dates, dividend payment dates, and based on changes in the quoted price of the Company's Common Stock. During fiscal years 2000, 1999 and 1998 compensation expense, in relation to the Deferred Compensation Plan, was recorded in the amounts of approximately $0.1 million, $0.1 million and $0.2 million, respectively. 1990 DEFERRED COMPENSATION OPTION PLAN FOR OUTSIDE DIRECTORS: The Company adopted the 1990 Deferred Compensation Option Plan for Outside Directors (the "Outside Directors Plan"), which is administered by the Company's Compensation Committee. Options were awarded, on or prior to the annual meeting of shareholders or on initial election to the Board of Directors ("Board"), to each Director of the Company who filed with the Company an irrevocable election to receive options in lieu of not less than fifty percent (50%) of the retainer fees to be earned during each fiscal year. The option price was $1.00 per share with the number of shares being determined by dividing the amount of the annual retainer fee by the fair market value ("FMV") of the shares on the option date less $1.00 per share. The amount of annual retainer fee for options was expensed by the Company as earned. The options in the Outside Directors Plan vest on the first anniversary date of the option grant and, at March 31, 2000 there were 2,424 shares of common stock exercisable. The Outside Directors Plan terminated in August 1995 and options outstanding remain in effect until exercised or their expiration in August of 2001. Options granted and outstanding under this plan are as follows:
Common Stock Weighted Outstanding Average Optioned Exercise Shares Price --------------------------------- April 1, 1997 17,852 $0.76 Exercised ( 4,802) 0.53 --------- March 31, 1998 13,050 0.85 Exercised ( 6,450) 0.82 --------- March 31, 1999 6,600 0.87 Exercised (4 ,176) 0.80 --------- March 31, 2000 2,424 1.00 =========
1986 STOCK INCENTIVE PLAN: The Company adopted the 1986 Stock Incentive Plan (the "1986 Plan"), which was administered by the Company's Compensation Committee. Stock options were granted under the 1986 Plan at a price not less than the FMV of the stock on the option grant date and must be exercised not later than five years after the date of grant. Stock options issued to a person then owning more than 10% of the voting power in all classes of the Company's outstanding stock were granted at a purchase price of not less than 110% of the FMV and must be exercised within five years from the date of grant. The options vested 1/4 each year for four years beginning on the first anniversary date of the option grant. The 1986 Plan terminated in March 1996 and all options outstanding expired during fiscal 2000 with a weighted average exercise price of $14.64. There were no options granted or exercised under this plan during the last three fiscal years. NOTE M - RETIREMENT PLANS The Company has adopted the Thomas Nelson, Inc. Employee Stock Ownership Plan ("Company ESOP"), which includes a 401(k) salary deferral feature. In addition, Gibson maintains The C.R. Gibson Company Employee Stock Ownership Plan ("Gibson ESOP") and The C.R. Gibson Company Savings and Investment Plan ("Gibson 401(k) Plan"). The Company ESOP covers all eligible officers and employees other than those employed by Gibson. The Company, at its discretion, matches each employee's 401(k) contribution annually and, in addition, may make retirement contributions to the ESOP at its discretion. The Gibson ESOP and Gibson 401(k) Plan benefit all eligible Gibson employees. Gibson matches, at its discretion, each Gibson employee's 401(k) contributions annually and contributes 4% of the first $6,600 of a participant's compensation in the Gibson 401(k) Plan. The Company's contributions to these retirement plans, including matching contributions, totaled $2.4 million, $2.7 million and $2.9 million in 2000, 1999 and 1998, respectively. NLTC has adopted a profit sharing plan which is qualified under section 401 of the Internal Revenue Code. Eligible employees over 21 years of age may participate in the plan after one year of credited service with NLTC. NLTC's contribution to the plan for any year is discretionary. During fiscal 2000, NLTC matched 20% of all employee contributions. A proposal to merge the Gibson ESOP and Gibson 401(k) plans into the Company ESOP has been approved by the Board of Directors. The surviving plan will continue to allow employer discretionary contributions to a stock bonus feature and will continue to have a 401(k) feature. The surviving plan will allow all eligible employees to elect deferral contributions of between 1% and 15% of their eligible compensation. The Company will match 100% of each participant's salary deferral contributions up to 3% of eligible compensation and 50% of the next 2% of eligible compensation. The transfer of assets is planned for August 1, 2000, with full conversion expected to be completed by September 15, 2000. The new 401(k) matching schedule will be retroactive to January 1, 2000, in order for the surviving plan to qualify as a "safe harbor" 401(k) plan under applicable Internal Revenue Code Sections. NOTE N - COMMON STOCK On June 10, 1998, the Company announced its intention to repurchase up to three million shares of common stock and/or Class B common stock from time to time in the open market or through privately negotiated transactions. As of March 31, 2000, the Company has repurchased approximately 2.9 million shares of common stock at an aggregate cost to the Company of $39.2 million. NOTE O - INCOME TAXES The income tax provision is comprised of the following at March 31 (in thousands):
2000 1999 1998 ------------------------ Current: U.S. federal $5,331 $6,018 $2,126 State 1,107 1,278 544 Foreign 150 175 175 ------------------------- Total current 6,588 7,471 2,845 Deferred ( 1,803) ( 2,371) 4,758 ------------------------- Total tax provision $4,785 $5,100 $7,603 =========================
SFAS No. 109 permits the recognition of a deferred tax asset if it is more likely than not that the future tax benefit will be realized. The Company believes that, based on its history of profitable operations, the net deferred tax asset will be realized on future tax returns, primarily from the generation of future taxable income. During fiscal 2000, the Company acquired approximately $3.0 million of net deferred tax assets in connection with the NLTC business combination. The net deferred tax asset is comprised of the following at March 31 (in thousands):
2000 1999 ------------------- Accelerated depreciation ($1,898) ($3,728) Deferred charges ( 779) ( 1,021) Contributions 3,075 3,944 Inventory obsolescence reserve 2,963 3,138 Bad debt and returns reserves 1,795 1,308 Inventory-unicap tax adjustment 1,158 1,138 Advances and prepaid expenses 92 278 Accrued liabilities 4,507 3,074 Valuation allowance ( 3,840) ( 5,848) ------------------- Net deferred tax asset $7,073 $2,283 ===================
Reconciliation of income taxes computed at the U.S. federal statutory tax rate to the Company's effective tax rate is as follows at March 31:
2000 1999 1998 -------------------------- U.S. federal statutory tax rate provision 34.0% 34.0% 34.0% State taxes on income, net of federal 2.5% 2.5% 3.5% Tax benefit of foreign translation adjustment charge-off ( 4.0%) -- -- ------------------------- Effective tax rate 32.5% 36.5% 37.5% =========================
During the fourth quarter of fiscal year 2000, the Company closed a foreign subsidiary in the United Kingdom. This subsidiary distributed Gift products throughout Europe. The Company will continue to sell Gift products in Europe through third-party distributor arrangements. This closure is not expected to have a material impact on the Company's financial statements. While this foreign subsidiary produced only nominal revenues and operating income over the last several years, it did generate a substantial cumulative foreign currency translation loss over the course of its existence. Upon the closure of this foreign subsidiary, the Company realized a permanent tax benefit of approximately $0.6 million, related to the cumulative foreign currency translation loss. Cash payments for income taxes were $6.7 million, $2.8 million and $20.0 million in 2000, 1999 and 1998, respectively. NOTE P - QUARTERLY RESULTS (UNAUDITED) Summarized results for each quarter in the fiscal years ended March 31, 2000 and 1999 are as follows (dollars in thousands, except per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------- 2000 ---- Net revenues $59,116 $70,110 $62,224 $70,372 Gross profit 25,833 31,755 26,164 29,923 Net income 1,380 4,252 2,814 1,495 Net income per share 0.10 0.30 0.20 0.11 1999 ---- Net revenues $55,994 $70,445 $66,584 $68,622 Gross profit 25,660 33,295 30,394 28,075 Net income (loss) 1,256 4,383 4,157 ( 941) Net income (loss) per share 0.08 0.29 0.28 ( 0.06)
NOTE Q - COMMITMENTS AND CONTINGENCIES The Company has commitments to provide advances to certain authors in connection with products being developed for the Company. These commitments totaled approximately $11.9 million at March 31, 2000. The timing of payments will be dependent upon the performance by the authors of conditions provided in the applicable contracts. It is anticipated that a substantial portion of the commitments will be completed within the next five years. The Company is subject to various other legal proceedings, claims and liabilities, which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. NOTE R - FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments as of March 31, 2000 is made in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information as of March 31, 2000 and 1999, respectively. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market transaction (in thousands):
2000 1999 ------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------------------------- CASH AND CASH EQUIVALENTS $ 814 $ 814 $ 609 $ 609 LONG-TERM DEBT: Credit Agreements $84,500 $84,500 $59,800 $59,800 Industrial Revenue Bonds 1,325 1,325 1,525 1,525 Capital Lease Obligations - - 80 80 Loan Agreement 1,000 1,000 1,667 1,667 Senior Notes 17,422 16,832 21,285 21,799
The carrying values of the cash and cash equivalents approximated the fair value based on the short-term nature of the investment instruments. The fair values of the Senior Notes are based on the quoted prices from financial institutions. The carrying value of the Company's Credit Agreements and Loan Agreement approximate the fair value. Due to the variable rate nature of the instruments, the interest rate paid by the Company approximates the current market rate demanded by investors; therefore, the instruments are valued at par. The carrying value of the Industrial Revenue Bonds and the Capital Lease Obligations approximates the fair value. Outstanding letters of credit totaled $2.0 million and $1.0 million as of March 31, 2000 and 1999, respectively. The letters of credit guarantee performance to third parties of various trade activities. Fair value estimated on the basis of fees paid to obtain the obligations is not material at March 31, 2000 and 1999. Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. NOTE S - OPERATING SEGMENTS The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," at March 31, 1999, which directs the way the Company reports information about its operating segments. The Company is organized and managed based upon its products. The Company has two reportable business segments, identified as publishing and gift. The publishing segment primarily creates and markets Bibles, inspirational books, videos and hosts inspirational seminars for women. The gift segment primarily designs and markets gift products, including stationery items, albums, journals, candles, etc. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column includes corporate related items not allocated to reportable segments (in thousands).
Publishing Gift(a) Other Total -------------------------------------------------- 2000 ---- Revenues $173,965 $87,857 $ -- $261,822 Operating income 20,253 414 -- 20,667 Identifiable assets 148,088 71,900 78,242 298,230 Capital expenditures 876 2,765 -- 3,641 Depreciation and amortization expense 3,329 3,962 -- 7,291 1999 ---- Revenues $168,325 $93,320 $ -- $261,645 Operating income 18,823 1,726 -- 20,549 Identifiable assets 126,620 66,986 61,724 255,330 Capital expenditures 2,139 2,034 -- 4,173 Depreciation and amortization expense 2,889 6,076 -- 8,965 1998 ---- Revenues $163,480 $89,478 $ -- $252,958 Operating income 19,732 5,048 -- 24,780 Identifiable assets 119,072 70,024 98,346 287,442 Capital expenditures 2,285 2,530 -- 4,815 Depreciation and amortization expense 2,964 5,613 -- 8,577 (a) For fiscal 1999, reflects pre-tax restructuring and other related charges of $4.7 million pertaining primarily to severance and reserves for inventory to be liquidated.
Additional information regarding the Company's revenue sources follow. No single customer accounted for as much as 10% of consolidated revenues in fiscal 2000, 1999 or 1998. Foreign revenues accounted for less than 10% of consolidated revenues in fiscal 2000, 1999 and 1998. Report of Independent Public Accountants To the Board of Directors of Thomas Nelson, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Thomas Nelson, Inc. (a Tennessee corporation) and Subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thomas Nelson, Inc. and Subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Nashville, Tennessee May 19, 2000 ------------------------------------------------------------------------------ Other Financial Information (Unaudited) The common stock and the Class B common stock are traded on the NYSE under the symbols "TNM" and "TNM.B," respectively. The following table sets forth, for the periods indicated, the high and low closing sales prices as reported on the NYSE composite tape:
Common Class B Stock Common Stock ------------------------------------ Dividends Paid High Low High Low Per Share ------------------------------------ Fiscal 2000 ----------- First Quarter $11.2500 $ 9.6875 $11.2500 $ 9.2500 $.04 Second Quarter 11.6250 9.6875 11.2500 9.7500 .04 Third Quarter 10.3750 8.3750 10.0000 9.0000 .04 Fourth Quarter 9.5000 7.5625 9.5625 8.2500 .04 ---- $.16 ==== Fiscal 1999 ----------- First Quarter $14.5000 $11.8750 $16.0000 $13.1875 $.04 Second Quarter 15.6875 11.5000 15.3750 12.5000 .04 Third Quarter 14.0000 12.0000 14.0000 12.1250 .04 Fourth Quarter 13.5000 10.0000 13.5000 9.2500 .04 ---- $.16 ====
As of June 19, 2000, there were 952 record holders of the common stock and 613 record holders of the Class B 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 existing at the time. Certain covenants of the Company's Credit Agreements and Senior Notes limit the amount of cash dividends payable based on the Company's cumulative consolidated net income. See Note J of Notes to Consolidated Financial Statements. On May 25, 2000, the Company declared a cash dividend of $0.04 per share on its common stock and Class B common stock to be paid on August 21, 2000 to shareholders of record on August 7, 2000.