10-Q 1 qdec2000.txt 10-Q FOR 12/31/2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-4095 THOMAS NELSON, INC. (Exact name of Registrant as specified in its charter) Tennesse 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 At February 12, 2001, the Registrant had outstanding 13,268,427 shares of Common Stock and 1,074,801 shares of Class B Common Stock. THOMAS NELSON, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, March 31, December 31, 2000 2000 1999 ------------ ------------ ------------ (Unaudited) (Unaudited) ASSETS Current assets Cash and cash equivalents $ 2,258 $ 803 $ 504 Accounts receivable, less allowances of $9,562, $7,171 and $9,586, respectively 79,586 78,132 75,746 Inventories 82,479 72,972 64,891 Prepaid expenses 15,962 13,532 12,809 Assets held for sale 17,283 22,168 - Refundable income taxes 881 - - Deferred tax assets 9,679 9,679 6,715 Net assets of discontinued operations - Ceres 2,299 10,248 9,327 ------------ ------------ ------------ Total current assets 210,427 207,534 169,992 Property, plant and equipment, net 16,707 16,023 24,033 Other assets 7,901 8,912 22,022 Deferred charges 552 959 1,545 Goodwill 64,032 63,555 54,361 ------------ ------------ ------------ TOTAL ASSETS $299,619 $296,983 $271,953 ============ ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 31,442 $ 26,786 $ 15,186 Accrued expenses 14,809 15,468 13,550 Deferred revenue 5,703 6,553 - Dividends payable 574 569 569 Income taxes currently payable - 3,851 1,043 Current portion of long-term debt & capital lease obligations 5,924 7,588 3,916 ------------ ------------ ------------ Total current liabilities 58,452 60,815 34,264 Long-term debt 107,646 100,354 100,917 Deferred tax liabilities 2,606 2,606 4,432 Other liabilities 1,250 1,476 1,521 Minority interest 149 - - 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 13,257,427, 13,144,776 and 13,141,476 shares, respectively 13,257 13,145 13,141 Class B common stock, $1.00 par value, authorized 5,000,000 shares; issued 1,085,801, 1,085,819 and 1,089,119 shares, respectively 1,086 1,086 1,089 Additional paid-in capital 43,844 43,126 43,126 Retained earnings 71,329 74,375 73,463 ------------ ------------ ------------ Total shareholders' equity 129,516 131,732 130,819 ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $299,619 $296,983 $271,953 ============ ============ ============ See Accompanying Notes
THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Nine Months Ended Three Months Ended December 31, December 31, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) NET REVENUES $221,677 $192,549 $ 72,719 $ 61,748 COSTS AND EXPENSES: Cost of goods sold 135,070 113,332 46,194 37,368 Selling, general and administrative 68,554 57,408 22,781 17,276 Depreciation and amortization 4,953 4,478 1,660 1,403 ---------- ---------- ---------- ---------- Total expenses 208,577 175,218 70,635 56,047 ---------- ---------- ---------- ---------- OPERATING INCOME 13,100 17,331 2,084 5,701 Other income (expense) (262) 263 29 (30) Interest expense 4,499 4,233 1,281 1,459 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes and minority interest 8,339 13,361 832 4,212 Provision for income taxes 2,978 4,877 304 1,537 Minority interest 149 - 30 - ---------- ---------- ---------- ---------- Income from continuing operations 5,212 8,484 498 2,675 Discontinued operations - Ceres: Operating income (loss), net of applicable tax provision (benefit) of ($766), ($21), ($255) and $80, respectively (1,332) (37) (444) 139 Loss on disposal, net of applicable tax benefit of $2,995 (5,210) - (5,210) - ---------- ---------- ---------- ---------- Total discontinued operations (6,542) (37) (5,654) 139 Net income (loss) $(1,330) $ 8,447 $(5,156) $ 2,814 ========== ========== ========== ========== Weighted average number of shares outstanding: Basic 14,284 14,245 14,343 14,225 ========== ========== ========== ========== Diluted 14,303 14,250 14,343 14,227 ========== ========== ========== ========== NET INCOME (LOSS) PER SHARE: Basic Income from continuing operations $ 0.36 $ 0.60 $ 0.03 $ 0.19 Income (loss) from discontinued operations $ (0.45) $ (0.01) $ (0.39) $ 0.01 ---------- ---------- ---------- ---------- Net income (loss) per share $ (0.09) $ 0.59 $ (0.36) $ 0.20 ========== ========== ========== ========== Diluted Income from continuing operations $ 0.36 $ 0.60 $ 0.03 $ 0.19 Income (loss) from discontinued operations $ (0.45) $ (0.01) $ (0.39) $ 0.01 ---------- ---------- ---------- ---------- Net income (loss) per share $ (0.09) $ 0.59 $ (0.36) $ 0.20 ========== ========== ========== ========== DIVIDENDS DECLARED PER SHARE $ 0.12 $ 0.12 $ 0.04 $ 0.04 ========== ========== ========== ========== See Accompanying Notes
THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine Months Ended December 31, ------------------------------ 2000 1999 -------------- -------------- (Unaudited) (Unaudited) CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Net income $ 5,212 $ 8,484 Adjustments to reconcile net income to net cash provided by (used in) operations: Minority interest 149 - Depreciation and amortization 4,953 4,478 Loss (gain) on sale of fixed assets & assets held for sale 198 - Changes in assets and liabilities, net of acquisitions and disposals: Accounts receivable, net (1,454) 3,140 Inventories (9,507) 3,896 Prepaid expenses (2,430) 281 Accounts payable and accrued expenses 3,997 (12,444) Deferred revenues 850 - Income taxes currently payable (1,800) (1,750) -------------- -------------- Net cash provided by (used in) continuing operations 168 6,085 -------------- -------------- Discontinued operations: Loss from discontinued operations (1,332) (37) Changes in discontinued assets (1,766) (454) -------------- -------------- Net cash provided by (used in) discontinued operations (3,098) (491) -------------- -------------- Net cash provided by (used in) operating activities (2,930) 5,594 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,185) (2,491) Proceeds from sales of fixed assets and assets held for sale 3,658 1,445 Purchase of net assets of acquired companies - net of cash received (760) (8,407) Changes in other assets and deferred charges 111 (13,557) -------------- -------------- Net cash provided by (used in) investing activities (176) (23,010) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings/payments under line of credit agreement 14,750 27,680 Payments under capital lease obligation - (16) Payments on long-term debt (9,137) (7,173) Dividends paid (1,713) (1,711) Proceeds from issuance of common stock 3 - Common stock repurchased and retired - (1,649) Other financing activities 658 180 -------------- -------------- Net cash provided by (used in) financing activities 4,561 17,311 -------------- -------------- Net increase (decrease) in cash and cash equivalents 1,455 (105) Cash and cash equivalents at beginning of period 803 609 -------------- -------------- Cash and cash equivalents at end of period $ 2,258 $ 504 ============== ============== Supplemental disclosures of non-cash investing and financing activities: Dividends accrued and unpaid $ 574 $ 569 Acquisition through shares issued (108,574 common shares) $ 760 $ -
THOMAS NELSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation The accompanying unaudited consolidated condensed financial statements reflect all adjustments (which are of a normal recurring nature) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to Securities and Exchange Commission rules and regulations. The statements should be read in conjunction with the Summary of Significant Accounting Policies and notes to the consolidated financial statements included in the Company's annual report for the year ended March 31, 2000. The consolidated balance sheet and related information in these notes as of March 31, 2000, have been taken from the audited consolidated financial statements as of that date. Certain reclassifications have been made to conform presentation of the fiscal 2000 financial statements with fiscal 2001 presentation. Note B - New Pronouncements 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 does not expect that it will have a material impact on the Company's financial statements. In September 2000, the Emerging Issue Task Force of the FASB issued Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 addresses the income statement classification of shipping and handling fees both billed and incurred by entities. The Company adopted EITF 00-10 effective October 1, 2000. This pronouncement had no impact on the Company's operating income, but did require reclassifications of freight expense from selling, general and administrative expenses to net revenues for amounts billed to customers and to cost of goods sold for the cost of freight. These reclassifications have been made for all periods presented. Note C - Inventories Components of inventories consisted of the following (in thousands):
December 31, March 31, December 31, 2000 2000 1999 ------------ ------------ ------------ Finished goods $73,784 $66,239 $58,635 Raw materials and work in process 8,695 6,733 6,256 ------------ ------------ ------------ $82,479 $72,972 $64,891 ============ ============ ============
Note D - Cash Dividend On May 25, 2000 the Company's board of directors declared a cash dividend of $.04 per share of Common and Class B Common Stock. The dividend was paid August 21, 2000, to shareholders of record on August 7, 2000. On August 18, 2000, the Company's board of directors declared a cash dividend of $.04 per share of Common and Class B Common Stock. The dividend was paid November 20, 2000 to shareholders of record on November 6, 2000. On November 16, 2000, the Company's board of directors declared a cash dividend of $.04 per share of Common and Class B Common Stock. The dividend is payable February 12, 2001 to shareholders of record on January 29, 2001. Note E - Operating Segments The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," at March 31, 1999, which changed 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, 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 and discontinued operations (in thousands).
For the Three Months Ended Publishing Gift Other Total -------------------------- ---------- ---------- --------- --------- December 31, 2000: Revenues $ 54,372 $ 18,347 $ - $ 72,719 Operating income: 5,098 (3,014) - 2,084 December 31, 1999: Revenues $ 45,706 $ 16,042 $ - $ 61,748 Operating income: 6,520 (819) - 5,701 For the Nine Months Ended Publishing Gift Other Total ------------------------- ---------- ---------- ---------- -------- December 31, 2000: Revenues $159,276 $ 62,401 $ - $221,677 Operating income: 16,785 (3,685) - 13,100 December 31, 1999: Revenues $129,885 $ 62,664 $ - $192,549 Operating income: 15,201 2,130 - 17,331 As of December 31, 2000: Identifiable assets $140,453 $ 69,232 $89,934 $299,619 As of December 31, 1999: Identifiable assets $124,748 $ 63,193 $84,012 $271,953
Note F - Discontinued Operations During December 2000, the Company decided to sell the Ceres Candle operation, a division of its Gift segment. This sale is expected to be completed by January 1, 2002. These operations have been accounted for as discontinued operations and accordingly, their assets, liabilities and results of operations are segregated in the accompanying consolidated statements of operations, balance sheets and statements of cash flows and have been reclassified for all periods presented. Revenues, as well as the losses from operations, net of income tax benefits associated with the discontinued operations, as well as the loss on disposal were as follows for the nine months ended December 31 (in thousands):
2000 1999 --------- --------- Net revenues $ 5,416 $ 6,141 --------- --------- Loss from operations before income tax benefit $(2,098) $ (58) Income tax benefit (766) (21) --------- --------- Loss from operations (1,332) (37) --------- --------- Loss on disposal before income tax benefit(F1) (8,205) - Income tax provision benefit (2,995) - --------- --------- Loss on disposal (5,210) - --------- --------- Total loss from discontinued operations $(6,542) $ (37) The loss on disposal consists of a write-down of assets to expected net realizable value of $7.2 million and an allowance of $1.0 million for estimated future operating losses.
Net assets from discontinued operations have been classified separately on the consolidated balance sheets. Summarized balance sheet data for the discontinued operations is as follows (in thousands):
December 31, March 31, December 31, 2000 2000 1999 ----------- ----------- ----------- Current assets $2,826 $ 2,889 $3,480 Property, plant and equipment, net 1,502 1,400 1,498 Other assets - 992 - Goodwill - 6,215 5,612 Total assets 4,328 11,496 10,590 Current liabilities 2,029 1,243 1,258 Other non-current liabilities - 5 5 ----------- ----------- ----------- Net assets $2,299 $10,248 $9,327 =========== =========== ===========
Note G - Depreciation and Amortization This caption on the accompanying consolidated statements of operations includes all depreciation and amortization, including that related to goodwill, intangible assets, deferred loan costs, and property, plant and equipment. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW -------- The following table sets forth for the periods indicated certain selected statements of operations data of the Company expressed as a percentage of net revenues and the percentage change in dollars in such data from the prior fiscal year.
Nine Months Ended Fiscal Year-to-Year December 31, Increase 2000 1999 (Decrease) ------ ------ ------------------- (%) (%) (%) Net revenues Publishing 71.9 67.5 22.6 Gift 28.1 32.5 (0.4) ------ ------ ------------------- Total net revenues 100.0 100.0 15.1 ------ ------ ------------------- Expenses Cost of goods sold 60.9 58.9 19.2 Selling, general and administrative 30.9 29.8 19.4 Depreciation and amortization 2.2 2.3 10.6 ------ ------ ------------------- Total expenses 94.0 91.0 19.0 ------ ------ ------------------- Operating income 6.0 9.0 (24.4) ------ ------ ------------------- Net income from continuing operations 2.4 4.4 (38.6) ------ ------ ------------------- Loss from discontinued operations, net of tax (3.0) (0.0) (100.0) ------- ------ ------------------ Net income (0.6) 4.4 (115.7) ======= ====== ==================
As a result of operating trends and the softness of the retail markets for the Company's Gift division, the Company determined during the third quarter of fiscal 2001 to discontinue the operations of the Ceres Candle division. Ceres designs and manufactures high quality candles, primarily under private labels for the specialty and department store markets. It was determined that the full integration of this newly acquired division was too much of a distraction from the current focus of improving the Gift division's long-term profitability. The Company continues to search for strategies to improve Gift operations and is implementing an immediate reduction in product offerings in an effort to improve long-term profitability. The Company is also reviewing other strategies that may enhance the value of the Gift operations. The Company's net revenues fluctuate seasonally, with net revenues in the first fiscal quarter historically being lower than those for the remainder of the year. This seasonality is the result of increased consumer purchases of the Company's products during the traditional holiday periods. In addition, the Company's quarterly operating results may fluctuate significantly due to the seasonality of new product introductions, the timing of selling and marketing expenses and changes in sales and product mixes. The following discussion includes certain forward-looking statements. Actual results could differ materially from those reflected by the forward-looking statements and a number of factors may affect future results, liquidity and capital resources. These factors include softness in the general retail environment, the timing of products being introduced into the market, the level of returns experienced by operating divisions, the level of margins achievable in the marketplace, the ability to minimize operating expenses and the ability of the Company to dispose of its Ceres operations and its other assets held for sale on favorable terms and in a timely manner. Future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its business strategy during the remainder of fiscal 2001. The Company disclaims any intent or obligation to update forward-looking statements. Results of Operations --------------------- Net revenues for the first nine months of fiscal 2001 increased $29.1 million, or 15.1%, and for the third quarter increased $11.0 million, or 17.8%, over the same periods in fiscal 2000. The Publishing product net revenues for the first nine months increased $29.2 million, or 22.6%, and for the third quarter increased $8.7 million, or 19.0%, compared to the prior year periods. The increase in Publishing net revenues for the third quarter and the nine months ended December 31, 2000 is primarily attributable to the acquisition of Women of Faith during the fourth quarter of fiscal 2000. Women of Faith contributed $4.7 million in revenues for the quarter and $20.3 million for the nine months ended December 31, 2000, which is in line with our expectations. The Publishing division also had a strong showing from the Bible and Reference divisions for the quarter and the fiscal year to date. This performance was led by our Extreme for JesusTM line. Net revenues for the Publishing division were also impacted the Company's more aggressive stance in selling excess inventory at or below cost. Net revenues from Gift products for the first nine months were essentially flat and for the third quarter increased $2.3 million, or 14.4%, compared to the prior year. The increase in net revenues for the quarter is a reflection of the Gift division regaining some of the shelf space lost during the previous year's restructuring issues. The Gift division introduced a very focused new line of journals and stationery products targeted at the mass market during the quarter, which positively impacted revenues for the quarter. The Gift division also was impacted by more aggressive sales of excess inventory at or below cost. Price increases did not have a material effect on net revenues. The Company's cost of goods sold, excluding depreciation and amortization, increased for the first nine months of fiscal 2001 by $21.7 million, or 19.2%, and for the third quarter by $8.8 million, or 23.6%, over the same periods in fiscal 2000 and, as a percentage of net revenues, increased to 60.9% for the first nine months of fiscal 2001 from 58.9%, and for the third quarter to 63.5% from 60.5%, in the comparable periods in fiscal 2000. The increase in cost of goods sold, as a percentage of net revenues, for both periods in fiscal 2001 resulted from several factors. First, the Company has been more aggressive in the current year in selling excess inventory at or below cost. This especially impacted the Gift division, as that division has reduced its product offerings by 35% in an effort to be more focused in its marketing and selling activities, as well as to reduce inventory levels. The reduction in Gift product offerings is expected to negatively impact the Company's margins into fiscal year 2002. The Gift division also incurred expenses related to providing free freight to customers in a promotional effort to regain shelf space that was lost due to the restructuring and product availability issues dating from the beginning of calendar year 2000. Further, during the current year, the Company's Publishing division experienced a product mix shift from higher margin book product to lower margin Bible product. Selling, general and administrative expenses, excluding depreciation and amortization, for the first nine months of fiscal 2001 increased by $11.1 million, or 19.4%, and for the third quarter increased $5.5 million, or 31.9%, from the same periods in fiscal 2000. These expenses, expressed as a percentage of net revenues, increased to 30.9% for the first nine months of fiscal 2001 from 29.8% and for the third quarter to 31.3% from 28.0% in the comparable periods in fiscal 2000. These increases for both periods were attributable to payroll related to integration of the prior year's acquisitions and additional warehousing costs related to restructuring the Gift division. This division is in the process of reducing product offerings in an effort to improve long-term profitability and reduce inventory levels, which is expected to reduce warehousing costs. Interest expense, attributable to continuing opertions, was relatively consistent for the first nine months and the third quarter of fiscal 2001 when compared to the same periods in fiscal 2000. Liquidity and Capital Resources ------------------------------- At December 31, 2000, the Company had approximately $2.3 million in cash and cash equivalents. The primary sources of liquidity to meet the Company's future obligations and working capital needs are cash generated from operations and borrowings available under bank credit facilities. At December 31, 2000, the Company had working capital of $152.0 million. Net cash provided by (used in) operating activities was ($2.9) million and $5.6 million for the first nine months of fiscal 2001 and 2000, respectively. Cash used in operations during the first nine months of fiscal 2001 was principally attributable to cash used by the Ceres candle operations and increases in inventory levels. During the first nine months of fiscal 2001, capital expenditures totaled approximately $3.2 million, primarily consisting of computer software and equipment. During the remainder of fiscal 2001, the Company anticipates capital expenditures of approximately $1.0 million, primarily consisting of computer and warehousing equipment. 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, LIBOR plus a percentage, subject to adjustment based on certain financial ratios, and matures on 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. At December 31, 2000, the Company had $95.2 million outstanding under the Credit Agreements, and $14.8 million available for borrowing. Due to the seasonality of the Company's business, borrowings under the Credit Agreements typically peak during the third quarter of the fiscal year. At December 31, 2000, the Company had outstanding approximately $14.4 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at rates from 6.68% to 8.35% due through fiscal 2006. Under the terms of the Credit Agreements and the 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 December 31, 2000, the Company was in compliance with all covenants of these debt agreements, as amended. Management believes cash generated by operations and borrowings available under the Credit Agreements will be sufficient to fund anticipated working capital requirements for existing operations through the remainder of fiscal 2001. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- There have been no material changes in the Company's investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Company's Annual Report on Form 10-K for the year ended March 31, 2000. PART II Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number ------- 11 - Statement re Computation of Per Share Earnings 27 - Financial Data Schedule (b) The Company filed a current report on Form 8-K on January 30, 2001 to announce its third quarter of fiscal year 2001 earnings release date and conference call. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Thomas Nelson, Inc. (Registrant) February 14, 2001 BY s / Joe L. Powers ------------------------ ----------------------- Joe L. Powers Executive Vice President (Principal Financial and Accounting Officer) INDEX TO EXHIBITS Exhibit Number ------- 11 -- Statement re computation of Per Share Earnings 27 -- Financial Data Schedule (for SEC purposes only)