10-Q 1 q1092002.txt FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] 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) Tennessee 62-0679364 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 501 Nelson Place, Nashville, Tennessee 37214-1000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (615) 889-9000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ] At November 13, 2002, the Registrant had outstanding 13,343,765 shares of Common Stock and 1,024,795 shares of Class B Common Stock. Thomas Nelson, Inc. and Subsidiaries Consolidated Balance Sheets (000's omitted, except per share data) (unaudited)
September 30, March 31, September 30, 2002 2001 2001 ------------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 363 $ 535 $ 33 Accounts receivable, less allowances of $7,425/$6,389/$6,133, respectively 55,700 61,600 60,103 Inventories 41,236 39,195 48,893 Prepaid expenses 15,597 17,571 17,922 Assets held for sale 2,500 2,500 2,500 Refundable income taxes 7,266 7,800 6,023 Deferred income tax benefits 7,966 7,966 12,876 Net assets of discontinued operations - - 30,259 ------------- ------------- ------------- Total current assets 130,628 137,167 178,609 Property, Plant and Equipment, net 9,582 9,242 11,887 Other Assets 7,845 7,541 5,901 Deferred Charges 1,992 2,135 1,518 Goodwill 29,304 29,304 29,304 ------------- ------------- ------------- Total Assets $179,351 $185,389 $227,219 ============= ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 23,772 $ 22,258 $ 23,855 Accrued expenses 13,067 15,603 23,097 Deferred revenue 8,981 11,222 10,378 Income taxes currently payable 1,825 500 - Current portion of long-term debt 3,322 3,322 4,845 ------------- ------------- ------------- Total current liabilities 50,967 52,905 62,175 Long term debt 44,641 53,052 87,145 Deferred income taxes 792 792 1,866 Other liabilities 898 1,064 1,185 Minority interest 38 - 56 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 13,343,765, 13,329,759 and 13,285,827 shares, respectively 13,344 13,330 13,286 Class B stock, $1.00 par value, authorized 5,000,000 shares; issued 1,024,795, 1,036,801 and 1,057,401 shares, respectively 1,025 1,037 1,057 Additional paid-in capital 44,023 44,008 43,844 Retained earnings 23,623 19,201 16,605 ------------- ------------- ------------- Total shareholders' equity 82,015 77,576 74,792 ------------- ------------- ------------- Total Liabilities and Shareholders' Equity $179,351 $185,389 $227,219 ============= ============= =============
Thomas Nelson, Inc. and Subsidiaries Consolidated Statements of Operations (000's omitted, except per share data) (unaudited)
Three Months Ended Six Months Ended September 30, September 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net revenues $ 62,074 $ 58,710 $103,243 $104,124 Costs and expenses: Cost of goods sold 37,656 35,540 62,594 62,926 Selling, general and administrative 16,795 15,942 30,988 31,753 Depreciation and amortization 588 662 1,123 1,270 -------- -------- -------- -------- Total expenses 55,039 52,144 94,705 95,949 -------- -------- -------- -------- Operating income 7,035 6,566 8,538 8,175 Other expense 18 - 27 - Interest expense 536 1,290 1,488 2,049 -------- -------- -------- -------- Income from continuing operations before income taxes 6,481 5,276 7,023 6,126 Provision for income taxes 2,365 1,926 2,563 2,236 Minority interest 16 56 38 56 -------- -------- -------- -------- Income from continuing operations 4,100 3,294 4,422 3,834 Discontinued operations: Operating loss, net of applicable taxes - (532) - (766) Loss on disposal, net of applicable taxes - (14,707) - (14,707) -------- -------- -------- -------- Total loss from discontinued operations - (15,239) - (15,473) Cumulative effect of change in accounting principle - (40,433) - (40,433) -------- -------- -------- -------- Net income $ 4,100 $(52,378) $ 4,422 $(52,072) ======== ======== ======== ======== Weighted average number of shares Basic 14,369 14,343 14,368 14,343 ======== ======== ======== ======== Diluted 14,649 14,373 14,665 14,373 ======== ======== ======== ======== Net income (loss) per share, Basic: Income from continuing operations $ 0.29 $ 0.23 $ 0.31 $ 0.27 Loss from discontinued operations - (1.06) - (1.08) Cumulative effect of change in accounting principle - (2.82) - (2.82) -------- -------- -------- -------- Net income (loss) per share $ 0.29 $(3.65) $ 0.31 $(3.63) ======== ======== ======== ======== Net income (loss) per share, Diluted: Income from continuing operations $ 0.28 $ 0.23 $ 0.30 $ 0.27 Loss from discontinued operations - (1.06) - (1.08) Cumulative effect of change in accounting principle - (2.81) - (2.81) -------- -------- -------- -------- Net income (loss) per share $ 0.28 $(3.64) $ 0.30 $(3.62) ======== ======== ======== ========
Thomas Nelson, Inc. and Subsidiaries Statement of Cash Flows (000's omitted) (unaudited)
Six Months Ended September 30, 2002 2001 --------- --------- Cash Flows From Operating Activities: Net income from continuing operations $ 4,422 $ 3,834 Adjustments to reconcile income to net cash provided by (used in) operations: Minority interest 38 56 Depreciation and amortization 1,416 1,405 Loss on sale of fixed assets 141 19 Changes in assets and liabilities: Accounts receivable, net 5,900 (2,254) Inventories (2,041) 2,515 Prepaid expenses 1,974 (3,231) Accounts payable and accrued expenses 1,675 7,014 Deferred revenues (2,241) (1,294) Deferred income taxes - 634 Income taxes currently payable 1,325 1,004 Change in other assets and liabilities and deferred charges (611) 511 --------- --------- Net cash provided by continuing operations 11,998 10,213 --------- --------- Discontinued Operations Loss from discontinued operations - (766) Loss on disposal - (14,707) Change in discontinued net assets (2,163) 18,459 --------- --------- Net cash provided by (used in) discontinued operations (2,163) 2,986 --------- --------- Net cash provided by operating activities 9,835 13,199 --------- --------- Cash Flows From Investing Activities: Property plant and equipment expenditures (1,582) (834) Proceeds from sale of fixed assets and assets held for sale 24 7,235 --------- --------- Net cash provided by (used in) investing activities (1,558) 6,401 --------- --------- Cash Flows From Financing Activities: Payments under credit agreement, net (6,543) (6,764) Payments on long-term debt (1,868) (13,046) Dividends paid - (1,148) Proceeds from issuance of common stock 13 - Other financing activities (51) (743) --------- --------- Net cash used in financing activities (8,449) (21,701) --------- --------- Net decrease in cash and cash equivalents (172) (2,101) --------- --------- Cash and cash equivalents at beginning of period 535 2,134 --------- --------- Cash and cash equivalents at end of period $ 363 $ 33 ========= ========= Supplemental cash flow information: Interest paid, net $ 1,484 $ 4,000 Income taxes paid (received), net $ 3,242 $ 5,498
THOMAS NELSON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED 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, 2002. The consolidated balance sheet and related information in these notes as of March 31, 2002 have been derived from the audited consolidated financial statements as of that date. Certain reclassifications of prior period amounts have been made to conform to the current year's presentation. Note B - New Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations" and requires all business combinations to be accounted for using the purchase method of accounting. In addition, SFAS 141 requires that identifiable intangible assets be recognized apart from goodwill based on meeting certain criteria. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets" and addresses how intangible assets and goodwill should be accounted for at and subsequent to their acquisition. SFAS No. 142 requires that goodwill will no longer be amortized, but tested for impairment by comparing net book carrying values to fair market values upon adoption and periodically thereafter. The Company decided to early adopt the provisions of SFAS No. 142 effective April 1, 2001. The Company completed its measurement of this potential impairment loss during fiscal 2002. The transition impairment loss relating to the goodwill and other net assets of the gift segment was $40.4 million. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and provide a single accounting model for long-lived assets to be disposed of. The Company adopted the Statement effective April 1, 2002. Such adoption did not have a material impact on the Company's financial condition or results of operations. During July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3. The new standard is effective for exit or restructuring activities initiated after December 31, 2002, although earlier application is encouraged. Note C - Inventories Components of inventories consisted of the following (in thousands):
September 30, March 31, September 30, 2002 2002 2001 ------------- ------------- ------------- Finished goods $39,535 $36,736 $43,276 Raw materials and work in process 1,701 2,459 5,617 ------------- ------------- ------------- $41,236 $39,195 $48,893 ============= ============= =============
Note D - Cash Dividend On August 24, 2001, the Company's board of directors determined that it was in the best interest of the Company to use cash for current working capital needs that had previously been used to pay dividends. The board of directors will review the Company's dividend policy from time to time in the future. Note E - Operating Segments In accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," the Company reports information about its operating segments. The Company is organized and managed based upon its products and services. Subsequent to the sale of the Company's gift division during fiscal 2002, the Company has reassessed its segment reporting and has identified two reportable business segments: publishing and conferences. The publishing segment primarily creates and markets Bibles, inspirational books and videos. The conference segment hosts inspirational and motivational conferences across North America. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column consists of items related to discontinued operations (in thousands).
For the Six Months Ended Publishing Conferences Other Total ======================== ========== =========== ======== ======== September 30, 2002: ------------------- Net Revenues $ 84,321 $18,922 - $103,243 Operating Income 5,261 3,277 - 8,538 September 30, 2001: ------------------ Net Revenues $ 87,146 $16,978 - $104,124 Operating Income 7,292 883 - 8,175 For the Three Months Ended ========================== September 30, 2002: ------------------- Net Revenues $ 50,017 $12,057 - $ 62,074 Operating Income 4,785 2,250 - 7,035 September 30, 2001: ------------------- Net Revenues $ 48,376 $10,334 - $ 58,710 Operating Income 5,648 918 - 6,566 Fiscal Year Ended March 31, 2002: ================================= Net Revenues $187,859 $27,693 - $215,552 Operating Income 15,252 936 - 16,188 As of September 30, 2002: ------------------------- Identifiable Assets $145,787 $21,798 $11,766 $179,351 As of September 30, 2001: ------------------------- Identifiable Assets $165,655 $20,782 $40,782 $227,219 As of March 31, 2002: --------------------- Identifiable Assets $149,825 $23,264 $12,300 $185,389
Note F - Discontinued Operations On October 11, 2001, the Company announced that it had entered into a definitive agreement by which the Company would sell and CRG Acquisition Corp. ("CRG") would purchase the Company's gift business, including substantially all of the assets of the Company's wholly-owned subsidiary, The C.R. Gibson Company "Gibson"). The purchase was consummated on November 7, 2001 by CRG with an effective date of October 31, 2001 at a purchase price of $30.5 million plus the assumption of certain liabilities. This sale resulted in a loss on disposal of $15.3 million. The Company also recognized a $40.4 million cumulative effect of a change in accounting principle charge to write-off goodwill associated with Gibson. The Company utilized the net proceeds from the sale to pay down existing debt. The financial statements reflect the gift business segment as discontinued operations for all periods presented. During December 2000, the Company determined it would dispose of its Ceres candles operation, formerly a division of its gift business segment. The sale was completed in August 2001 for approximately $1.5 million. This sale resulted in a loss on disposal of $0.5 million in fiscal 2002 and $7.3 million in fiscal 2001. Effective April 1, 2001, Remuda Ranch Center for Anorexia and Bulimia, Inc., ("Remuda Ranch") which operates therapeutic centers in Arizona for women with eating disorders, was reflected as a discontinued operation. For periods prior to April 1, 2001, Remuda Ranch net assets are reflected as assets held for sale in accordance with Emerging Issues Task Force Issue No. 87-11, "Allocation of Purchase Price to Assets to be Sold." Remuda Ranch was a wholly owned subsidiary of New Life Treatment Center, Inc., acquired during fiscal 2000, and was considered as an asset held for sale from the acquisition date through March 31, 2001. The Company closed the sale of the Remuda Ranch assets in July 2001 for approximately $7.2 million in cash and a $2 million note receivable. This sale resulted in a loss on disposal of $0.3 million during fiscal 2002. Note G - Depreciation and Amortization This caption on the accompanying consolidated statements of operations includes all depreciation and amortization related to publishing rights and property, plant and equipment. Note H - Debt The Company's bank credit facility consists of a $65 million Senior Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit Facility bears interest at either the lenders' base rate or, at the Company's option, the LIBOR plus a percentage, based on certain financial ratios. The Credit Facility has a term of three years and matures on June 28, 2005. At September 30, 2002, the Company had outstanding borrowings of $37.6 million under the Credit Agreement and had $27.4 million available for borrowing. Due to the seasonality of the Company's business, borrowings under the Credit Agreement will typically peak during the third quarter of the fiscal year. At September 30, 2002, the Company had outstanding approximately $9.5 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at rates from 6.68% to 8.31% due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth, which are similarly calculated for each debt agreement. At September 30, 2002, the Company was in compliance with all covenants of these debt agreements. Note I - Royalty Advances At September 30, 2002, March 31, 2002 and September 30, 2001, prepaid expenses include $10.7 million, $12.1 million and $11.4 million, respectively, of royalty advances for products that have released to the market or are expected to release within the next twelve months. At September 30, 2002, March 31, 2002 and September 30, 2001, other assets include $2.8 million, $3.1 million and $1.9 million, respectively, for royalty advances for products not expected to release to the market within the next twelve months. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------------------------- NOTE ON FORWARD-LOOKING STATEMENTS The following discussion includes certain forward-looking statements. Actual results could differ materially from those in the forward-looking statements, and a number of factors may affect future results, liquidity and capital resources. These factors include, but are not limited to, softness in the general retail environment, the timing of products being introduced to the market, the level of product returns experienced, the level of margins achievable in the marketplace, the collectibility of accounts receivable, recoupment of royalty advances, effects of acquisitions or dispositions, financial condition of our customers and suppliers, realization of inventory values at carrying amounts, access to capital and realization of income tax and intangible assets. Future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its business strategy. The Company disclaims any intent or obligation to update forward-looking statements. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. These policies are common with industry practice and are applied consistently from period to period. Revenue Recognition: The Company has four primary revenue sources: sales of publishing product, attendance fees and product sales from its conferences, royalty income from licensing copyrighted material to third parties and billed freight. Revenue from the sale of publishing product is recognized upon shipment to the customer. A reserve for sales returns is recorded where return privileges exist. The returns reserve is determined by using a 12-month rolling average return rate, multiplied by gross sales occurring over the previous four-month period by sales channel. Historical experience reflects that product is generally returned from and credited to customers' accounts within the first 120 days of the original sale. The Company's current analysis indicates that its experience changed during fiscal 2002 from 90 days to 120 days. The full amount of the returns reserve, net of inventory and royalty costs (based on current gross margin rates), is shown as a reduction of accounts receivable in the accompanying consolidated financial statements. Returns of publishing products from customers are accepted in accordance with standard industry practice. Generally, products that are designated as out-of-print are not returnable 180 days after notice of out-of- print status is given to the customer. Also, certain sales are not returnable. Revenue from conferences is recognized as the conferences take place. Cash received in advance of conferences is included in the accompanying financial statements as deferred revenue. Royalty income from licensing the Company's publishing rights is recorded as revenue when earned under the terms of the applicable license, net of amounts due to authors. Billed freight consists of shipping and handling charges billed to customers and is recorded as revenue upon shipment of product. Allowance for Doubtful Accounts: The Company records an estimated reserve for bad debts as a reduction to accounts receivable in the accompanying consolidated financial statements. The reserve for bad debts has two components: an unallocated reserve and a specific reserve. The unallocated reserve is calculated using a 10-year rolling bad debt history applied to the accounts receivable balance, less specific reserves. The Company's credit department management identifies specific reserves for each customer which we deem to be a collection risk or files for bankruptcy protection. Inventories: Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method. The FIFO method of accounting for inventory was selected to value our inventory at the lower of market or current cost because the Company continuously introduces new products, eliminates existing products and redesigns products. Therefore, inflation does not have a material effect on the valuation of inventory. Costs of producing publishing products are included in inventory and charged to operations when product is sold or otherwise disposed. These costs include paper, printing, binding, outside editorial, international freight and duty costs, when applicable. The Company policy is to expense all internal editorial, typesetting, production, warehousing and domestic freight-in costs as incurred, except for certain indexing, stickering and assembly costs, which are capitalized into inventory. Costs of abandoned publishing projects are charged to operations when identified. The Company also maintains a reserve for excess and obsolete inventory as a reduction to inventory in the accompanying consolidated financial statements. This reserve is based on historical liquidation recovery rates applied to inventory quantities identified in excess of a twenty-four month supply on hand for each category of product. Royalty Advances/Pre-Production Costs: Royalty advances are typically paid to authors at contract execution, as is standard in the publishing industry. These advances are either recorded as prepaid assets or other (long-term) assets in the accompanying consolidated financial statements, depending on the expected publication date (availability for shipment) of the product. Author advances for trade books are generally amortized over five months beginning when the product is first sold into the market. The Company's historical experience is that typically 80% of book product sales occur within the first five months after release into the market. Reference and video royalty advances are generally amortized over a twelve-month period beginning with the first sale date of the product, as these products typically have a longer sales cycle than books. Royalty advances for significant new Bible products are amortized on a straight-line basis for a period not to exceed five years (as determined by management). When royalty advances are earned through product sales at a faster pace than the amortization period, the amortization expense is accelerated to match the royalty earnings. Outstanding advances are reviewed monthly for abandoned projects or titles that appear to have unrecoverable advances. All abandoned projects and advances that management does not expect to fully recover are charged to operations when identified. For authors with multiple book/product contracts, the advance is amortized over a period that encompasses the publication of all products, generally not to exceed 24 months or the actual recovery period, whichever is shorter. Advances to our most important authors are typically expensed as they are recovered through sales. These authors generally have multiple year and multiple book contracts, as well as strong sales history of backlist titles (products published during preceding fiscal years and prior) that can be used to recover advances over long periods of time. Many Bible, reference and video products require significant development costs prior to the actual printing or production of the saleable product. These products also typically have a longer life cycle. All video pre- production costs are amortized over 12 months on a straight-line basis. Bible and reference products typically have the longest life cycle. Pre-production costs for significant Bible and reference products are recorded as other assets in the accompanying consolidated financial statements and are amortized on a straight-line basis, for a period not to exceed five years (as determined by management). Goodwill and Intangible Assets: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized, but tested for impairment by comparing net book carrying values to fair market values upon adoption and periodically thereafter. The Company has adopted the provisions of SFAS No. 142 as of April 1, 2001. The election of SFAS No. 142 resulted in a $40.4 million cumulative effect of a change in accounting principle charge to write-off goodwill associated with the Company's gift division, which was discontinued and sold during fiscal 2002. In accordance with SFAS No. 142, goodwill was tested for impairment by the Company's reporting units: Publishing, Conferences and Gift. The fair value for the assets of the Publishing and Conferences reporting units was evaluated using discounted expected cash flows and current market multiples, and it was determined that no impairment existed during fiscal 2002. The fair value of the Gift assets was determined by the actual sales price for that division. Goodwill will be tested for impairment annually during the fourth quarter. 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.
Six Months Ended Fiscal Year-to-Year September 30, Increase 2002 2001 (Decrease) ------ ------ ------------------- (%) (%) (%) Net revenues 100.0 100.0 (0.8) Expenses Cost of goods sold 60.6 60.4 (0.5) Selling, general and administrative 30.0 30.5 (2.4) Depreciation and amortization 1.1 1.2 (11.6) ------ ------ ------------------- Total expenses 91.7 92.1 (1.3) ------ ------ ------------------- Operating income 8.3 7.9 4.4 ------ ------ ------------------- Net income from continuing operations 4.3 3.7 15.3 ------ ------ ------------------- Loss from discontinued operations, net of tax - (0.7) n/a Loss on disposal, net of tax - (14.1) n/a Cumulative change in accounting principle - (38.8) n/a ====== ====== =================== Net income 4.3 (50.0) n/a ====== ====== ===================
The Company's net revenues fluctuate seasonally, with net revenues in the first fiscal quarter historically being lower than those for the remainder of the year. This seasonality is the result of increased consumer purchases of the Company's products during the traditional holiday periods. In addition, the Company's quarterly operating results may fluctuate significantly due to the seasonality of new product introductions, the timing of selling and marketing expenses and changes in sales and product mixes. Results of Operations --------------------- Consolidated Results - Second Quarter of Fiscal 2003 Compared with Second Quarter of Fiscal 2002 ---------------------------------------------------- Net revenues for the three months ended September 30, 2002 increased $3.4 million, or 6% over the same period in fiscal 2002. Net revenues from publishing products increased $1.6 million or 3%, primarily due to the timing of new product releases. Net revenues from conferences increased $1.7 million or 17%, primarily due to the timing of conference events. Price increases did not have a material effect on net revenues during the period. The Company's cost of goods sold increased for the three months ended September 30, 2002 by $2.1 million, or 6% from the same period in fiscal 2002 and, as a percentage of net revenues, remained essentially unchanged at 61%. A slight decline in publishing segment gross margins, due to a higher level of royalty advance write-offs and free freight given to customers, was offset by improved gross margins in the conference segment, due to improved attendance at the events in this year's period, compared to the prior year events. Selling, general and administrative expenses, excluding depreciation and amortization, for the three months ended September 30, 2002 increased $0.9 million, or 5%, from the same period in fiscal 2002. These expenses, expressed as a percentage of net revenues, remained essentially unchanged at 27%. Increased expenditures in advertising for publishing products and general overhead were offset by overhead reductions in the conference segment operations. The increased spending in advertising for publishing products is due to the soft market conditions and timing of new releases. The Company has streamlined the conference segment operations and consolidated some of its "back-office" functions with those of the publishing segment. These actions are expected to continue to produce net savings for future periods. Depreciation and amortization for the three months ended September 30, 2002 decreased $0.1 million from the same period in fiscal 2002, primarily due to lower levels of fixed assets. Interest expense for the three months ended September 30, 2002 was $0.5 million, a decrease of $0.8 million from the same period in the prior fiscal year. This reduction is a result of debt reduction and improved interest rates. The provision for income taxes remains consistent with the prior year at an effective rate of 36.5%. The net loss from discontinued operations for the three months ended September 30, 2001 was related to the decision to sell the Company's gift division, along with the sale of the net assets of Remuda Ranch and Ceres Candles. The Company also recognized a $40.4 million cumulative effect of a change in accounting principle charge to write-off goodwill associated with the gift division. Consolidated Results - First Six Months of Fiscal 2003 Compared with First Six Months of Fiscal 2002 ------------------------------------------------------ Net revenues for the first six months of fiscal 2003 decreased $0.9 million, less than 1%, from the same period in fiscal 2002. Publishing product net revenues decreased $2.8 million, or 3%, primarily due to timing of new releases and the fact that we believe that our primary markets are flat to down over the previous year. Net revenues from conferences increased $1.9 million, or 11%, primarily due to the timing of conference events. Price increases did not have a material effect on net revenues during the period. The Company's cost of goods sold decreased $0.3 million, less than 1%, over the same period in fiscal 2002 and, as a percentage of net revenues, remained essentially unchanged. A slight decline in publishing segment gross margins, due to a higher level of royalty advance write-offs and free freight given to customers, was offset by improved gross margins in the conference segment, due to improved attendance at the events in this year's period, compared to the prior year events. Selling, general and administrative expenses, excluding depreciation and amortization, for the six months ended September 30, 2002 decreased by $0.8 million, or 2% from the same period in the prior fiscal year. These expenses, expressed as a percentage of net revenues, remained essentially the same. Increased expenditures in advertising for publishing products and general overhead were offset by overhead reductions in the conference segment operations. The increased spending in advertising for publishing products is due to the soft market conditions and timing of new releases. The Company has streamlined the conference segment operations and consolidated some of its "back-office" functions with those of the publishing segment. These actions are expected to continue to produce net savings for future periods. Depreciation and amortization for fiscal 2003 decreased $0.1 million from fiscal 2002, primarily due to lower levels of fixed assets. Interest expense for fiscal 2003 decreased $0.6 million from fiscal 2002 due to lower debt levels and lower interest rates. The provision for income taxes remains consistent with the prior year at an effective rate of 36.5%. The net loss from discontinued operations for the six months ended September 30, 2001 was related to the decision to sell the Company's gift division, along with the sale of the net assets of Remuda Ranch and Ceres Candles. The Company also recognized a $40.4 million cumulative effect of a change in accounting principle charge to write-off goodwill associated with the gift division. Liquidity and Capital Resources ------------------------------- At September 30, 2002, the Company had approximately $0.4 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, an expected tax refund and borrowings available under bank credit facilities. At September 30, 2002, the Company had working capital of $79.7 million. Net cash provided by continuing operations was $12.0 million for the six months ended September 30, 2002 and $10.2 million for the same period last year. Cash provided by continuing operations during the six months ended September 30, 2002 was principally attributable to income from continuing operations and collections of accounts receivable, partially offset by increases in inventories. Fiscal year-to-date, capital expenditures have totaled approximately $1.6 million, primarily consisting of warehousing, building improvements and computer software and equipment. During the remainder of fiscal 2003, the Company anticipates capital expenditures of approximately $3.3 million, primarily consisting of warehousing, building improvements and computer software and equipment. The Company is also obligated to pay $2.5 million to repurchase its former Beacon Falls Distribution Center under the terms of a "put option" from the Asset Purchase Agreement between CRG Acquisition Corp. and Thomas Nelson for the sale of C.R. Gibson. The Company has engaged the services of a commercial real estate broker to list the property for sale. The Company's bank credit facility consists of a $65 million Senior Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit Facility bears interest at either the lenders' base rate or, at the Company's option, the LIBOR plus a percentage, based on certain financial ratios. The Credit Facility has a term of three years and matures on June 28, 2005. At September 30, 2002, the Company borrowed $37.6 million under the Credit Agreement and had $27.4 million available for borrowing. Due to the seasonality of the Company's business, borrowings under the Credit Agreement have historically peaked during the third quarter of the fiscal year. At September 30, 2002, the Company had outstanding approximately $9.5 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at rates from 6.68% to 8.31% due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth. At September 30, 2002, the Company was in compliance with all covenants of these debt agreements. Management believes cash generated by operations, an expected tax refund and borrowings available under the Credit Facilities will be sufficient to fund anticipated working capital requirements for existing operations through the remainder of fiscal 2003. The Company's current cash commitments include current maturities of debt and operating lease obligations that are disclosed in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 2002, as well as the $2.5 million purchase of the Beacon Falls Distribution Center. The Company also has current inventory purchase and royalty advance commitments in the ordinary course of business that require cash payments as vendors and authors fulfill their requirements to the Company in the form of delivering satisfactory product orders and manuscripts, respectively. The Company has no off-balance sheet commitments or transactions with any special purpose entities (SPE's). Management also is not aware of any undisclosed material related party transactions or relationships with management, officers or directors. Item 3. 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 as of and for the year ended March 31, 2002. Item 4. Controls and Procedures The Chief Executive Officer and Chief financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to the Exchange Act Rule 13A-14, as of November 13, 2002. Based on that evaluation, the chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that matieral information required to be filed in this quartelry report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief Executive OFficer and Chief Financial Officer completed their evaluation. PART II Item 2. Changes in Securities and Use of Proceeds. The Company's new Credit Facility contains restrictions on its ability to pay cash dividends to shareholders, based on a percentage of the Company's net income. Item 4. Submission of Matters to a Vote of Security Holders. The Company held its Annual Meeting of Stockholders on August 22, 2002 (the "Annual Meeting"). At the Annual Meeting, the stockholders of the Company voted to elect three Class Three directors, Jesse T. Correll, Brownlee O. Currey, Jr. and W. Lipscomb Davis, Jr., for three-year terms and until their successors are duly elected and qualified. The following table sets forth the number of votes cast for, withheld/abstained and against with respect to each of the nominees:
Withheld/ Nominee For Abstained Against -------------------------- ---------- --------- -------- Jesse T. Correll 16,202,905 60,000 3,950 Brownlee O. Currey, Jr. 16,197,311 65,227 4,317 W. Lipscomb Davis, Jr. 16,194,960 67,945 3,950
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 99.1 - Certification of President and Chief Executive Officer relating to Form 10-Q for period ending September 30, 2002 99.2 - Certification of Chief Financial Officer relating to Form 10-Q for period ending September 30, 2002 (b) Reports on Form 8-K The Company filed a current report on Form 8-K on August 9, 2002, as amended by Form 8-K/A on August 13, 2002, to announce its change in independent accountants and to announce the date and times of its earnings release and conference call for the first quarter of FY2003. The Company filed a current report on Form 8-K on August 14, 2002, in which the certifications of the Company's Chief Executive Officer and Chief Financial Officer were filed, relating to Form 10-Q for the period ended June 30, 2002, as required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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) November 14, 2002 BY /s/ Joe L. Powers ------------------- --------------------- Joe L. Powers Executive Vice President (Principal Financial and Accounting Officer) CERTIFICATIONS I, Sam Moore, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Thomas Nelson, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Sam Moore --------------------------- Sam Moore Chairman, Chief Executive Officer and President CERTIFICATIONS I, Joe L. Powers, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Thomas Nelson, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Joe L. Powers --------------------------- Joe L. Powers Executive Vice President and Secretary INDEX TO EXHIBITS Exhibit Number ------- 11 -- Statement re Computation of Per Share Earnings 99.1 -- Certification of President and Chief Executive Officer relating to Form 10-Q for period ending September 30, 2002 99.2 -- Certification of Chief Financial Officer relating to Form 10-Q for period ending September 30, 2002