10-Q 1 dec2003q.txt FORM 10-Q FOR PERIOD ENDED 12/31/2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13788 THOMAS NELSON, INC. (Exact name of Registrant as specified in its charter) Tennessee 62-0679364 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number 501 Nelson Place, Nashville, Tennessee 37214-1000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (615) 889-9000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes [X] No [ ] At February 13, 2004, the Registrant had outstanding 13,453,425 shares of Common Stock and 983,595 shares of Class B Common Stock. Thomas Nelson, Inc. and Subsidiaries Consolidated Balance Sheets (000's omitted, except per share data) (unaudited)

Thomas Nelson, Inc. and Subsidiaries Consolidated Statements of Income (000's omitted, except per share data) (unaudited)

Thomas Nelson, Inc. and Subsidiaries Statement of Cash Flows (000's omitted) (unaudited)

THOMAS NELSON, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to Securities and Exchange Commission rules and regulations. The statements should be read in conjunction with the Summary of Significant Accounting Policies and notes to the consolidated financial statements included in the Company's annual report for the year ended March 31, 2003. The condensed consolidated balance sheets and related information in these notes as of March 31, 2003 have been derived from the audited consolidated financial statements as of that date. Certain reclassifications of prior period amounts have been made to conform to the current year's presentation. Total comprehensive income and net income are the same for all periods presented. Note B - Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equities." SFAS No. 150 requires issuers to classify as liabilities (or assets, in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements. Note C - Stock-Based Compensation The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25," issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

June 11, 2003, the Company issued 604,000 options to purchase shares. Three hundred four thousand options for shares of Common Stock were granted under the 1992 Employee Stock Incentive Plan with an exercise price of $12.07, the closing market price that day. Three hundred thousand options were granted under the 2003 Stock Incentive Plan, exercisable for either shares of Common or Class B Common Stock. The exercise price of this grant is $12.33, representing the fair value of Class B Common Stock on the grant date. Vesting under both plans are at a rate of 33-1/3% on the first through third anniversaries of the grant date, subject to certain performance goals, and vest in full if the employee is employed on the third anniversary of the grant, regardless of whether such goals are met. The fair value of each option on its date of grant has been estimated for pro forma purposes using the Black-Scholes option pricing model using the following weighted average assumptions:

Note D - Inventories Components of inventories consisted of the following (in thousands):

Note E - Operating Segments The Company is organized and managed based upon its products and services. The Company has identified two reportable business segments: publishing and conferences. The publishing segment primarily creates and markets Bibles, inspirational books and videos. The conference segment hosts inspirational and motivational conferences across North America. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column consists of items related to discontinued operations (in thousands).

Note F - Other Liabilities Other liabilities at December 31, 2003 include a liability which resulted from an income tax refund of $18.7 million received in April 2003. This tax refund was related to the disposal of the Company's C.R. Gibson gift division and was used to pay down existing debt. Further, the Company has reduced its current year income tax payments by approximately $2.2 million related to additional tax credits generated by the tax loss realized on the disposal of C.R. Gibson. Until such time that the Company can conclude that the position taken on its income tax returns will ultimately be sustained by the taxing authorities, the refund and the tax credits will be recorded as a non-current tax liability. If the Company's position is sustained, the Company will recognize the refund and the tax credits as income from discontinued operations. Note G - Debt The Company's bank credit facility consists of a $65 million Senior Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit Facility bears interest at either the lenders' base rate or, at the Company's option, the LIBOR plus a percentage, based on certain financial ratios. The Credit Facility has a term of three years and matures on June 28, 2005. At December 31, 2003, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2003, the Company had outstanding approximately $5.3 million in unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at rates from 6.68% to 8.31% due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth, which are similarly calculated for each debt agreement. At December 31, 2003, the Company was in compliance with all covenants of these debt agreements. Note H - Royalty Advances At December 31, 2003, March 31, 2003 and December 31, 2002, prepaid expenses include $9.1 million, $8.4 million and $9.2 million, respectively, of royalty advances for products that have been released to the market or are expected to be released within the next twelve months. At December 31, 2003, March 31, 2003 and December 31, 2002, other assets include $2.3 million, $2.9 million and $3.5 million, respectively, for royalty advances for products not expected to be released to the market within the next twelve months. Note I - Acquisitions On September 19, 2003, the Company purchased substantially all of the assets of World Bible Publishers ("World") from RiversideWorld, Inc., which is a customer and competitor of the Company, for approximately $5.2 million. As of December 31, 2003, the Company had paid cash in the amount of $4.5 million and issued credit against accounts receivable from RiversideWorld in the amount of $0.7 million. World primarily publishes Bibles and Christian books and was headquartered in Iowa Falls, Iowa. The purchase price has been preliminarily allocated to the net assets acquired, based on their estimated fair values (inventory of $4.2 million and development cost for publication of Bibles of $1 million, which will be amortized over a five-year period). Note J - Cash Dividend On August 21, 2003, the Company's Board of Directors declared a cash dividend of $0.04 per share of Common and Class B Common Stock. The dividend was paid on October 20, 2003 to shareholders of record on October 6, 2003. On November 20, 2003, the Company's board of directors declared a cash dividend of $.04 per share of Common and Class B Common Stock. The dividend was paid on January 19, 2004 to shareholders of record on January 5, 2004. Note K - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share amounts):

Options that are not dilutive were excluded from the diluted weighted average share calculation and totaled approximately 95,184 for the fiscal year-to-date period ended December 31, 2003 and 51,000 for the quarter ended December 31, 2003. Note L - Commitments and Contingencies On February 3, 2004, the Company received letter from one of its former customers that has filed for Chapter 11 bankruptcy. It indicated that the Company may have received preference transfers, in the form of cash and returned books, totaling approximately $1.7 million. We are evaluating the notice and intend to vigorously defend the matter. While resolution of this matter is not expected to materially affect the Company's liquidity, if all or a portion of these amounts were to be repaid, it would reduce the Company's net income in the amount of the repayment, net of tax. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------- Executive Summary ----------------- Thomas Nelson, Inc. publishes Bibles and books and hosts inspirational conferences, designed to appeal to the Christian and family-oriented lifestyle segments of the population. The Company's business strategy is to publish high-quality products and offer related conference services for the Christian and general retail markets. Thomas Nelson's Common Stock and Class B Common Stock are listed on the New York Stock Exchange under the symbols TNM and TNMB, respectively. More information can be found in our Annual Report on Form 10-K. With a 4% increase in Revenues for the fiscal third quarter ended December 31, 2003, the Company posted a 59% increase in Net Income. On a fiscal year-to-date basis, we had a 3% increase in sales and achieved a 68% increase in Net Income. Our publishing product segment has enjoyed a very successful period of publishing a number of best-selling books. Six of our books have appeared on the New York Times bestseller list in the past 12-month period. Our conference segment had a good quarter from a revenue standpoint, but is behind our expectations for the fiscal year-to-date period. We believe the war in Iraq and the smaller venues for the earlier events in this fiscal year were the primary reasons for the decline in ticket sales. However, conference revenues were up 20% in the current quarter over last years' comparable period, driven by higher attendance levels and product sales. We are ahead of the prior year in pre-selling tickets for the next conference theme, which changes on a calendar year basis. We have experienced higher gross margin percentages over the past few quarters. We believe these improvements are primarily due to the following matters. First, we have published a number of products that have been well received in the marketplace, including the general trade and mass markets outside our core channels. Second, we have incurred less obsolescence costs associated with lower inventory levels and the end of the "Word" trademark license as of December 31, 2002. Third, we have achieved an improved percentage of earnings against royalty advances driven by the strong performance of some of our recent publishing offerings. Fourth, we have experienced a slight shift in product mix to higher margin book products from lower margin Bible products. While we expect to maintain these higher gross margin percentages, we are mindful of the uncertainties inherent in our business, as well as the need to continue to develop products that will be widely accepted in the marketplace, to maintain an appropriate product mix and to pursue new opportunities. Please refer to the Cautionary Note on Forward Looking Statements. We are experiencing a difficult business environment in the Christian Bookselling Association (CBA) retail market, our historical "core" market. Based on information that we receive from our customers, salespeople and other market sources, we believe that this market will produce another year of flat-to-down sales. We believe there are shifts within this market where the larger chains continue to grow at the expense of the sole-proprietors. Also, we believe this market is losing sales to the general trade and mass merchandisers. Notwithstanding this environment, on a year to date basis, we have maintained our sales levels in the CBA market. Accordingly, we believe that we have actually gained market share in the CBA. We will continue striving to gain market share in the CBA; however, it appears that the Company's highest growth potential lies in the general markets and school fund raising programs. Some of our efforts in these areas include a new Nelson Business imprint, a new Christian fiction imprint (WestBow Press) and our Cool Springs Press state-by-state gardening book line. This summary should be read together with the complete Management's Discussion and Analysis and the related financial statements and notes thereto. Cautionary Note On Forward-Looking Statements --------------------------------------------- Management's discussion and analysis includes certain forward-looking statements. Actual results could differ materially from those in the forward-looking statements, and a number of factors may affect future results, liquidity and capital resources. These factors include, but are not limited to, softness in the retail environment, the timing and acceptance of products being introduced to the market, the level of product returns experienced, the level of margins achievable in the marketplace, the collectibility of accounts receivable, recoupment of royalty advances, the effects of acquisitions or dispositions, the financial condition of our customers and suppliers, the realization of inventory values at carrying amounts, our access to capital, the realization of income tax assets (including the outcome of any future Internal Revenue Service audits), and the realization or impairment of intangible assets. Future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its business strategy. The Company disclaims any intent or obligation to update forward-looking statements. OVERVIEW -------- The following table sets forth for the periods indicated certain selected statements of income data of the Company expressed as a percentage of net revenues and the percentage change in dollars in such data from the prior fiscal year.

The Company's net revenues fluctuate seasonally, with net revenues in the first fiscal quarter historically being lower than those for the remainder of the year. This seasonality is the result of increased consumer purchases of the Company's products during the traditional holiday periods. In addition, the Company's quarterly operating results may fluctuate significantly due to the seasonality of new product introductions, the timing of selling and marketing expenses and changes in sales and product mixes. Results of Operations --------------------- Consolidated Results - Third Quarter of Fiscal 2004 Compared with Third Quarter of Fiscal 2003 ----------------------------------------------------------------- Net revenues for the three months ended December 31, 2003 increased $2.3 million, or 4%, from the same period in the prior year. Net revenues from publishing products increased $0.7 million, or 2%. The increase in publishing revenues is primarily due to increased sales from the World Publishing acquisition. Net revenues from conferences increased $1.6 million or 21%, primarily due to slightly higher attendance per event and increased product sales. Price increases did not have a material effect on net revenues. The Company's cost of goods sold decreased for the three months ended December 31, 2003 by $0.4 million, or 1% from the same period in the prior year, and as a percentage of net revenues, decreased to 57% from 61% in the prior year. This decrease as a percentage of net revenues is attributable to strong-performing publishing product sales occurring in a higher margin product and market mix. Also, the prior year's cost of goods sold was higher than normal due to a higher level of royalty advance write-offs, free freight given to customers and obsolescence charges from liquidating inventory produced under the imprint with the "Word" name, as the Company's licensing agreement using the "Word" name expired. The "Word" name was licensed for use in fiscal 1998 in conjunction with the sale of the Company's former Word Music division. Selling, general and administrative expenses, excluding depreciation and amortization, for the three months ended December 31, 2003 increased $0.4 million, or 2.3% from the same period in the prior year. These expenses, expressed as a percentage of net revenues, decreased to 29% from 30% in the prior year. This reduction is primarily attributable to planned reductions in advertising expenditures. The Company's avertising strategy emphasizes advertising fewer products and focusing on products management believes may enjoy widespread acceptance in the marketplace. Depreciation and amortization for the three months ended December 31, 2003, as compared to the three months ended December 31, 2002, were relatively unchanged. Interest expense for the three months ended December 31, 2003 was $0.2 million, a decrease of $0.6 million from the same period in the prior year due to lower debt levels. The provision for income taxes has been increased from 36.5% to 37.5% for the current fiscal year due to increased business activity in states with higher income tax rates without the benefit of state net operating loss carry forwards that existed in prior periods and accruals for other tax items. Consolidated Results - First Nine Months of Fiscal 2004 Compared with the First Nine Months of Fiscal 2003 ------------------------------------------------------------------------- Net revenues for the nine months ended December 31, 2003 increased $4.7 million, or 3%, from the same period in the prior year. Net revenues from publishing products increased $5.9 million, or 4%, primarily due to a strong performance by the book divisions and increased revenues from the World Publishing acquisition, despite continued softness in the CBA channel. Net revenues from conferences decreased $1.2 million or 5%, primarily due to lower attendance levels earlier in the fiscal year compared to the prior year. We believe the lower attendance levels were primarily due to the war in Iraq and the smaller venues of the early conferences, compared to the prior year period. The same number of conferences were held this year compared to the prior year's period. Price increases did not have a material effect on net revenues. The Company's cost of goods sold decreased for the nine months ended December 31, 2003 by $1.0 million, or 1.0% from the same period in the prior year, and as a percentage of net revenues, decreased to 58% from 61% in the prior year. This decrease as a percentage of net revenues is primarily attributable to strong-performing publishing products with the increase in sales occurring in a higher margin product and market mix, partially offset by lower attendance levels at conference events with fixed costs. Also, the prior year's cost of goods sold, as a percentage of net revenues, was slightly higher than normal due to higher levels of royalty advance and obsolescence losses noted previously. Selling, general and administrative expenses, excluding depreciation and amortization, for the nine months ended December 31, 2003 decreased $1.0 million, or 2% from the same period in the prior year. These expenses, expressed as a percentage of net revenues, decreased to 28% from 30% in the prior year period. This reduction is primarily attributable to curtailed advertising expenses and lower lease expense due to fewer leased facilities. Depreciation and amortization for the nine months ended December 31, 2003, as compared to the nine months ended December 31, 2002, were relatively unchanged. Interest expense for the nine months ended December 31, 2003 was $0.7 million, a decrease of $1.7 million from the same period in the prior year due to lower debt levels. The provision for income taxes has been increased from 36.5% to 37.5% for the current fiscal year due to increased business activity in states with higher income tax rates without the benefit of state net operating loss carry forwards that existed in prior periods, and accruals for other tax items. Liquidity and Capital Resources ------------------------------- At December 31, 2003, the Company had approximately $6.3 million in cash and cash equivalents. The primary sources of liquidity to meet the Company's future obligations and working capital needs are cash generated from operations and borrowings available under bank credit facilities. At December 31, 2003, the Company had working capital of $72.4 million. Net cash provided by continuing operations was $11.8 million for the nine months ended December 31, 2003 and $18.7 million for the same period last year. Cash provided by continuing operations during the nine months ended December 31, 2003 was principally attributable to net income from continuing operations. Cash provided by continuing operations during the nine months ended December 31, 2002 was principally attributable to income from continuing operations and the collection of accounts receivable. In April 2003, the Company received an income tax refund of $18.7 million. This tax refund was related to the recognition of a loss on disposal of the Company's C.R. Gibson gift division and was used to pay down debt. Further, the Company has reduced its current year income tax payments by approximately $2.2 million related to additional tax credits generated by the tax loss realized on the disposal of C.R. Gibson. Until such time that we conclude that the position taken on our income tax returns will ultimately be sustained by the taxing authorities, the refund and the tax credits will be recorded as a non-current tax liability. If the Company's position is sustained, the Company will recognize the refund and the tax credits as income from discontinued operations. Fiscal year-to-date capital expenditures have totaled approximately $2.3 million, primarily consisting of building improvements, computer software and equipment. During the remainder of fiscal 2004, the Company anticipates capital expenditures of approximately $1.7 million, primarily consisting of building improvements and computer software and equipment. The Company's bank credit facility consists of a $65 million Senior Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit Facility bears interest at either the lenders' base rate or, at the Company's option, the LIBOR plus a percentage, based on certain financial ratios. The Credit Facility has a term of three years and matures on June 28, 2005. At December 31, 2003, the Company had no outstanding borrowings under the Credit Agreement. At December 31, 2003, the Company had outstanding approximately $5.3 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at rates from 6.68% to 8.31% due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth. At December 31, 2003, the Company was in compliance with all covenants of these debt agreements. Management believes cash generated by operations and borrowings available under the Credit Facility will be sufficient to fund anticipated working capital requirements for existing operations through the remainder of fiscal 2004. The Company's current cash commitments include current maturities of debt and operating lease obligations that are disclosed in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 2003. The Company also has current inventory purchase and royalty advance commitments in the ordinary course of business that require cash payments as vendors and authors fulfill their requirements to the Company in the form of delivering satisfactory product orders and manuscripts, respectively. The Company has no off-balance sheet commitments or transactions with any variable interest entities (VIE's). Management also is not aware of any undisclosed material related party transactions or relationships with management, officers or directors.