10-Q 1 q062004.txt FORM 10-Q FOR PERIOD ENDED 6/30/2004, DATED 8/9/2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE TRANSITION SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13788 THOMAS NELSON, INC. (Exact name of Registrant as specified in its charter) Tennessee 62-0679364 (State or other jurisdiction of (I.R.S. Employer Identification number) incorporation or organization) 501 Nelson Place, Nashville, Tennessee 37214-1000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (615) 889-9000 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At August 6, 2004, the Registrant had outstanding 13,672,061 shares of Common Stock and 931,485 shares of Class B Common Stock. PART I FINANCIAL INFORMATION Item 1. Financial Statements Thomas Nelson, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (000's omitted, except share amounts) (unaudited)
June 30, March 31, June 30, 2004 2004 2003 ---------- ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 23,634 $ 22,780 $ 8,943 Accounts receivable, less allowances of $7,200, $7,951 and $7,190, respectively 44,616 56,275 42,999 Inventories 36,104 30,341 37,924 Prepaid expenses 16,094 14,018 15,567 Assets held for sale - - 1,785 Deferred tax assets 4,923 4,923 5,085 ---------- ---------- ---------- Total current assets 125,371 128,337 112,303 Property, plant and equipment, net 13,068 13,039 11,444 Other assets 8,311 6,425 6,733 Deferred charges 1,581 1,754 1,445 Intangible assets 805 860 882 Goodwill, net 29,304 29,304 29,304 ---------- ---------- ---------- Total Assets $178,440 $179,719 $162,111 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 23,299 $ 19,753 $ 19,910 Accrued expenses 7,145 13,278 9,930 Deferred revenue 12,437 11,758 12,703 Income taxes currently payable 2,808 2,419 3,393 Current portion of long-term debt 2,308 3,022 3,622 ---------- ---------- ---------- Total current liabilities 48,578 50,809 49,558 Long term debt, less current portion 1,154 2,308 3,461 Long-term taxes payable 21,290 21,290 18,722 Deferred tax liabilities 1,021 1,021 721 Other liabilities 1,111 1,300 672 Minority interest 10 9 35 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 13,593,795, 13,502,855 and 13,359,708 shares, respectively 13,594 13,503 13,360 Class B stock, $1.00 par value, authorized 5,000,000 shares; issued 938,485, 963,195 and 1,024,795 shares, respectively 938 963 1,025 Additional paid-in capital 45,635 44,697 44,115 Retained earnings 45,109 43,819 30,442 ---------- ---------- ---------- Total shareholders' equity 105,276 102,982 88,942 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $178,440 $179,719 $162,111 ========== ========== ========== See Notes to Condensed Consolidated Financial Statements
Thomas Nelson, Inc. and Subsidiaries Condensed Consolidated Statements of Income (000's omitted, except per share data) (unaudited)
Three Months Ended June 30, ------------------- 2004 2003 -------- -------- Net revenues $ 49,008 $ 41,831 Costs and expenses: Cost of goods sold 28,938 25,875 Selling, general and administrative 16,286 13,665 Depreciation and amortization 588 560 -------- -------- Total costs and expenses 45,812 40,100 -------- -------- Operating income 3,196 1,731 Other income 67 191 Interest expense 220 244 -------- -------- Income before income taxes 3,043 1,678 Provision for income taxes 1,171 629 Minority interest 1 (8) -------- -------- Net income $ 1,871 $ 1,057 ======== ======== Weighted average number of shares outstanding: Basic 14,495 14,382 ======== ======== Diluted 15,297 14,607 ======== ======== NET INCOME PER SHARE: Basic $ 0.13 $ 0.07 ======== ======== Diluted $ 0.12 $ 0.07 ======== ======== See Notes to Condensed Consolidated Financial Statements
Thomas Nelson, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (000's omitted) (unaudited)
Three Months Ended June 30, ------------------- 2004 2003 -------- -------- Cash Flows From Operating Activities: Net income from continuing operations $ 1,871 $ 1,057 Adjustments to reconcile income to net cash provided by (used in) operations: Depreciation and amortization 588 560 Amortization of deferred charges 52 52 Gain/loss on sale of fixed assets and assets held for sale - (1) Minority interest 1 (8) Changes in assets and liabilities, net of acquisitions and disposals: Accounts receivable, net 11,659 13,807 Inventories (5,763) (4,287) Prepaid expenses (2,076) (2,046) Accounts payable and accrued expenses (2,599) (4,171) Deferred revenue 679 1,210 Income taxes currently payable 389 1,014 Change in other assets and liabilities and deferred charges (1,910) 923 -------- -------- Net cash provided by continuing operations 2,891 8,110 -------- -------- Discontinued Operations: Federal income tax receivable/payable - 18,722 Change in discontinued net assets 12 (42) -------- -------- Net cash provided by discontinued operations 12 18,680 -------- -------- Net cash provided by operating activities 2,903 26,790 -------- -------- Cash Flows From Investing Activities: Capital expenditures (606) (370) Net proceeds from sales of property, plant and equipment and assets held for sale - 8 Acquisition of publishing rights - (375) -------- -------- Net cash used in investing activities (606) (737) -------- -------- Cash Flows From Financing Activities: Payments under revolving credit facility - (17,000) Payments on long-term debt (1,868) (1,869) Dividends paid (579) - Proceeds from issuance of common stock 1,004 52 -------- -------- Net cash used in financing activities (1,443) (18,817) -------- -------- Net increase (decrease) in cash and cash equivalents 854 7,236 Cash and cash equivalents at beginning of period 22,780 1,707 -------- -------- Cash and cash equivalents at end of period $23.634 $ 8,943 -------- -------- Supplemental cash flow information: Interest paid $ 315 $ 483 Income taxes paid (refunded), net $ 482 ($19,108) Dividends accrued and unpaid $ 581 $ - Tax benefit of non-qualified stock options exercised, credited to additional paid-in capital $ 300 $ - See Notes to Condensed Consolidated Financial Statements
THOMAS NELSON, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to Securities and Exchange Commission rules and regulations. The statements should be read in conjunction with the Summary of Significant Accounting Policies and notes to the consolidated financial statements included in the Company's annual report for the year ended March 31, 2004. The condensed consolidated balance sheets and related information in these notes as of March 31, 2004 have been derived from the audited consolidated financial statements as of that date. Certain reclassifications of prior period amounts have been made to conform to the current period's presentation. Total comprehensive income and net income are the same for all periods presented. Note B - Stock-Based Compensation The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25," issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," 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.
Three Months Ended June 30, ------------------ 2004 2003 -------- -------- Net income (in thousands): As reported $1,871 $1,057 ======== ======== Less: additional stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects 256 448 ======== ======== Pro forma $1,615 $ 609 ======== ======== Net income per share: Basic -- As reported $ 0.13 $ 0.07 ======== ======== Pro forma $ 0.11 $ 0.04 ======== ======== Diluted -- As reported $ 0.12 $ 0.07 ======== ======== Pro forma $ 0.11 $ 0.04 ======== ========
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:
2004 2003 ------- ------ Expected future dividend payment $0.16 $ - Expected stock price volatility 50.2% 44.4% Risk free interest rate 2.6% 3.9% Expected life of options 9 years 9 years
Note C - Inventories Components of inventories consisted of the following (in thousands):
June 30, March 31, June 30, 2004 2004 2003 ------------- ------------- ------------- Finished goods $33,897 $28,000 $36,339 Raw materials and work in process 2,207 2,341 1,585 ------------- ------------- ------------- $36,104 $30,341 $37,924 ============= ============= =============
Note D -Operating Segments The Company is organized and managed based upon its products and services. The Company has identified two reportable business segments: publishing and conferences. The publishing segment primarily creates and markets Bibles, inspirational books and videos. The conference segment hosts inspirational and motivational conferences across North America. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column consists of items related to discontinued operations (in thousands).
For the Three Months Ended Publishing Conferences Other Total -------------------------- ----------- ----------- ----------- -------- June 30, 2004: Net Revenues $ 41,254 $ 7,754 $ - $ 49,008 Operating Income 2,580 616 - 3,196 Goodwill 14,169 15,135 - 29,304 Assets Excluding Goodwill 140,934 6,202 2,000 149,136 Total Assets 155,103 21,337 2,000 178,440 Capital Expenditures 584 22 - 606 Depreciation and Amortization 532 56 - 588 June 30, 2003: Net Revenues $ 36,004 $ 5,827 $ - $ 41,831 Operating Income 1,892 (161) - 1,731 Goodwill 14,169 15,135 - 29,304 Assets Excluding Goodwill 121,412 7,610 3,785 132,807 Total Assets 135,581 22,745 3,785 162,111 Capital Expenditures 332 38 - 370 Depreciation and Amortization 496 64 - 560 Fiscal Year Ended March 31, 2004: --------------------------------- Net Revenues $193,161 $29,458 $ - $222,619 Operating Income 26,025 1,115 - 27,140 Goodwill 14,169 15,135 - 29,304 Assets Excluding Goodwill 143,510 4,905 2,000 150,415 Total Assets 157,679 20,040 2,000 179,719 Capital Expenditures 3,569 97 - 3,666 Depreciation and Amortization 2,028 259 - 2,287
Conferences net revenues include event ticket sales of $5.8 million, $4.4 million and $21.9 million for the three months ended June 30, 2004 and 2003 and the fiscal year ended March 31, 2004, respectively. Note E - Long-Term Taxes Payable Long-term taxes payable at June 30, 2004 include a liability, which resulted from an income tax refund of $18.7 million received in April 2003. This tax refund was related to the disposal of the Company's C.R. Gibson gift division and was used to pay down existing debt. Further, the Company has reduced its income tax payments by approximately $2.2 million related to additional tax credits generated by the tax loss realized on the disposal of C.R. Gibson. Until such time that the Company can conclude that the position taken on its income tax returns will ultimately be sustained by the taxing authorities, the refund and the tax credits will be recorded as a non-current tax liability. If the Company's position is sustained, the Company will recognize the refund and the tax credits as income from discontinued operations. Note F - Debt The Company's bank credit facility 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 and matures on June 28, 2005. At June 30, 2004, the Company had no outstanding borrowings under the Credit Facility. At June 30, 2004, the Company had outstanding approximately $3.5 million in unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at 6.68% and are due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth, which are similarly calculated for each debt agreement. At June 30, 2004, the Company was in compliance with all covenants of these debt agreements. Note G - Royalty Advances At June 30, 2004, March 31, 2004 and June 30, 2003, prepaid expenses include $9.6 million, $9.2 million and $9.5 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 June 30, 2004, March 31, 2004 and June 30, 2003, other assets include $4.2 million, $2.3 million and $2.3 million, respectively, for royalty advances for products not expected to be released to the market within the next twelve months. Note H - Common Stock Declaration of dividends is within the discretion of the Board of Directors of the Company. The Board considers the payment of dividends on a quarterly basis, taking into account the Company's earnings and capital requirements, as well as financial and other conditions at the time. Certain covenants of the Company's Credit Facility and Senior Notes limit the amount of cash dividends payable based on the Company's cumulative consolidated net income. On May 20, 2004, 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 July 19, 2004 to shareholders of record on July 5, 2004. Class B Common Stock carries ten votes per share, compared to one vote per share for Common Stock, and is convertible to Common Stock on a one-to-one ratio at the election of the holder. The Class B and Common Stock are identical in all other material respects. Note I - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share amounts):
June 30, 2004 June 30, 2003 ------------- ------------- Net income $ 1,871 $ 1,057 ======== ======== BASIC EARNINGS PER SHARE: Weighted average shares outstanding 14,495 14,382 ======== ======== Net income per share $ 0.13 $ 0.07 ======== ======== DILUTED EARNINGS PER SHARE: Basic weighted average shares outstanding 14,495 14,382 Dilutive stock options - based on treasury stock method using the average market price 802 225 -------- -------- Total weighted average diluted shares 15,297 14,607 ======== ======== Net income per share $ 0.12 $ 0.07 ======== ========
As of June 30, 2004, there were no anti-dilutive options or other securities outstanding that could potentially dilute basic earnings per share in the future. The diluted weighted average share calculation included the impact of all outstanding stock options. 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 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.
Three Months Ended June 30, Fiscal Year-to-Year ------------------ Increase 2004 2003 (Decrease) ------- ------- ------------------- (%) (%) (%) Net revenues: Publishing 84.2 86.1 14.6 Conferences 15.8 13.9 33.1 ------- ------- ------------------- Total net revenues 100.0 100.0 17.2 Expenses: Cost of goods sold 59.1 61.9 11.8 Selling, general and administrative 33.2 32.7 19.2 Depreciation and amortization 1.2 1.3 5.0 ------- ------- ------------------- Total expenses 93.5 95.9 14.2 ------- ------- ------------------- Operating income 6.5 4.1 84.6 ------- ------- ------------------- Net income 3.8 2.5 77.0 ======= ======= ===================
The Company's net revenues fluctuate seasonally, with net revenues in the first fiscal quarter historically being lower than those for the remainder of the year. This seasonality is the result of increased consumer purchases of the Company's products during the traditional holiday periods. In addition, the Company's quarterly operating results may fluctuate significantly due to the seasonality of new product introductions, the timing of selling and marketing expenses, the timing and size of the venues for conference events and changes in sales and product mixes. Cautionary Note On Forward-Looking Statements --------------------------------------------- The following discussion includes certain forward-looking statements (all statements other than those made solely with respect to historical fact). Actual results could differ materially from those in the forward-looking statements, and a number of known and unknown risks and uncertainties may affect future operating results, liquidity and capital resources. These risks and uncertainties include, but are not limited to, softness in the general 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 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, the realization of deferred tax assets, our access to capital and the outcome of any taxing authority audits. Future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its business strategy during the 2005 fiscal year. The Company disclaims any intent or obligation to update forward-looking statements. Results of Operations --------------------- Consolidated Results - First Quarter of Fiscal 2005 Compared with First Quarter of Fiscal 2004 ----------------------------------------------------------------------- Net revenues for the three months ended June 30, 2004 increased $7.2 million, or 17%, from the same period in the prior year. Net revenues from publishing products increased $5.3 million, or 15%. The revenue performance for publishing products reflect the World Publishing acquisition on September 19, 2003 and increased front list (products released in the current fiscal year) and back list (products released prior to the current fiscal year) sales across most all of our product lines (imprints). All major market channels also demonstrated improvement over the prior year. Given this strength across our product lines, we believe the sales gains reflect overall market improvements as well as our delivery of quality products to the marketplace. Net revenues from conferences increased $1.9 million or 33%, compared to the prior year. This improvement relates to a mix of larger venues this fiscal year compared to the prior period and the comparison to a relatively weak start last year, which we believe was partially attributable to the beginning of the war in Iraq. There were the same number of conferences held in both periods. Price increases did not have a material effect on net revenues. The Company's cost of goods sold increased for the three months ended June 30, 2004 by $3.1 million, or 12% from the same period in the prior year, and as a percentage of net revenues, decreased to 59% from 62% in the prior year. The improvement in the cost of goods sold as a percentage of net revenues was primarily attributable to improved recovery on sales of excess inventories, improved recovery of royalty advances, and higher attendance levels at conference events. Selling, general and administrative expenses, excluding depreciation and amortization, for the three months ended June 30, 2004 increased $2.6 million, or 19% from the same period in the prior year. These expenses, expressed as a percentage of net revenues, remained consistent at 33% for both periods. The increase in dollars over the prior year is primarily attributable to planned increases in advertising, the acquisition of World Publishing on September 19, 2003, expenditures required for compliance with the Sarbanes-Oxley Act, and variable expenses that increased as in relation to net revenues. Depreciation, amortization and interest expense for the three months ended June 30, 2004, as compared to the three months ended June 30, 2003, were relatively unchanged. The provision for income taxes has been increased from 37.5% to 38.5% for the current fiscal year due to increased business activity in states with higher income tax rates without the benefit of state net operating loss carry forwards that existed in prior periods, and accruals for other tax items. Liquidity and Capital Resources ------------------------------- At June 30, 2004, the Company had approximately $23.6 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 June 30, 2004, the Company had working capital of $76.8 million. Net cash provided by continuing operations was $2.9 million for the three months ended June 30, 2004 and $8.1 million for the same period last year. Cash provided by continuing operations during the three months ended June 30, 2004 was principally attributable to net income and collections of accounts receivable. Cash provided by continuing operations during the three months ended June 30, 2003 was prinicipally attributable to collections of accounts receivable, other working capital improvements, and net income. In April 2003, the Company received a tax refund of $18.7 million. This tax refund was related to the recognition of a loss on disposal of the Company's C.R. Gibson gift division and was used to pay down debt. Until such time that we conclude that the position taken on our income tax returns will ultimately be sustained by the taxing authorities, the refund will be recorded as a non-current tax liability. If sustained, the Company will record the refund as income from discontinued operations. Fiscal year-to-date capital expenditures have totaled approximately $0.6 million, primarily consisting of building improvements, computer software and equipment. During the remainder of fiscal 2005, the Company anticipates capital expenditures of approximately $3.4 million, primarily consisting of 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 June 30, 2004, the Company had no outstanding borrowings under the Credit Agreement. At June 30, 2004, the Company had outstanding approximately $3.5 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at a rate of 6.68% due through fiscal 2006. Under the terms of the Credit Facility and the Senior Notes, the Company has agreed to limit the payment of dividends and to maintain certain financial ratios and tangible net worth. At June 30, 2004, the Company was in compliance with all covenants of these debt agreements. On February 3, 2004, the Company received a letter from one of its former customers that has filed for Chapter 11 bankruptcy. It indicated that the Company may have received preference transfers, in the form of cash and returned books, totaling approximately $1.7 million. We are evaluating the notice and intend to vigorously defend the matter. While resolution of this matter is not expected to materially affect the Company's liquidity, if all or a portion of these amounts were to be repaid, it would reduce the Company's net income in the amount of the repayment, net of tax. Management believes cash on hand, cash generated by operations and borrowings available under the Credit Facility, will be sufficient to fund anticipated working capital requirements for existing operations through the remainder of fiscal 2005. The Company's current cash commitments include current maturities of debt and operating lease obligations that are disclosed in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 2004. The Company also has current inventory purchase and royalty advance commitments in the ordinary course of business that require cash payments as vendors and authors fulfill their requirements to the Company in the form of delivering satisfactory product orders and manuscripts, respectively. The Company has no off-balance sheet commitments or transactions with any variable interest entities (VIE's). Management also is not aware of any undisclosed material related party transactions or relationships with management, officers or directors.
Payments Due by Fiscal Year Contractual ------------------------------------------------------------ Commitments 2009 and (in 000's) 2005 2006 2007 2008 Thereafter Total ------------------ -------- -------- -------- -------- ---------- -------- Long-term debt $ 2,308 $ 1,154 $ - $ - $ - $ 3,462 Inventory purchases 3,759 5,000 5,000 5,000 3,333 22,092 Operating leases 1,210 1,089 478 424 886 4,087 Royalty advances 5,429 3,056 979 720 1,274 11,458 -------- -------- -------- -------- ---------- -------- Total obligations $12,706 $10,299 $6,457 $6,144 $5,493 $41,099 ======== ======== ======== ======== ========== ========
CRITICAL ACCOUNTING POLICIES ---------------------------- The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. These policies are common with industry practice and are applied consistently from period to period. Revenue Recognition: The Company has four primary revenue sources: sales of publishing product, attendance fees and product sales from its conferences, royalty income from licensing copyrighted material to third parties and billed freight. Revenue from the sale of publishing product is recognized upon shipment to the customer or when title passes. In accordance with Securities and Exchange Commission's Staff Accounting Bulletin No. 104 regarding revenue recognition, we recognize revenue only when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectibility is reasonably assured. An allowance for sales returns is recorded where return privileges exist. The returns allowance is determined by using a 12-month rolling average return rate, multiplied by gross sales occurring over the previous four-month period by market sales channel. Historical experience reflects that product is generally returned from and credited to customers' accounts within the first 120 days of the original sale. The full amount of the returns allowance, net of inventory and royalty costs (based on current gross margin rates) is shown as a reduction of accounts receivable in the accompanying condensed consolidated financial statements. Returns of publishing products from customers are accepted in accordance with standard industry practice. Generally, products that are designated as out-of-print are not returnable 90 days after notice of out-of-print status is given to the customer. Also, certain high discount sales are not returnable. Revenue from conferences is recognized as the conferences take place. Cash received in advance of conferences is included in the accompanying condensed consolidated financial statements as deferred revenue. Royalty income from licensing the Company's publishing rights is recorded as revenue when earned under the terms of the applicable license, net of amounts due to authors. Billed freight consists of shipping charges billed to customers and is recorded as revenue upon shipment of product. Allowance for Doubtful Accounts: The Company records an allowance for bad debts as a reduction to accounts receivable in the accompanying condensed consolidated financial statements. The valuation allowance has a specific component related to accounts with known collection risks and a component which is calculated using a 5-year rolling bad debt history applied as a percentage of the accounts receivable balance, less the specific component of the allowance. Our credit department identifies specific allowances for each customer who is deemed to be a collection risk, may have filed for bankruptcy protection or may have disputed amounts with the Company. Inventories: Inventories are stated at the lower of cost or market value using the first-in, first-out (FIFO) valuation method. The FIFO method of accounting for inventory was selected to value our inventory at the lower of market value or current cost because the Company continuously introduces new products, eliminates existing products and redesigns products. Therefore, inflation does not have a material effect on the valuation of inventory. Costs of producing publishing products are included in inventory and charged to operations when product is sold or otherwise disposed. These costs include paper, printing, binding, outside editorial and design, typesetting, artwork, international freight and duty costs, when applicable. The Company's policy is to expense all internal editorial, production, warehousing and domestic freight-in costs as incurred, except for certain indexing, stickering, typesetting and assembly costs, which are capitalized into inventory. Costs of abandoned publishing projects are charged to operations when identified. The Company also maintains an allowance for excess and obsolete inventory as a reduction to inventory in the accompanying condensed consolidated financial statements. This allowance is based on historical liquidation recovery rates applied to inventory quantities identified in excess of a twenty-four month supply on hand for each category of product. Royalty Advances/Pre-Production Costs: Royalty advances are typically paid to authors, as is standard in the publishing industry. These advances are either recorded as prepaid assets or other (non-current) assets in the accompanying condensed consolidated financial statements, depending on the expected publication date (availability for shipment) of the product. Author advances for trade books are generally amortized over five months beginning when the product is first sold into the market. The Company's historical experience is that typically 75% to 80% of book product sales occur within the first five months after release into the market. Reference and video royalty advances are generally amortized over a twelve-month period beginning with the first sale date of the product, as these products typically have a longer sales cycle than books. Royalty advances for significant new Bible products are amortized on a straight-line basis for a period not to exceed five years (as determined by management). When royalty advances are earned through product sales at a faster pace than the amortization period, the amortization expense is accelerated to match the royalty earnings. All abandoned projects and advances that management does not expect to fully recover are charged to operations when identified. For authors with multiple book/product contracts, the advance is amortized over a period that encompasses the publication of all products, generally not to exceed 24 months or the actual recovery period, whichever is shorter. Advances to our most important authors are typically expensed as they are recovered through sales. These authors generally have multiple year and multiple book contracts, as well as strong sales history of backlist titles (products published during preceding fiscal years) that can be used to recover advances over long periods of time. Many Bible, reference and video products require significant development costs prior to the actual printing or production of the saleable product. These products also typically have a longer life cycle. All video pre-production costs are amortized over 12 months on a straight-line basis. Pre-production costs for significant Bible and reference products are recorded as deferred charges in the accompanying condensed consolidated financial statements and are amortized on a straight-line basis, for a period not to exceed five years (as determined by management). Goodwill and Intangible Assets: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized, but tested for impairment by comparing net book carrying values to fair market values upon adoption and periodically thereafter. The Company has adopted the provisions of SFAS No. 142 as of April 1, 2001. In accordance with SFAS No. 142, goodwill is tested for impairment by the Company's reporting units: Publishing and Conferences. The fair value for the assets of the Publishing and Conferences reporting units are evaluated using discounted expected cash flows and current market multiples. Unless circumstances dictate an earlier analysis, we will conduct our annual goodwill impairment test in our fourth fiscal quarter. Item 3. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------------------- As of and for the period ended June 30, 2004, there have been no material changes in the Company's investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Company's Annual Report on Form 10-K. The Company invoices and collects all foreign sales and makes purchases from overseas in U.S. dollars. Accordingly, the Company's customers and vendors bear all material currency exchange risks. Item 4. Controls and Procedures ------------------------------------------------------------------------------- The Chairman and Chief Executive Officer and the Executive Vice President, Secretary and Chief Financial Officer have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chairman and Chief Executive Officer and the Executive Vice President, Secretary and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Company's disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in the Company's reports that it files or submits to the SEC under the Securities Exchange Act of 1934 has been made known to them in a timely fashion. There have been no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II Item 6. Exhibits and Reports on Form 8-K. ------------------------------------------------------------------------------- (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number ------- 31.1 -- Certification of Sam Moore, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K - On May 12, 2004, the Company furnished a current report on Form 8-K to announce the financial results for the 4th quarter and fiscal 2004 year-end. - On May 20, 2004, the Company furnished a current report on Form 8-K to announce the Board's declaration of a cash dividend to be paid July 19, 2004. 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) Date: August 9, 2004 By: /s/ Joe L. Powers ------------------- ------------------------ Joe L. Powers Executive Vice President and Chief Financial Officer INDEX TO EXHIBITS Exhibit Number ------- 31.1 -- Certification of Sam Moore, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002