10-Q 1 dec2004q.txt FORM 10-Q FOR PERIOD ENDED DECEMBER 31, 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 December 31, 2004 or [ ] 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 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 February 7, 2005, the Registrant had outstanding 13,822,043 shares of Common Stock and 924,662 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)

THOMAS NELSON, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (000's omitted, except per share data, unaudited)

THOMAS NELSON, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS 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 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.

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

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 and family oriented 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).

Net revenues from conferences include event ticket sales of $20.9 million, $18.7 million and $21.9 million for the nine months ended December 31, 2004 and 2003 and the fiscal year ended March 31, 2004, respectively. Note E - Long-Term Taxes Payable Long-term taxes payable at December 31, 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 subsequent income tax payments by approximately $3.2 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 $50 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 October 15, 2008. At December 31, 2004, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2004, the Company had outstanding approximately $2.3 million in unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at 6.68% due through December 2005. 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, 2004, the Company was in compliance with all covenants of these debt agreements. Note G - Royalty Advances At December 31, 2004, March 31, 2004 and December 31, 2003, prepaid expenses include $12.3 million, $9.2 million and $9.1 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, 2004, March 31, 2004 and December 31, 2003, other assets include $5.0 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 amoun of cash dividends payable based on the Company's cumulative consolidated net income. The following table indicates dividend activity for the nine-month period ended December 31, 2004. Dividends relate to both Common Stock and Class B Common Stock.

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):

For the three months and nine months ended December 31, 2004 there were no anti-dilutive options outstanding. For the three months ended December 31, 2003, there were 51,000 anti-dilutive options outstanding; and for the nine months ended December 31, 2003, there were 95,184 anti-dilutive options outstanding. As of December 31, 2004, there were no other securities outstanding that could potentially dilute basic earnings per share in the future. Note J - Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 123R ("Share-Based Payment"). SFAS 123R requires the Company to recognize compensation expense for equity instruments awarded to employees. SFAS 123R is effective for the Company as of the beginning of the first interim period that begins after June 15, 2005. The Company is currently evaluating the impact that this pronouncement will have on it future operations. 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, available at our website: www.thomasnelson.com. Net revenues for the quarter ending December 31, 2004 were up 13% in comparison to the comparable quarter in the prior year. Publishing net revenues were up 14% in the quarter. The revenue performance for publishing products reflect increased front list (products released in the current fiscal year) and backlist (products released prior to the current fiscal year) sales across most all of our product lines (imprints). Most 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. Thomas Nelson, Inc. had seven of the top 10 books according to the January 3, 2005 point-of-sale data generated by Sales Tracking Analysis Trends Summary (STATS) compiled by the Evangelical Christian Publishers Association. Thomas Nelson is the only publisher to have multiple products in the top 10. Analyzing the STATS results further past the top 10 titles shows continued domination, with 18 of the top 50 products claimed by Thomas Nelson - more than double the number of the nearest competitor's best sellers. In addition, Thomas Nelson Publishers also has a general market best seller in "The Total Money Makeover" (Nelson Books) by Dave Ramsey, which ranks on the "New York Times" Business Best Sellers list at #11 as of January 2, 2005. Thomas Nelson also had three titles on the "Publisher's Weekly" Religion Hardcover Best Seller list for December including #3 "Epic" (Nelson Books) by John Eldredge, #6 "Come Thirsty" (W Publishing) by Max Lucado and #7 "Wild at Heart" (Nelson Books) by John Eldredge. Net revenues from conferences increased 8%, compared to the prior year's quarter. This improvement relates to hosting conferences at larger venues and increased attendance this quarter compared to the prior period. There were the same number of conferences held in both periods. 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 The following discussion includes certain forward-looking statements (all statements other than those made solely with respect to historical fact) and the actual results may differ materially from those contained in the forward-looking statements due to known and unknown risks and uncertainties. Any one or more of several risks and uncertainties could account for differences between the forward-looking statements that are made today and the actual results, including with respect to our sales, profits, liquidity and capital position. These factors include, but are not limited to: risks relating to our ability to satisfy regulatory requirements with respect to our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, which requires us to perform an evaluation of our internal control over financial reporting and have our auditor attest to such evaluation; softness in the general retail environment or in the markets for our products; 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; 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; our access to capital; the outcome of any future Internal Revenue Service audits; and the realization of income tax and intangible assets. These conditions cannot be predicted reliably and the Company may adjust its strategy in light of changed conditions or new information. Thomas Nelson disclaims any 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 2005 Compared with Third Quarter of Fiscal 2004 ------------------------------------------- Net revenues for the quarter ending December 31, 2004 increased to $63.4 million from $56 million in the prior year, a 13% increase in comparison to the comparable quarter in the prior year. Publishing net revenues were up 14% in the quarter. The revenue performance for publishing products reflected increased frontlist (products released in the current fiscal year) and backlist (products released prior to the current fiscal year) sales across most all of our product lines (imprints). Most 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 8%, compared to the prior year's quarter. This improvement relates to hosting conferences at larger venues and increased attendance this quarter compared to the prior period. The same number of conferences were 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 December 31, 2004 by $2.8 million, or 9% from the same period in the prior year, and as a percentage of net revenues, decreased from 57% to 55%. The improvement in cost of goods sold as a percentage of net revenues is primarily attributable to improved recovery on sales of excess publishing product inventories and improved recovery of royalty advances on publishing products. Selling, general and administrative expenses, excluding depreciation and amortization, for the three months ended December 31, 2004 increased $2.5 million, or 15% from the same period in the prior year. These expenses, expressed as a percentage of net revenues, increased from 29% to 30%. The increase in dollars and percentage over the prior year is primarily attributable to additional expenditures required for compliance with the Sarbanes-Oxley Act, planned increases in advertising, variable expenses that increased in relation to net revenues, and overhead investments in certain publishing areas for future growth, such as fiction, curriculum, World Publishing and direct to school sales programs. Depreciation and amortization increased slightly from the prior period due to building improvements last year. 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. Consolidated Results - First Nine Months of Fiscal 2005 Compared with the First Nine Months of Fiscal 2004 -------------------------------------------------- Net revenues for the nine months ended December 31, 2004 increased $12.6 million, or 8%, from the same period in the prior year. Net revenues from publishing products increased $8.3 million, or 6%, primarily due to a strong performance by the book divisions and increased revenues from the September 19, 2003 acquisition of World Publishing. Net revenues from conferences increased $4.3 million or 17%, primarily due to hosting one additional conference in the current period, a mix of larger venues, and increased attendance and product sales. Price increases did not have a material effect on net revenues. The Company's cost of goods sold increased for the nine months ended December 31, 2004 by $4.8 million, or 5% from the same period in the prior year, and as a percentage of net revenues, decreased to 57% from 58% in the prior year. Improvement in the cost of goods sold as a percentage of net revenues for publishing products was partially offset by a planned increase in cost of products sold at conferences to attempt to increase volume and total profit at conference events. The improvement for publishing products was primarily attributable to improved recovery on sales of excess inventories and improved recovery of royalty advances. Selling, general and administrative expenses, excluding depreciation and amortization, for the nine months ended December 31, 2004 increased $4.6 million, or 10% from the same period in the prior year. These expenses, expressed as a percentage of net revenues, increased to 29% from 28% in the prior year period. The increase in dollars and percentage over the prior year is primarily attributable to additional expenditures required for compliance with the Sarbanes-Oxley Act, planned increases in advertising, variable expenses that increased in relation to net revenues, and overhead investments in certain publishing areas for future growth, such as fiction, curriculum, World Publishing and direct to school sales programs. Depreciation and amortization increased slightly from the prior period due to building improvements last year. Interest expense for the nine months ended December 31, 2004 was $0.6 million, a decrease of $0.2 million from the same period in the prior year due to lower debt levels. 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 December 31, 2004, the Company had approximately $21.0 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, 2004, the Company had working capital of $88.3 million. Net cash provided by continuing operations was $2.2 million for the nine months ended December 31, 2004 and $11.8 million for the same period last year. Cash provided by continuing operations during the nine months ended December 31, 2004 was principally attributable to net income offset by an increase in inventory and royalty advances and a decrease in deferred revenue. The increase in inventory is due to the seasonality of our publishing business and timing of new publishing product releases, and the increase in royalty advances relates to the signing of certain key authors to new multi-book agreements. The reduction in deferred revenue from March 31, 2004 related to the end of our calendar year conference events. Cash provided by continuing operations during the nine months ended December 31, 2003 was principally attributable to net income from continuing operations. 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 subsequent income tax payments by approximately $3.2 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 $1.8 million, primarily consisting of building improvements, computer software and equipment. During the remainder of fiscal 2005, the Company anticipates capital expenditures of approximately $2.2 million, primarily consisting of building improvements and computer software and equipment. The Company's bank credit facility consists of a $50 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 October 15, 2008. At December 31, 2004, the Company had no outstanding borrowings and $50 million available to borrow under the Credit Agreement. At December 31, 2004, the Company had outstanding approximately $2.3 million of unsecured senior notes ("Senior Notes"). The Senior Notes bear interest at 6.68% due through December 2005. 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, 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 preferential 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 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. Management also is not aware of any undisclosed material related party transactions or relationships with management, officers or directors.