10-K 1 mar200610k.txt FORM 10-K FOR PERIOD ENDED 3/31/2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the Fiscal year ended March 31, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the transition period from_____to______. 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 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, Par Value $1.00 per share New York Stock Exchange Class B Common Stock, Par Value $1.00 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ] 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 requirement for the past 90 days. YES [X ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] As of March 31 2006, the Registrant had outstanding 14,066,327 shares of Common stock and 948,228 shares of Class B common stock. On such date the aggregate market value of shares of common stock and Class B common stock held by non-affiliates was approximately $438.8 million. The market value calculation was determined using the closing sale price of the Registrant's common stock and Class B common stock on March 31, 2006, as reported on The New York Stock Exchange. DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference in this Form 10-K. 2 PART I Item 1. Business Thomas Nelson, Inc. (the "Company"), incorporated in 1961, is a leading publisher, producer and distributor of books emphasizing Christian, inspiration- al and family value themes and believes it is the largest commercial publisher of the Bible in English language translations. The Company believes it is the largest publisher of Christian and inspirational Bibles and books in the United States. The Company also hosts inspirational conferences. The financial performance of our publishing and conference segments is reflected in Note T to our consolidated financial statements. PUBLISHING ---------- The Company's book publishing division publishes and distributes hardcover and trade paperback books emphasizing Christian, inspirational and family value themes. The Company believes it is the largest publisher of Christian and inspirational Bibles and books in the United States. Books are published by the Company under several imprints including Thomas Nelson(R), W PublishingTM, J. Countryman(R), Tommy Nelson(R), Nelson Current, Rutledge Hill Press(R), Cool Springs PressTM, WestBow Press, Grupo Nelson, Nelson Electronic and Reference, World Publishing, Nelson Ignite and Naked, Inc., and consist generally of inspirational, trade, gift, children's and reference books emphasizing Christian and family values themes. The Company distributes books primarily through Christian bookstores, general bookstores, mass merchandisers and direct sales to consumers, churches, and ministries. In fiscal 2006, 2005 and 2004, the Company released approximately 500, 450 and 480 new book titles, respectively. The Company publishes and distributes some of the best known communicators in Christian and inspirational publishing, including John Bevere, Lisa Bevere, Henry Blackaby, Dr. Don Colbert, Ted Dekker, John Eldredge, Billy Graham, Franklin Graham, John Hagee, Hank Hanegraaf, Jack Hayford, Benny Hinn, Angela Hunt, Barbara Johnson, Thomas Kinkade, Max Lucado, John C. Maxwell, John MacArthur, Frank Peretti, Dr. Charles Stanley and Charles Swindoll. In addition, the Company maintains a backlist of approximately 3,900 titles, which provides a stable base of recurring revenues as many popular titles continue to generate significant sales from year to year. Backlist titles accounted for approximately 54% of the publishing division's net revenues in fiscal 2006. Authors and titles are supported through radio, television, cooperative advertising, author appearances, in-store promotions, print advertising and other means. The Company's book publishing business is enhanced by the breadth of its marketing and distribution channels. In addition to enhancing sales of its products, the Company believes its ability to sign and renew contracts with popular authors is improved because the Company's marketing and distribution capabilities provide exposure for the authors' books to a broader audience than its competitors (see "Marketing, Distribution and Production"). The Company believes it is the largest commercial publisher of English translations of the Bible. The Bible is based on ancient manuscripts, which are the surviving reproductions of the original writings. These manuscripts, written in Hebrew, Aramaic or Greek, have been translated into English and other modern languages by biblical scholars and theologians, generally under the auspices of a major Bible society or translation organization. Each of the many English translations available differs in some degree from the others, primarily because of different translation guidelines and principles used as the basis for each translation. The distinctiveness of each translation is also, in part, a result of the evolution of the meaning and use of words within the English language. Virtually all Bibles and Bible products currently published in the United States are based on one of fourteen major translations. Of these fourteen translations, thirteen are protected by copyright laws, which grant the copyright owner the exclusive right, for a limited term, to control the publication of such translation. The Company publishes Bibles and Bible products based on nine of the fourteen major translations, of which three are exclusive to the Company as a result of copyright ownership. Approximately 40% of the Company's net revenues from Bible publishing in fiscal 2006 were generated through sales of its proprietary Bible products. 3 The following table sets forth the nine major Bible translations, in the English language, currently published by the Company:
Date First Proprietary Translation Published to the Company ----------- ---------- -------------- King James Version (KJV) 1611 No New American Standard Bible (NASB) 1960 No Revised Standard Version, Catholic Edition (RSVCE) 1965 No New American Bible (NAB) 1970 No New King James Version(TM) (NKJV)(R) 1982 Yes International Children's Bible (ICB) 1983 Yes New Century Version (NCV) 1984 Yes New Revised Standard Version (NRSV) 1990 No New Living Translation (NLT) 1996 No
The KJV, currently published in its fourth revision, is the most widely distributed of all English translations of the Bible. In 1975, the Company commissioned the fifth revision of the KJV resulting in the publication of the proprietary NKJV(R) in 1982. Electronic Bibles and biblical reference books are published under the Nelson Electronic and Reference PublishingTM imprint. These products include electronic collections centered on Bible study; electronic libraries featuring well-known authors, such as Jack Hayford, John MacArthur, John Maxwell, Max Lucado and Charles Stanley; and software for preparing Bible study lessons. The Company believes it has achieved a leadership position in the industry with its electronic publications and is aggressively pursuing new digital formats of publication and distribution as they develop, such as the Internet and emerging portable book technologies. The Company continually seeks to expand its Bible product line by developing or aiding in the development of new translations and editions and seeking new publishing opportunities. The Company also continually makes editorial, design and other changes to its existing line of Bibles and other Bible products in an effort to increase their marketability. The Company currently publishes approximately 2,500 different Bibles and biblical reference products such as commentaries, study guides and other popular Bible help texts. Styles range from inexpensive paperbacks to deluxe leather-bound Bibles to CD-ROM to audio and video products. Different editions of a particular Bible translation are created by incorporating additional material, such as study helps, concordances, indices and Bible outlines, or artwork, into the biblical text. These editions (which are generally proprietary to the Company regardless of whether or not the Company holds proprietary rights to the underlying Bible translation) are targeted to the general market or positioned for sale to specific market segments. CONFERENCES ----------- Women of Faith(R) hosts inspirational conferences and has an Internet portal, womenoffaith.com. Both are designed to foster a community setting for Christian women and to introduce women to a lifestyle of God's Grace. The Company benefits through conference attendance fees and the sale of Christian products at the conferences. In fiscal year 2006, Women of Faith launched the "Revolve" tour, hosting 5 events with a target audience of teen girls between 7th through 12th grades. In addition, 26 traditional conferences were held throughout North America, which, all together, attracted approximately 400,000 participants. Womenoffaith.com is an on-line community of women who gather to build relationships with one another. Founded in June 1999, womenoffaith.com created a place where Christian women from all over the world come to share their life experiences and faith with one another. The conferences and the Internet site both provide opportunities to market and sell inspirational products. 4 MARKETING, DISTRIBUTION AND PRODUCTION ------------------------------------- The principal market channels through which the Company markets its products domestically are Christian bookstores, which include national chains and stores owned independently; general bookstores, including national chains such as Barnes & Noble(R) and Borders(R); mass merchandisers such as Costco(R), Target(R), Wal-Mart(R) and Sam's(R) Wholesale Club, and directly to consumers through direct mail, telemarketing, inspirational conferences and the Internet. The Company services these market channels through its sales force and through wholesalers or jobbers servicing bookstores, gift stores, other retail outlets and libraries. As of March 31, 2006, the Company employed a sales force of approximately 130 people and maintained 24-hour-a-day telemarketing capability. These employees service over 15,000 retail accounts and 18,000 church, school and consumer-related accounts. Customer orders are usually shipped through a variety of common carriers, as well as by UPS(R), FedEx(R) and parcel post. No single customer accounted for more than 10% of net revenues during fiscal 2006. The Company contracts with a number of foreign publishers to translate the Company's English titles into foreign languages. The Company typically retains publishing rights to the titles translated. The Company distributes its products internationally in South America, Europe, Australia, New Zealand, Africa, the Far East, Mexico and Canada. In fiscal 2006, the Company's export operations accounted for less than 10% of the Company's total net revenues. Substantially all of the Company's products are manufactured by domestic and foreign commercial printers, binders and manufacturers, which are selected on the basis of competitive bids. The Company may contract separately for paper and certain other supplies used by its manufacturers. The Company's net revenues fluctuate seasonally, with revenues in the first fiscal quarter historically being less than each of the remaining quarters of the year. Seasonality is the result of increased consumer purchases of the Company's products during the traditional calendar year-end holidays. In addition, the Company's quarterly operating results may fluctuate significantly due to new product introductions, the timing of selling and marketing expenses and changes in sales and product mixes. COPYRIGHTS AND ROYALTY AGREEMENTS --------------------------------- The Company customarily secures copyright registrations on its books and Bible editions in order to protect its publishing rights. Almost all of the Company's book products are published under royalty agreements with their respective authors or other copyright proprietors. COMPETITION ----------- The Company believes that it is the largest publisher of Christian and inspirational Bibles and books in the United States. The Company competes with numerous other companies that publish and distribute Christian and inspirational books, certain of which are tax-exempt organizations. While the Company's prices are comparable to those of its competitors, the Company believes that its breadth of product line, established market channels, established sales forces and customer service give it a competitive advantage. The most important factor with respect to the competitive position of the Company is the contractual relationships it establishes and maintains with authors. The Company competes with other book publishing companies, both Christian and secular, for signing top authors. The Company's ability to sign and re-sign popular authors depends on a number of factors, including distribution and marketing capabilities, the Company's management team and the royalty and advance arrangements offered. The Company believes its relationships with its authors, which are based on its reputation in the publishing industry, its marketing and distribution experience and its management expertise, give it a competitive advantage in signing and maintaining contracts with top Christian and inspirational authors. 5 EMPLOYEES --------- As of March 31, 2006, the Company employed approximately 650 persons. The Company has not suffered any work stoppages as a result of labor disputes in recent years and considers relations with its employees to be good. AVAILABLE INFORMATION --------------------- The Company files reports with the Securities and Exchange Commission (the "Commission"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time-to-time. The Company is an electronic filer and the Commission maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. The Company's website address is www.thomasnelson.com. Please note that the Company's website address is provided as an inactive textual reference only. The Company makes the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K available free of charge through the Company's website, as well as all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Commission. The information provided on the Company's website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report. Item 1A. Risk Factors ----------------------- Shareholders should carefully consider the following risks in addition to the other information contained in this report. Each of these factors could adversely affect the business, operating results and financial condition of the Company. In addition, these factors could adversely affect the value of an investment in the Company's capital stock. Our operations may be adversely affected by general economic conditions. ----------------------------------------------------------------------- General economic factors that are beyond the Company's control impact the Company's forecasts and actual performance. These factors include interest rates; recession; inflation; deflation; consumer credit availability; consumer debt levels; energy costs; tax rates and policy; unemployment trends; the threat or possibility of war, terrorism or other global or national unrest; political or financial instability; and other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude. Changes in the economic climate could adversely affect the Company's performance. Our business faces a great deal of competitive pressure. ------------------------------------------------------- The Publishing Division operates in a market that is highly competitive, with a large number of companies selling books. The Publishing Division is in direct competition with all of these other companies, the majority of which have larger financial resources than the Company. The book industry is a $25.1 billion market. Unanticipated changes in the pricing and marketing practices of these competitors may adversely affect the performance of the Company's Publishing Division. Seasonality of sales. -------------------- The Company's business is subject to seasonal influences, with a major portion of sales and income historically realized during the third and fourth quarters of our fiscal year, which includes traditional holiday seasons. This seasonality causes the Company's operating results to vary somewhat from quarter to quarter and could materially and adversely affect the market price of its securities. 6 Our operations are highly dependent on a single distribution facility. --------------------------------------------------------------------- The Company's distribution functions for most of its publishing products are handled from a single facility in Nashville, Tennessee. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair the Company's ability to distribute merchandise to its customers, which could cause sales to decline. Other factors may negatively affect our business. ------------------------------------------------ The foregoing list of risk factors is not exclusive. Other factors and unanticipated events could adversely affect the Company. These other factors include, but are not limited to: 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; implementation of new processes and systems; the outcome of any 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. Item 1B. Unresolved Staff Comments ----------------------------------- None. Item 2. Properties ------------------- The Company's executive, editorial, sales and production offices are primarily located at its corporate headquarters at 501 Nelson Place in Nashville, Tennessee. These facilities are housed in a 74,000 square foot building completed in 1981, which is owned by the Company. The Company's major warehouse facilities, which are owned by the Company, are located in a building containing approximately 275,000 square feet adjacent to its corporate headquarters in Nashville, Tennessee. This includes a 95,000 square foot building, which was completed in fiscal 1976, and additions to the warehouse and distribution center of approximately 120,000 and 60,000 square feet, which were completed during fiscal 1993 and 2003, respectively. The Company signed a lease which commenced in August 2005 for 41,000 square feet of office space, replacing a previous office space lease of 38,000 square feet, which expired in November 2005. The Company's significant leased properties are described below: Square Annual Lease Location Use/Segment Feet Rent Expiration ---------------- ------------------------- ------ -------- ---------- Nashville, TN Sales office/publishing 41,000 $580,000 12/2013 Plano, TX Office/Women of Faith 23,931 $340,000 10/2010
All building improvements on the properties are brick veneer, metal or block construction and are considered adequate and suitable by the Company for the purposes for which they are used. The Company's machinery and equipment are located in Nashville, Tennessee and Plano, Texas and consist primarily of computer equipment, warehousing and shipping racks, conveyors and other material handling equipment and office equipment. Such machinery and equipment are in good repair and adequate for the Company's present operations. All such equipment, other than a portion of the computer equipment and office equipment that is leased, is owned by the Company. 7 The Company's properties are operated near capacity. The warehouse currently operates two daily shifts and could run three daily shifts, if necessary. Additional personnel are employed as required. Item 3. Legal Proceedings -------------------------- The Company and each of its directors have been named as defendants in "City of Pontiac General Employees' Retirement System vs. Thomas Nelson, Inc., et. al.," a Tennessee state court action filed in the Chancery Court for Davidson County, Tennessee on February 24, 2006. The suit was brought in connection with the Company's recently announced Agreement and Plan of Merger with an affiliate of InterMedia Partners, L.P. (the "Merger Agreement") and certain agreements related thereto with the Company's Chairman, Sam Z. Moore. The plaintiff(s) in the action allege that the defendants breached their fiduciary duties by, among other things, pursuing a transaction without regard to the fairness of the transaction to all of the Company's shareholders and without properly valuing the company and allowing a competitive bidding process to take place. The plaintiff(s) also allege that the defendants breached their fiduciary duties by taking steps to discourage other acquisition proposals, including by agreeing to an excessive termination fee in the Merger Agreement. The lawsuit seeks among other things, certification as a class action, a determination that fiduciary duties were breached, injunctive relief against the proposed transaction and recovery of costs of the plaintiff(s), including attorneys' fees. The Company believes the suit is without merit and intends to defend against it vigorously. The Company is subject to various other legal proceedings, claims and liabilities that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not materially affect the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ The Company did not submit any matter to a vote of its security holders during the last quarter of its fiscal year ended March 31, 2006. PART II Item 5. Market for the Company's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities ---------------------------------------------------------------------------- The Common Stock and the Class B Common Stock are traded on the NYSE under the symbols "TNM" and "TNMB," respectively. The following table sets forth, for the periods indicated, the high and low closing sales prices as reported on the NYSE composite tape:
Common Class B Stock Common Stock Dividends ---------------- ---------------- Declared High Low High Low Per Share ------ ------ ------ ------ --------- Fiscal 2006 ----------- First Quarter $25.10 $20.61 $24.75 $21.25 $.05 Second Quarter 23.00 18.41 23.00 18.50 .05 Third Quarter 25.59 18.20 25.40 18.50 .05 Fourth Quarter 29.34 24.08 28.85 24.20 - --------- $.15 ========= Fiscal 2005 ----------- First Quarter $28.85 $20.30 $28.75 $20.75 $.04 Second Quarter 21.95 18.10 21.75 17.50 .05 Third Quarter 24.70 19.99 24.65 20.00 .05 Fourth Quarter 24.06 21.60 23.75 21.50 .05 --------- $.19 =========
As of June 9, 2006, there were 605 record holders of the Common Stock and 398 record holders of the Class B Common Stock. 8 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 existing at the time. Certain covenants of the Company's Credit Facility limit the amount of cash dividends payable based on the Company's cumulative consolidated net income. The following table indicates dividend activity for the fiscal year ended March 31, 2006. Dividends relate to both Common Stock and Class B Common Stock.
Declaration Dividend Record Payment Date Per Share Date Date ----------- --------- ---------------- ------------ May 19, 2005 $0.05 July 5, 2005 July 19, 2005 August 18, 2005 $0.05 October 7, 2005 October 21, 2005 November 17, 2005 $0.05 January 6, 2006 January 20, 2006
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. 9 Item 6. Selected Financial Data SELECTED FINANCIAL DATA (in thousands, except per share data)
YEARS ENDED March 31, 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------- OPERATING RESULTS (a): Net revenues $253,057 $237,817 $222,619 $217,217 $215,552 Operating income 33,096 31,708 27,140 18,926 16,563 Income from continuing operations 21,140 19,767 16,295 10,184 7,821 Income (loss) from discontinued operations (b) (163) 50 (130) -- (16,862) Cumulative effect of a change in accounting principle (c) -- -- -- -- (40,433) -------- -------- -------- -------- -------- Net income (loss) $ 20,977 $ 19,817 $16,165 $ 10,184 $(49,474) ======== ======== ======== ======== ======== Cash flow: Net cash provided by continuing operating activities $ 12,969 $ 7,121 $ 27,752 $ 34,439 $ 23,199 Net cash provided by (used in) discontinued operating activities 412 1,238 21,237 1,660 (3,092) Net cash provided by (used in) investing activities (8,245) (4,500) (6,866) (4,569) 34,705 Net cash provided by (used in) financing activities (3,344) (2,640) (21,050) (30,358) (56,411) EBITDA(d): Income from continuing operations $ 21,140 $ 19,767 $ 16,295 $ 10,184 $ 7,821 Interest expense 252 644 882 3,026 4,295 Provision for income taxes 12,524 11,647 9,756 5,878 4,495 Depreciation and amortization 3,064 2,587 2,287 2,061 2,649 -------- -------- -------- -------- -------- EBITDA FROM CONTINUING OPERATIONS 36,980 34,645 29,220 21,149 19,260 -------- ------- -------- -------- -------- Changes in working capital and other (24,011) (27,524) (1,468) 13,290 3,939 -------- -------- -------- -------- -------- Net cash provided by continuing operating activities $ 12,969 $ 7,121 $ 27,752 $ 34,439 $ 23,199 ======== ======== ======== ======== ======== ----------------------------------------------------------------------------- FINANCIAL POSITION: Total assets $226,312 $203,394 $179,266 $163,055 $185,389 Working capital 98,033 90,423 77,075 60,994 84,262 Total debt -- 2,308 5,330 25,952 56,374 Shareholders' equity 146,351 124,621 102,982 87,824 77,576 Long-term debt to total capitalization -- 1.8% 4.9% 22.8% 42.1% ----------------------------------------------------------------------------- DILUTED PER SHARE DATA (a): Income per share from continuing operations $ 1.38 $ 1.31 $ 1.09 $ 0.70 $ 0.54 Income (loss) per share from discontinued operations (b) (0.01) -- (0.01) -- (1.16) Cumulative effect of a change in accounting principle (c) -- -- -- -- (2.79) -------- -------- -------- -------- -------- Net income (loss) per share $ 1.37 $ 1.31 $ 1.08 $ 0.70 $ (3.41) ======== ======== ======== ======== ======== Dividends declared per share $ 0.15 $ 0.19 $ 0.12 $ -- $ 0.04 Book value per share 9.75 8.42 7.12 6.11 5.40 Weighted average number of shares outstanding (e) 15,344 15,107 14,999 14,596 14,488 -----------------------------------------------------------------------------
(a) For all periods presented, operating results and per share data have been reclassified for discontinued operations. (b) Discontinued operations include Ceres Candles and Gifts, Remuda Ranch Center for Anorexia and Bulimia, Inc. and The C.R. Gibson Company. (c) The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of April 1, 2001. The adoption of SFAS No. 142 resulted in a $40.4 million cumulative effect of a change in accounting principle charge to write-off goodwill associated with the Company's gift division, which was discontinued and sold during fiscal 2002. (d) We believe EBITDA (earnings from continuing operations before interest, taxes, depreciation and amortization) provides a useful measure of cash flows from operations for our investors because EBITDA is an industry comparative measure of cash flows generated by our operations prior to the payment of interest and taxes and because it is a financial measure used by management to assess the performance of our Company. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America and should not be considered in isolation or construed as a substitute for net income or other operations data or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America for purposes of analyzing our profitability or liquidity. In addition, not all funds depicted by EBITDA are available for management's discretionary use. For example, a portion of such funds are subject to contractual restrictions and functional requirements to pay debt service, fund necessary capital expenditures and meet other commitments from time to time as described in more detail in this Annual Report and on Form 10-K. EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. (e) Represents diluted weighted average number of shares outstanding in accordance with SFAS No. 128. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------------------------------ EXECUTIVE SUMMARY Thomas Nelson, Inc. publishes Bibles, books, audios, videos and CD-ROM products 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 at our website: www.thomasnelson.com. Net revenues in fiscal 2006 increased 6.4% over fiscal 2005. Net revenues from publishing products increased 6.0%, primarily due to a strong performance from our trade book groups. We had several higher volume titles compared to the prior year. In fact, our top three trade books averaged net sales units in excess of 500,000 units. Last year, our top trade book sold fewer than 400,000 net units. Net billings from our top ten titles were up 22% from the prior year. Net revenues from conferences increased 8.7%, compared to the prior fiscal year. This improvement relates to greater attendance levels at the events and hosting five new "Revolve" events for young women and teenage girls. Excluding the new "Revolve" conferences, we hosted 26 primary conferences during fiscal 2006, compared to 28 during fiscal 2005. This included one national conference this fiscal year compared to 2 national conferences last year. A national event is a 3-day event compared to our normal 2-day event and, as such, carries a higher ticket price. Included in Selling, General and Administrative Expenses are $2.5 million in costs related to the Company pursuing strategic alternatives, primarily related to the proposed Merger Agreement. The Merger Agreement, entered into on February 20, 2006, provides for the acquisition of Thomas Nelson by Faith Media Holdings, LLC, which is controlled by InterMedia Partners, LP, a private equity investment firm. On June 8, 2006, the Company held a Special Meeting of the Shareholders. At that meeting, the shareholders approved the Merger Agreement by more than 66 2/3rds vote. The Merger Agreement, dated February 20, 2006, is by and among the Company, Faith Media Holdings, LLC ("Faith Media") and Faith Media's wholly-owned subsidiary, FM Mergerco, Inc. ("Mergerco"). Upon consummation of the Merger, Mergerco will be merged into the Company, with the Company as the surviving corporation. As a result of the Merger, the Company will become a wholly-owned subsidiary of Faith Media. Faith Media was formed by InterMedia Partners, L.P. to acquire the Company in the Merger. The Merger Agreement provides for the Company to become privately owned and for the shareholders to receive $29.85 in cash ("Per Share Merger Consideration"), without interest, for each share of our common stock and our Class B common stock outstanding. In addition, at the time of the consummation of the Merger, all outstanding and unexercised options to acquire shares of the Company's common stock and Class B common stock will be immediately vested and cancelled, and the holders of such options will receive, in lieu thereof, cash consideration for each option share equal to the difference between $29.85 and the exercise price for such share, without interest. It is anticipated that, on June 12, 2006, Mergerco will close the Merger Agreement by funding the purchase price ($473.4 million) and estimated transaction expenses ($19.1 million) with a common equity contribution of $190.5 million, proceeds of a $205 million senior secured credit agreement, proceeds of $72 million in senior subordinated notes and $25 million in cash held by the Company. This summary should be read together with the complete Management's Discussion and Analysis and the related financial statements and notes thereto. 11 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS --------------------------------------------- Management's discussion and analysis of financial condition and results of operations include 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 and the actual results, including with respect to our sales, profits, liquidity and capital position. These factors include, but are not limited to: 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; implementation of new processes and systems; the outcome of any 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. RESULTS OF OPERATIONS --------------------- 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 of such data from the prior fiscal year.
Fiscal Year-to-Year Years Ended March 31, Increase (Decrease) ------------------------ ------------------------- 2006 2005 2004 2005 to 2006 2004 to 2005 ------ ------ ------ ------------ ------------ Net Revenues: Publishing 85.6% 85.9% 86.8% 6.0% 5.8% Conferences 14.4 14.1 13.2 8.7 3.4 ------ ------ ------ ------ ------ Total net revenues 100.0 100.0 100.0 6.4 6.8 Costs and expenses: Cost of goods sold 55.7 56.4 58.2 5.1 3.5 Selling, general and administrative 30.0 29.2 28.6 9.5 9.1 Depreciation and amortization 1.2 1.1 1.0 18.4 13.1 ------ ------ ------ ------ ------ Total costs and expenses 86.9 86.7 87.8 6.7 5.4 ------ ------ ------ ------ ------ Operating income 13.1 13.3 12.2 4.4 16.8 Interest expense 0.1 0.3 0.4 (60.9) (27.0) ------ ------ ------ ------ ------ Net income 8.3% 8.3% 7.3% 5.9% 21.3% ====== ====== ====== ====== ======
The Company's net revenues fluctuate seasonally, with revenues in the first fiscal quarter historically being less than each of the remaining quarters of the year. Seasonality is the result of increased consumer purchases of the Company's products during the traditional calendar year-end holidays. In addition, the Company's quarterly operating results may fluctuate significantly due to new product introductions, the timing of selling, marketing and other operating expenses and changes in sales and product mixes. Fiscal 2006 Compared to Fiscal 2005 ----------------------------------- Net revenues in fiscal 2006 increased $15.2 million or 6.4% over fiscal 2005. Net revenues from publishing products increased $12.3 million or 6.0%, primarily due to a strong performance by our trade book imprints. We had several higher volume titles compared to the prior year. In fact, our top three trade books averaged net sales units in excess of 500,000 units. Last year, our top trade book sold fewer than 400,000 net units. Net billings from our top ten titles were up 22% from the prior year. Net revenues from conferences increased $2.9 million, or 8.7%, primarily due to larger attendance at the events and hosting five new "Revolve" events for young women and teenage 12 girls. We hosted 26 events in fiscal 2006, excluding the new "Revolve" events, compared to 28 events in fiscal 2005. These events include 1 national event in fiscal 2006 compared to 2 national events in fiscal 2005. A national event is a 3-day event compared to our normal 2-day event and, as such, carries a higher ticket price. Price increases did not have a material effect on net revenues. The Company's cost of goods sold increased $6.8 million, or 5.1% from fiscal 2005 and, as a percentage of net revenues, decreased to 55.7% from 56.4% in the prior year. The improvement in cost of goods sold as a percentage of net revenues is primarily attributable to improved cost of good sold for conferences as a percentage of sales. This improvement was due to several factors, such as improved attendance and higher royalty and affinity income. Publishing cost of sales as a percentage of revenue improved slightly due to several higher volume titles, mostly offset by a decline in recovered costs from royalty advances. Selling, general and administrative expenses, excluding depreciation and amortization, increased by $6.6 million, or 9.5% from fiscal 2005 and, as a percentage of net revenues, increased to 30.0% from 29.2%. The increase in dollars and percentage over the prior year is primarily attributable to $2.5 million of additional expenditures incurred in relation to pursuing strategic alternatives, primarily related to the proposed merger transaction. Depreciation and amortization increased slightly from the prior year due to building improvements and investments in computer hardware and software. Other Income consists primarily of interest income from cash equivalents and notes receivable (included in other assets and collected during fiscal year 2006). Interest expense for fiscal 2006 was $0.3 million compared to $0.6 million in the prior year, a decrease of $0.3 million due to lower debt levels. The provision for income taxes as a percentage of income from continuing operations before income taxes for fiscal 2006 was 37.2% compared to 37.1% in the prior year. We expect our annual marginal income tax rate to be 37.2% for future earnings. Fiscal 2005 Compared to Fiscal 2004 ----------------------------------- Net revenues in fiscal 2005 increased $15.2 million or 6.8% over fiscal 2004. Net revenues from publishing products increased $11.2 million or 5.8%, primarily due to a strong performance by our new imprints WestBow Press (fiction) and Nelson Impact (curriculum), which were first introduced in fiscal 2005, and fiscal 2005 being the first full year for our World Publishing acquisition. Net revenues from conferences increased $4 million, or 13.4%, primarily due to larger attendance at the events and higher product sales per attendee. We hosted 28 events in fiscal 2005 compared to 29 events in fiscal 2004. These events include 2 national events in fiscal 2005 compared to one national event in fiscal 2004. Price increases did not have a material effect on net revenues. The Company's cost of goods sold increased $4.5 million, or 3.5% from fiscal 2004 and, as a percentage of net revenues, decreased to 56.4% from 58.2% in the prior year. 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. The improvement in publishing products was partially offset by a planned increase in cost of goods sold at conferences as a percentage of net revenues as an attempt to increase attendance and total profit at conference events. Selling, general and administrative expenses, excluding depreciation and amortization, increased by $5.8 million, or 9.1% from fiscal 2004 and, as a percentage of net revenues, increased to 29.2% from 28.6%. 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. 13 Depreciation and amortization increased slightly from the prior year due to building improvements and investments in computer hardware and software. Other Income consists primarily of interest income from cash equivalents and notes receivable (included in other assets). The loss in fiscal 2004 was attributable to an abandoned, unconsolidated start-up joint venture, partially offset by interest income. Interest expense for fiscal 2005 was $0.6 million compared to $0.9 million in the prior year, a decrease of $0.3 million due to lower debt levels. The provision for income taxes for fiscal 2005 was 37.1% compared to 37.5% in the prior year. The decline in the effective tax rate is primarily attributable to a permanent tax difference related to product donations to charitable organizations during the fourth quarter of fiscal 2005. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At March 31, 2006, the Company had $25.8 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 March 31, 2006, the Company had working capital of $98.0 million. Under its bank credit facilities, at March 31, 2006 and 2005, the Company had no borrowings outstanding, and $50 million available for borrowing. Net cash provided by operating activities was $13.4 million, $8.4 million, and $49.0 million fiscal 2006, 2005 and 2004, respectively. The cash generated by operations during fiscal 2006 was principally attributable to income from operations and reductions in inventories, partially offset by increases in receivables and royalty advances paid to key authors for future projects. The increase in receivables was due to increases in publishing revenues late in the final quarter of fiscal 2006. The cash provided by operations during fiscal 2005 was principally attributable to income from operations, partially offset by royalty advances paid to established authors for future projects. The cash generated by operations during fiscal 2004 was principally attributable to income from operations and an $18.7 million tax refund related to discontinued operations. During fiscal 2006, capital expenditures totaled approximately $8.5 million. The capital expenditures were primarily for corporate office renovations, computer equipment, computer software and warehousing equipment. In fiscal 2007, the Company anticipates capital expenditures of approximately $3.8 million, consisting primarily of corporate office renovations, computer equipment, computer software and warehousing equipment. On April 25, 2006, the Company entered into an agreement with the United States Department of the Treasury - Internal Revenue Service ("IRS") regarding a proposed assessment of federal income tax and agreed to pay approximately $7.9 million in tax, together with interest thereon as provided by law (accrued interest as of April 25, 2006 was estimated at approximately $1.5 million). The assessment relates primarily to the Company's disposition of the business of its former subsidiary, C.R. Gibson for which the Company received a federal income tax refund of $18.7 million in April 2003 and reduced subsequent income tax payments by approximately $3.5 million related to tax losses recognized on the disposal of C.R. Gibson. The assessment, which previously had been reported as a non-current tax liability, has now been reclassified as a current tax liability. The agreement is subject to review by the Congressional Joint Committee on Taxation. If the agreement is finally approved, the amount reported by the Company in excess of the agreed assessment, which continues to be reported as a non-current tax liability, will be recorded as income from discontinued operations. No assurance can be given that the agreement will be finally approved. The Company's bank credit facility is 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 Company has agreed to maintain certain financial ratios and tangible net worth, as well as to limit the payment of cash dividends. The Credit Facility matures on October 15, 2008. At March 31, 2006, the Company had no balance outstanding under the Credit Facility and $50 million available for borrowing. At March 31, 2006, the Company was in compliance with all covenants of the Credit Facility. 14 Management believes cash generated by operations, cash in banks and borrowings available under the Credit Facility (or Credit Facilities and debt financings expected to be entered into in connection with the Merger) will be sufficient to fund anticipated working capital and capital expenditure requirements for existing operations in fiscal 2007. The Company' current cash commitments include operating lease obligations and commitments to purchase inventories and pay royalty advances 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 following table sets forth these commitments. The Company has no off-balance sheet commitments or transactions with any variable interest entities (VIE's). The Company also does not have any undisclosed material related party transactions or relationships with management, officers or directors.
Payments Due by Fiscal Year Contractual ----------------------------------------------------- commitments 2011 and (in 000's) 2007 2008 2009 2010 thereafter Total --------------------- ------- ------- ------- ------- ---------- ------- Long-term debt $ - $ - $ - $ - $ - $ - Inventory purchases 10,303 4,000 4,000 667 - 18,970 Operating leases 885 1,253 1,011 966 1,702 5,817 Royalty advances 11,042 2,698 1,517 1,152 510 16,919 ------- ------- ------- ------- ------- ------- Total obligations $22,230 $ 7,951 $ 6,528 $2,785 $ 2,212 $41,706 ======= ======= ======= ======= ======= =======
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 existing 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. The following table indicates dividend activity for the fiscal year ended March 31, 2006. Dividends relate to both Common Stock and Class B Common Stock.
Declaration Dividend Record Payment Date Per Share Date Date ----------- --------- ---------------- ------------ May 19, 2005 $0.05 July 5, 2005 July 19, 2005 August 18, 2005 $0.05 October 7, 2005 October 21, 2005 November 17, 2005 $0.05 January 6, 2006 January 20, 2006
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. ACCOUNTING PRONOUNCEMENTS ------------------------- In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash Flows." The provisions of SFAS 123R are similar to those of SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest. SFAS 123R is effective for all public companies no later than the first annual period beginning after June 15, 2005 and applies to all outstanding and unvested share-based payment awards at a company's adoption date. We plan to adopt this pronouncement beginning in the first quarter of fiscal 2007, using the modified-prospective transition method. Under this method, compensation cost will be recognized in the financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. As we previously adopted only the pro forma disclosures 15 under SFAS 123, we will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption, using the same estimate of grant-date fair value and the same option pricing model used to determine the pro forma disclosures under SFAS 123 (see Note A of the Notes To Consolidated Financial Statements). CRITICAL ACCOUNTING POLICIES ---------------------------- The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related 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 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 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 on the last day that the conference takes place. Cash received in advance of conferences is included in the accompanying 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 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, 16 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 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 consolidated financial statements, depending on the expected publication date (availability for shipment) of the product. Except for our established authors, 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 established authors are typically expensed as they are recovered through sales. These authors generally have multiple year and multiple book contracts, as well as a 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 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: 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. The Company's annual impairment testing in fiscal 2006 and 2005 indicated no goodwill impairment was evident. Item 7A. Quantitative and Qualitative Disclosures about Market Risk -------------------------------------------------------------------- The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing and cash management activities. The exposure relates primarily to the Credit Facility. However, there were no borrowings outstanding under the Credit Facility at March 31, 2006. Interest income on invested cash is not material. 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. 17 Item 8. Financial Statements and Supplementary Data ---------------------------------------------------- THOMAS NELSON, INC. AND SUBSIDIARIES ------------------------------------ INDEX ----- PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Statements of Income for the Fiscal Years Ended March 31, 2006, March 31, 2005 and March 31, 2004......... 19 Consolidated Balance Sheets for the Fiscal Years Ended March 31, 2006 and March 31, 2005 .............................. 20 Consolidated Statements of Shareholder Equity and Comprehensive Income for the Fiscal Years Ended March 31, 2006, March 31, 2005 and March 31, 2004 .............. 21 Consolidated Cash Flows for the Fiscal Years Ended March 31, 2006, March 31, 2005 and March 31, 2004 .............. 22 Notes to Consolidated Financial Statements ....................... 23 FINANCIAL STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED MARCH 31, 2006, MARCH 31, 2005 AND MARCH 31, 2004 II - Valuation and Qualifying Accounts ........................... 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING ........................ 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............... 40 All other schedules were omitted because they are not required, not applicable or the information is otherwise shown in the financial statements or the notes thereto. 18 THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Years Ended March 31, ------------------------------- 2006 2005 2004 -------- -------- -------- NET REVENUES $253,057 $237,817 $222,619 COSTS AND EXPENSES: Cost of goods sold 140,857 134,057 129,532 Selling, general and administrative 76,040 69,465 63,660 Depreciation and amortization 3,064 2,587 2,287 -------- -------- -------- Total costs and expenses 219,961 206,109 195,479 -------- -------- -------- OPERATING INCOME 33,096 31,708 27,140 Other income (expense) 825 354 (241) Interest expense 252 644 882 -------- -------- -------- Income from continuing operations before income taxes 33,669 31,418 26,017 Provision for income taxes 12,524 11,647 9,756 Minority interest 5 4 (34) -------- -------- -------- Income from continuing operations 21,140 19,767 16,295 Discontinued operations: Gain (loss) on disposal, net of applicable tax benefit of $97, tax expense of $31, and tax benefit of $78, respectively (163) 50 (130) -------- -------- -------- Net income $ 20,977 $ 19,817 $ 16,165 ======== ======== ======== Weighted average number of shares outstanding: Basic 14,921 14,649 14,404 ======== ======== ======== Diluted 15,344 15,107 14,999 ======== ======== ======== NET INCOME PER SHARE: Basic: Income from continuing operations $ 1.42 $ 1.35 $ 1.13 Loss from discontinued operations (0.01) - (0.01) -------- -------- -------- Net income per share $ 1.41 $ 1.35 $ 1.12 ======== ======== ======== Diluted: Income from continuing operations $ 1.38 $ 1.31 $ 1.09 Loss from discontinued operations (0.01) - (0.01) -------- -------- -------- Net income per share $ 1.37 $ 1.31 $ 1.08 ======== ======== ======== See Notes to Consolidated Financial Statements
19 THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, -------------------- 2006 2005 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 25,791 $ 23,999 Accounts receivable, less allowances of $9,700 and $8,539, respectively 69,622 61,342 Inventories 34,944 36,678 Prepaid expenses 24,922 18,037 Deferred income tax benefits 5,116 4,797 -------- -------- Total current assets 160,395 144,853 Property, plant and equipment, net 19,999 14,618 Other assets 12,122 12,181 Deferred charges 2,094 1,353 Intangible assets 2,398 1,085 Goodwill 29,304 29,304 -------- -------- TOTAL ASSETS $226,312 $203,394 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,713 $ 25,739 Accrued expenses 13,013 12,699 Deferred revenue 10,336 9,784 Dividends payable - 740 Income taxes currently payable 11,300 3,160 Current portion of long-term debt - 2,308 -------- -------- Total current liabilities 62,362 54,430 Long-term taxes payable 14,473 22,592 Deferred tax liabilities 1,024 911 Other liabilities 2,084 827 Minority interest 18 13 Commitments and contingencies - - 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 and 14,066,327 and 13,875,108 shares, respectively 14,066 13,875 Class B Common Stock, $1.00 par value, authorized 5,000,000 shares; issued 948,228 and 923,762 shares, respectively 948 924 Additional paid-in capital 51,760 48,978 Retained earnings 79,577 60,844 -------- -------- Total shareholders' equity 146,351 124,621 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $226,312 $203,394 ======== ======== See Notes to Consolidated Financial Statements
20 THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands, except per share data)
Class B Additional Common Common Paid-In Retained Stock Stock Capital Earnings Total -------- -------- --------- -------- -------- Balance at April 1, 2003 $13,350 $1,025 $44,064 $29,385 $ 87,824 Net and comprehensive income - - - 16,165 16,165 Class B Stock converted to common 62 (62) - - - Common Stock issued: Option plans -- 90,823 common shares 91 - 633 - 724 Dividends declared -- $0.12 per share - - - (1,731) (1,731) -------- -------- --------- -------- -------- Balance at March 31, 2004 13,503 963 44,697 43,819 102,982 ======== ======== ========= ======== ======== Net and comprehensive income - - - 19,817 19,817 Class B Stock converted to common 39 (39) - - - Common Stock issued: Option plans -- 332,821 common shares 333 - 2,792 - 3,125 Tax benefit from stock options exercised - - 1,489 - 1,489 Dividends declared -- $0.19 per share - - - (2,792) (2,792) -------- -------- --------- -------- -------- Balance at March 31, 2005 13,875 924 48,978 60,844 124,621 ======== ======== ========= ======== ======== Net and comprehensive income - - - 20,977 20,977 Class B Stock converted to common 21 (21) - - - Common Stock issued: Option plans -- 215,985 common shares 170 45 2,225 - 2,440 Tax benefit from stock options exercised - - 557 - 557 Dividends declared -- $0.15 per share - - - (2,244) (2,244) -------- -------- --------- -------- -------- Balance at March 31, 2006 $14,066 $ 948 $51,760 $79,577 $146,351 ======== ======== ========= ======== ======== See Notes to Consolidated Financial Statements
21 THOMAS NELSON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended March 31, ------------------------------------ 2006 2005 2004 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $21,140 $19,767 $16,295 Adjustments to reconcile income to net cash provided by continuing operations: Depreciation and amortization 3,064 2,587 2,287 Amortization of deferred charges 116 170 210 Deferred income taxes (206) 16 462 Loss on sale of fixed assets and assets held for sale 51 16 110 Minority interest 5 4 (34) Changes in assets and liabilities, net of acquisitions and disposals: Accounts receivable, net (8,174) (5,067) (135) Inventories 1,824 (6,337) 7,447 Prepaid expenses (6,885) (4,019) (463) Accounts payable and accrued expenses 2,303 5,521 (1,122) Deferred revenue 552 (1,974) 265 Income taxes currently payable (569) 741 40 Change in other assets and liabilities (809) (5,793) 2,390 Tax benefit from stock options exercised 557 1,489 - ---------- ---------- ---------- Net cash provided by continuing operations 12,969 7,121 27,752 ---------- ---------- ---------- Discontinued operations: Loss on disposal (163) 50 (130) Federal income tax payable 590 1,302 21,290 Changes in discontinued net assets (15) (114) 77 ---------- ---------- ---------- Net cash provided by discontinued operations 412 1,238 21,237 ---------- ---------- ---------- Net cash provided by operating activities 13,381 8,359 48,989 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,493) (4,153) (3,666) Proceeds fromcollection on Notes Receivable 1,974 - - Net proceeds from sales of property, plant and equipment and assets held for sale 13 3 1,734 Purchase of net assets of acquired companies - net of cash received (739) - (4,559) Acquisition of publishing rights (1,000) (350) (375) ---------- ---------- ---------- Net cash used in investing activities (8,245) (4,500) (6,866) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under revolving credit facility - - (17,000) Payments on long-term debt (2,308) (3,022) (3,622) Dividends paid (2,984) (2,631) (1,152) Proceeds from issuance of Common Stock 2,440 3,125 724 Other (492) (112) - ---------- ---------- ---------- Net cash used in financing activities (3,344) (2,640) (21,050) ---------- ---------- ---------- Net increase cash and cash equivalents 1,792 1,219 21,073 Cash and cash equivalents at beginning of year 23,999 22,780 1,707 ---------- ---------- ---------- Cash and cash equivalents at end of year $25,791 $23,999 $22,780 ========== ========== ========== Supplemental disclosures of noncash investing and financing activities: Dividends accrued and unpaid $ - $ 740 $ 579 See Notes to Consolidated Financial Statements
22 Thomas Nelson, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE A - DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS: Thomas Nelson, Inc. (a Tennessee corporation) and subsidiaries (the "Company"), is a publisher, producer and distributor of Bibles, books, audios, videos and CD-ROM products emphasizing Christian, inspirational and family values themes; the Company also hosts inspirational conferences. The principal markets for the Company's products are Christian bookstores, general bookstores, mass merchandisers and direct marketing to consumers. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements consist of the accounts of the Company, including its subsidiaries, Worthy, Incorporated and Live Event Management, Inc. ("LEM"), formerly New Life Treatment Centers, Inc. All intercompany transactions and balances have been eliminated in consolidation. LEM has minority shareholders that own approximately 0.1% of the outstanding equity shares of LEM at March 31, 2006. Minority interest is presented as an element of net income (loss) on the consolidated statements of income and as a separate caption between liabilities and shareholders' equity on the consolidated balance sheets. At the time of acquisition, LEM had a net deficit in shareholders' equity. MERGER AGREEMENT: On February 20, 2006, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Faith Media Holdings, LLC ("FM Holdings") and FM Holdings' wholly owned subsidiary, FM Mergerco, Inc. ("Mergerco"). FM Holdings is an affiliate of InterMedia Partners, L.P. (collectively, "Faith Media"). Under the terms of the Merger Agreement, Mergerco will merge with and into the Company, with the Company continuing as the surviving corporation ("the "Merger"). In the Merger, all of the shares of the Company's common stock and Class B common stock issued and outstanding immediately prior to the consummation of the Merger will be converted into and exchanged for the right to receive $29.85 in cash, without interest. (See Note U - Subsequent Events.) 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 conferences across North America. 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 consolidated balance sheets. 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 and sales to certain market channels are not returnable. Revenue from conferences is recognized on the last day that the conference takes place. Cash received in advance of conferences is included in the accompanying consolidated balance sheets 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. 23 ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company records an allowance for doubtful accounts as a reduction to accounts receivable in the accompanying consolidated balance sheets. The valuation allowance has a 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 or 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 using the first-in, first-out (FIFO) valuation method. The FIFO method of accounting for inventory was selected to value our inventory at the lower of market or current cost because the Company continuously introduces new products, eliminates existing products and redesigns products. Therefore, inflation does not have a material effect on the valuation of inventory. Costs of producing publishing products are included in inventory and charged to operations when product is sold or otherwise disposed. These costs include paper, printing, binding, outside editorial and design, typesetting, artwork, international freight and duty costs, when applicable. The Company 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 consolidated balance sheets. 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. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are provided for, principally on the straight-line method over the estimated useful lives of the individual assets: 30 years for buildings and 3 to 10 years for furniture, fixtures and equipment. GOODWILL: 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. The Company's annual impairment testing in fiscal 2006 and 2005 indicated no goodwill impairment was evident. IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value, less costs to sell, and no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. PREPAID EXPENSES: Prepaid expenses consist primarily of royalty advances. 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 consolidated balance sheets, depending on the expected publication date (availability for shipment) of the product. Except for our established authors, 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). 24 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 and 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 established authors are typically expensed as they are recovered through sales. These authors generally have multiple year and multiple book contracts, as well as a strong sales history of backlist titles (products published during preceding fiscal years) that can be used to recover advances over long periods of time. Certain costs related to the Women of Faith conferences are paid in advance. Charges such as deposits for venues, postage and printing costs for mailings, etc., are often incurred in advance and are classified as prepaid expenses until the conferences take place, at which time they are recognized as costs of goods sold in the consolidated statements of income. DEFERRED CHARGES: Deferred charges consist primarily of loan issuance costs that are being amortized over the average life of the related debt, which approximates the effective interest method, and publication costs that are expected to be of benefit to future periods. 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 consolidated balance sheets and are amortized on a straight-line basis for a period not to exceed five years (as determined by management). OTHER ASSETS: Other assets include prepaid royalty costs for works and projects that are not expected to be released within the next fiscal year. 25 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.
2006 2005 2004 -------- -------- -------- Net income (in thousands): As reported $20,977 $19,817 $16,165 ======== ======== ======== Less: additional stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects 729 1,760 1,781 -------- -------- -------- Pro forma net income $20,248 $18,057 $14,384 ======== ======== ======== Net income (loss) per share: Basic -- As reported $ 1.41 $ 1.35 $ 1.12 ======== ======== ======== Pro forma $ 1.36 $ 1.23 $ 1.00 ======== ======== ======== Diluted -- As reported $ 1.37 $ 1.31 $ 1.08 ======== ======== ======== Pro forma $ 1.32 $ 1.20 $ 0.96 ======== ======== ========
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:
2006 2005 2004 -------- -------- -------- Expected future dividend payment $ 0.20 $ 0.20 $ 0.16 Expected stock price volatility 43.1% 51.4% 45.2% Risk free interest rate 4.2% 4.5% 3.3% Expected life of options 9 years 9 years 9 years Average fair value $11.19 $12.61 $ 6.18
At March 31, 2006, there were no other securities outstanding that could potentially dilute basic earnings per share in the future. INCOME TAXES: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME: Comprehensive income generally includes all changes to equity during a period, excluding those resulting from investments by stockholders and distributions to stockholders. Comprehensive income was the same as net income for the periods presented. STATEMENT OF CASH FLOWS: For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less as cash equivalents. 26 COMPUTATION OF NET INCOME PER SHARE: Basic net income per share is computed by dividing net income by the weighted average number of Common and Class B Common shares outstanding during the year. Diluted earnings per share reflects the dilutive effect of stock options outstanding during the period. The following table presents the calculations of earnings per share (in thousands, except per share data):
March 31, March 31, March 31, 2006 2005 2004 ----------- ----------- ----------- BASIC EARNINGS PER SHARE: ------------------------ Weighted average shares outstanding 14,921 14,649 14,404 =========== =========== =========== Income from continuing operations $21,140 $19,767 $16,295 Loss from discontinued operations (163) 50 (130) ----------- ----------- ----------- Net income $20,977 $19,817 $16,165 =========== =========== =========== Income per share from continuing operations $ 1.42 $ 1.35 $ 1.13 Loss per share from discontinued operations (0.01) - (0.01) ----------- ----------- ----------- Net income per share $ 1.41 $ 1.35 $ 1.12 =========== =========== =========== DILUTED EARNINGS PER SHARE: -------------------------- Basic weighted average shares outstanding 14,921 14,649 14,404 Dilutive stock options - based on treasury stock method using the average market price 423 458 595 ----------- ----------- ----------- Total shares 15,344 15,107 14,999 =========== =========== =========== Income from continuing operations $21,140 $19,767 $16,295 Loss from discontinued operations (163) 50 (130) ----------- ----------- ----------- Net income $20,977 $19,817 $16,165 =========== =========== =========== Income per share from continuing operations $ 1.38 $ 1.31 $ 1.09 Loss per share from discontinued operations (0.01) - (0.01) ----------- ----------- ----------- Net income per share $ 1.37 $ 1.31 $ 1.08 =========== =========== ===========
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash Flows." The provisions of SFAS 123R are similar to those of SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest. 27 SFAS 123R is effective for all public companies no later than the first annual period beginning after June 15, 2005 and applies to all outstanding and unvested share-based payment awards at a company's adoption date. We plan to adopt this pronouncement beginning in the first quarter of fiscal 2007 using the modified-prospective transition method. Under this method, compensation cost will be recognized in the financial statements issued subsequent to the date of adoption for all shared-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. As we previously adopted only the pro forma disclosures under SFAS 123, we will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of grant-date fair value and the same option pricing model used to determine the pro forma disclosures under SFAS 123 (see "Stock-based Compensation" above). RECLASSIFICATIONS: Certain reclassifications of prior period amounts have been made to conform to the current year's presentation. NOTE B - ACQUISITIONS On September 19, 2003, the Company purchased substantially all of the assets of World Bible Publishers ("World") from RiversideWorld, Inc. for approximately $5.3 million. As of December 31, 2003, the Company had paid cash in the amount of $4.6 million and issued credit against accounts receivable from RiversideWorld in the amount of $0.7 million. World primarily publishes Bibles and Christian books. The purchase price has been 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 $1.1 million, which will be amortized over a five-year period). This acquisition was accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenues or expenses related to this acquisition prior to the closing date. This acquisition did not have a material impact on the consolidated financial statements. NOTE C - DISCONTINUED OPERATIONS On November 7, 2001, effective October 31, 2001, the Company completed the sale of the Company's gift business, including substantially all of the assets and certain liabilities of the Company's wholly-owned subsidiary, The C.R. Gibson Company ("Gibson"). Gibson is a designer, marketer and distributor of stationery and memory albums (the Company' former gift product segment). The purchase was consummated at a purchase price of $30.5 million, subject to certain purchase price adjustments. During the third quarter of fiscal 2003, the Company settled claims and working capital adjustments related to the sale of the gift assets for total additional consideration of $2.5 million. The Company utilized net proceeds from the sale to pay down existing debt. The accompanying consolidated financial statements reflect the gift business segment as discontinued operations for all periods presented. During fiscal 2006, the Company recorded loss on disposal of $260,000 to record legal expenses related to the C.R. Gibson worthless stock tax deduction and related tax filing. During fiscal 2005, the Company recorded income on disposal of $81,000 to record final settlement of certain reserved items, partially offset by legal expenses. During fiscal 2004, the Company recorded a loss on disposal of $249,000 to record additional allowances for the disposal of Gibson, primarily the write-down of assets held for sale to its estimated fair value, less costs to sell. During December 2000, the Company determined it would dispose of its Ceres Candles operation, a former division of its gift segment. Ceres manufactured and marketed candles, primarily under private labels for the specialty and department store markets, and was headquartered in Hayward, California. This sale was completed in August 2001 for approximately $1.5 million. During fiscal 2004, the Company recorded income on disposal of $41,000 related to a change in estimate for certain unutilized allowances for the disposal of Ceres. Effective April 1, 2001, Remuda Ranch was reclassified as a discontinued operation. Remuda Ranch Center for Anorexia and Bulimia, Inc. ("Remuda Ranch") operates therapeutic centers in Arizona for women with eating disorders. For periods prior to April 1, 2001, Remuda Ranch net assets are reflected as assets held for sale in accordance with Emerging Issues Task Force Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold." Remuda Ranch was part of the LEM acquisition during fiscal 2000 and was considered as assets held for sale from the acquisition date through March 31, 2001. The Company closed the sale of the Remuda Ranch net assets in July 2001 for approximately $7.2 million in cash and a $2 million note receivable. The Company collected the $2 million note receivable during fiscal 2006, which was included in other assets. 28 NOTE D - INVENTORIES Inventories consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Finished goods $31,020 $33,540 Work in process and raw materials 3,924 3,138 -------- -------- $34,944 $36,678 ======== ========
NOTE E - PREPAID EXPENSES Prepaid expenses consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Royalties $19,006 $13,327 Prepaid conference expenses 2,928 2,490 Prepaid production costs 1,429 968 Other 1,559 1,252 -------- -------- $24,922 $18,037 ======== ========
NOTE F - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Land $ 291 $ 291 Buildings 14,469 12,616 Machinery and equipment 16,929 11,958 Furniture and fixtures 4,280 4,109 Leasehold Improvements 1,060 1,042 Construction in progress 257 1,981 -------- -------- 37,286 31,997 Less accumulated depreciation and amortization ( 17,287) ( 17,379) -------- -------- $19,999 $14,618 ======== ========
Depreciation expense was $3.0 million, $2.5 million and $2.3 million for fiscal years 2006, 2005 and 2004, respectively. NOTE G - DEFERRED CHARGES Deferred charges consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Deferred publication costs $2,006 $1,149 Deferred finiancing charges 88 204 -------- -------- $2,094 $1,353 ======== ========
Amortization for deferred charges was $0.1 million, $0.2 million and $0.2 million for fiscal 2006, 2005 and 2004, respectively. NOTE H - OTHER ASSETS Other assets consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Prepaid royalties $ 9,039 $ 7,715 Notes receivable - 2,000 Cash surrender value of life insurance policies 2,873 2,324 Other 210 142 -------- --------- $12,122 $12,181 ======== =========
29 NOTE I - GOODWILL AND INTANGIBLE ASSETS
Weighted Gross Average Net Carrying Amortization Accumulated Carrying Amount Period Amortization Amount -------- ------------ ------------ --------- Goodwill $29,304 ========= Intangible assets ----------------- Amortizable: Publishing rights and copyrights $3,577 5 $2,929 648 Non-amortizable: Publishing rights 1,750 n/a - 1,750 -------- ------------ --------- Total intangible assets $5,327 $2,929 $ 2,398 ======== ============ =========
Amortization expense for intangible assets was $24,000, $93,000 and $88,000 for fiscal years 2006, 2005 and 2004, respectively. Estimated amortization expense for the next five years is $100,000 in each of fiscal years 2007, 2008, 2009, 2010 and 2011. NOTE J - ACCRUED EXPENSES Accrued expenses consisted of the following at March 31 (in thousands):
2006 2005 -------- -------- Accrued royalties $ 5,696 $ 5,288 Accrued compensation 5,933 6,078 Accrued group insurance 16 23 Accrued interest - 39 Accrued sales and property tax 123 106 Net liability of discontinued operations 59 44 Accrued conference expenses 197 194 Unclaimed property liabilities 246 177 Accrued legal and audit 95 229 Contractual commitments 56 116 Other 592 405 -------- -------- $13,013 $12,699 ======== ========
Cash payments for interest were $0.4 million in 2006, $0.7 million in 2005, and $1.1 million in 2004. NOTE K - LONG-TERM DEBT The Company's bank credit facility is 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 average interest rate for the revolving credit facility was approximately 3.9% at March 31, 2006. The Company has agreed to maintain certain financial ratios and tangible net worth, as well as to limit the payment of cash dividends under the Credit Facility. The Credit Facility matures on October 15, 2008. At March 31, 2006, the Company had no outstanding balance under the Credit Facility and $50 million available for borrowing. At March 31, 2006, the Company was in compliance with all covenants of the Credit Facility. 30 NOTE L - LEASES Total rental expense for operating leases associated with continuing operations, including short-term leases of less than a year, amounted to approximately $2.0 million in 2006, $1.9 million in 2005 and $2.0 million in 2004. Generally, the leases provide that, among other things, the Company shall pay for utilities, insurance, maintenance and property taxes in excess of base year amounts. Minimum rental commitments under non-cancelable operating leases for the years ending March 31 are as follows (in thousands):
2007 $ 885 2008 1,253 2009 1,011 2010 966 2011 and thereafter 1,702 ------- Total minimum lease payments $5,817 ======
NOTE M - STOCK PLANS STOCK-BASED COMPENSATION PLANS: The Company's Compensation Committee administers the Company's stock-based compensation plans. The Company accounts for options issued to employees and directors under APB Opinion No. 25 and related interpretations. All options are granted with exercise prices equal to or greater than market value of the Company's Common Stock on the date of grant. As a result, no compensation cost has been recognized. The Company's 1992 Amended and Restated Employee Stock Incentive Plan (the "Stock Incentive Plan") has expired, except for the outstanding options remaining. The Stock Incentive Plan, as amended, authorized grants of options to purchase up to 2,140,000 shares of authorized but unissued common or Class B Common Stock. Stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and other stock-based awards have been granted to employees under this plan. In addition, 140,000 shares of Common Stock were authorized for issuance under this plan for annual stock option grants to each of the Company's outside directors for the purchase of 2,000 shares of Common Stock. Stock options have been granted under this plan as indicated in the table below. The options in the Stock Incentive Plan typically vest at a rate of 33 1/3% on the first through third anniversaries of the date of grant, subject to certain performance goals, and vest in full if the executive is employed on the third anniversary of the date of grant, regardless of whether such goals are met.
Remaining Outstanding Options Weighted Weighted Shares ------------------- Average Average Reserved Common Class B Exercise and Fair 1992 PLAN For Grant Stock Stock Grant Price Value ------------------------------------------------------------------------------- April 1, 2003 654,491 1,383,834* - $10.09 ============================== Options canceled 75,534 (75,534) - 10.69 Options exercised - (91,823)** - 8.20 Options granted (340,000) 340,000 - 11.98 $6.74 Termination of Plan (390,025) - - - ============================== March 31, 2004 - 1,556,477 - 8.87 ============================== Options canceled - (58,170) - 12.98 Options exercised - (332,821) - 9.39 Options granted - - - - - ------------------------------ March 31, 2005 - 1,165,486 - 10.78 ============================== Options canceled - (3,001) - 17.22 Options exercised - (211,985) - 11.20 Options granted - - - - ------------------------------ March 31, 2006 - 950,500 - $10.67 - =====================================================
*Includes 231,684 options exercisable as either Common or Class B Common Stock. **1,000 shares returned to Company at market price in lieu of cash to exercise certain options. 31 The 2003 Stock Incentive Plan ("the Plan") has 1,000,000 authorized shares of stock. Any number of shares of Common Stock or Class B Common Stock may be awarded under the Plan so long as the total number of shares of stock awarded does not exceed 1,000,000 shares, but no more than 200,000 shares may be issued as Restricted Stock and no more than 500,000 shares may be issued upon exercise of options qualified under Section 422 of the Internal Revenue Code (Incentive Stock Options).
Remaining Outstanding Options Weighted Weighted Shares ------------------- Average Average Reserved Common Class B Exercise and Fair 2003 PLAN For Grant Stock Stock Grant Price Value ------------------------------------------------------------------------------- Plan implemented 1,000,000 - - - Options granted (300,000) - 300,000 $12.33 $5.55 ------------------------------ March 31, 2004 700,000 - 300,000 12.33 ------------------------------ Options canceled - - - - Options exercised - - - - Options granted (161,000) 161,000 - 19.55 $12.61 ------------------------------ March 31, 2005 539,000 161,000 300,000 14.85 ------------------------------ Options canceled - (2,000) - 18.38 Options exercised - (4,000) - 18.10 Options granted (20,000) 20,000 - 19.40 $11.19 ------------------------------ March 31, 2006 519,000 175,000 300,000 15.00 ------------------------------ Total of All Plans 519,000 1,125,500 300,000 $12.11 =====================================================
As of March 31, 2006, there were exercisable options outstanding to purchase 896,001 shares of Common Stock and 199,998 shares of Class B Common Stock with a weighted average exercise price of $12.11; and the range of exercise prices and weighted average remaining contractual life of outstanding options was $7.00 to $18.38 and 5.2 years, respectively. As of March 31, 2005, there were exercisable options outstanding to purchase 817,823 shares of Common Stock and 100,000 shares of Class B Common Stock with a weighted average exercise price of $12.11. 1997 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS: The Company adopted the 1997 Deferred Compensation Plan for Non-Employee Directors (the "Deferred Compensation Plan"), which is administered by the Compensation Committee. The Deferred Compensation Plan is a non-qualified plan that allows eligible non-employee members of the Company's Board of Directors to elect to defer receipt of all or any portion of annual base fees payable to them for services rendered to the Company as Directors. The participating Directors are awarded performance units of the Company's Common Stock at fair market value on the deferral dates and dividend payment dates. Distributions at age 65 or 70 are paid in cash, based on the value of the performance units at the time of distribution, payable in a lump sum or in installments. Compensation expense is recognized on deferral dates and dividend payment dates, based on changes in the quoted price of the Company's Common Stock. During fiscal years 2006, 2005 and 2004, compensation expense in relation to the Deferred Compensation Plan was recorded in the amounts of approximately $44,000, ($120,000) and $485,000, respectively. NOTE N - RETIREMENT PLANS The Company administers the Thomas Nelson, Inc. Savings and Investment Plan ("Company Plan"), which includes employer discretionary ESOP contributions to a stock bonus feature and a 401(k) salary deferral feature. The Company Plan allows all eligible employees to elect deferral contributions of between 1% and 15% of their eligible compensation. The Company will match 100% of each participant's salary deferral contributions up to 3% of eligible compensation and 50% of the next 2% of eligible compensation. The Company Plan qualifies as a "safe harbor" 401(k) plan under applicable Internal Revenue Code Sections. The Company's contribution expense under this plan, including matching contributions and discretionary ESOP contributions, totaled $1.2 million, $1.0 million and $1.0 million for each of the fiscal years ended 2006, 2005 and 2004, respectively. 32 LEM has adopted a profit sharing plan, which is qualified under section 401 of the Internal Revenue Code. Eligible employees over 21 years of age may participate in the plan after one year of credited service with LEM. LEM's contribution to the plan for any year is discretionary. During fiscal 2006, 2005 and 2004, LEM matched 20% of all employee contributions, up to 15% of eligible compensation. The Company's matching contributions under this plan totaled $9,000, $26,000 and $16,000 during fiscal 2006, 2005 and 2004, respectively. NOTE O - 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 existing at the time. Certain covenants of the Company's Credit Facility limit the amount of cash dividends payable based on the Company's cumulative consolidated net income. The following table indicates dividend activity for the fiscal year ended March 31, 2006. Dividends relate to both Common Stock and Class B Common Stock.
Declaration Dividend Record Payment Date Per Share Date Date ----------- --------- ---------------- ------------ May 19, 2005 $0.05 July 5, 2005 July 19, 2005 August 18, 2005 $0.05 October 7, 2005 October 21, 2005 November 17, 2005 $0.05 January 6, 2006 January 20, 2006
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 P - INCOME TAXES The income tax provision (benefit) is comprised of the following for the fiscal years ended March 31, (in thousands):
2006 2005 2004 ------- ------- ------- Current: U.S. federal $11,300 $10,300 $ 8,300 State 1,333 1,362 916 ------- ------- ------- Total current 12,633 11,662 9,216 Deferred (206) 16 462 ------- ------- ------- Total tax provision $12,427 $11,678 $ 9,678 ======= ======= ======= Provision for income taxes from continuing operations $12,524 $11,647 $ 9,756 Expense (benefit) for income taxes from discontinued operations (97) 31 (78) ------- ------- ------- Total tax provision $12,427 $11,678 $ 9,678 ======= ======= =======
33 Deferred tax assets are recognized if it is more likely than not that the future tax benefit will be realized. The Company believes that, based on its history of profitable operations, the net deferred tax asset will be realized on future tax returns, primarily from the generation of future taxable income. The Company maintains a valuation allowance for certain deferred tax assets, which consists primarily of cumulative state tax losses in recent years. The net deferred taxes are comprised of the following at March 31 (in thousands):
2006 2005 ------- ------- Net current deferred tax assets: Inventory obsolescence allowances 941 927 Bad debt and returns allowances 2,948 2,589 Inventory-uniform capitalization tax adjustment 989 988 Advances and prepaid expenses - 134 Accrued liabilities/other 238 159 State net operating loss carryforwards 269 260 Valuation allowance (269) (260) ------- ------- 5,116 4,797 Net non-current deferred tax liabilities: Accelerated depreciation and amortization (1,265) (1,284) Note receivable bad debt reserve - 147 Accrued liability 241 226 ------- ------- (1,024) (911) ------- ------- Net deferred taxes $4,092 $3,886 ======= =======
Reconciliation of income taxes from continuing operations computed at the U.S. federal statutory tax rate to the Company's effective tax rate is as follows for the fiscal years ended March 31:
2006 2005 2004 ------- ------- ------- U.S. federal statutory tax rate provision 35.0% 35.0% 35.0% State taxes on income, net of federal tax effect 2.7% 2.7% 2.5% Permanent difference for product donations - (0.6%) - Other (0.5%) - - ------- ------- ------- Effective tax rate 37.2% 37.1% 37.5% ======= ======= =======
Net cash payments (received) for income taxes were $12.6 million, $8.7 million and $(11.7) million in 2006, 2005 and 2004, respectively. On April 25, 2006, the Company entered into an agreement with the United States Department of the Treasury - Internal Revenue Service ("IRS") regarding a proposed assessment of federal income tax and agreed to pay approximately $7.9 million in tax, together with interest thereon as provided by law (accrued interest as of April 25, 2006 was estimated at approximately $1.5 million). The assessment relates primarily to the Company's disposition of the business of its former subsidiary, C.R. Gibson for which the Company received a federal income tax refund of $18.7 million in April 2003 and reduced subsequent income tax payments by approximately $3.5 million related to tax losses recognized on the disposal of C.R. Gibson. The assessment, which previously had been reported as a non-current tax liability, has now been reclassified as a current tax liability. The agreement is subject to review by the Congressional Joint Committee on Taxation. If the agreement is finally approved, the amount reported by the Company in excess of the agreed assessment, which continues to be reported as a non-current tax liability, will be recorded as income from discontinued operations. No assurance can be given that the agreement will be finally approved. 34 NOTE Q - QUARTERLY RESULTS (UNAUDITED) Summarized results from continuing operations for each quarter in the fiscal years ended March 31, 2006 and 2005 are as follows (dollars in thousands, except basic per share data):
Quarters -------- 1st 2nd 3rd 4th --------- --------- --------- --------- 2006 ---- Net revenues $45,559 $67,697 $70,654 $69,147 Operating income 1,039 10,979 10,911 10,167 Net income 696 6,913 6,886 6,482 Net income per share, diluted 0.05 0.45 0.45 0.42 2005 ---- Net revenues $49,008 $61,902 $63,355 $63,552 Operating income 3,196 10,602 8,905 9,005 Net income 1,871 6,424 5,468 6,054 Net income per share, diluted 0.12 0.43 0.36 0.40
NOTE R - COMMITMENTS AND CONTINGENCIES The Company has commitments to provide advances to certain authors in connection with products being published by the Company. These commitments totaled approximately $16.9 million at March 31, 2006. The timing of payments will be dependent upon the performance by the authors of conditions provided in the applicable contracts. It is anticipated that a substantial portion of the commitments will be completed within the next four years. The Company also has certain inventory purchase commitments with vendors totaling approximately $19.0 million over the next four years. The Company is subject to various other legal proceedings, claims and liabilities that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. Thomas Nelson, Inc. and each of its directors have been named as defendants in "City of Pontiac General Employees' Retirement System vs. Thomas Nelson, Inc., et. Al.," a Tennessee state court action filed in the Chancery Court for Davidson County, Tennessee on February 24, 2006. The suit was brought in connection with the Company's recently announced Merger Agreement and certain agreements related thereto with the Company's Chairman, Sam Z. Moore. The plaintiff(s) in the action allege that the defendants breached their fiduciary duties by, among other things, pursuing a transaction without regard to the fairness of the transaction to all of the Company's shareholders and without properly valuing the company and allowing a competitive bidding process to take place. The plaintiff(s) also allege that the defendants breached their fiduciary duties by taking steps to discourage other acquisition proposals, including by agreeing to an excessive termination fee in the Merger Agreement. The lawsuit seeks among other things, certification as a class action, a determination that fiduciary duties were breached, injunctive relief against the proposed transaction and recovery of costs of the plaintiff(s), including attorneys' fees. The Company believes the suit is without merit and intends to defend against it vigorously. 35 NOTE S - FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments as of March 31, 2005 is made in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information as of March 31, 2006 and 2005, respectively. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market transaction (in thousands):
2006 2005 --------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- CASH AND CASH EQUIVALENTS $25,791 $25,791 $23,999 $23,999 LONG-TERM DEBT: Senior notes $ - $ - $ 2,308 $ 2,329
Outstanding letters of credit totaled $0.4 million and $1.3 million as of March 31, 2006 and 2005, respectively. The letters of credit guarantee performance to third parties of various trade activities and Workers' Compensation claims. Fair value estimated on the basis of fees paid to obtain the obligations was not material at March 31, 2006 and 2005. Financial instruments that potentially subject the Company to credit risk consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the diverse nature of the Company's customer base. NOTE T - OPERATING SEGMENTS Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column includes items related to discontinued operations (in thousands).
Publishing Conferences Other Total ---------- ----------- ------- --------- 2006 ---- Net revenues $216,731 $36,326 $ - $253,057 Operating income 28,982 4,114 - 33,096 Assets, excluding goodwill 191,343 5,665 - 197,008 Goodwill 14,169 15,135 - 29,304 Total assets 206,168 20,144 - 226,312 Capital expenditures 8,298 195 - 8,493 Depreciation and amortization 2,840 224 - 3,064 2005 ---- Net revenues $204,398 $33,419 $ - $237,817 Operating income 28,421 3,287 - 31,708 Assets, excluding goodwill 166,503 5,587 2,000 174,090 Goodwill 14,169 15,135 - 29,304 Total assets 180,672 20,722 2,000 203,394 Capital expenditures 3,657 496 - 4,153 Depreciation and amortization 2,364 223 - 2,587 2004 ---- Net revenues $193,161 $29,458 $ - $222,619 Operating income 24,823 2,317 - 27,140 Assets, excluding goodwill 143,057 4,905 2,000 149,962 Goodwill 14,169 15,135 - 29,304 Total assets 157,226 20,040 2,000 179,266 Capital expenditures 3,569 97 - 3,666 Depreciation and amortization 2,028 259 - 2,287
36 Net revenues from conferences include event ticket sales of $25.0 million, $24.1 million and $21.9 million for fiscal years 2006, 2005 and 2004, respectively. No single customer accounted for as much as 10% of consolidated revenues in fiscal 2006, 2005 or 2004. Foreign revenues accounted for less than 10% of consolidated revenues in fiscal 2006, 2005 and 2004. NOTE U - SUBSEQUENT EVENTS On June 8, 2006, the Company held a Special Meeting of the Shareholders. At that meeting, the shareholders approved the Merger Agreement by more than 66 2/3rds vote. The Merger Agreement, dated February 20, 2006, is by and among the Company, Faith Media Holdings, LLC ("Faith Media") and Faith Media's wholly-owned subsidiary, FM Mergerco, Inc. ("Mergerco"). Upon consummation of the Merger, Mergerco will be merged into the Company, with the Company as the surviving corporation. As a result of the Merger, the Company will become a wholly-owned subsidiary of Faith Media. Faith Media was formed by InterMedia Partners, L.P. to acquire the Company in the Merger. The Merger Agreement provides for the Company to become privately owned and for the shareholders to receive $29.85 in cash ("Per Share Merger Consideration"), without interest, for each share of our common stock and our Class B common stock outstanding. In addition, at the time of the consummation of the Merger, all outstanding and unexercised options to acquire shares of the Company's common stock and Class B common stock will be immediately vested and cancelled, and the holders of such options will receive, in lieu thereof, cash consideration for each option share equal to the difference between $29.85 and the exercise price for such share, without interest. It is anticipated that, on June 12, 2006, Mergerco will close the Merger Agreement by funding the purchase price ($473.4 million) and estimated transaction expenses ($19.1 million) with a common equity contribution of $190.5 million, proceeds of a $205 million senior secured credit agreement, proceeds of $72 million in senior subordinated notes and $25 million in cash held by the Company. 37
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES ------------------------------------------------ March 31, March 31, March 31, 2006 2005 2004 ----------- ----------- ----------- Allowance for Sales Returns: Balance at beginning of period $ 7,437,000 $6,792,000 $6,046,000 Additions: 1. Charged to costs and expenses 43,472,000 41,053,000 40,058,000 Deductions: 1. Charge-offs 42,194,000 40,408,000 39,312,000 ----------- ------------ ------------ Balance at end of period $ 8,715,000 $ 7,437,000 $ 6,792,000 =========== ============ ============ Allowance for Doubtful Accounts: Balance at beginning of period $ 1,102,000 $ 1,159,000 $ 1,265,000 Additions: 1. Charged to costs and expenses 387,000 600,000 1,262,000 Deductions: 1. Charge-offs 504,000 657,000 1,368,000 ----------- ------------ ------------ Balance at end of period $ 985,000 $ 1,102,000 $ 1,159,000 =========== ============ ============ Discontinued Operations: Balance at beginning of period $ 44,000 $ 158,000 $ 128,000 Additions: 1. Charged to costs and expenses 260,000 - 208,000 Deductions: 1. Charge-offs 245,000 114,000 178,000 ----------- ------------ ------------ Balance at end of period $ 59,000 $ 44,000 $ 158,000 =========== ============ ============
38 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Thomas Nelson, Inc. and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2006, and our report dated June 12, 2006, expressed an unqualified opinion on those consolidated financial statements. KPMG LLP /s/ KPMG LLP Nashville, Tennessee June 12, 2006 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Thomas Nelson, Inc: We have audited the accompanying consolidated balance sheets of Thomas Nelson, Inc. and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thomas Nelson, Inc. and subsidiaries as of March 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Thomas Nelson, Inc.'s internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 12, 2006, expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP KPMG LLP Nashville, Tennessee June 12, 2006 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------------------------------------------------------------- None. Item 9A. Controls and Procedures --------------------------------- Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer (principal executive officer) and Executive Vice President and Secretary (principal financial and accounting officer), as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Executive Vice President and Secretary, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Executive Vice President and Secretary concluded that the Company's disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal controls over financial reporting during the Corporation's fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management's Assessment on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance that the controls and procedures will meet their objectives regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company's management assessed the effectiveness of the Company's internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management's evaluation under the criteria in Internal Control-Integrated Framework, we concluded that our internal control over financial reporting was effective as of March 31, 2006. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of March 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. Item 9B. Other Information --------------------------- None. 41 PART III Item 10. Directors and Executive Officers of the Company --------------------------------------------------------- (a) DIRECTORS Information regarding the directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is shown in the table below. Except as indicated below, each director and nominee has been an employee of the firm(s) listed below as his principal occupation for more than the past five years.
Director Name Principal Occupation Age Since ---- -------------------- ---- -------- Ronald W. Blue President of Christian Financial 64 2003 (A, E & N) Professionals Network, a private investment firm. Former Chairman emeritus of Ronald Blue & Co., LLC from January 2002 to July 2003; Founder and CEO of Ronald Blue & Co., LLC from 1979 to January 2002; Board of Directors of Campus Crusade for Christ, Crown Financial Ministries, and The National Christian Foundation from 1999 to current. Brownlee O. Currey, Jr. President, Currey Investments, 77 1984 (A, C & N) a private investment firm. Previously served as Chairman of the Board of The Nashville Banner Publishing Co. from January 1980 to May 1998. W. Lipscomb Davis, Jr. Partner of Hillsboro Enterprises, 74 1984 (A, C & E) a private investment firm. Michael S. Hyatt President and Chief Executive Officer 50 2004 (E) of the Company. Sam Moore Chairman of the Board of the 76 1961 (E) Company. Sam Moore is the father of S. Joseph Moore. S. Joseph Moore President of C.R. Gibson, Inc., 43 1995 a company which designs and sells gift products, from November 2001 to present; from 1995 to October 2001, served as Executive Vice President of the Company; S. Joseph Moore is the son of Sam Moore. Millard V. Oakley Businessman managing private 76 1972 (C, E & N) investments.
--------------------- Member of Executive (E), Compensation (C), Nominating and Corporate Governance (N), Audit (A) Committee Board and Committee Meetings ---------------------------- The Board of Directors has four standing committees--the Executive Committee, the Compensation Committee, the Audit Committee, and the Nominating and Corporate Governance Committee, the members of which are indicated in the previous table. 42 Executive Committee The Executive Committee has such powers and authority as may be legally delegated to the Executive Committee by the Board of Directors from time to time. Compensation Committee Among other responsibilities, the Compensation Committee reviews and approves management compensation and administers the Company's retirement and incentive plans. The Board of Directors has determined that each current member of the Compensation Committee is independent within the meaning of the New York Stock Exchange (the "NYSE") corporate governance standards and the Securities and Exchange Commission's director independence standards for compensation committee members. The charter of the Compensation Committee, which is available on the investor relations section of our website. Nominating and Corporate Governance Committee The purpose of the Nominating and Corporate Governance Committee is to, among other responsibilities, identify, evaluate and recommend to the Board of Directors nominees for election to the Board of Directors, develop and recommend to the Board corporate governance principles and guidelines and oversee and advise the Board with respect to corporate governance matters. Additional information regarding the responsibilities of the Nominating and Corporate Governance Committee and its activities in fiscal 2005 is provided in the "Corporate Governance and Related Matters" section in this Form 10-K. The charter of the Nominating and Corporate Governance Committee is available on the investor relations section of our website. The Board of Directors has determined that each current member of the Nominating and Corporate Governance Committee is independent within the meaning of the NYSE corporate governance standards and the Commission's director independence standards for nominating committee members. Audit Committee The Audit Committee oversees the accounting and financial reporting processes and controls of the Company and the audits of the financial statements of the Company. Among other responsibilities, the Audit Committee (i) oversees the appointment, compensation, retention and oversight of the work performed by any independent public accountants engaged by the Company, (ii) recommends, establishes and monitors procedures designed to improve the quality and reliability of the disclosure of the Company's financial condition and results of operations and (iii) establishes procedures designed to facilitate (a) the receipt, retention and treatment of complaints relating to accounting, internal accounting controls or auditing matters and (b) the receipt of confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. The charter of the Audit Committee is available on the investor relations section of our website. The Board of Directors has determined that each current member of the Audit Committee is independent within the meaning of the NYSE listing standards and the Commission's director independence standards for audit committee members, has the accounting and financial related management expertise required by the NYSE listing standards, and that Mr. Blue qualifies as an "audit committee financial expert" under the rules of the Commission. Meeting Attendance During the last fiscal year, the Board of Directors held seven meetings, the Compensation Committee held three meetings, the Nominating and Corporate Governance Committee held two meetings, the Audit Committee held seven meetings, and the Executive Committee held no meetings. Each of the incumbent directors attended at least 75% of the aggregate of all Board of Director meetings and meetings of committees on which he served during the last fiscal year. 43 Directors Compensation Directors not otherwise employed by the Company receive $1,500 per month plus $1,500 for attending, in person, each meeting of the Board of Directors or any committee, when such committee meetings are separately called and held. Directors attending such meetings by means of a telephone conference call receive $750 for each meeting. In addition, the Chairman of the Audit Committee receives $500 per month; the Chairman of the Compensation Committee receives $400 per month; the Chairman of the Executive Committee receives $400 per month; and the Chairman of the Nominating and Corporate Governance Committee receives $400 per month. Board members who are employed as officers by the Company receive no extra compensation for their services as directors or committee members. All directors are reimbursed by the Company for expenses incurred by them in connection with their service on the Board of Directors and committees. In fiscal 1998, the Company adopted the 1997 Deferred Compensation Plan for Non-Employee Directors (the "Non-Employee Directors Plan"). Pursuant to the Non-Employee Directors Plan, beginning in September 1997 directors who are not employed as officers of the Company may file with the Company an irrevocable election to defer payment of not less than fifty percent (50%) of the retainer fees to be earned during each fiscal year. Deferred amounts are invested in an account reflected in Company stock equivalent units, the number of which is computed by dividing the amount of the deferred retainer fees by the fair market value of the Company's shares on the date of deferral. Directors may elect the form and timing of payments of deferred amounts (and any earnings reflecting dividends thereon) to be paid in cash from the Company in a lump sum or installment payments after such director's sixty-fifth or seventieth birthday, based on the number of stock equivalent units in such director's account and the fair market value of the Company's shares on the first business day of the year in which payments are made. In addition, pursuant to the 2003 Stock Incentive Plan, each outside director receives a non-qualified stock option to purchase 4,000 shares of Common Stock on the date of each annual meeting of shareholders with an exercise price equal to the fair market value of the Common Stock on such date. The shares subject to such options vest on the first anniversary of the date of grant and are exercisable for a period of ten years. (b) EXECUTIVE OFFICERS Officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board of Directors. Following is certain information regarding the executive officers of the Company:
Name Age Position with the Company -------------------- ---------- ------------------------------- Sam Moore 76 Chairman of the Board and Director Michael S. Hyatt 50 President, Chief Executive Officer and Director Joe L. Powers 60 Executive Vice President, Chief Finacial Officer and Secretary Vance Lawson 47 Senior Vice President, Finance and Operations Group
Except as indicated below, each executive officer has been an employee of the Company as his principal occupation for more than the past five years. Sam Moore has been Chairman of the Board and a Director of the Company since its founding in 1961. He was also President until January 2004 and Chief Executive Officer until August 2005. Michael S. Hyatt was appointed President and Chief Operating Officer of the Company in January 2004 and was then appointed to the position of Chief Executive Officer in August 2005. He has been with the Company since February 1998. Joe L. Powers was appointed Executive Vice President and Secretary (principal financial and accounting officer) of the Company in 1995. Previously, Mr. Powers served as a Vice President of the Company since 1980. Vance Lawson was appointed Senior Vice President, Finance and Operations Group in 2000. Previously, Mr. Lawson served as Vice President, Finance of the Company since 1993 and had served as Senior Vice President of Finance and Operations at Word, Incorporated since 1988. 44 CORPORATE GOVERNANCE AND RELATED MATTERS Corporate Governance Principles and Guidelines The Company is committed to having sound corporate governance principles, and our Board of Directors has established a set of Corporate Governance Guidelines that meet the requirements of the corporate governance standards of the NYSE. These guidelines address such matters as director qualifications, director nominations, director responsibilities, director compensation, orientation and training and other matters and are published on an investor relations page of the Company's website at www.thomasnelson.com. The Board of Directors believes that such guidelines are appropriate for the Company in its effort to promote sound corporate governance practices. Each committee of the Board of Directors (other than the Executive Committee) operates under a charter that has been approved by the Board of Directors. A current copy of each committee charter is available on the investor relations section of the Company's website: www.thomasnelson.com. A copy of these charters, and/or the Corporate Governance Guidelines and our Code of Conduct (as described below), may also be obtained, free of charge, from the Company upon a written request directed to: Thomas Nelson, Inc., 501 Nelson Place, P.O. Box 141000, Nashville, Tennessee 37214-1000, Attention: Investor Relations. The Company believes that its Board committee charters meet the requirements of the NYSE listing standards as well as the Sarbanes-Oxley Act of 2002 and the Commission's related rules. Each committee (other than the Executive Committee) reviews the appropriateness of its charter and will perform a self-evaluation of the effectiveness of the committee at least annually. Code of Business Conduct and Ethics The Company has a Code of Business Conduct and Ethics (the "Code of Conduct") that applies to all of the Company's directors and employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The purpose of the Code of Conduct is to, among other things, provide our directors and employees written standards that are reasonably designed to deter wrongdoing and to promote honest and ethical conduct in the discharge of their duties; promote compliance with applicable laws, rules and regulations; promote prompt and good faith internal reporting of violations of the Code of Conduct; and provide accountability for adherence to the Code of Conduct. Each director and employee is required to read and certify in writing annually that he or she has read, understands and will comply with the Code of Conduct. A current copy of the Code of Conduct is available on the investor relations section of our website, and it is available in printed form free of charge to any shareholder who requests it. The Company intends to disclose amendments to or waivers from a provision of the Code of Conduct that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on the investor relations section of its website, or by such other method prescribed by applicable law or regulation. Director Independence The Board has determined that each member of the Board except for Sam Moore, S. Joseph Moore and Michael S. Hyatt is an "independent director" within the meaning of the listing standards of the NYSE and that each such director does not have any relationship that would preclude a finding of independence. Furthermore, the Board of Directors has determined that the composition of each of the committees of the Board of Directors complies with the requirements of the NYSE listing standards, the Commission and other applicable laws or regulations, as currently in effect. Director Qualifications The Company's director nominees are recommended to the Board of Directors by a Nominating and Corporate Governance Committee (the "Nominating Committee") which is composed solely of independent directors. The Company's Board of Directors and its Nominating Committee have adopted a procedure for the 45 evaluation of director candidates (the "Nominee Procedures") that contain certain minimum qualifications for candidates (including those candidates recommended by the Company's shareholders). The Nominating Committee will consult with the Board of Directors on an annual basis regarding the results of the annual performance evaluation of the Board and its Committees, and the qualifications of potential director candidates in accordance with the Nominating Committee's charter and the Company's related policies or guidelines regarding the nomination and evaluation of director candidates. The consideration of a candidate as a director will include the Nominating Committee's assessment of the individual's background, skills and abilities, and whether such characteristics are consistent with the Company's guidelines and fulfill the needs of the Board at that time. The Nominating Committee will be responsible for assessing shareholder proposals with respect to director nominations. The Company's Corporate Governance Guidelines may also contain additional membership criteria that apply to nominees for the Company's Board of Directors. The Nominee Procedures provide that candidates for nomination to the Board of Directors, including those recommended by shareholders in compliance with the Company's charter, bylaws and applicable law, are required to be submitted to the Nominating Committee's Chairman with as much biographical information as is available and a brief statement of the candidates' qualifications. The Nominating Committee will consider whatever factors it deems appropriate in its assessment of a candidate; however, at a minimum, a candidate must in the Committee's judgment: be able to represent the interests of the Company and all of its shareholders and not be disposed by affiliation or interest to favor any individual, group or class of shareholders or other constituency; meet the Company's minimum qualifications for directors and fulfill the needs of the Board of Directors at that time; and possess the background and demonstrated ability to contribute to the Board's performance of its collective responsibilities, through senior executive management experience, relevant professional or academic distinction, and/or a record of relevant civic and community leadership. In addition to these minimum qualifications, the Nominating Committee may also consider whether the candidate: is of the highest ethical character and shares the core values of the Company as reflected in the Company's Code of Conduct; has a reputation, both personal and professional, consistent with the image and reputation of the Company; is highly accomplished in the candidate's field; is an active or former chief executive officer of a public company or a similar business or is a leader of another complex organization; has relevant expertise and experience, and would be able to offer advice and guidance to the chief executive officer based on that expertise and experience; and has the ability to exercise sound business judgment. Communications with Members of the Board The Company's Board of Directors has established procedures for the Company's shareholders to communicate with members of the Board of Directors. Shareholders may communicate with any of the Company's directors, including the chairman of any of the committees of the Board of Directors, by writing to such director(s) c/o Thomas Nelson, Inc., 501 Nelson Place, P.O. Box 141000, Nashville, Tennessee 37214-1000, Attention: Corporate Secretary. Appropriate communications will be forwarded to such director(s) by the Corporate Secretary. Board Member Attendance at Annual Meetings The Company strongly encourages each member of the Board of Directors to attend the Annual Meetings of Shareholders. All of the Company's directors attended the 2005 Annual Meeting of Shareholders. Executive Sessions of Independent Directors In accordance with the NYSE corporate governance standards, the Board of Directors has instituted a policy stating that executive sessions of the independent directors will be held following each regularly scheduled in-person meeting of the Board of Directors. Executive sessions do not include any employee directors of the Company. Mr. Oakley (the "Chairman") is currently responsible for chairing the executive sessions. Interested shareholders may communicate directly with the Chairman in the manner described above under "Communications with Members of the Board." 46 General Information For more information regarding the Company's corporate governance policies, you are invited to access the investor relations section of our website at www.thomasnelson.com. Item 11. Executive Compensation The following table provides information as to annual, long-term and other compensation during fiscal years 2006, 2005 and 2004 for the Company's Chief Executive Officer and the persons who, in fiscal 2006, were the other most highly compensated executive officers of the Company (the foregoing are collectively defined as the "Named Officers"). Summary Compensation Table --------------------------
Long-Term Compensation Awards ------------ Annual Compensation Securities All ----------------------------- Underlying Other Other Annual Options/ Compen- Name and Bonus Compensation SARs sation Principal Position Year Salary ($) ($) ($) (#) (1) ($) (2) ------------------ ---- --------- -------- ------------ ------- ------- Sam Moore, Chairman 2006 $450,000 $142,736 $ 35,030(3) - $ 8,400 2005 450,000 289,300 36,712(3) - 0 12,344 2004 450,000 521,900 26,339(3) 300,000 12,944 -------------------------------------------------------------------------------- Michael S. Hyatt 2006 389,000 160,565 3,258 - 5,769 President and Chief 2005 300,000 161,000 277,475(4) 50,000 4,844 Executive Officer 2004 242,000 248,000 - 50,000 4,098 -------------------------------------------------------------------------------- Joe L. Powers 2006 250,000 69,474 - - 13,184 Executive Vice 2005 230,000 95,900 - - 14,721 President, Secretary 2004 230,000 228,300 - 35,000 13,278 and Treasurer -------------------------------------------------------------------------------- Vance Lawson 2006 180,000 82,289 - - 10,196 Senior Vice 2005 175,000 60,000 - - 12,462 President 2004 175,000 144,000 - 5,000 9,906 -------------------------------------------------------------------------------- Jerry Park 2006 180,000 3,915 150,011(5) - 3,365 Executive Vice 2005 175,000 133,300 - - 11,295 President and Chief 2004 155,000 90,600 - 5,000 10,214 Marketing Officer -------------------------------------------------------------------------------- Tamara Heim, 2006 250,000 - 5,392(6) - - Executive Vice 2005 55,400 - - - - President and Chief Publishing Officer -------------------------------------------------------------------------------- Mark Schoenwald, 2006 257,000 36,625 - - 9,919 Executive Vice 2005 177,884 - - 10,000 - President and Chief Sales Officer --------------------------------------------------------------------------------
(1) Represents the number of stock options granted under the Company's 1992 Stock Incentive Plan and the 2003 Stock Incentive Plan. (2) Represents amounts contributed to the Company's 401(k)/ESOP Plan by the Company and other Company benefit plans. (3) For 2006, represents various perquisites, net of taxes, including reimbursements of travel expenses ($5,017), life insurance premiums paid ($14,933) and automobile expenses ($15,080). For 2005, represents reimbursements of travel expenses ($14,635), life insurance premiums paid ($6,997) and automobile expenses ($15,080). For 2004, represents reimbursements of travel expenses ($12,009) and automobile expenses ($14,330). (4) Represents gains from exercise of non-qualified stock options of $277,475. (5) Represents gains from exercise of non-qualified stock options of $150,011. (6) Represents relocation allowance. 47 Option/SAR Grants in Last Fiscal Year ------------------------------------- No options were granted to any named officers during fiscal year 2006. Fiscal Year-End Option Values ----------------------------- The following table provides information as to the aggregate number of shares of Common Stock and Class B Common Stock covered by both exercisable and unexercisable stock options granted to the Named Officers as of March 31, 2005, and the values for the "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the year-end price of the Common Stock or Class B Common Stock.
Number of Securities Underlying Value of Unexercised Shares Unexercised Options In-The-Money Options Acquired at Fiscal Year-End (#) at Fiscal Year-End ($)(1) on Value ----------------------- ------------------------- Exercise Realized Unexercis- Unexercis- Name (#) ($) Exercisable able Exercisable able ---- -------- -------- ----------- ----------- ----------- ------------ Sam Moore 45,366 507,417 504,632 100,002 $9,420,871 $1,692,034 Michael Hyatt - - 88,333 66,667 1,433,420 758,830 Joe L. Powers - - 128,333 11,667 2,543,494 200,431 Vance Lawson - - 59,433 1,667 1,112,680 28,633 Jerry Park 16,000 180,383 1,667 1,667 28,645 28,633 Mark Schoenwald - - 3,333 6,667 31,500 63,000 Tamara Heim - - - - - -
(1) Certain outstanding options are exercisable for either Common Stock or Class B Common Stock and, where appropriate, the value of unexercised options reflects gains based on the closing price of either stock depending on which option to purchase stock was "in-the-money" at fiscal year end. On March 31, 2006, the closing prices of the Common Stock and Class B Common Stock on the New York Stock Exchange were $29.25 and $28.85, respectively. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Securitiy Ownership of Certain Beneficial Owners. The information below is based on a review of all statements on Schedules 13D and 13G filed with the SEC by persons other than our directors and executive officers, except as otherwise known by us. As of June 8, 2006, the shareholders indicated below have reported the following ownership of shares of our common stock or our Class B common stock, which represents the following percent of outstanding shares of our common stock or our Class B common stock as of that date.
Amount of Amount of Class B Common Stock Percent Common Stock Percent Beneficially of Beneficially of Name of Beneficial Owner Owned # (1) Class Owned # (1) Class ----------------------- --------------- ------- -------------- ------- Gabelli Asset Mgmt., Inc. (and Affiliates)(2) 1,691,080 12.0% - * Paradigm Capital Management, Inc.(3) 866,300 6.2% - * Investment Counselors of Maryland, LLC(4) 714,150 5.1% - * Charles Z. Moore(5) 79,738 * 68,663 7.2% ----------------------- *less than 1%
(1) Shares of Class B common stock are convertible into an equal number of shares of common stock at the option of the holder, and, wherever applicable, share information set forth above with respect to our common stock assumes the conversion of all Class B common stock by the holders thereof for an equivalent number of shares of common stock that may be so acquired by conversion. 48 (2) As reflected in a Schedule 13D filed with the SEC on November 22, 2004 by Gabelli Asset Management, Inc. The address of Gabelli Asset Management, Inc. is One Corporate Center, Rye, New York 10580-1434. (3) As reflected in a Schedule 13G filed with the SEC on February 15, 2006 by Paradigm Capital Management, Inc. The address of Paradigm Capital Management, Inc. is 9 Elk Street, Albany, New York, 12207. (4) As reflected in a Schedule 13G filed with the SEC on January 19, 2006 by Investment Counselors of Maryland. The address of Investment Counselors of Maryland, LLC is 803 Cathedral Street, Baltimore, Maryland 21201-5297. (5) As reflected in a Schedule 13D filed with the SEC on March 6, 2006 by Charles Z. Moore. Mr. Moore's address is 5106 Pheasant Run Trail, Brentwood, Tennessee 37027. Charles Z. Moore is Sam Moore's brother. (b) Security Ownership of Management. The following table shows the ownership of our capital stock as of June 8, 2006 by (i) each of our directors, (ii) each of our executive officers, (iii) our three additional named officers that are not executive officers, and (iv) all of our directors, executive officers and additional named officer as a group. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares beneficially owned.
Amount of Amount of Class B Common Stock Percent Common Stock Percent Beneficially of Beneficially of Name of Beneficial Owner Owned # (1) Class Owned # (1) Class ----------------------- --------------- ------- -------------- ------- Sam Moore***** (3) 2,201,973 14.2% 1,113,442 77.9% S. Joseph Moore** (4) 303,097 2.0% 91,987 9.7% Ronald W. Blue** (5) 12,000 * - - Brownlee O. Currey, Jr.** (6) 208,754 1.4% 4,035 * W. Lipscomb Davis, Jr.** (6) 33,312 * - - Michael S. Hyatt***** (7) 157,356 1.0% - - Millard V. Oakley** (8) 238,605 1.6% 19,542 2.1% Vance Lawson**** (9) 68,435 * - - Jerry Park*** (10) 11,963 * - - Joe L. Powers**** (11) 174,179 1.2% - - Mark Schoenwald***(12) 10,000 * - - Tamara Heim*** - - - - All directors, executive officers and additional named offers as a group (12 persons) (13) 3,419,674 21.3% 1,229,006 86.0% ------------------------- * less than 1% ** director *** named officer **** executive officer and named officer ***** director, executive officer, and named officer
49 (1) Pursuant to the rules of the SEC, the shares subject to options held by directors and executive officers of the Company which are exercisable within 60 days of June 8, 2006, the record date for the special meeting, are all deemed outstanding for the purpose of computing such director's or executive officer's percentage ownership and the percentage ownership of all directors and executive officers as a group. Thomas Nelson's 1992 and 2003 Stock Incentive Plans have a change in control provision which requires immediate vesting of outstanding options in the event of a change in control. Due to the voting results of the Special Shareholders' Meeting held June 8, 2006, all outstanding options have been included in the directors' and executive officers' beneficial ownership totals. The share information further assumes that when such individuals can elect to receive either common stock or Class B common stock upon exercise of options, an election is made to receive Class B common stock. 49 (2) Shares of our Class B common stock are convertible into an equal number of shares of our common stock at the option of the holder, and, wherever applicable, share information set forth above with respect to the common stock assumes the conversion of all Class B common stock, including options convertible into either common stock or Class B common stock at the holder's option, by the holders thereof for an equivalent number of shares of common stock that may be so acquired by conversion during the 60-day period commencing on the record date. (3) Includes shares issuable upon exercise of outstanding options to purchase 123,316 shares of common stock and 481,318 shares of Class B common stock under Thomas Nelson's 1992 and 2003 stock incentive plans, 301,945 shares of common stock held by two trusts of which Mr. Moore is trustee, and 250,000 shares held by the Moore International Foundation. Sam Moore's spouse owns 31,418 shares of common stock and 3,435 shares of Class B common stock. Sam Moore's address is 501 Nelson Place, P.O. Box 141000, Nashville, Tennessee 37214. (4) Includes 14,000 shares of common stock issuable upon exercise of outstanding options under Thomas Nelson's 1992 and 2003 stock incentive plans, 22,750 shares of common stock and 36,785 shares of Class B common stock held by a trust of which S. Joseph Moore is a trustee and the sole beneficiary, 23,625 shares of common stock and 1,000 shares of Class B common stock owned by S. Joseph Moore as custodian for certain of S. Joseph Moore's children. S. Joseph Moore's spouse owns 2,380 shares of common stock. Excluded from the table are 44,167 Class B common stock held in trust, of which S. Joseph Moore has a 50% discretionary income interest for life; however, he has disclaimed beneficial ownership interest of these shares. S. Joseph Moore's address is 404 BNA Drive, Building 200, Suite 600, Nashville, Tennessee 37217. (5) Includes 12,000 shares of common stock issuable upon exercise of outstanding options under Thomas Nelson's 1992 and 2003 stock incentive plans. (6) Includes 26,000 shares of common stock issuable upon exercise of outstanding options under Thomas Nelson's 1992 and 2003 stock incentive plans. (7) Includes shares issuable upon exercise of outstanding options to purchase 155,000 shares of common stock under Thomas Nelson's 1992 and 2003 stock incentive plans and 2,356 shares held by the Thomas Nelson ESOP over which Mr. Hyatt has voting power. (8) Includes 26,000 shares of common stock issuable upon exercise of outstanding options under Thomas Nelson's 1992 and 2003 stock incentive plans. (9) Includes shares issuable upon exercise of outstanding options to purchase 56,100 shares of common stock under Thomas Nelson's 1992 stock incentive plan and 5,935 shares held by the Thomas Nelson ESOP over which Mr. Lawson has voting power. (10) Includes 3,334 shares of common stock issuable upon exercise of outstanding options under Thomas Nelson's 1992 stock incentive plan and 4,129 shares held by the Thomas Nelson ESOP over which Mr. Park has voting power. (11) Includes shares issuable upon exercise of outstanding options to purchase 140,000 shares of common stock under Thomas Nelson's 1992 stock incentive plan. (12) Includes shares issuable upon exercise of outstanding options to purchase 10,000 shares of common stock under Thomas Nelson's 2003 stock incentive plan. (13) Includes an aggregate of 12,420 shares of common stock held by the Thomas Nelson ESOP, and shares issuable upon exercise of options to purchase 511,750 shares of common stock and 486,318 shares of Class B common stock. 50 The Company does not maintain any equity compensation plans under which stock may be issued except those approved by the Company's shareholders. The table set forth below provides certain information as of March 31, 2006 with respect to the Company's equity compensation plans: EQUITY COMPENSATION PLAN INFORMATION
A B C -------------------- ------------------- -------------------- Number of securities to be issued upon Number of securities exercise of Weighted-average available for future outstanding options, exercise price issurance under equity warrants and rights of outstanding compensation plans -------------------- options, warrants (excluding securities Plan Category Common Class B and rights reflected in Column A) ------------- --------- --------- ------------------- --------------------- Equity compensation Common or plans approved 1,125,500(1) 300,000 $12.11 519,000 Class B by security Common holders -------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions -------------------------------------------------------- In connection with the Merger, Sam Z. Moore, the Chairman of the Board of Directors of the Company, S. Joseph Moore, a member of the Company's Board of Directors and Sam Z. Moore's son and certain of their affiliates entered into a Voting Agreement with the Company, FM Holdings and Mergerco, dated February 20, 2006, pursuant to which such shareholders agreed to vote their shares of the company's capital stock in favor of the Merger and agreed to take (or refrain from taking) certain actions in connection therewith. The shares subject to the Voting Agreement represent, in the aggregate, approximately one-third of the voting power of the Company's shares (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, filed on February 22, 2006 and incorporated herein by reference). In addition, the Company and Sam Z. Moore have also entered into an Amendment to Employment Agreement, dated February 20, 2006, pursuant to which the parties have amended Mr. Moore's existing employement agreement to provide that (i) upon Mr. Moore's termination of employement in connection with a change-in-control of the Company, he will be entitled to receive only a lump-sum severance payment equal to 2.99 times the sum of his W-2 compensation for calendar year 2005, and (ii) upon such termination, he will enter into a one (1) year consulting agreement with the Company (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on February 22, 2006 and incorporated herein by reference). Item 14. Principal Accountant Fees and Services ------------------------------------------------ Fees Billed to the Company by KPMG LLP During Fiscal 2006 and 2005 Audit Fees. Audit fees include fees paid by the Company to KPMG LLP in connection with the annual audit of the Company's consolidated financial statements and KPMG LLP's review of the Company's interim financial statements, as well as fees related to the audit on internal control over financial reporting, which was required by the Sarbanes-Oxley Act of 2002. Audit fees also include fees for services performed by KPMG LLP that are closely related to the audit and, in many cases, could only be provided by the Company's independent registered accounting firm. Such services include comfort letters and consents related to registration statements filed with the Securities and Exchange Commission and other capital-raising activities. The aggregate fees billed to the Company by KPMG LLP for audit services rendered to the Company and its subsidiaries for fiscal 2006 and 2005 were $300,000 and $302,500, respectively. 51 Audit-Related Fees. Audit-related services include due diligence and audit services related to mergers and acquisitions, accounting consultations, internal control review, employee benefit plan audits and certain attest services. The aggregate fees billed to the Company by KPMG LLP for audit-related services rendered to the Company and its subsidiaries for fiscal 2006 and 2005 were $13,000 and $3,000, respectively. Tax Fees. Tax fees include corporate tax compliance and counsel and advisory services. The aggregate fees billed to the Company by KPMG LLP for the tax related services rendered to the Company and its subsidiaries for fiscal 2006 and 2005 were $0 and $10,000, respectively. All Other Fees. For fiscal 2006 and 2005, KPMG LLP did not bill any fees to the Company for any other services, other than those set forth above. The Audit Committee of the Board of Directors has considered and determined that the provision of the foregoing non-audit services by KPMG LLP was compatible with maintaining KPMG LLP's independence in the conduct of its audit. The Audit Committee has also adopted a formal policy concerning approval of audit and non-audit services to be provided by the Company's independent registered public accounting firm. The policy requires that all services that the Company's independent auditor may provide to the Company, including audit services and permitted audit-related and non-audit services, be pre-approved by the Committee. The Audit Committee approved all audit and non-audit services provided by KPMG LLP during fiscal 2006 and 2005 prior to KPMG LLP performing such services. PART IV Item 15. Exhibits and Financial Statement Schedules ---------------------------------------------------- Documents filed as part of Report (a) Financial Statements and Financial Statement Schedules The financial statements and financial statemetn schedules are filed as part of this report and are listed in the Table of Contents to the Consolidated Financial Statements in Part II, Item 8. (b) Exhibits The following exhibits are included herein or incorporated by reference as indicated. Exhibit numbers refer to Item 601 of Regulation S-K. Exhibit Number ------- 3.1 -- Thomas Nelson, Inc. Amended and Restated Charter (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33-80086) and incorporated herein by reference) 3.2 -- Thomas Nelson, Inc. Amended Bylaws (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended March 31, 1999 and incorporated herein by reference) 4.1 -- Revolving Credit Agreement dated as of June 28, 2002, among the Company, several banks and other financial institutions from time to time party hereto, and SunTrust Bank, Nashville, in its capacity as Administrative Agent (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended March 31, 2002 and incorporated herein by reference) 4.2 -- First Amendment to Revolving Credit Agreement dated August 27, 2004, among Thomas Nelson, Inc., the Lenders from time totime party thereto and SunTrust Bank, as Administrative Agent (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated August 30, 2004 and incorporated herein by reference) 52 Exhibit Number ------- 10.1 -- Thomas Nelson, Inc. Amended and Restated 1990 Deferred Compensation Option Plan for Outside Directors (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 (No. 33-80086) dated June 13, 1994 and incorporated herein by reference)* 10.2 -- Thomas Nelson, Inc. Amended and Restated 1992 Employee Stock Incentive Plan (filed as Exhibit 4.6 to the Company's Proxy Statement dated July 26, 1995, for the Annual Meeting of Shareholders held on August 24, 1995 and incorporated herein by reference)* 10.3 -- Employment Agreement dated as of May 13, 1996, between the Company and Sam Moore (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended March 31, 1996 and incorporated herein by reference)* 10.4 -- Addendum to Employment Agreement dated as of May 13, 1996, between the Company and Sam Moore (executed on June 22, 2000) (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended March 31, 2000 and incorporated herein by reference)* 10.5 -- Employment Agreement dated as of May 10, 1996, between the Company and Joe L. Powers (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended March 31, 1996 and incorporated herein by reference)* 10.6 -- Employment Agreement dated as of June 23, 1993, between the Company and Vance Lawson (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 and incorporated herein by reference)* 10.7 -- Addendum to Employment Agreement dated as of May 10, 1996, between the Company and Joe L. Powers (executed on June 22, 2000) (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended March 31, 2000 and incorporated herein by reference)* 10.8 -- Thomas Nelson, Inc. 1997 Deferred Compensation Plan for Non-employee Directors (adopted on May 22, 1997) (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended March 31, 2000 and incorporated herein by reference)* 10.9 -- Amended and Restated Asset Purchase Agreement, dated October 31, 2001 by and between the Company, The C.R. Gibson Company, and C.R. Gibson Sales Company, Inc. and CRG Acquisition Corp., as Buyer. Schedules to the Amended and Restated Asset Purchase Agreement have been omitted. The Company agrees to furnish supplementally a copy of any Schedule to the Commission upon request. (filed as Exhibit 2.1 to the Company's Form 10-Q for the quarter period ended September 30, 2001 and incorporated herein by reference) 10.10 -- Transition Services Agreement, dated November 7, 2001, effective as of October 31, 2001 by and between the Company and CRG Acquisition Corp. (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter period ended September 30, 2001 and incorporated herein by reference) 10.11 -- Lease Agreement, dated November 7, 2001, effective as of October 31, 2001 by and between the Company, as Tenant, and CRG Acquisition Corp., as Landlord. (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter period ended September 30, 2001 and incorporated herein by reference) 10.12 -- Employment Agreement dated as of July 7, 2000 between the Company and Mike Hyatt (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended March 31, 2002 and incorporated herein by reference)* 53 Exhibit Number ------- 10.13 -- Amendment to Thomas Nelson, Inc. Amended and Restated 1992 Employee Stock Incentive Plan (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended March 31, 2003 and incorporated herein by referece)* 10.14 -- Thomas Nelson, Inc. 2003 Stock Incentive Plan, as adopted on August 21, 2003 (filed as Appendix B to the Company's Proxy Statement dated July 11, 2003, for the Annual Meeting of Shreholders held on August 21, 2003 and incorporated herein by reference)* 10.15 -- Employment Agreement dated May 25, 2004 between the Company and Michael S. Hyatt (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended March 31, 2004 and incorporated herein by reference)* 10.16 -- Employment Agreement dated March 25, 1998 between the Company and Jerry Park (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended March 31, 2005 and incorporated herein by reference)* 10.17 -- Employment Agreement dated July 12, 2004, between the Company and Mark Donald Schoenwald* 10.18 -- Employment Agreement dated October 26, 2004, between the Company and Tamara L. Heim* 10.19 -- Merger Agreement, dated February 20, 2006, by and among the Company, Faith Media Holdings, LLC and Faith Media's wholly-owned subsidiary, FM Mergerco, Inc., dated February 20, 2006, between (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 22, 2006 and incorporated herein by reference) 10.20 -- Voting Agreement, dated February 20, 2006, between Sam Z. Moore, S. Joseph Moore and certain of their affiliates, and the Company, FM Holdings, and Mergerco, (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, dated February 22, 2006 and incorporated herein by reference) 10.21 -- Amendment to Employment Agreement, dated February 20, 2006, between the Company and Sam Z. Moore, (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated February 22, 2006 and incorporated herein by reference)* 10.22 -- Discretionary Bonus Plan (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated February 27, 2006 and incorporated herein by reference)* 21 -- Subsidiaries of the Company 23 -- Reports on Schedule and Consents of Independent Registered Public Accounting Firm 31.1 -- Certification of Michael S. Hyatt, 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 Michael S. Hyatt, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002. ----------------------- *Management contract or compensatory plan or arrangement. 54 Information contained in this Annual Report on Form 10-K includes statements that are forward-looking as defined in Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations (see Part II, Item 7). 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Michael S. Hyatt ----------------------- Michael S. Hyatt Presidnet and Chief Executive Officer Date: June 12, 2006 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date --------------------- --------------------- ----------------- /s/ Sam Moore Chairman of the Board of June 12, 2006 ---------------------------- Directors Sam Moore /s/ Michael S. Hyatt President and Chief Executive June 12, 2006 ---------------------------- Officer Michael S. Hyatt /s/ Joe L. Powers Executive Vice President, June 12, 2006 ---------------------------- Secretary, and Chief Financial Joe L. Powers Officer /s/ Ronald W. Blue Director June 12, 2006 ----------------------------- Ronald W. Blue /s/ Brownlee O. Currey, Jr. Director June 12, 2006 ----------------------------- Brownlee O. Currey, Jr. /s/ W. Lipscomb Davis, Jr. Director June 12, 2006 ----------------------------- W. Lipscomb Davis, Jr. /s/ S. Joseph Moore Director June 12, 2006 ----------------------------- S. Joseph Moore /s/ Millard V. Oakley Director June 12, 2006 ----------------------------- Millard V. Oakley 56 INDEX TO EXHIBITS Exhibit Page Number Description Number ------- ----------- ------ 10.17 -- Employment Agreement dated June 27, 2004, between the Company and Mark Donald Schoenwald ...................................... 58 10.18 -- Employment Agreement dated October 26, 2004, between the Company and Tamara L. Heim .............................................. 62 21 -- Subsidiaries of the Company ..................................... 66 23 -- Report and Consent of Independent Registered Public Accounting Firm ................................................. 67 31.1 -- Certification of Michael S. Hyatt, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ............................... 68 31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ............................... 69 32.1 -- Certification of Michael S. Hyatt, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002 ......... 70 32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350 - the Sarbanes-Oxley Act of 2002 ................... 71 57