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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 Commission File No. 0-24134
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INTEGRITY INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 63-0952549
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Cody Road
Mobile, Alabama 36695
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(Address of principal executive offices, zip code)
(334) 633-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 7, 1997
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Class A Common Stock, $.01 par value 2,079,000
Class B Common Stock, $.01 par value 3,435,000
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
SEP 30,1997 DEC 31,1996
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ASSETS
Current Assets
Cash $ 739 $ 1,131
Trade receivables, less allowance for returns and doubtful accounts of $1,305 and $1,684 5,483 4,195
Other receivables 2,014 943
Inventories 3,479 4,219
Prepaid expenses and other assets 2,320 3,562
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Total current assets 14,035 14,050
Property and equipment, net 3,534 3,709
Product masters, net of accumulated amortization of $6,602 and $3,813 8,479 8,601
Non-compete agreement, net of accumulated amortization of $1,082 and $895 168 355
Other assets, net 4,184 4,343
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Total assets $ 30,400 $ 31,058
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt and capital lease obligation $ 1,458 $ 1,470
Accounts payable and accrued expenses 2,290 1,826
Royalties payable 1,152 136
Other current liabilities 517 151
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Total current liabilities 5,417 3,583
Line of credit 4,259 5,949
Long term debt less current maturities 9,739 10,885
Deferred revenue 161 154
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Total liabilities 19,576 20,571
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Stockholders' equity
Common stock 55 55
Additional paid-in capital 13,428 13,428
Retained earnings (2,648) (2,945)
Foreign currency translation (11) (51)
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Total stockholders' equity 10,824 10,487
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Total liabilities and stockholders' equity $ 30,400 $ 31,058
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEP 30 SEP 30
1997 1996 1997 1996
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Net Revenue $ 8,551 $ 7,682 $ 24,474 $ 23,876
Cost of Sales 4,188 3,231 11,398 10,032
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Gross Profit 4,363 4,451 13,076 13,844
Marketing and Fulfillment 1,731 1,938 5,290 7,243
General and Administrative 1,749 1,561 5,990 5,426
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Income from Operations 883 952 1,796 1,175
Other Income (Expenses)
Interest (495) (585) (1,374) (1,366)
Other (20) 5 (62) (30)
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Income before taxes and extraordinary item 368 372 360 (221)
Provision for income taxes 93 147 66 (99)
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Net income before extraordinary item 275 225 294 (122)
Extraordinary item from early
extinguishment of debt less applicable
taxes of $109,000 0 (186) 0 (186)
Net income $ 275 $ 39 $ 294 $ (308)
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Net income per share $ 0.05 $ 0.04 $ 0.05 $ (0.02)
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Extraordinary item 0 (0.03) 0 (0.04)
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Net income per share $ 0.05 $ 0.01 $ 0.05 $ (0.06)
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Weighted average number of shares 5,514 5,514 5,514 5,514
outstanding ======= ======= ======== ========
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
CLASS A CLASS B
COMMON STOCK COMMON STOCK
EQUITY
ADDITIONAL ADJUSTMENTS
PAID-IN RETAINED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TRANSLATIONS TOTAL
Balance, Jun 30, 1996 2,079,000 21 3,435,000 34 12,035 415 (198) 12,307
Net income (loss) 39 39
Issuance of stock
warrants 1,393 1,393
Translation Adjustments 167 167
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Balance, Sep 30, 1996 2,079,000 21 3,435,000 34 13,428 454 (31) 13,906
Net income (loss) (3,399) (3,399)
Translation Adjustments (20) (20)
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Balance, Dec 31, 1996 2,079,000 21 3,435,000 34 13,428 $(2,945) (51) 10,487
Net income 184 184
Translation Adjustments ---------- ------- --------- --- ------- ------- ----- -------
Balance, Mar 31, 1997 2,079,000 21 3,435,000 34 13,428 (2,761) (51) 10,671
Net income (163) (163)
Translation Adjustments (12) (12)
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Balance, Jun 30, 1997 2,079,000 21 3,435,000 34 13,428 (2,924) (63) 10,496
Net income 275 275
Translation Adjustments 52 52
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Balance, Sep 30, 1997 2,079,000 $ 21 3,435,000 $34 $13,428 $(2,649) $ (11) $10,823
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED
SEP 30, 1997 SEP 30, 1996
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 294 $ (308)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 834 882
Amortization of product masters and other 2,399 2,242
Allowance for returns and doubtful accounts (379) (261)
Changes in operating assets and liabilities
(Increase) decrease in trade receivables (909) 376
(Increase) decrease in other receivables (1,071) 803
Decrease in inventories 740 190
Decrease in prepaid and other assets 1,242 108
Increase (decrease) in accounts payable and accrued expenses 464 (1,036)
Increase (decrease) in royalties payable 1,016 (508)
Increase in other current liabilities and deferred revenue 373 165
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Net cash provided by operating activities 5,003 2,653
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (235) (488)
Payments for product masters (2,277) (2,505)
(Increase) decrease in other assets (75) (436)
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Net cash used in investing activities (2,587) (3,429)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit (1,690) (7,850)
Proceeds from issuance of long-term debt -- 13,000
Principal payments on debt (1,158) (4,209)
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Net cash (used) provided by financing activities (2,848) 941
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Effect of foreign currency rate fluctuations on cash 40 128
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(Decrease) increase in cash (392) 293
CASH BEGINNING OF PERIOD 1,131 1,045
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CASH END OF PERIOD $ 739 $ 1,338
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,091 $ 1,377
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Income taxes $ 0 $ 0
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INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company" or "Integrity") is a producer
and publisher of Christian lifestyle products developed to facilitate worship,
entertainment and education. Product formats include cassettes, compact discs,
videos and print music. The Company produces Christian music ranging from
praise and worship music, its largest category, to other styles of adult
contemporary Christian music and children's music. Integrity's products are
sold primarily through retail stores and direct to consumers throughout the
United States and in over 125 other countries worldwide.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements contained in the Company's Annual Report dated December
31, 1996. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share of common stock is computed by dividing
net income (loss) applicable to common stock by the weighted average number of
shares of common stock outstanding during the periods. The effect of the
Company's outstanding common stock equivalents on earnings per share is not
significant.
LONG TERM DEBT
In August 1996, the Company entered into a $19 million credit
agreement with a financial institution. The credit agreement includes a $6
million revolving credit facility and $13 million term loan maturing on August
6, 2002. At the Company's option, the credit agreement carries an interest rate
of the bank's base rate plus 1 1/2%, or LIBOR plus 3%. The lender received
warrants exercisable for up to 12.5% of the Company's stock exercisable as
Class A common stock, with an exercise price of $1.875, and the warrants expire
in 10 years. Under the terms of the financing agreement, the lender cannot
exercise the warrants until August 1998 (unless the Company undergoes a change
in control).
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total net revenue increased $598,000 or 2.5% to $24.5 million for the
nine months ended September 30, 1997, from $23.9 million during the nine months
ended September 30, 1996. This increase in sales revenue is mainly attributable
to increased sales in the retail, special and church divisions. Sales in the
retail division increased 18% to $6.8 million for the nine months ended
September 30, 1997, compared to $5.8 million for the same period in 1996, due
to stronger new releases in the first nine months of 1997. The revenues for the
retail division for fiscal 1997 are net of a fulfillment fee for Word Inc., an
arrangement that did not exist in 1996. Copyright revenue increased 15% over
1996 and the church division increased 22% over the same period in 1996. As a
result of the Company's focus on smaller, yet more profitable direct to
consumer advertising mailings, sales in the direct to consumer division
decreased 30% to $6.3 million versus $8.9 million in the same period in 1996.
New product sales amounted to $6.9 million or 28.2% of net revenue for the nine
months ended September 30, 1997 versus $6.7 million or 28.0% of net revenue for
the same period in 1996. For the quarter ended September 30, 1997, total net
revenue increased $870,000 or 11.3% to $8.6 million, from $7.7 million in the
same period in 1996 due mainly to increased new product sales in the retail,
special and choral divisions.
Gross profit decreased 5.5% to $13.1 million for the nine months ended
September 30, 1997 from $13.8 million for the same period in 1996. Gross profit
as a percentage of sales decreased to 53.4% for the nine months ended September
30, 1997, from 58.0% for the same period in 1996. Retail sales, which are sales
to retail outlets at wholesale prices less Word's fulfillment fee, increased to
27.8% of total sales compared to 24.1% of total sales in 1996. The increase in
sales at wholesale prices compared to the decrease in sales at full retail
price through the direct to consumer channel is causing gross profit as a
percentage of sales to decrease. Third-quarter results as compared with the
prior year period reflected a decrease in gross profit of 2.0% to $4.4 million,
from $4.5 million for the same period in 1996. For the quarter ending September
30, 1997, gross profit as a percentage of sales decreased to 51.0%, compared to
57.9% for the same period in 1996.
Marketing and fulfillment expenses decreased 27.0% to $5.3 million or
21.6% of net sales for the nine months ended September 30, 1997, as compared
with $7.2 million or 30.0% of net sales for the same period in 1996. For the
quarter ended September 30, 1997, marketing and fulfillment expenses were $1.7
million or 20.3% of net sales, compared to $1.9 million or 25.2% of net sales
for the same period in 1996. The decrease in marketing and fulfillment expenses
is partly attributable to lower, but more productive and targeted, marketing
expenses in the direct to consumer division.
General and administrative expenses increased to $6.0 million or 24.5%
of net sales for the nine months ended September 30, 1997 as compared to $5.4
million or 22.7% of net sales for the same period in 1996. For the quarter
ended September 30, 1997, general and administrative expenses were $1.7 million
or 20.4% of net sales, compared to $1.6 million or 20.3% of net sales for the
same period in 1996. The increase from the 1996 periods is mainly attributable
to compensation expense and the Company's addition in late 1996 of a
distribution center responsible for direct to consumer and international
warehousing, physical inventory and distribution functions. Previously, this
function was outsourced and was included in marketing and fulfillment expenses.
Interest expense increased by 0.6% to $1.374 million for the nine
months ended September 30, 1997 as compared with $1.366 million for the same
period in 1996. The increase was the result of higher average debt levels in
the first nine months of 1997. The average interest rates for the nine months
ended September 30, 1997 and 1996 were 9.75% and 10.2%, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically and will continue to finance its
operations primarily through cash generated from operations, although such
funds have also been supplemented by borrowing under a line of credit and term
notes as needed.
Cash generated from operations totaled $5.0 and $2.7 million in the
nine months ended September 30, 1997 and 1996, respectively. Increases in net
income, general accounts payable and royalties payable, along with decreases in
inventory and prepaid assets, were the primary contributors to the increase in
cash generated from operations for the nine months ended September 30, 1997.
The use of cash will vary from quarter to quarter based on product releases and
scheduled marketing promotions.
In accordance with industry practice, the Company's music products are
sold on a returnable basis. The Company's allowance for returns and doubtful
accounts is based upon historical returns and collections of the Company. Due
to the nature of sales through direct to consumer continuity programs, the
Company has a somewhat higher product return and doubtful account exposure than
other music companies where the majority of sales are in traditional retail
markets. For the nine months ended September 30, 1997 and the same period in
1996 the amounts charged against income for returns and allowances for doubtful
accounts were $3.1 million and $4.7 million, respectively.
Capital expenditures totaled $235,000 and $488,000 for the nine month
periods ended September 30, 1997 and 1996, respectively. Capital expenditures
made during 1997 included computer equipment and capital repairs on existing
buildings. Other significant uses of cash were $2.3 million and $2.5 million
for product master development for the nine months ended September 30, 1997 and
1996, respectively.
Some of the statements contained in this report are forward
looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are: the failure of the Company's
redirected focus on core businesses; an increase in product development costs
and marketing and fulfillment expenses as the Company places emphasis on new
strategic initiatives and market opportunities; failure of the Company to
provide continued sales increases or improvements in profitability; a decrease
in consumer acceptance of the Company's new or existing products, including the
FairHope Albums and the Celebration Hymnal, which could result in an increase
in the rate of return on the Company's products above current levels; and the
risk factors listed from time to time in Integrity's SEC reports, including,
but not limited to, the report on Form 10-K for the year ended December 31,
1996.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation
of the Registrant, dated July 21, 1995, (incorporated by
reference from Exhibit 3(i).1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference from Exhibit 3(ii) to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
27 Financial Data Schedule (for SEC use only)
(B) REPORT ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRITY INCORPORATED
Date: November 7, 1997 /s/ P. Michael Coleman
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P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: November 7, 1997 /s/ Alison S. Richardson
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Alison S. Richardson
Senior Vice President,
Administration and Finance
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