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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 March 31, 1998 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 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 May 11, 1998
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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 1 FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS Mar 31, 1998 Dec 31, 1997
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Current Assets
Cash $ 554 $ 523
Trade receivables, less allowance for returns and doubtful accounts of $931 and $812 4,609 4,258
Other receivables 1,851 2,033
Inventories 5,716 5,303
Other current assets 2,574 2,927
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Total current assets 15,304 15,044
Property and equipment, net of accumulated depreciation of $3,214 and $3,085 3,483 3,499
Product masters, net of accumulated amortization of $8,101 and $7,537 8,479 8,618
Non-compete agreement, net of accumulated amortization of $1,169 and $1,130 81 120
Other assets 3,349 3,494
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Total assets $30,696 $30,775
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,074 $ 1,838
Accounts payable and accrued expenses 2,199 3,110
Royalties payable 1,240 908
Other current liabilities 356 237
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Total current liabilities 5,869 6,093
Long-term debt 13,024 13,279
Other long-term liabilities 139 207
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Total liabilities 19,032 19,579
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Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding
Class A common stock, $.01 par value; 7,500,000 shares authorized; 21 21
2,079,000 shares issued and outstanding
Class B common stock, $.01 par value, 10,500,000 shares authorized; 34 34
3,435,000 shares issued and outstanding
Additional paid-in capital 13,428 13,428
Accumulated deficit 1,848 2,303
Equity adjustments from foreign translation 29 16
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Total stockholders' equity 11,664 11,196
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Total liabilities and stockholders' equity $30,696 $30,775
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Quarter Ended
March 31
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1998 1997
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Net sales $ 8,951 $ 8,103
Cost of sales 3,997 3,710
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Gross profit 4,954 4,393
Marketing and fulfillment expenses 1,655 1,635
General and administrative expenses 2,416 1,951
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Income from continuing operations 883 807
Other expense
Interest expense, net 377 446
Other expense 45 63
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Income before taxes 461 298
Provision for income taxes 6 114
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Net income $ 455 $ 184
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BASIC EPS
Income from continuing operations $ 0.16 $ 0.15
Net income $ 0.08 $ 0.03
DILUTED EPS
Income from continuing operations $ 0.16 $ 0.15
Net income $ 0.08 $ 0.03
Weighted average number of shares outstanding 5,514 5,514
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ADDITIONAL RETAINED EQUITY TOTAL
CLASS A CLASS B PAID-IN EARNINGS ADJUSTMENTS
COMMON STOCK COMMON STOCK CAPITAL FROM
SHARES AMOUNT SHARES AMOUNT TRANSLATIONS
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
Net income 346 346
Translation Adjustments 27 27
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Balance, Dec 31, 1997 2,079,000 21 3,435,000 34 13,428 (2,303) 16 11,196
Net income 455 455
Translation Adjustments 13 13
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Balance, Mar 31, 1998 2,079,000 $21 3,435,000 $34 $13,428 $ (1,848) $ 29 $11,664
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MAR 31, 1998 MAR 31, 1997
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 455 $ 184
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 233 152
Amortization of product masters and other 564 765
Allowance for returns and doubtful accounts 119 (185)
Changes in operating assets and liabilities
Increase in trade receivables (470) (653)
(Increase) decrease in other receivables 181 (179)
Decrease in inventories (413) 76
Decrease in prepaid and other assets 366 273
Decrease in accounts payable and accrued expenses (911) (845)
Increase in royalties payable 332 752
Increase (decrease) in other current liabilities and deferred revenue 110 466
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Net cash provided by operating activities 566 806
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (114) (114)
Payments for product masters (425) (871)
Decrease in other assets 82 (2)
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Net cash used in investing activities (457) (987)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit 418 (480)
Proceeds from issuance of long-term debt
Principal payments on debt (496) (275)
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Net cash (used) provided by financing activities (78) (755)
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Effect of foreign currency rate fluctuations on cash
(Decrease) increase in cash 31 (936)
CASH BEGINNING OF PERIOD 523 1,131
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CASH END OF PERIOD $ 554 $ 195
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 342 $ 477
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Income taxes $ 0 $ 0
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INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND MARCH 31, 1997
(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 130 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, 1997. 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 March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
EARNINGS PER SHARE OF COMMON STOCK
The company adopted SFAS 128, "Earnings per Share" effect December 31,
1997. SFAS 128 requires that earnings per share be presented as basic earnings
per share which is computed by dividing income available to common stockholders
by the weighted average of common shares outstanding for the period and diluted
earnings per share which is calculated by dividing income available to common
stockholders by weighted average of common shares outstanding assuming issuance
of potential dilutive common shares related to options, warrants, convertible
debt, or other stock agreements. All earnings per share amounts have been
presented in accordance with the provisions of this statement. Additionally, all
prior years presented have been restated in accordance with the provisions of
this statement.
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 Class A common stock. The warrants
have an exercise price of $1.875 and expire in 10 years. Under the terms of the
financing agreement, the lender cannot exercise the warrants for two years
(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 $848,000 or 10.5% to $9.0 million for the
three months ended March 31, 1998, from $8.1 million for the three months ended
March 31, 1997. This increase in sales revenue is attributable mainly to strong
church, choral and hymnal sales, which increased 135% to $1.4 million versus
$579,000 in the same period in 1997. Also contributing to the increase was
copyright revenue, which increased by 13.0% over 1997. The retail division
revenues increased by $20,000 to $2.589 million for the first quarter of 1998,
compared to $2.569 million for the same period in 1997. The direct to consumer
division sales decreased 5.0% and the international division's sales decreased
18.0% over the same period in 1997. New product sales in all divisions amounted
to $1.9 million or 21.2% of net revenue for the three months ended March 31,
1998, versus $2.6 million or 32.2% of net revenue for the same period in 1997,
due to fewer new product releases in the first quarter.
Gross profit increased 12.8% to $5.0 million for the three months ended
March 31, 1998, from $4.4 million for the same period in 1997. Gross profit as a
percentage of sales increased to 55.3% for the three months ended March 31,
1998, from 54.2% for the same period in 1997. Lower manufacturing costs
contributed to the increased margin.
Marketing and fulfillment expenses increased 1.2% to $1.7 million or
18.5% of net sales for the three months ended March 31, 1998, as compared to
$1.6 million or 20.2% of net sales for the same period in 1997. The increase in
marketing and fulfillment expenses is partly attributable to research and
development costs of new direct to consumer programs.
General and administrative expenses increased to $2.4 million or 27.0%
of net sales for the three months ended March 31, 1998, as compared to $2.0
million or 24.1% of net sales for the same period in 1997. The increase is
attributable mainly to increases in compensation expense.
Interest expense decreased to $377,000 for the three months ended March
31, 1998, as compared to $446,000 for the same period in 1997. The decrease was
the result of lower average debt levels in the first three months of 1998. The
average interest rates for the three months ended March 31, 1998 and 1997 were
9.9% and 9.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically and will continue to finance its
operations primarily through cash generated from operations, although such funds
also have been supplemented by borrowing under a line of credit and term notes
as needed.
Cash generated from operations totaled $566,000 and $806,000 in the
three months ended March 31, 1998 and 1997, respectively. Payments for marketing
research contributed to the decrease in cash generated from operations for the
three months ended March 31, 1998. 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 three months ended March 31, 1998 and the same period in 1997, the
amounts charged against income for returns and allowances for doubtful accounts
were $1.3 million and $1.4 million, respectively.
Capital expenditures totaled $114,000 for each of the three month
periods ended March 31, 1998 and 1997. Capital expenditures during 1998 included
computer equipment and capital repairs on existing buildings. Other significant
uses of cash were $330,000 and $871,000 for product master development for the
three months ended March 31, 1998 and 1997, respectively.
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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).
10.1 Operating Agreement of Celebration Hymnal, LLC, dated
October 14, 1997, by and among the Members (as therein defined)
(subject to a request for confidential treatment).
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
March 31, 1998.
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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: May 11, 1998 /s/ P. Michael Coleman
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P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: May 11, 1998 /s/ Alison S. Richardson
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Alison S. Richardson
Sr. Vice President, Finance & Administration
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EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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10.1 Operating Agreement of Celebration Hymnal, LLC, dated
October 14, 1997, by and among the Members (as therein defined)
(subject to a request for confidential treatment).
27 Financial Data Schedule (for SEC use only).