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UNITED STATES 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 June 30, 1998 Commission File No. 0-24134
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INTEGRITY INCORPORATED
(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
(Address of principal executive offices, zip)
(334) 633-9000
(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 August 7, 1998
- ----- -----------------------------
Class A Common Stock, $0.01 par value 2,079,000
Class B Common Stock, $0.01 par value 3,435,000
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FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
Jun 30, 1998 Dec 31, 1997
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ASSETS
Current Assets
Cash $ 517 $ 523
Trade receivables, less allowance for returns and doubtful accounts 5,672 4,258
of $1,127 and $812
Other receivables 2,152 2,033
Inventories 4,228 5,303
Other current assets 2,699 2,927
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Total current assets 15,268 15,044
Property and equipment, net of accumulated depreciation 3,473 3,499
of $4,118 and $3,085
Product masters, net of accumulated amortization 8,658 8,618
of $9,325 and $7,537
Non-compete agreement, net of accumulated amortization 40 120
of $1,210 and $1,130
Other assets 3,316 3,494
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Total assets $30,755 $30,775
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,833 $ 1,838
Accounts payable and accrued expenses 2,276 2,156
Royalties payable 399 908
Other current liabilities 587 237
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Total current liabilities 5,095 5,139
Long Term Debt 12,592 13,279
Deferred revenue 133 207
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Total liabilities 17,820 18,625
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Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, 0 0
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 1,674 2,303
Minority interest 1,104 954
Equity adjustments from foreign translation 22 16
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Total stockholders' equity 12,935 12,150
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Total liabilities and stockholders' equity $30,755 $30,775
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Quarter Ended Six Months
June 30 Ended June 30
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 8,837 $ 7,819 $ 17,788 $ 15,923
Cost of sales 4,028 3,500 8,025 7,210
-------- -------- -------- --------
Gross profit 4,809 4,319 9,763 8,713
Marketing and fulfillment expenses 1,734 1,924 3,389 3,559
General and administrative expenses 2,330 2,290 4,746 4,241
-------- -------- -------- --------
Income from continuing operations 745 105 1,628 913
Other expense (income)
Interest expense, net 400 433 777 879
Other expense (income) (22) (22) 4 42
Minority interest 174 0 193 0
-------- -------- -------- --------
Income before taxes 193 (306) 654 (8)
Provision for (benefit from) income taxes 19 (143) 25 (27)
-------- -------- -------- --------
Net income (loss) $ 174 $ (163) $ 629 $ 19
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BASIC EPS
Income from continuing operations $ 0.14 $ 0.02 $ 0.30 $ 0.17
Net income $ 0.03 $ (0.03) $ 0.11 $ 0.00
DILUTED EPS
Income from continuing operations $ 0.14 $ 0.02 $ 0.30 $ 0.17
Net income $ 0.03 $ (0.03) $ 0.11 $ 0.00
Weighted average number of shares outstanding 5,514 5,514 5,514 5,514
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Class A Class B Additional Retained Equity Adj. Minority Total
Common Stock Common Stock Paid-In Earnings From Interest
Capital Translations
Shares Amount Shares Amount
------ ------ ------ ------
Balance, Jun 30, 1996 2,079,000 $21 3,435,000 $34 $12,035 $415 $(198) $0 $12,307
Net income (loss) 39 39
Issuance of stock warrants 1,393
Translation adjustments 167 167
Balance, Sep 30, 1996 2,079,000 21 3,435,000 34 1,393 454 (31) 13,906
Net income (loss) (3,399) (3,399)
Translation adjustments (20) (20)
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 0
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)
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
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
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
Balance, Mar 31, 1998 2,079,000 21 3,435,000 34 13,428 (1,848) 29 11,664
Net income 174 174
Minority interest 1,104 1,104
Translation adjustments (7) (7)
Balance, Jun 30, 1998 2,079,000 $21 3,435,000 $34 $13,428 $(1,674) $22 $1,104 $12,935
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
Six Months Ended
Jun 30, 1998 Jun 30, 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 629 $ 19
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 466 298
Amortization of product masters 1,080 1,914
Allowance for returns and doubtful accounts 316 (263)
Changes in operating assets and liabilities
Increase in trade receivables (1,729) (50)
Increase in other receivables (120) (537)
Decrease in inventories 1,075 190
Decrease in prepaid assets 228 918
Increase (decrease) in accounts payable and accrued expenses 78 (965)
(Decrease) increase in royalties payable (509) 451
Increase in other current liabilities and deferred revenue 334 176
Equity adjustments from translation 6 (12)
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Net cash provided by operating activities 1,854 2,139
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (182) (205)
Payments for product masters (1,120) (1,403)
Decrease in other assets 0 (175)
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Net cash used in investing activities (1,302) (1,783)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit 575 (580)
Proceeds from issuance of long-term debt 0 --
Principal payments on debt (1,326) (610)
Minority interest 193 0
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Net cash (used) provided by financing activities (558) (1,190)
(Decrease) increase in cash (6) (834)
Cash beginning of period 523 1,131
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Cash end of period $ 517 $ 297
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 744 $ 719
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Income taxes $ 0 $ 0
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INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND JUNE 30, 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 June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
EARNINGS PER SHARE OF COMMON STOCK
The company adopted SFAS 128, "Earnings per Share" effective 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 warrants become exercisable in August 1998.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total net revenue increased $1.9 million or 11.7% to $17.8 million for
the six months ended June 30, 1998, from $15.9 million during the six months
ended June 30, 1997. This increase in sales revenue is attributable to strong
sales in the church/choral and hymnal divisions. Sales in the church/choral
division increased $600,000 or 54.5% to $1.7 million compared to $1.1 million in
the same period in 1997 due to strong releases in the first half of the year and
increased market share with an expanded auto-release program to targeted
churches and church leaders. Sales in the hymnal division increased $1.3 million
or 488% to $1.6 million compared to $267,000 for the same period in 1997 due to
a full year of sales. The Celebration Hymnal was released in April of 1997.
Sales in the retail division decreased 4.3% to $4.4 million compared to $4.6
million for the same period in 1997 due to delays in shipping resulting from a
change in operating systems by the Company's retail distributor in the first
half of the year. The conversion is now complete and the Company does not
anticipate any further delays as a result of the conversion at this time.
Copyright revenue increased 19% to $1.8 million and direct to consumer revenue
decreased 6.8% to $4.2 million. New product sales in all divisions amounted to
$4.8 million or 26.9% of net revenue for the six months ended June 30, 1998
versus $4.3 million or 27.0% of net revenue for the same period in 1997. For the
quarter ended June 30, 1998, total net revenue increased $1.0 million or 13.0%
to $8.8 million, from $7.8 million in the same period in 1997. The increase is
due mainly to increased sales in the church/choral and hymnal divisions with
continued sales of the Celebration Hymnal and sales from newly released
ancillary products that accompany the Hymnal.
Gross profit increased 12.1% to $9.8 million for the six months ended
June 30, 1998 from $8.7 million for the same period in 1997. Gross profit as a
percentage of sales increased to 54.9% for the six months ended June 30, 1998,
from 54.7% for the same period in 1997. Second-quarter results as compared with
the prior year period reflected an increase in gross profit of 11.4% to $4.8
million, from $4.3 million for the same period in 1997. For the quarter ending
June 30, 1998, gross profit as a percentage of sales decreased to 54.4%,
compared to 55.2% for the same period in 1997.
Marketing and fulfillment expenses decreased 4.8% to $3.4 million or
19.1% of net sales for the six months ended June 30, 1998, as compared with $3.6
million or 22.3% of net sales for the same period in 1997. For the quarter ended
June 30, 1998, marketing and fulfillment expenses were $1.7 million or 19.6% of
net sales, compared to $1.9 million or 24.6% of net sales for the same period in
1997. The decrease in marketing and fulfillment expenses is partly attributable
to fewer but more productive and targeted marketing expenses in the direct to
consumer division.
General and administrative expenses increased to $4.7 million or 26.7%
of net sales for the six months ended June 30, 1998 as compared to $4.2 million
or 26.6% of net sales for the same period in 1997. For the quarter ended June
30, 1998, general and administrative expenses were $2.3 million or 26.4% of net
sales, compared to $2.3 million or 29.3% of net sales for the same period in
1997. The increase from the 1997 period is mainly attributable to compensation
expense.
Interest expense decreased to $777,000 for the six months ended June
30, 1998 as compared with $879,000 for the same period in 1997. The decrease was
the result of lower average debt levels in the first six months of 1998. The
average interest rates for the six months ended June 30, 1998 and 1997 were 8.8%
and 9.3%, 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 $1.9 and $2.1 million in the six
months ended June 30, 1998 and 1997, respectively. Increase in accounts
receivable was the primary contributor to the decrease in cash generated from
operations for the six months ended June 30, 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 six months ended June 30, 1998 and the same period in 1997 the amounts
charged against income for returns and allowances for doubtful accounts were
$2.6 million and $2.5 million, respectively.
Capital expenditures totaled $182,000 and $205,000 for the six month
periods ended June 30, 1998 and 1997, respectively. Capital expenditures made
during 1998 included computer equipment and capital repairs on existing
buildings.
Other significant uses of cash were $1.1 million and $1.4 million for
product master development for the six months ended June 30, 1998 and 1997,
respectively. Product masters, which include sound recordings, print masters and
video masters, both live action and animated, are amortized over their future
estimated useful lives, using a method that reasonably relates to the amount of
net revenue expected to be realized. The cost of producing a product master
includes the cost of the musical talent, the cost of the technical talent for
engineering, directing and mixing, cost for the use of the equipment to record
and produce the master and studio facility charges. Current book value for
product masters is $8.7 million. From time to time, the Company analyzes the
book value of its product masters and adjusts, as necessary, for those product
masters not expected to recoup recording costs. Write-downs to the value of
product masters for the years ended December 31, 1997, 1996 and 1995 were $0,
$1.7 million and $659,000, respectively.
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PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 6, 1998, the
following matters were brought before and voted upon by the stockholders:
1. A proposal to elect the following to the Board of Directors to serve
until the 1999 annual meeting:
Class A Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 1,837,032 6,500 235,468
Jean C. Coleman 1,842,332 1,200 235,468
John B. Ellis 1,837,032 6,500 235,468
Charles V. Simpson 1,837,032 6,500 235,468
Heeth Varnedoe, III 1,842,532 1,000 235,468
Class B Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 3,435,000 0 0
Jean C. Coleman 3,435,000 0 0
John B. Ellis 3,435,000 0 0
Charles V. Simpson 3,435,000 0 0
Heeth Varnedoe, III 3,435,000 0 0
2. A proposal to ratify the selection of Price Waterhouse LLP as
independent auditors for the Company for the fiscal year ending December 31,
1998:
For Against Class A Abstain Non-Votes
- --- ------- ------- ------- ---------
1,842,532 1,000 0 235,468
For Against Class B Abstain Non-Votes
- --- ------- ------- ------- ---------
3,435,000 0 0 0
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ITEM 5 - OTHER INFORMATION
On the Company's Annual Report on Form 10-K for the year ended December
31, 1997, the Company reported that it had failed to meet one of the new
requirements for maintenance of the listing of its shares on the Nasdaq National
Market. This new requirement states that the value of its publicly traded shares
be $5 million. The new listing and maintenance requirements went into effect
February 23, 1998. The Company further indicated it had elected to transfer its
listing to the Nasdaq SmallCap Market. The company was given 90 days to regain
compliance with the new maintenance requirement, the 90-day period ending on May
28, 1998. The Company did regain compliance for 11 days during this period.
On April 24, 1998, the Company announced through a press release that
it would suspend the process for listing on the Nasdaq SmallCap Market and would
take advantage of any and all review and appeal processes available to continue
trading its stock on the Nasdaq National Market. On May 29, 1998, Nasdaq issued
a letter advising that unless the Company filed for an appeal, the Company's
stock would be deslisted from the Nasdaq National Market. The Company filed an
appeal and attended a hearing with Nasdaq's Board of Governors on July 24, 1998.
As of the date of this filing, the results of the hearing are unknown.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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
June 30, 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: August 7, 1998 /s/ P. Michael Coleman
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P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: August 7, 1998 /s/ Alison S. Richardson
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Alison S. Richardson
Senior Vice President,
Finance and Administration
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