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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, 1999 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 the past 90 days.
Yes [X] No [ ]
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 10, 1999
- ----- ------------------------------
Class A Common Stock, $0.01 par value 2,179,000
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 SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 1999 Dec. 31, 1998
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ASSETS (Unaudited)
Current Assets
Cash $ 1,101 $ 989
Trade receivables, less allowance for returns and doubtful accounts of $1,080
and $696 5,921 4,913
Other receivables 996 1,637
Inventories 4,114 4,528
Other current assets 2,925 3,831
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Total current assets 15,057 15,898
Property and equipment, net of accumulated depreciation of $3,840 and $3,575 3,440 3,473
Product masters, net of accumulated amortization of $10,663 and $11,325 9,063 9,050
Other assets 3,046 3,196
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Total assets $ 30,606 $ 31,617
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,106 $ 1,847
Accounts payable and accrued expenses 2,593 2,732
Royalties payable 771 569
Other current liabilities 1,134 923
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Total current liabilities 5,604 6,071
Long-term debt 10,386 11,121
Other long-term liabilities 52 60
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Total liabilities 16,042 17,252
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Commitments and contingencies -- --
Minority interest 1,049 1,384
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Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and
Outstanding 0 0
Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,179,000 and 2,179,000 shares issued and outstanding 22 21
Class B common stock, $.01 par value, 10,500,000 shares authorized;
3,435,000 shares issued and outstanding 34 34
Additional paid-in capital 13,914 13,428
Unearned compensation (352) 0
Accumulated Deficit (70) (449)
Equity adjustments from foreign currency translation (33) (53)
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Total stockholders' equity 13,515 12,981
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Total liabilities and stockholders' equity $ 30,606 $ 31,617
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 10,513 $ 9,678 $ 21,558 $ 19,131
Cost of sales 4,664 4,028 9,887 8,025
--------- --------- --------- ---------
Gross profit 5,849 5,650 11,671 11,106
Marketing and fulfillment expenses 2,892 2,575 5,554 4,732
General and administrative expenses 2,365 2,330 4,695 4,746
--------- --------- --------- ---------
Income from operations 592 745 1,422 1,628
Other expenses
Interest expense, net 304 400 679 777
Other expenses (24) (22) (6) 4
--------- --------- --------- ---------
Income before minority interest and taxes 312 367 749 847
Provision for income taxes 104 83 260 96
Minority interest, less applicable taxes 52 110 110 122
--------- --------- --------- ---------
Net income $ 156 $ 174 $ 379 $ 629
========= ========= ========= =========
Adjustments to determine comprehensive income
Foreign currency translation adjustments (5) (7) 20 6
--------- --------- --------- ---------
Comprehensive income $ 151 $ 167 $ 399 $ 635
========= ========= ========= =========
EARNINGS PER SHARE
Basic $ 0.03 $ 0.03 $ 0.07 $ 0.11
========= ========= ========= =========
Diluted $ 0.03 $ 0.03 $ 0.06 $ 0.11
========= ========= ========= =========
Weighted average number of shares outstanding
Basic 5,580 5,514 5,543 5,514
Diluted 6,004 5,514 6,041 5,514
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months Ended June 30
------------------------
1999 1998
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Cash flows from operating activities
Net income $ 379 $ 629
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 558 466
Amortization of product masters 1,336 1,080
Minority interest 110 122
Stock compensation 23 0
Changes in operating assets and liabilities
Trade receivables (1,008) (1,413)
Other receivables (1) (120)
Inventories 414 1,075
Other assets 1,588 228
Accounts payable, royalties payable and
Accrued expenses 63 (431)
Other current and non current liabilities 223 411
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Net cash provided by operating activities 3,685 2,047
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Cash flows from investing activities
Purchases of property and equipment (232) (182)
Distributions to joint venture partner (510) 0
Payments for product masters (1,349) (1,120)
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Net cash used in investing activities (2,091) (1,302)
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Cash flows from financing activities
Net (repayments) borrowings under line of credit (317) 575
Principal payments of long-term debt (1,165) (1,326)
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Net cash used in financing activities (1,482) (751)
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Net (decrease) increase in cash 112 (6)
Cash, beginning of year 989 523
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Cash, end of period $ 1,101 $ 517
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The accompanying notes are an integral part of these condensed
consolidated financial statements
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INTEGRITY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes and compact discs, print
music and related products, primarily by direct to consumer marketing and
wholesale trade methods. A principal direct to consumer marketing method of
distribution is continuity programs whereby subscribers receive products at
regular intervals.
Integrity Music Europe Ltd. was formed in 1988; Integrity Music Pty.
Ltd. was formed in 1991; and Integrity Media Asia Pte. Ltd. was formed in 1995.
These wholly-owned subsidiaries of the Company serve to expand the Company's
presence in Western Europe, Australia and New Zealand; and Singapore,
respectively. Celebration Hymnal LLC was formed in 1997 as a 50/50 joint
venture with Word Entertainment, for the purpose of producing and promoting The
Celebration Hymnal. Word Entertainment's interest in the joint venture is
presented as a minority interest in these financial statements, as the joint
venture is controlled by the Company.
The accompanying unaudited condensed 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, 1998. The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments and the nonrecurring billing adjustment described below, considered
necessary for a fair presentation of results for the interim period, have been
included.
During the six months ended June 30, 1999, the Company recorded
certain adjustments to correct an inadvertent overstatement of shipping and
handling revenue resulting from software modifications carried out last year.
This situation, which affected only one portion of the Company's direct to
consumer segment, had no impact on customers, has been rectified, and had an
immaterial impact on all prior periods. The impact of these adjustments in 1999
was to reduce net sales by $.3 million and $.2 million, gross profit by $.3
million and $.2 million and net income by $.2 million and $.1 million for the
three and six month periods ended June 30, 1999, respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Operating results for the quarter ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain amounts in the prior years' financial statements
have been reclassified to conform with the current year presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company, the Celebration Hymnal LLC, and its wholly-owned subsidiaries, which
include Integrity Music Pty. Ltd., Integrity Music Europe, Ltd., Integrity
Media Asia Pte. Ltd. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Provisions are made
based on estimates derived from historical data for sales returns and
allowances in the period in which the related products are shipped. The full
amount of the returns allowance is shown, along with the allowance for doubtful
accounts, as a reduction of accounts receivable in the accompanying financial
statements. Generally, revenue derived from licensing the use of songs in the
Company's song catalogs is recognized as payments are received from licensees.
MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct sales to customers. Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized. Other marketing costs are expensed the first
time advertising takes place. Prepaid marketing costs, including artwork,
printing and direct mail packages, are included in assets in the accompanying
financial statements. Marketing costs expensed for the six months ended June
30, 1999 and 1998 approximated $2.9 million and $2.4 million, respectively.
PRODUCT MASTERS
Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives using a method that
reasonably relates to the amount of net revenue expected to be realized.
Management regularly reviews the product masters amortization rates and adjusts
the rate based on management's estimates for future sales. In conjunction with
such analysis, any amounts that do not appear to be fully recoverable are
charged to expense during the period the loss becomes estimatable. The costs of
producing a product master include the cost of the musical talent, the cost of
the technical talent for engineering, directing and mixing, the cost of the
equipment used to record and produce the master and the cost of the studio
facility used.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average of common shares
outstanding assuming issuance of potential dilutive common shares related to
options and warrants.
LONG TERM DEBT
The Company has a $19 million credit agreement with a financial
institution, which includes a $6 million revolving credit facility and a $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 holds warrants exercisable for approximately 12.5%
of the Company's Class A common stock. The warrants have an exercise price of
$1.875 and expire August 6, 2006. Under the terms of the financing agreement,
the warrants became exercisable in August 1998. During the six months ended
June 30, 1999, the Company amended its credit agreement to adjust certain
covenant restrictions for future periods. The nature of the revised covenants
are consistent with the previous covenants; however, the financial ratios are
somewhat less restrictive.
STOCKHOLDERS' EQUITY AND OPTIONS
During February 1999 the Company granted to an officer 100,000 shares
of restricted Class A Common Stock, which was issued in May 1999. The
restricted stock cliff vests after an additional seven years of employment by
the officer. The fair value of the stock on the date of grant was approximately
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$375,000 and is being amortized to expense over the vesting period. As a result
of the grant, the Company's debt agreement required the issuance of
approximately 35,000 additional warrants to its primary lender with terms that
are consistent with their initial grant. The fair value of these warrants of
approximately $109,000 has been recorded as additional discount on the
long-term debt. The fair value of the warrants was determined based on a
Black-Scholes option pricing model with the following assumptions: dividend
yield at 0%, risk-free interest rate of 5.5%, expected life of 5 years, and
volatility of 95%.
SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
Six months ended June 30
Net Sales 1999 1998
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Direct to consumer $ 6,893 $ 6,748
Retail 9,825 7,595
International 3,510 3,008
Other 2,469 3,118
Eliminations (1,139) (1,338)
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$ 21,558 $ 19,131
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Operating profit (before minority interest)
Direct to consumer $ 965 $ 1,161
Retail 2,204 2,007
International 809 641
Other 119 306
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Consolidated 4,097 4,115
General corporate expense 2,669 2,491
Interest expense, net 679 777
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Income before income taxes and minority
interest $ 749 $ 847
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Three months ended June 30
Net Sales 1999 1998
--------- ---- ----
Direct to consumer $ 3,425 $ 3,644
Retail 5,303 4,186
International 1,881 1,613
Other 957 1,778
Eliminations (1,053) (1,543)
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$ 10,513 $ 9,678
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Operating profit (before minority interest)
Direct to consumer $ 404 $ 416
Retail 1,156 1,174
International 459 260
Other (41) 278
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Consolidated 1,978 2,128
General corporate expense 1,362 1,361
Interest expense, net 304 400
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Income before income taxes and minority
interest $ 312 $ 367
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales increased $2.5 million or 13.1% to $21.6 million for the six
months ended June 30, 1999, as compared to $19.1 million during the six months
ended June 30, 1998. For the quarter ended June 30, 1999, net sales increased
$800,000 or 8.3% to $10.5 million, from $9.7 million in the same period in
1998. New product sales in all segments amounted to $5.9 million or 27.4% of
net revenue for the six months ended June 30, 1999, as compared to $4.8 million
or 26.9% of net revenue for the same period in 1998. The increases in revenue
for both the three and six month periods are primarily attributable to
increased volume in the retail segment. During the six month period ended June
30, 1999, sales in the retail segment increased $2.2 million or 28.9% to $9.8
million, compared to $7.6 million in the same period in 1998. For the quarter
ended June 30, 1999, sales in the retail segment increased 26.1% to $5.3
million, compared to $4.2 million during the same period in 1998. The increase
in the three month and six months periods were both due to strong releases
during the first six months of 1999. A leading product in the retail segment is
WOW, a double CD, that accounted for $1.0 million in sales in the second
quarter. International sales for the six month period grew by 16.7% to $3.5
million, as compared to $3.0 million in the same period in 1998, while
international sales for the three month period increased 18.8% to $1.9 million
in 1999. International sales growth was experienced in all significant
territories including Singapore where revenue increased 28.5% during the six
month period. Direct to consumer sales were relatively flat for the six month
period at $6.8 million and decreased by approximately $219,000 to $3.4 million
during the three month period ended June 30, 1999. Direct to consumer sales
were negatively impacted by approximately $300,000 and $200,000 during the
three and six month periods ended June 30, 1999 due to adjustments to correct
an inadvertent overstatement of shipping and handling revenue related to system
modifications carried out last year. This situation, which affected only one
portion of the Company's direct to consumer segment, had no impact on
customers, has been rectified, and had an immaterial impact on all prior
periods.
Gross profit increased to $11.7 million or 54.2% of sales, as compared
to $11.1 million or 58.1% of sales, for the six month periods ended June 30,
1999 and 1998, respectively. During the first six months, the sales mix
included a higher-than-usual proportion of distributed and artist products,
which have lower gross margin percentages. The gross margin percentages in the
retail segment were negatively impacted with the sales of WOW. Although the
album has generated significant revenues, it was created in partnership with
two other record companies, and, as a result, the Company's margin is
significantly lower due to higher royalties. Gross profit was also negatively
impacted by approximately $300,000 and $200,000 during the three and six month
periods ended June 30, 1999, as a result of the billing adjustments in the
direct-to-consumer segment discussed above. Management expects that the sales
mix is likely to continue to focus in the retail segment over the course of the
year, which may keep gross margins lower than in previous years. Gross profit
for the quarter ended June 30, 1999 was $5.8 million or 55.2% of sales, as
compared to $5.7 million or 58.8% of sales for the same period in 1998. The
factors that contributed to the decrease during the three month period are
consistent with those described above. While gross margins for the retail
segment are lower, operating profit margins from the retail segment were 22.4%
and 26.4% for the six months ended June 30, 1999 and June 30, 1998,
respectively, compared with 14.0% and 17.2% for the direct to consumer segment
for the same periods.
Marketing and fulfillment expenses increased 19.1% to $5.6 million or
25.9% of net sales for the six months ended June 30, 1999, as compared with
$4.7 million or 24.6% of net sales for the same period in 1998. For the quarter
ended June 30, 1999, marketing and fulfillment expenses were $2.9 million or
27.6% of net sales, compared to $2.6 million or 26.8% of net sales for the same
period in 1998. The increases in marketing and fulfillment expenses as a
percent of sales are primarily attributable to increased marketing for
Integrity Notes, a new greeting card continuity series in the direct to
consumer division. Other new marketing programs launched during the six months
designed to further increase the Company's market share also contributed to the
overall increase in marketing and fulfillment expenses.
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General and administrative expenses remained constant at $4.7 million
or 21.8% of net sales for the six months ended June 30, 1999, as compared to
$4.7 million or 24.6% of net sales for the same period in 1998. For the quarter
ended June 30, 1999, general and administrative expenses were $2.4 million or
22.9% of net sales, compared to $2.3 million or 23.7% of net sales for the same
period in 1998.
Interest expense decreased to $304,000 and $679,000 for the three and
six months ended June 30, 1999 as compared with $400,000 and $777,000 for the
same periods in 1998. The decrease was the result of lower average debt levels
in the first six months of 1999. The average interest rate for the six months
ended June 30, 1999 and 1998 was 10.3% and 9.4%, respectively.
The Company recorded an income tax provision of $260,000 and $96,000
for the six months ended June 30, 1999 and 1998, respectively. The Company's
effective tax rate for the first six months of 1999 was 37.1%. The period's
income tax provision effective rate is the product of applying current tax
rates against the taxable income generated by the Company. The Company has made
no adjustments to its valuation allowance of $500,000 against its deferred tax
asset since December 31, 1998.
Net income for the quarter and for the year-to-date period was also
reduced by approximately $200,000 and $100,000 respectively, as a result of the
non-recurring billing adjustment discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically and will continue to finance its
operations primarily through cash generated from operations and from borrowings
under a line of credit and term notes as needed. The Company's principal uses
of cash historically have been debt service and the production and recording of
product masters to build the Company's product master library. The Company
believes that funds generated from operations, together with existing cash and
available borrowings under its Credit Agreement will be sufficient to finance
its current operations and planned capital expenditure requirements and
internal growth for the foreseeable future.
Late in the first quarter the Company revised its existing $19 million
financing agreements to implement less restrictive financial covenants so that
it has more flexibility in making future operating decisions, capital
expenditures and product development. For the periods ended June 30, 1999 and
1998, the Company had average borrowings under the credit agreement of $13.1
million and $16.5 million at average rates of 10.3% and 9.4%, respectively. At
June 30, 1999, the Company had $2.2 million available to borrow under this
agreement. Cash generated from operations totaled $3.7 million and $2.0 million
in the six months ended June 30, 1999 and 1998, respectively. The use of cash
varies from quarter to quarter based, among other things, on product releases
and scheduled marketing promotions.
The Company's primary uses of cash are to (1) repay existing debt and
(2) to invest in the development of product masters to maintain the Company's
quality creative releases. The Company made principle payments on its term loan
of $1.0 million and $750,000 for the six months ended June 30, 1999 and 1998,
respectively. The investments in product masters for the six months ended June
30, 1999 and 1998 totaled $1.3 and $1.1 million, respectively. The current book
value for product masters is $9.1 million.
Capital expenditures for computer equipment and capital improvements
to existing buildings totaled $232,000 and $182,000 for the six months ended
June 30, 1999 and 1998, respectively.
During the six month period ended June 30, 1999, the Company made
distributions in the aggregate of $510,000 to its 50% partner in the
Celebration Hymnal LLC joint venture, Word Entertainment.
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YEAR 2000 COMPLIANCE
The Year 2000 Problem
The Company is devoting resources throughout its business operations
to minimize the risk of potential disruption from the "Year 2000" problem. This
problem is a result of computer programs having been written using two digits
rather than four to define the applicable year. Information technology ("IT")
systems that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
and system failures. The problem also extends to certain operating and control
systems that rely on embedded chip systems. In addition, like every other
business enterprise, the Company is at risk from Year 2000 failures on the part
of its major business counterparts, including suppliers, distributors,
contractors and service providers, as well as potential failures in public and
private infrastructure service, including electricity, water, gas,
transportation and communications.
State of Readiness
If the Company or its significant suppliers, distributors, contractors
and service providers do not successfully achieve Year 2000 compliance, the
Company's financial condition and results of operations could be materially and
adversely affected, resulting from, among other things, the Company's inability
in a timely manner:
- - to efficiently manufacture, sell and ship existing products to distributors
- - to collect accounts receivable, and
- - to produce and effectively market new products.
During 1998, the Company formed a Year 2000 committee to identify and
address any potential Year 2000 problems with the Company's internal IT
systems, non-IT systems and products, as well as with its suppliers,
distributors, contractors and service providers. This phase involved a review
of all IT and significant non-IT systems and Company products, and testing of
the Company's IT systems and significant non-IT systems. The Company completed
this phase in February 1999 and determined that its internal IT systems are
Year 2000 compliant, including all in-house software. In addition, the Company
performed a successful full scale Year 2000 simulation of its IT systems in May
1999.
The Company has determined that all internal non-IT systems and
products either are Year 2000 compliant or that a Year 2000 problem with such
non-IT system or product will not be material to the Company's operation. In
making this determination, the Company relied upon representations from certain
third parties, including the vendors of its significant studio and recording
equipment.
The Company's business depends upon the accurate and timely
fulfillment of certain operations contracted to third-party service providers
and manufacturers, including Word in the retail market segment, LCS Industries,
Inc., located in Clifton, New Jersey, in the direct to consumer segment,
numerous international distributors in the international segment, and Eva-Tone,
Inc., located in Clearwater, Florida, in the production of musical recordings
from the Company's master recordings. In February 1999, the Company developed a
Year 2000 compliance questionnaire and solicited its principal suppliers,
distributors, contractors and service providers to determine such party's Year
2000 status. The Company's key US vendors and distributors have provided the
Company with assurances that their systems are compliant, as well as
contingency plans where necessary. The most significant distributors in the
international segment have not provided any assurances their systems are or
will become Year 2000 compliant.
Costs to Address Year 2000
The total cost associated with the Company's Year 2000 remediation is
not expected to exceed $40,000 or to be material to the Company's financial
condition or results of operations. The Company has not employed any outside
consultants regarding Year 2000 remediation and has spent approximately
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$25,000 in April 1999 to replace its non-Year 2000 compliant telephone system.
All other Year 2000 remediation costs will be incurred in the form of
compensation and benefits of internal employees working on the Company's Year
2000 project.
The Company's Year 2000 Risks and Contingency Plan
There can be no assurance that unanticipated or undiscovered Year 2000
compliance problems will not have a material adverse effect on the Company's
financial condition or results of operations. Such problems could result in a
diversion of resources away from the Company's core business and the Company's
inability to efficiently sell and ship products to distributors, collect
accounts receivable in a timely manner, and produce and market new products.
These issues could in turn lead to significant additional operating costs and a
decrease in product sales, as well as damage the Company's reputation in the
industry. Notwithstanding the positive confirmations received from all
significant domestic contractors or service providers, should a Year 2000
failure occur at one of the Company's domestic contractors or service
providers, including Word, LCS or Eva-Tone, the Company's contingency plan
includes utilizing alternate distributors, contractors and service providers
and moving certain fulfillment functions in-house, such as order and payment
processing. However, because of the volume of transactions that could be
required to be performed upon the failure of a contractor such as LCS, the
Company cannot be certain it would be able to timely fulfill its domestic
orders in-house, and as a result, the Company could suffer a significant
decline in sales.
However, the most likely worst case Year 2000 scenario is that the
Company's international distributors will encounter Year 2000 problems and will
not be able to utilize their systems for some period of time to efficiently
sell and distribute the Company's products overseas. The Company is developing
a contingency plan to address this scenario pursuant to which the Company would
utilize alternate distributors and its foreign subsidiaries to fulfill
international orders. Currently, no individual international distributor
distributes an amount of product that is material to the Company's overall
results of operations or financial condition. However, due to the number and
diversity of environments in which these distributors operate, the Company
cannot be certain that it would be able to timely fulfill international orders
under these circumstances and that such a Year 2000 problem would not have a
material adverse effect on the Company's financial condition or results of
operation.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which the Company expects to complete actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, results of
further Year 2000 testing, adequate resolution of Year 2000 problems by
suppliers, distributors, contractors or service providers of the Company, the
adequacy of and ability to further develop and implement contingency plans and
similar uncertainties. The "forward-looking statements" contained in the
foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
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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 7,
1999, the following matters were brought before and voted upon by stockholders:
1. A proposal to elect the following to the Board of Directors to serve
until the 2000 annual meeting:
Class A Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 1,927,271 51,250 100,479
Jean C. Coleman 1,928,471 49,850 100,679
Charles V. Simpson 1,927,621 50,700 100,679
Heeth Varnedoe III 1,928,671 49,650 100,679
Jimmy M. Woodward 1,927,471 50,850 100,679
Class B Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 34,350,000 0 0
Jean C. Coleman 34,350,000 0 0
Charles V. Simpson 34,350,000 0 0
Heeth Varnedoe III 34,350,000 0 0
Jimmy M. Woodward 34,350,000 0 0
2. A proposal to approve the 1999 Long-Term Incentive Plan, as described
in the related Proxy Statement of the Company:
Class A
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
405,002 282,235 2,153 1,389,610
Class B
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
34,350,000 0 0 0
3. A proposal to ratify the selection of PricewaterhouseCoopers LLP as
independent auditors for the Company for the fiscal year ending
December 31, 1999:
Class A
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
1,974,511 1,910 1,900 100,679
Class B
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
34,350,000 0 0 0
11
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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).
10.1 Integrity Incorporated 1999 Long-Term Incentive Plan, as
approved by the Stockholders of the Corporation on May 7,
1999.
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, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities 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 10, 1999 /s/ P. Michael Coleman
- ---------------------- ------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: August 10, 1999 /s/ Alison S. Richardson
- ---------------------- ------------------------
Alison S. Richardson
Senior Vice President,
Finance and Administration
13