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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 September 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
(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
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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 [ ]
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 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)
Sep 30, 1999 Dec 31, 1998
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 568 $ 989
Trade receivables, less allowance for returns and
doubtful accounts of $1,289 and $696 5,910 4,913
Other receivables 778 1,637
Inventories 3,756 4,528
Other current assets 2,895 3,831
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Total current assets 13,907 15,898
Property and equipment, net of accumulated depreciation
of $3,959 and $3,575 3,408 3,473
Product masters, net of accumulated amortization of
$10,838 and $11,325 9,114 9,050
Other assets 2,957 3,196
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Total assets $ 29,386 $ 31,617
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,875 $ 1,847
Accounts payable and accrued expenses 1,889 2,732
Royalties payable 1,401 569
Other current liabilities 958 923
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Total current liabilities 6,123 6,071
Long-term debt 7,969 11,121
Other long-term liabilities 60 60
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Total liabilities 14,152 17,252
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Commitments and contingencies -- --
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Minority interest 1,085 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 2,079,000 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 13,912 13,428
Unearned compensation (339) 0
Retained earnings (accumulated deficit) 562 (449)
Equity adjustments from foreign currency translation (42) (53)
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Total stockholders' equity 14,149 12,981
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Total liabilities and stockholders' equity $ 29,386 $ 31,617
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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 Nine months Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- ------- --------
Net sales $ 11,547 $ 10,196 $33,105 $ 29,327
Cost of sales 5,807 5,257 15,694 13,282
-------- -------- ------- --------
Gross profit 5,740 4,939 17,411 16,045
Marketing and fulfillment expenses 2,351 2,114 7,905 6,847
General and administrative expenses 2,321 1,910 7,016 6,656
-------- -------- ------- --------
Income from operations 1,068 915 2,490 2,542
Other expenses
Interest expense, net 359 348 1,038 1,125
Other expenses 64 14 58 17
-------- -------- ------- --------
Income before minority interest and taxes 645 553 1,394 1,400
(Benefit from) provision for income taxes (10) 45 250 142
Minority interest, less applicable taxes 23 65 133 186
-------- -------- ------- --------
Net income $ 632 $ 443 $ 1,011 $ 1,072
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Adjustments to determine comprehensive income
Foreign currency translation adjustments (9) (35) 11 (29)
-------- -------- ------- --------
Comprehensive income $ 623 $ 408 $ 1,022 $ 1,043
======== ======== ======= ========
NET INCOME PER SHARE
Basic $ 0.11 $ 0.08 $ 0.18 $ 0.19
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Diluted $ 0.10 $ 0.08 $ 0.17 $ 0.19
======== ======== ======= ========
Weighted average number of shares outstanding
Basic 5,614 5,514 5,569 5,514
Diluted 6,061 5,514 6,044 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)
Nine months Ended
September 30
--------------------
1999 1998
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Cash flows from operating activities
Net income $ 1,011 $ 1,072
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 833 701
Amortization of product masters 2,517 2,315
Minority interest 133 186
Stock compensation 36
Changes in operating assets and liabilities
Trade receivables (997) (1,188)
Other receivables 859 174
Inventories 772 1,590
Other assets 987 427
Accounts payable, royalties payable and
Accrued expenses (11) (467)
Other current and non current liabilities 46 69
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Net cash provided by operating activities 6,186 4,879
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Cash flows from investing activities
Purchases of property and equipment (319) (251)
Distributions to joint venture partner (510)
Payments for product masters (2,581) (2,108)
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Net cash used in investing activities (3,410) (2,359)
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Cash flows from financing activities
Net repayments under line of credit (1,349) (312)
Principal payments of long-term debt (1,848) (1,792)
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Net cash used in financing activities (3,197) (2,104)
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Net (decrease) increase in cash (421) 416
Cash, beginning of year 989 523
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Cash, end of period $ 568 $ 939
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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
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
creative content, distribution and publishing of music cassette tapes and
compact discs, print music and related products, sold to the public primarily
through retail sales outlets and direct to consumer marketing. 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 nine months ended September 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 $.2 million, gross profit by $.2 million and net
income by $.1 million for the nine month period ended September 30, 1999.
During the three and nine months ended September 30, 1999, the Company
recorded a non-cash deferred tax benefit of $180,000 as the result of reducing
the Company's income tax valuation allowance. After review by management, it was
determined that this portion of the valuation allowance was not required as it
was more likely than not, based on past operating performance and current plans,
that such amount would be utilized in the future.
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 September 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.
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PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company, its wholly-owned subsidiaries, which include Integrity Music Pty. Ltd.,
Integrity Music Europe, Ltd., Integrity Media Asia Pte. Ltd., and of the
Celebration Hymnal LLC. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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, retail and e-commerce sales to customers. Marketing expenditures that
benefit future periods are capitalized and charged to operations using the
straight-line method over a period of nine 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 nine months ended September 30, 1999 and 1998 approximated $3.8 million and
$3.5 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.
NOTE 2 - 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 nine months ended
September 30, 1999, the Company amended its credit agreement to adjust certain
covenant restrictions
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for future periods. The nature of the revised covenants are consistent with the
previous covenants; however, the financial ratios are somewhat less restrictive.
NOTE 3 - STOCKHOLDERS' EQUITY AND OPTIONS
In May 1999 the Company issued to an officer 100,000 shares of
restricted Class A Common Stock. 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 $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%.
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NOTE 4 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
Nine months ended
September 30
----------------------
1999 1998
-------- --------
Net Sales
---------
Direct to consumer $ 9,768 9,593
Retail 15,514 11,721
International 5,085 4,209
Other 4,463 5,001
Eliminations (1,725) (1,197)
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$ 33,105 $ 29,327
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Operating profit (before minority interest)
-------------------------------------------
Direct to consumer 1,437 1,528
Retail 3,093 3,114
International 1,009 687
Other 546 248
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Consolidated 6,085 5,577
General corporate expense (3,653) (3,053)
Interest expense, net (1,038) (1,125)
-------- --------
Earnings before income taxes and minority
interest $ 1,394 $ 1,399
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Three months ended
September 30
----------------------
1999 1998
-------- --------
Net Sales
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Direct to consumer $ 2,875 2,845
Retail 5,689 4,126
International 1,575 1,201
Other 1,994 1,883
Eliminations (586) 141
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$ 11,547 $ 10,196
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Operating profit (before minority interest)
-------------------------------------------
Direct to consumer 472 367
Retail 889 1,107
International 200 46
Other 427 (58)
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Consolidated 1,988 1,462
General corporate expense (984) (561)
Interest expense, net (359) (348)
-------- --------
Earnings before income taxes and minority
interest $ 645 $ 553
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NOTE 5 - SUBSEQUENT EVENT
During October 1999, the Company reached an agreement with its
insurance carrier to settle a claim originating in a prior year. The claim
related to inventory losses resulting from water damage at the Company's
distribution center. The Company expensed the inventory at the time it was
originally damaged. As a result of the settlement, the Company received
approximately $300,000, which will be recorded as a reduction of cost of sales
and a reduction of certain general and administrative expenses in the fourth
quarter.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales increased $3.8 million or 12.9% to $33.1 million for the nine
months ended September 30, 1999, as compared to $29.3 million during the nine
months ended September 30, 1998. For the quarter ended September 30, 1999, net
sales increased $1.3 million or 13.7% to $11.5 million, from $10.2 million in
the same period in 1998. Sales of new products in all segments amounted to $8.8
million or 26.7% of net revenue for the nine months ended September 30, 1999, as
compared to $7.1 million or 24.2% of net revenue for the same period in 1998.
The increases in revenue for both the three and nine month periods are primarily
attributable to increased volume in the retail and international segments.
During the nine month period ended September 30, 1999, sales in the retail
segment increased $3.8 million or 32.5% to $15.5 million, compared to $11.7
million in the same period in 1998. For the quarter ended September 30, 1999,
sales in the retail segment increased 39.0% to $5.7 million, compared to $4.1
million during the same period in 1998. The increase in the three month and nine
month periods were both due to strong releases during the first nine months of
1999. A leading product in the retail segment is WOW, a double CD that accounted
for $1.3 million in sales in the third quarter and $2.3 million for the nine
month period. International sales for the nine month period grew by 21.4% to
$5.1 million, as compared to $4.2 million in the same period in 1998, while
international sales for the three month period increased 31.1% to $1.6 million
in 1999. International sales growth was experienced in all significant
territories including Singapore where revenue increased 38.9% during the nine
month period. Direct to consumer sales were relatively flat for the nine month
period at $9.8 million compared to $9.6 million for the same period in 1998.
Sales in the direct to consumer division were also relatively flat for the
quarter at $2.9 million for the three months ending September 1999 compared to
$2.8 million for the same period in 1998. Direct to consumer sales were
negatively impacted by approximately $200,000 during the first nine months of
the year 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 $17.4 million or 52.6% of sales, as compared
to $16.0 million or 54.6% of sales, for the nine month periods ended September
30, 1999 and 1998, respectively. During the first nine months of 1999, the sales
mix included a higher portion of distributed and artist products than the
comparable period last year, 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 $200,000 during the first nine
months of the year, 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 September 30, 1999 was $5.7 million or 49.6% of sales, as
compared to $4.9 million or 48.0% of sales for the same period in 1998. The
primary factor that contributed to the increase in gross profit during the three
month period is the overall increase in sales, and lower write-downs of product
masters. Charges against product masters are the result of management's periodic
estimates of the eventual realizability of production costs and aggregated
$345,000 and $700,000 for the three and nine months ended September 30, 1999 and
1998, respectively.
Marketing and fulfillment expenses increased 16.2% to $7.9 million or
23.9% of net sales for the nine months ended September 30, 1999, as compared
with $6.8 million or 23.2% of net sales for the same period in 1998. For the
quarter ended September 30, 1999, marketing and fulfillment expenses were $2.4
million or 20.9% of net sales, compared to $2.1 million or 20.6% 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 nine months designed
to
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further increase the Company's market share also contributed to the overall
increase in marketing and fulfillment expenses.
General and administrative expenses increased $360,000 or 5.4% to $7.0
million or 21.1 % of net sales for the nine months ended September 30, 1999, as
compared to $6.7 million or 22.9% of net sales for the same period in 1998. For
the quarter ended September 30, 1999, general and administrative expenses were
$2.3 million or 20.0% of net sales, compared to $1.9 million or 18.6% of net
sales for the same period in 1998. The quarter's higher level of general and
administrative expenses primarily reflected higher compensation amounts and
legal expenses of $105,000 related to an insurance claim for a prior year, which
produced a favorable pre-tax settlement of $300,000 in the fourth quarter.
Interest expense decreased $87,000 or 8.4% to $1.0 million or 3.1% of
net sales for the nine months ended September 1999, as compared to $1.1 million
or 3.8% of net sales for the same period in 1998. Interest expense increased
$11,000 or 3.1% to $359,000 or 3.1% of net sales for the three months ended
September 30, 1999, as compared to $348,000 or 3.4% of net sales for the same
period in 1998. The decrease in the first nine months of 1999 was the result of
lower average debt levels for the period. The average interest rate for the nine
months ended September 30, 1999 and 1998 was 11.1% and 10.7%, respectively.
The Company recorded an income tax provision of $250,000 and $142,000
for the nine months ended September 30, 1999 and 1998, respectively. After
review by management, it was further determined that the remaining valuation
allowance of $180,000 was not required as it was more likely than not, based on
past operating performance and current plans, that such amount would be utilized
in the future. This $180,000 amount is included as a non-cash deferred benefit
from income taxes in the provision for income taxes. The remaining valuation
allowance of $320,000 is specifically required for certain foreign attributes.
Net income for the year-to-date period was also reduced by
approximately $100,000 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 September 30, 1999
and 1998, the Company had average borrowings under the credit agreement of $12.5
million and $13.9 million at average rates of 11.1% and 10.7%, respectively. At
September 30, 1999, the Company had $3.3 million available to borrow under this
agreement. Cash generated from operations totaled $5.6 million and $4.9 million,
or $1.02 and $0.88, in the nine months ended September 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 $1.9 million in both the nine months ended September 30, 1999 and 1998,
respectively. Net repayments under its line of credit were $1.3 million and $.3
million for the nine months ended September 30, 1999 and 1999, respectively. The
investments in product masters
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for the nine months ended September 30, 1999 and 1998 totaled $2.6 and $2.1
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 $319,000 and $251,000 for the nine months ended
September 30, 1999 and 1998, respectively.
During the nine month period ended September 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.
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
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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 $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
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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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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 Amendment to the Integrity Music, Inc. 1994 Employee Stock Purchase
Plan as approved on August 6, 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 September
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: November 10, 1999 /s/ P. Michael Coleman
- ------------------------ --------------------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: November 10, 1999 /s/ Alison S. Richardson
- ------------------------ --------------------------------------
Alison S. Richardson
Senior Vice President,
Finance and Administration
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