<PAGE> 1
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, 1996 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 code)
(334) 633-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 8, 1996
- ----- -------------------------------
<S> <C>
Class A Common Stock, $.01 par value 2,079,000
Class B Common Stock, $.01 par value 3,435,000
</TABLE>
<PAGE> 2
Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEP 30, 1996 DEC 31, 1995
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<S> <C> <C>
ASSETS
Current Assets
Cash $ 1,338 $ 1,045
Trade receivables, less allowance for returns and doubtful accounts of $1,415 and $1,676 5,076 5,191
Other receivables 1,124 1,927
Inventories 3,878 4,068
Prepaid expenses and other assets 3,366 3,474
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Total current assets 14,782 15,705
Property and equipment, net 4,967 4,936
Product masters, net of accumulated amortization of $2,539 and $3,161 10,249 9,986
Non-compete agreement, net of accumulated amortization of $812 and $645 438 605
Other assets, net 4,998 3,427
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Total assets $35,434 $34,659
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt and capital lease obligation $1,003 $18,018
Accounts payable and accrued expenses 1,348 2,384
Royalties payable 452 960
Other current liabilities 594 395
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Total current liabilities 3,397 21,757
Deferred revenue 175 209
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Long Term Liabilities
Note Payable 5,949
Long term debt less current maturities 12,007
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Total long term liabilities 17,956
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Total liabilities 21,528 21,966
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Stockholders' equity
Common stock 55 55
Additional paid-in capital 13,428 12,035
Retained earnings 454 762
Foreign currency translation (31) (159)
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Total stockholders' equity 13,906 12,693
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Total liabilities and stockholders' equity $35,434 $34,659
======= =======
</TABLE>
1
<PAGE> 3
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenue $7,682 $ 9,093 $23,876 $28,628
Cost of Sales 3,231 4,808 10,032 11,786
------ ------- ------- -------
Gross Profit 4,451 4,285 13,844 16,842
Marketing and Fulfillment 1,938 3,464 7,243 11,170
General and Administrative 1,561 2,105 5,426 6,004
------ ------- ------- -------
Income (loss) from Operations 952 (1,284) 1,175 (332)
Other Income (Expenses)
Interest (585) (338) (1,366) (665)
Other 5 (19) (30) (55)
------ ------- ------- -------
Income (loss) before taxes and 372 (1,641) (221) (1,052)
extraordinary item
Provision for (benefit from) for 147 (571) (99) (366)
income taxes ------ ------- ------- -------
Net income (loss) before 225 (1,070) (122) (686)
extraordinary item
Extraordinary item from early
extinguishment of debt less
applicable taxes of $109,000 (186) (186)
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Net (loss) income $ 39 $(1,070) $ (308) $ (686)
====== ======= ======= =======
Net (loss) income per share:
Net (loss) income before
extraordinary item $ 0.04 $ (0.19) $ (0.02) $ (0.12)
====== ======= ======= =======
Extraordinary item (0.03) (0.04)
====== =======
Net (loss) income per share $ 0.01 $ (0.19) $ (0.06) $ (0.12)
====== ======= ======= =======
Weighted average number of shares 5,514 5,514 5,514 5,514
outstanding ====== ======= ======= =======
</TABLE>
2
<PAGE> 4
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK EQUITY
ADDITIONAL ADJUSTMENTS
PAID-IN RETAINED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TRANSLATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Jun 30, 1995 2,079,000 $21 3,435,000 $34 $12,035 $3,198 $ (159) $15,129
Net income (loss) (1,070) (1,070)
Translation Adjustments 54 54
--------- --- --------- --- ------ ------- ------ -------
Balance, Sep 30, 1995 2,079,000 21 3,435,000 34 12,035 2,128 (105) 14,113
Net income (loss) (1,366) (1,366)
Translation Adjustments (54) (54)
--------- --- --------- --- ------ ----- ------ -------
Balance, Dec 31, 1995 2,079,000 21 3,435,000 34 12,035 762 (159) 12,693
Net income (loss) 50 50
Translation Adjustments 51 51
--------- --- --------- --- ------ ----- ------ -------
Balance, Mar 31, 1996 2,079,000 21 3,435,000 34 12,035 812 (108) 12,794
Net income (loss) (397) (397)
Translation Adjustments (90) (90)
--------- --- -------- --- ------ ---- ------ -------
Balance, Jun 30, 1996 2,079,000 21 3,435,000 34 12,035 415 (198) 12,307
Net income (loss) 39 39
Issuance of stock
warrants 1,393 1,393
Translation Adjustments 167 167
--------- --- --------- --- ------- ---- ------ -------
Balance, Sep 30, 1996 2,079,000 $21 3,435,000 $34 $13,428 $454 $ (31) $13,906
========= === ========= === ======= ==== ====== =======
</TABLE>
3
<PAGE> 5
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEP 30, 1996 SEP 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net (loss) income $ (308) $ (686)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 882 723
Amortization of product masters 2,242 2,087
Allowance for returns and doubtful accounts (261) 623
Changes in operating assets and liabilities
Increase in trade receivables 376 (1,144)
Decrease (increase) in other receivables 803 (204)
Decrease (increase) in inventories 190 (427)
Decrease in prepaid and other assets 108 668
Decrease in accounts payable and accrued expenses (1,036) (707)
Decrease in royalties payable (508) 728
Decrease in other current liabilities and deferred revenue 165 (794)
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Net cash provided (used) by operating activities 2,653 867
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (488) (2,009)
Payments for product masters (2,505) (5,249)
Increase (decrease) in other assets (436) (3,187)
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Net cash used in investing activities (3,429) (10,445)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit (7,850) 10,558
Proceeds for issuance of long-term debt 13,000 4,500
Principal payments on debt (4,209) (4,114)
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Net cash provided by financing activities 941 10,944
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Effect of foreign currency rate fluctuations on cash 128 1
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Increase in cash 293 1,367
Cash beginning of period 1,045 229
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CASH END OF PERIOD $ 1,338 $ 1,596
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,377 $ 508
Income taxes $0 $ 683
</TABLE>
4
<PAGE> 6
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
(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 songbooks. 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 110 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, 1995. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share of common stock is computed by dividing
net income (loss) applicable to common stock by the weighted average number of
shares of common stock outstanding during the periods. The effect of the
Company's outstanding common stock equivalents on earnings per share is not
significant.
LONG TERM DEBT
On August 2, 1996, the Company entered into a $19 million, six-year
financing agreement with a lender. The credit agreement includes a $6 million
revolving credit facility and $13 million term loan. The lender received
warrants exercisable for up to 12.5% of the Company's Class A common stock,
with an exercise price of $1.875, and the warrants expire in 10 years. Under
the terms of the financing agreement, the lender cannot exercise the warrants
for two years (unless the Company undergoes a change in control). Due to the
new financing, approximately $186,000, net of income taxes of $109,000, of debt
issue costs were expensed as an extraordinary item in the accompanying
statement of operations during the third quarter of 1996.
5
<PAGE> 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total net revenue decreased $4.7 million or 16.6% to $23.9 million for
the nine months ended September 30, 1996, from $28.6 million during the nine
months ended September 30, 1995. The decrease is partly attributable to lower
direct response sales as a result of fewer direct response marketing promotions
in 1996. Furthermore, the transition in the second quarter to the Word
distribution sales force is still having an impact on retail sales. Sales in
the retail division decreased 39.9% to $1.6 million for the third quarter of
1996 compared to $2.6 million in the same period in 1995. International sales
experienced a decrease of 3.2% for the quarter but still had an increase of
23.8% for the nine months ended September 30, 1996. For the quarter ended
September 30, 1996, total net revenue decreased 15.5% to $7.7 million, from
$9.1million for the same period in 1995. New product sales in all divisions
amounted to $6.7 million or 31.4% of net revenue for the nine months ended
September 30, 1996.
Gross profit decreased 17.8% to $13.8 million for the nine months
ended September 30, 1996 from $16.8 million for the same period in 1995. Gross
profit as a percentage of sales decreased to 58.0% for the nine months ended
September 30, 1996, from 58.9% for the same period in 1995. Higher amortization
in the first nine months of 1996 contributed to the lower margin. Also in an
effort to reduce inventory levels, the direct, international and retail
divisions conducted special inventory clearance sales with low gross margins.
Third-quarter gross profits results as compared with the prior year period
reflected an increase in expenses associated with product masters of 3.9% to
$4.5 million, from $4.3 million for the same period in 1995.
Marketing and fulfillment expenses decreased 35.2% to $7.2 million or
30.0% of net sales for the nine months ended September 30, 1996, as compared
with $11.2 million or 39.0% of net sales for the same period in 1995. For the
quarter ended September 30, 1996, marketing and fulfillment expenses decreased
44.0% to $1.9 million or 25.2% of net sales, compared to $3.5 million or 38.0%
of net sales for the same period in 1995. The decrease in marketing and
fulfillment expenses is partly attributable to lower expenditures for mailings
to direct response clubs in December and June which are amortized over the
first six months from the mail date, and also lower bad debt levels in direct
response which are classified as fulfillment expense. .
General and administrative expenses were $5.4 million or 22.7% of net
sales for the nine months ended September 30, 1996 as compared to $6.0 million
or 21.0% of net sales for the same period in 1995. For the quarter ended
September 30, 1996, general and administrative expenses were $1.6 million or
20.3% of net sales, compared to $2.1million or 23.1% of net sales for the same
period in 1995. Although the nine month figures include severance and related
benefit costs associated with the outsourcing of the Company's retail sales
force, the improvement reflects managements' continued efforts to streamline
costs in all areas of the company.
Interest expense increased to $1.4 million for the nine months ended
September 30, 1996 as compared with $665,000 for the same period in 1995. The
increase was the result of higher average debt levels and higher interest rates
in the first nine months of 1996. The average interest rates for the nine
months ended September 30, 1996 and 1995 were 10.2% and 8.0% respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed 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.
6
<PAGE> 8
Cash generated from operations totaled $2.7 million and $868,000 in
the nine months ended September 1996 and 1995, respectively. A decrease in
marketing expenditures for direct response, artist marketing and artist
advances and receipt of an income tax refund were the primary contributors to
cash generated from operations for the nine months ended September 30, 1996.
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 response continuity programs, the Company
has a somewhat higher product return and doubtful account exposure than other
music companies where the majority of sales are in traditional retail markets.
For the nine months ended September 30, 1996 and the same period in 1995 the
amounts charged against income for returns and allowances for doubtful accounts
were $4,657,553 and $958,174 respectively. Returns in the retail division have
been higher than the same period last year due to the transition to the Word
Distribution sales force.
Capital expenditures totaled $488,000 and $2.0 million for the nine
month periods ended September 30, 1996 and 1995, respectively. Capital
expenditures made during 1996 included weather proofing the new office
building. At this point construction has been halted and no additional
expenditures are anticipated for the new building in 1996. Other significant
uses of cash were $2.5 million and $5.2 million for product master development
for the nine months ended September 30, 1996 and 1995, respectively.
7
<PAGE> 9
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
3(i) Certificate of Incorporation of the Registrant, as amended (incorporated by reference from
Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-84584) filed
on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated July 21,
1995, (incorporated by reference from Exhibit 3(i).1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by reference from Exhibit 3(ii) to the
Registrant's Registration Statement on Form S-1 (File No. 33-78582), and amendments thereto,
originally filed on May 6, 1994).
27 Financial Data Schedule (for SEC use only)
(B) REPORT ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended September 30, 1996.
</TABLE>
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRITY INCORPORATED
Date: November 8, 1996 /s/ P. Michael Coleman
- ---------------------- -----------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: November 8, 1996 /s/ Alison S. Richardson
- ----------------------- -----------------------------------
Alison S. Richardson
Vice President, Corporate Controller
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,338
<SECURITIES> 0
<RECEIVABLES> 5,076
<ALLOWANCES> 1,415
<INVENTORY> 3,878
<CURRENT-ASSETS> 14,782
<PP&E> 7,603
<DEPRECIATION> 2,636
<TOTAL-ASSETS> 35,434
<CURRENT-LIABILITIES> 3,397
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 35,434
<SALES> 21,173
<TOTAL-REVENUES> 23,876
<CGS> 10,032
<TOTAL-COSTS> 7,243
<OTHER-EXPENSES> 5,426
<LOSS-PROVISION> 5,616
<INTEREST-EXPENSE> (1,366)
<INCOME-PRETAX> (221)
<INCOME-TAX> (99)
<INCOME-CONTINUING> (308)
<DISCONTINUED> 0
<EXTRAORDINARY> (186)
<CHANGES> 0
<NET-INCOME> (308)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.06)
</TABLE>