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Previous: TRACK DATA CORP, 10-Q, 1997-05-13 |
Next: CNL AMERICAN PROPERTIES FUND INC, 424B3, 1997-05-13 |
<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 March 31, 1997 Commission File No. 0-24134
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 code)
(334) 633-9000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
------- -------
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 May 9, 1997
----- --------------------------
<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>
MAR 31,1997 DEC 31,1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 195 $ 1,131
Trade receivables, less allowance for returns and doubtful accounts of $1,499 and $1,684 5,033 4,195
Other receivables 1,122 943
Inventories 4,143 4,219
Prepaid expenses and other assets 3,289 3,562
------- -------
Total current assets 13,782 14,050
Property and equipment, net 3,671 3,709
Product masters, net of accumulated amortization of $4,931 and $3,813 8,859 8,601
Non-compete agreement, net of accumulated amortization of $957 and $895 293 355
Other assets, net 4,255 4,343
------- -------
Total assets $30,860 $31,058
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt and capital lease obligation $ 1,215 $ 1,470
Accounts payable and accrued expenses 1,333 1,826
Royalties payable 888 136
Other current liabilities 263 151
------- -------
Total current liabilities 3,699 3,583
Long term debt less current maturities 16,334 16,834
Deferred revenue 156 154
------- -------
Total liabilities 20,189 20,571
------- -------
Stockholders' equity
Common stock 55 55
Additional paid-in capital 13,428 13,428
Retained earnings (2,761) (2,945)
Foreign currency translation (51) (51)
------- -------
Total stockholders' equity 10,671 10,487
------- -------
Total liabilities and stockholders' equity $30,860 $31,058
======= =======
</TABLE>
1
<PAGE> 3
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
---- ----
<S> <C> <C>
Net Revenue $8,103 $ 9,762
Cost of Sales 3,710 4,348
------ -------
Gross Profit 4,393 5,414
Marketing and Fulfillment 1,635 3,176
General and Administrative 1,951 1,796
------ -------
Income from Operations 807 442
Other Income (Expenses)
Interest (446) (339)
Other (63) (28)
------ -------
Income before taxes 298 75
Provision for income taxes 114 25
------ -------
Net income $ 184 $ 50
====== =======
Net income per share $ 0.03 $ 0.01
Weighted average number of shares outstanding 5,514 5,514
====== =======
</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, 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
Net income (loss) (3,399) (3,399)
Translation Adjustments (20) (20)
--------- --- --------- --- ------- ------- ----- -------
Balance, Dec 31, 1996 2,079,000 21 3,435,000 34 13,428 $(2,945) (51) 10,487
Net income 184 184
Translation Adjustments
Balance, Mar 31, 1997 2,079,000 $21 3,435,000 $34 $13,428 $(2,761) $(51) $10,671
========= === ========= === ======= ======== ===== =======
</TABLE>
3
<PAGE> 5
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
Mar 31, 1997 Mar 31, 1996
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 184 $ 50
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 152 243
Amortization of product masters and other 765 768
Allowance for returns and doubtful accounts (185) (62)
Changes in operating assets and liabilities
Increase in trade receivables (653) (679)
(Increase) decrease in other receivables (179) 514
Decrease in inventories 76 334
Decrease in prepaid and other assets 273 275
Decrease in accounts payable and accrued expenses (845) (108)
Increase in royalties payable 752 290
Increase (decrease) in other current liabilities and deferred revenue 466 (140)
------ ------
Net cash provided by operating activities 806 1,485
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (114) (159)
Payments for product masters (871) (971)
Decrease in other assets (2) (114)
------ ------
Net cash used in investing activities (987) (1,244)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit (480) 949
Proceeds from issuance of long-term debt (167)
Principal payments on debt (275)
------
Net cash (used) provided by financing activities (755) 782
------ ------
Effect of foreign currency rate fluctuations on cash 51
------
(Decrease) increase in cash (936) 1,074
Cash beginning of period 1,131 1,045
------ ------
CASH END OF PERIOD $ 195 $2,119
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 477 $ 177
====== ======
Income taxes $ 0 $ 0
====== ======
</TABLE>
4
<PAGE> 6
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND MARCH 31, 1996
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company" or "Integrity") is a producer
and publisher of Christian lifestyle products developed to facilitate worship,
entertainment and education. Product formats include cassettes, compact discs,
videos and print music. The Company produces Christian music ranging from
praise and worship music, its largest category, to other styles of adult
contemporary Christian music and children's music. Integrity's products are
sold primarily through retail stores and direct to consumers throughout the
United States and in over 120 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, 1996. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
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
In August 1996, the Company entered into a $19 million credit
agreement with a financial institution. The credit agreement includes a $6
million revolving credit facility and $13 million term loan maturing on August
6, 2002. At the Company's option, the credit agreement carries an interest
rate of the bank's base rate plus 1 1/2%, or LIBOR plus 3%. The lender
received warrants exercisable for up to 12.5% of the Company's stock
exercisable as 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).
5
<PAGE> 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total net revenue decreased $1.7 million or 17.0% to $8.1 million for
the three months ended March 31, 1997, from $9.8 million during the three
months ended March 31, 1996. This decrease in sales revenue is attributable to
a more targeted sales effort for the first quarter of 1997. The Company
focused on smaller yet more profitable direct to consumer advertising mailings
in the first three months of 1997. As a result, sales in the direct to
consumer division decreased 32.8% to $2.1 million versus $3.2 in the same
period in 1996. The retail division decreased 19.0% to $2.2 million for the
first quarter of 1997 compared to $2.7 million for the same period in 1996 due
to fewer new product releases and Word's fulfillment fee, which is deducted
from revenue and did not exist in 1996. Copyright revenue posted an increase
of 12.5% over 1996 and the church division posted an increase of 10.2% over the
same period in 1996. International continues to experience increased sales,
having increased 17.9% over the same period in 1996. New product sales in all
divisions amounted to $2.6 million or 32.2% of net revenue for the three months
ended March 31, 1997 versus $2.1 million or 22% of net revenue for the same
period in 1996.
Gross profit decreased 18.9% to $4.4 million for the three months
ended March 31, 1997 from $5.4 million for the same period in 1996. Gross
profit as a percentage of sales decreased slightly to 54.2% for the three
months ended March 31, 1997, from 55.5% for the same period in 1996. Royalty
expense in the first three months of 1997 contributed to the lower margin. The
increase in royalty expense was a result of increased copyright income.
Marketing and fulfillment expenses decreased 48.5% to $1.6 million or
20.2% of net sales for the three months ended March 31, 1997, as compared with
$3.2 million or 32.5% of net sales for the same period in 1996. The decrease
in marketing and fulfillment expenses is partly attributable to lower marketing
expenses in the direct to consumer division which was down 64.5% to $422,000
compared to $1.2 million for the first quarter of 1996.
General and administrative expenses increased to $2.0 million or 24.1%
of net sales for the three months ended March 31, 1997 as compared to $1.8
million or 18.4% of net sales for the same period in 1996. The increase is
mainly attributable to compensation expense.
Interest expense increased to $446,000 for the three months ended
March 31, 1997 as compared with $339,000 for the same period in 1996. The
increase was the result of higher average debt levels and higher interest rates
in the first three months of 1997. The average interest rates for the three
months ended March 31, 1997 and 1996 were 9.8% and 7.2% respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically and will continue to finance its
operations primarily through cash generated from operations, although such
funds have also been supplemented by borrowing under a line of credit and term
notes as needed.
Cash generated from operations totaled $806,000 and $1.5 million in
the three months ended March 31, 1997 and 1996, respectively. Decrease in
accounts payable and accrued expenses were the primary contributors to the
decrease in cash generated from operations for the three months ended March 31,
1997. 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
6
<PAGE> 8
collections of the Company. Due to the nature of sales through direct to
consumer continuity programs, the Company has a somewhat higher product return
and doubtful account exposure than other music companies where the majority of
sales are in traditional retail markets. For the three months ended March 31,
1997 and the same period in 1996 the amounts charged against income for returns
and allowances for doubtful accounts were $1.4 million and $2.2 million,
respectively.
Capital expenditures totaled $114,000 and $169,000 for the three month
periods ended March 31, 1997 and 1996, respectively. Capital expenditures made
during 1997 included computer equipment and capital repairs on existing
buildings. Other significant uses of cash were $871,000 and $956,000 for
product master development for the three months ended March 31, 1997 and 1996,
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).
10.29 Amendment Number Three to the Integrity Music, Inc. 401(k) Employee Savings Plan, dated as of
April 2, 1997.
27 Financial Data Schedule (for SEC use only)
(b) Report on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31, 1997.
</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: May 9, 1997 /s/ P. Michael Coleman
- ----------------- ------------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: May 9, 1997 /s/ Alison S. Richardson
- ----------------- ------------------------------------
Alison S. Richardson
Vice President, Corporate Controller
9
<PAGE> 1
AMENDMENT NUMBER THREE
TO THE
INTEGRITY MUSIC, INC. 401(K) EMPLOYEE SAVINGS PLAN
THIS AMENDMENT to the Integrity Music 401(k) Employee Savings Plan,
effective January 1, 1995, is adopted by Integrity Incorporated (the "Company"),
effective as of the date set forth below.
W I T N E S S E T H:
WHEREAS, the Company maintains the Integrity Music 401(k) Employee
Savings Plan (the "Plan"), and such Plan is currently in effect; and
WHEREAS, the Company desires to amend the Plan to require one Year
of Eligibility Service before participating in the Plan.
NOW, THEREFORE, the Company hereby amends the Plan as follows:
1.
Section 3.01 is hereby deleted and a new Section 3.01 is substituted
therefore as follows:
"3.01 Participation.
(a) Employees Who Participated in the Prior Plan. Any
Eligible Employee who participated in the Integrity
Music, Inc. Profit Sharing Plan immediately prior to
the Effective Date shall commence participation in
this Plan as of the Effective Date.
(b) Other Employees.
(1) Except as otherwise provided in
subparagraphs (2) and (3), an Eligible
Employee who does not satisfy the
requirements of paragraph (a) above shall
become a Participant in the Plan on the
Entry Date next following the later of (i)
the date on which the Employee has both
completed one Year of Eligibility Service
and attained age 21 or (ii) the date on
which the Employee becomes a member of the
class of Eligible Employees.
(2) Special Eligibility Rules for the Period
Between July 1, 1995 and March 31, 1997.
(A) Pre-Tax Contributions. For the
Period Between July 1, 1995 and
March 31, 1997, an Eligible
Employee who does
<PAGE> 2
not satisfy the requirements of
paragraph (a) above shall become a
Participant in the Plan for the
purpose of making Pre-Tax
Contributions on the later of (i)
the date on which the Employee has
attained age 21 or (ii) the date on
which the Employee becomes a member
of the class of Eligible Employees.
(B) Employer Matching Contributions.
For Period Between July 1, 1995 and
March 31, 1997, an Eligible
Employee who does not satisfy the
requirements of paragraph (a) above
shall become a Participant in the
Plan for the purpose of eligibility
to receive Employer Matching
Contributions on the Entry Date
next following the later of (i) the
date on which the Employee has both
completed one Year of Eligibility
Service and attained age 21 or (ii)
the date on which the Employee
becomes a member of the class of
Eligible Employees. See Section
3.04 below for special rules that
apply to new Employees following an
acquisition.
(3) Acquisitions. See Section 3.04 below for
special rules that apply to new Employees
following an acquisition.
(c) Break in Service. If an Eligible Employee either (i)
is not employed or (ii) is no longer an Eligible
Employee on the earliest Entry Date on or after which
such Employee satisfied the applicable eligibility
requirements described above, but returns to work or
again becomes an Eligible Employee before incurring a
Break in Service, such Eligible Employee shall
commence participation on the next Entry Date after
the date such Employee returns to work or again
becomes an Eligible Employee. If the Employee returns
to work or again becomes an Eligible Employee after a
Break in Service, such Employee must again satisfy
the requirements of Section 3.01(b).
(d) Enrollment. An Eligible Employee who becomes eligible
to participate in this Plan will be asked to follow
certain procedures to enroll in the Plan, and
pursuant to which he will designate Beneficiaries and
may elect to make Pre-Tax Contributions. However, an
Eligible Employee's participation in the Plan shall
not be contingent upon completion of such enrollment
process."
2.
This amendment shall be effective April 2, 1997. Except as amended
herein, the Plan shall continue in full force and effect.
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the Company has adopted this Amendment on the date
shown below, but effective as of the date indicated above.
INTEGRITY INCORPORATED
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
Date:
---------------------------
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 195
<SECURITIES> 0
<RECEIVABLES> 5,033
<ALLOWANCES> 1,499
<INVENTORY> 4,143
<CURRENT-ASSETS> 13,782
<PP&E> 6,285
<DEPRECIATION> 2,576
<TOTAL-ASSETS> 30,860
<CURRENT-LIABILITIES> 3,699
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 30,860
<SALES> 6,366
<TOTAL-REVENUES> 8,103
<CGS> 3,710
<TOTAL-COSTS> 1,635
<OTHER-EXPENSES> 1,951
<LOSS-PROVISION> 1,684
<INTEREST-EXPENSE> (446)
<INCOME-PRETAX> 298
<INCOME-TAX> 114
<INCOME-CONTINUING> 184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 184
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
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