<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 June 30, 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 August 8, 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 I FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUN 30,1997 DEC 31,1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 297 $ 1,131
Trade receivables, less allowance for returns and doubtful accounts of $1,421 and $1,684 4,508 4,195
Other receivables 1,480 943
Inventories 4,029 4,219
Prepaid expenses and other assets 2,644 3,562
-------- --------
Total current assets 12,958 14,050
Property and equipment, net 3,618 3,709
Product masters, net of accumulated amortization of $5,534 and $3,813 8,509 8,601
Non-compete agreement, net of accumulated amortization of $1,038 and $895 212 355
Other assets, net 4,242 4,343
-------- --------
Total assets $ 29,539 $ 31,058
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt and capital lease obligation $ 1,712 $ 1,470
Accounts payable and accrued expenses 861 1,826
Royalties payable 587 136
Other current liabilities 326 151
-------- --------
Total current liabilities 3,486 3,583
Line of credit 5,369 5,949
Long term debt less current maturities 10,033 10,885
Deferred revenue 155 154
-------- --------
Total liabilities 19,043 20,571
-------- --------
Stockholders' equity
Common stock 55 55
Additional paid-in capital 13,428 13,428
Retained earnings (2,924) (2,945)
Foreign currency translation (63) (51)
-------- --------
Total stockholders' equity 10,496 10,487
-------- --------
Total liabilities and stockholders' equity $ 29,539 $ 31,058
======== ========
</TABLE>
1
<PAGE> 3
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenue $ 7,819 $ 6,432 $ 15,923 $ 16,194
Cost of Sales 3,500 2,453 7,210 6,801
-------- -------- -------- --------
Gross Profit 4,319 3,979 8,713 9,393
Marketing and Fulfillment 1,924 2,130 3,559 5,306
General and Administrative 2,290 2,069 4,241 3,865
-------- -------- -------- --------
Income from Operations 105 (220) 913 222
Other Income (Expenses)
Interest (433) (442) (879) (781)
Other 22 3 (42) (25)
-------- -------- -------- --------
(Loss) income before taxes (306) (659) (8) (584)
(Benefit from) provision for income taxes (143) (262) (27) (237)
-------- -------- -------- --------
Net (loss) income $ (163) $ (397) $ 19 $ (347)
======== ======== ======== ========
Net loss per share $ (0.03) $ (0.07) $ 0.00 $ (0.06)
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
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
<S> <C> <C> <C> <C> <C> <C>
Balance, Mar 31, 1996 2,079,000 $21 3,435,000 $34 $12,035 $ 812
Net income (loss) (397)
Translation Adjustments
--------- --- --------- --- ------- -------
Balance, Jun 30, 1996 2,079,000 21 3,435,000 34 12,035 415
Net income (loss) 39
Issuance of stock
warrants 1,393
Translation Adjustments
--------- --- --------- --- ------- -------
Balance, Sep 30, 1996 2,079,000 21 3,435,000 34 13,428 454
Net income (loss) (3,399)
Translation Adjustments
--------- --- --------- --- ------- -------
Balance, Dec 31, 1996 2,079,000 21 3,435,000 34 13,428 $(2,945)
Net income 184
Translation Adjustments --------- --- --------- --- ------- -------
Balance, Mar 31, 1997 2,079,000 21 3,435,000 34 13,428 (2,761)
Net income (163)
Translation Adjustments
--------- --- --------- --- ------- -------
Balance, Jun 30, 1997 2,079,000 $21 3,435,000 $34 $13,428 $(2,924)
========= === ========= === ======= =======
<CAPTION>
EQUITY
ADJUSTMENTS
FROM
TRANSLATIONS TOTAL
<S> <C> <C>
Balance, Mar 31, 1996 $(108) $12,794
Net income (loss) (397)
Translation Adjustments (90) (90)
----- -------
Balance, Jun 30, 1996 (198) 12,307
Net income (loss) 39
Issuance of stock
warrants 1,393
Translation Adjustments 167 167
----- -------
Balance, Sep 30, 1996 (31) 13,906
Net income (loss) (3,399)
Translation Adjustments (20) (20)
----- -------
Balance, Dec 31, 1996 (51) 10,487
Net income 184
Translation Adjustments
Balance, Mar 31, 1997 (51) 10,671
Net income (163)
Translation Adjustments (12) (12)
----- -------
Balance, Jun 30, 1997 $ (63) $10,496
===== =======
</TABLE>
3
<PAGE> 5
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUN 30, 1997 JUN 30, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19 $ (347)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 298 585
Amortization of product masters and other 1,914 1,395
Allowance for returns and doubtful accounts (263) (241)
Changes in operating assets and liabilities
(Increase) in trade receivables (50) (289)
(Increase) decrease in other receivables (537) 1,054
Decrease in inventories 190 409
Decrease in prepaid and other assets 918 660
(Decrease) in accounts payable and accrued expenses (965) (91)
Increase (decrease) in royalties payable 451 (661)
Increase (decrease) in other current liabilities and deferred revenue 176 (174)
------- -------
Net cash provided by operating activities 2,151 2,300
======= =======
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (205) (449)
Payments for product masters (1,403) (1,825)
(Increase) decrease in other assets (175) 82
------- -------
Net cash used in investing activities (1,783) (2,192)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit (580) 1,068
Proceeds from issuance of long-term debt -- --
Principal payments on debt (610) (321)
------- -------
Net cash (used) provided by financing activities (1,190) 747
------- -------
Effect of foreign currency rate fluctuations on cash (12) (39)
------- -------
(Decrease) increase in cash (834) 816
CASH BEGINNING OF PERIOD 1,131 1,045
------- -------
CASH END OF PERIOD $ 297 $ 1,861
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 719 $ 740
======= =======
Income taxes $ 0 $ 0
======= =======
</TABLE>
4
<PAGE> 6
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND JUNE 30, 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 June 30, 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 $271,000 or 1.7% to $15.9 million for the
six months ended June 30, 1997, from $16.2 million during the six months ended
June 30, 1996. This decrease in sales revenue is attributable to a more targeted
sales effort for the first half of 1997 in direct to consumer. The Company
focused on smaller yet more profitable direct to consumer advertising mailings
in the first six months of 1997. As a result, sales in the direct to consumer
division decreased 25% to $4.5 million versus $6.0 million in the same period in
1996. The retail division, however, increased 9% to $4.6 million for the second
quarter of 1997 compared to $4.2 million for the same period in 1996 due to
stronger new releases in the first half of 1997. The revenues for the retail
division for fiscal 1997 are net of a fulfillment fee for Word Inc., an
arrangement that did not exist in 1996. Copyright revenue increased 3% over 1996
and the church division increased 25% over the same period in 1996. The
international division continues to experience increased sales, having increased
3% over the same period in 1996. New product sales in all divisions amounted to
$4.3 million or 27% of net revenue for the six months ended June 30, 1997 versus
$4.5 million or 27.9% of net revenue for the same period in 1996. For the
quarter ended June 30, 1997, total net revenue increased $1.4 million or 21.6%
to $7.8 million, from $6.4 million in the same period in 1996 due mainly to
increased new product sales in the retail division.
Gross profit decreased 7.2% to $8.7 million for the six months ended
June 30, 1997 from $9.4 million for the same period in 1996. Gross profit as a
percentage of sales decreased to 54.7% for the six months ended June 30, 1997,
from 58.0% for the same period in 1996. Retail sales, which are sales to retail
outlets at wholesale prices less Word's fulfillment fee, increased to 28.7% of
total sales compared to 25.9% of total sales in 1996. The increase in sales at
wholesale prices compared to the decrease in sales at full retail price through
the direct to consumer channel is causing gross profit as a percentage of sales
to decrease. Second-quarter results as compared with the prior year period
reflected an increase in gross profit of 8.5% to $4.3 million, from $4.0 million
for the same period in 1996. For the quarter ending June 30, 1997, gross profit
as a percentage of sales decreased to 55.2%, compared to 61.9% for the same
period in 1996.
Marketing and fulfillment expenses decreased 32.9% to $3.6 million or
22.3% of net sales for the six months ended June 30, 1997, as compared with $5.3
million or 32.8% of net sales for the same period in 1996. For the quarter ended
June 30, 1997, marketing and fulfillment expenses were $1.9 million or 24.6% of
net sales, compared to $2.1 million or 33.1% of net sales for the same period in
1996. The decrease in marketing and fulfillment expenses is partly attributable
to lower, but more productive and targeted, marketing expenses in the direct to
consumer division .
General and administrative expenses increased slightly to $4.2 million
or 26.6% of net sales for the six months ended June 30, 1997 as compared to $3.9
million or 23.9% of net sales for the same period in 1996. For the quarter ended
June 30, 1997, general and administrative expenses were $2.3 million or 29.3% of
net sales, compared to $2.1 million or 32.2% of net sales for the same period in
1996. The increase from the 1996 periods is mainly attributable to compensation
expense and the Company's addition in late 1996 of a distribution center
responsible for direct to consumer and international warehousing, physical
inventory and distribution functions. Previously, this function was outsourced
and was included in marketing and fulfillment expenses.
Interest expense increased to $879,000 for the six months ended June
30, 1997 as compared with $781,000 for the same period in 1996. The increase was
the result of higher average debt levels and higher interest rates in the first
six months of 1997. The average interest rates for the six months ended June 30,
1997 and 1996 were 9.3% and 8.9%, respectively.
6
<PAGE> 8
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 $2.2 and $2.3 million in the six
months ended June 30, 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 six months ended June 30, 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 collections of the Company. Due to
the nature of sales through direct to consumer continuity programs, the Company
has a somewhat higher product return and doubtful account exposure than other
music companies where the majority of sales are in traditional retail markets.
For the six months ended June 30, 1997 and the same period in 1996 the amounts
charged against income for returns and allowances for doubtful accounts were
$2.5 million and $3.8 million, respectively.
Capital expenditures totaled $205,000 and $449,000 for the six month
periods ended June 30, 1997 and 1996, respectively. Capital expenditures made
during 1997 included computer equipment and capital repairs on existing
buildings. Other significant uses of cash were $1.4 million and $1.8 million for
product master development for the six months ended June 30, 1997 and 1996,
respectively.
7
<PAGE> 9
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 9, 1997, the
following matters were brought before and voted upon by the stockholders:
1. A proposal to elect the following to the Board of Directors to serve until
the 1998 annual meeting:
<TABLE>
<CAPTION>
Class A Common Stock
--------------------
For Withhold Authority Broker Non-Votes
--- ------------------ ----------------
<S> <C> <C> <C>
P. Michael Coleman 1,832,278 2,300 244,422
Jean C. Coleman 1,832,178 2,400 244,422
John B. Ellis 1,833,278 1,300 244,422
Charles V. Simpson 1,833,278 1,300 244,422
Heeth Varnedoe, III 1,833,278 1,300 244,422
</TABLE>
<TABLE>
<CAPTION>
Class B Common Stock
--------------------
For Withhold Authority Broker Non-Votes
--- ------------------ ----------------
<S> <C> <C> <C>
P. Michael Coleman 3,435,000 0 0
Jean C. Coleman 3,435,000 0 0
John B. Ellis 3,435,000 0 0
Charles V. Simpson 3,435,000 0 0
Heeth Varnedoe 3,435,000 0 0
</TABLE>
2. A proposal to ratify the selection of Price Waterhouse LLP as independent
auditors of the Company for the fiscal year ending December 31, 1997:
Class A
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
1,833,578 0 1,000 244,422
</TABLE>
Class B
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
3,435,000 0 0 0
</TABLE>
8
<PAGE> 10
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 June 30, 1997.
</TABLE>
9
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRITY INCORPORATED
Date: August 8, 1997 /s/ P. Michael Coleman
- -------------------- ---------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: August 8, 1997 /s/ Alison S. Richardson
- -------------------- ---------------------------
Alison S. Richardson
Vice President, Corporate
Controller
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 297
<SECURITIES> 0
<RECEIVABLES> 4,508
<ALLOWANCES> 1,421
<INVENTORY> 4,029
<CURRENT-ASSETS> 12,958
<PP&E> 7,946
<DEPRECIATION> 4,328
<TOTAL-ASSETS> 29,539
<CURRENT-LIABILITIES> 3,486
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 29,539
<SALES> 14,404
<TOTAL-REVENUES> 15,923
<CGS> 7,210
<TOTAL-COSTS> 3,559
<OTHER-EXPENSES> 4,241
<LOSS-PROVISION> 1,421
<INTEREST-EXPENSE> (879)
<INCOME-PRETAX> (8)
<INCOME-TAX> (27)
<INCOME-CONTINUING> 19
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
