<PAGE> 1
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 March 31, 1999 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)
(334) 633-9000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1999
- ----- --------------------------
Class A Common Stock, $0.01 par value 2,079,000
Class B Common Stock, $0.01 par value 3,435,000
<PAGE> 2
FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Mar 31, 1999 Dec 31, 1998
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets
Cash $ 656 $ 989
Trade receivables, less allowance for returns and doubtful accounts of $835
and $696 5,452 4,913
Other receivables 1,944 1,637
Inventories 3,970 4,528
Other current assets 2,816 3,831
-------- --------
Total current assets 14,838 15,898
Property and equipment, net of accumulated depreciation of $3,712 and $3,575 3,393 3,473
Product masters, net of accumulated amortization of $12,142 and $11,325 8,654 9,050
Other assets 3,122 3,196
-------- --------
Total assets $ 30,007 $ 31,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,764 $ 1,847
Accounts payable and accrued expenses 1,526 2,732
Royalties payable 820 569
Other current liabilities 708 923
-------- --------
Total current liabilities 4,818 6,071
Long-term debt 10,700 11,121
Other long-term liabilities 55 60
-------- --------
Total liabilities 15,573 17,252
-------- --------
Commitments and contingencies -- --
Minority interest 1,215 1,384
-------- --------
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;
2,079,000 shares issued and outstanding 21 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 13,428 13,428
Accumulated deficit (226) (449)
Equity adjustments from foreign translation (38) (53)
-------- --------
Total stockholders' equity 13,219 12,981
-------- --------
Total liabilities and stockholders' equity $ 30,007 $ 31,617
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
<PAGE> 3
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
------- -------
<S> <C> <C>
Net sales $11,045 $ 9,453
Cost of sales 5,223 3,997
------- -------
Gross profit 5,822 5,456
Marketing and fulfillment expenses 2,662 2,157
General and administrative expenses 2,330 2,416
------- -------
Income from operations 830 883
Other expenses
Interest expense, net 375 377
Other expenses 18 1
------- -------
Income before minority interest and taxes 437 505
------- -------
Provision for income taxes 156 6
Minority interest, less applicable taxes 58 44
------- -------
Net income 223 455
======= =======
Adjustments to determine comprehensive income
Foreign currency translation adjustments 15 (13)
------- -------
Comprehensive income 238 442
======= =======
EARNINGS PER SHARE
Basic $ 0.04 $ 0.08
======= =======
Diluted $ 0.04 $ 0.08
======= =======
Weighted average number of shares outstanding
Basic 5,514 5,514
Diluted 6,069 5,514
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 4
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 223 $ 455
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 284 233
Amortization of product masters 830 564
Minority interest 58 44
Changes in operating assets and liabilities
Trade receivables (539) (351)
Other receivables (307) 181
Inventories 558 (413)
Other assets 942 448
Accounts payable, royalties payable and
Accrued expenses (955) (579)
Other current and non current liabilities (172) 66
----- -----
Net cash provided by operating activities 922 648
----- -----
Cash flows from investing activities
Purchases of property and equipment (57) (114)
Distribution to joint venture partner (260) 0
Payments for product masters (434) (425)
----- -----
Net cash used in investing activities (751) (539)
----- -----
Cash flows from financing activities
Net borrowings under line of credit 22 418
Principal payments of long-term debt (526) (496)
----- -----
Net cash used in financing activities (504) (78)
----- -----
Net (decrease) increase in cash (333) 31
Cash, beginning of year 989 523
----- -----
Cash, end of year $ 656 $ 554
===== =====
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
<PAGE> 5
INTEGRITY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND MARCH 31, 1998
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes and compact discs, print
music and related products, primarily by direct to consumer marketing and
wholesale trade methods. A principal direct to consumer marketing method of
distribution is continuity programs whereby subscribers receive products at
regular intervals.
Integrity Music Europe Ltd. was formed in 1988; Integrity Music Pty.
Ltd. was formed in 1991; and Integrity Media Asia Pte. Ltd. was formed in 1995.
These wholly-owned subsidiaries of the Company serve to expand the Company's
presence in Western Europe, Australia and New Zealand; and Singapore,
respectively. Celebration Hymnal LLC was formed in 1997 as a 50/50 joint
venture with Word Entertainment, for the purpose of producing and promoting The
Celebration Hymnal. Word Entertainment's interest in the joint venture is
presented as a minority interest in these financial statements, as the joint
venture is controlled by the Company.
The accompanying unaudited 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. 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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain amounts in the prior years' financial statements
have been reclassified to conform with the current year presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries, which include Integrity Music Pty.
Ltd., Integrity Music Europe, Ltd., Integrity Media Asia Pte. Ltd. and
Celebration Hymnal LLP. 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 sales to customers. Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized. Other marketing costs are expensed the first
time advertising takes place. Prepaid marketing costs, including artwork,
printing and direct mail packages, are included in assets in the accompanying
financial statements. Marketing costs expensed for the three months ended March
31, 1999 and 1998 approximated $1.4 million and $1.1 million, respectively.
4
<PAGE> 6
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 periodically 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, warrants, convertible debt, or other stock agreements.
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 up to 12.5% of the
Company's Class A common stock. The warrants have an exercise price of $1.875
and expire in 10 years. Under the terms of the financing agreement, the
warrants became exercisable in August 1998. During the three months ended March
31, 1999, the Company amended its credit agreement to adjust certain covenant
restrictions for future periods. The nature of the revised covenants are
consistent with the previous covenants; however, the financial ratios are
somewhat less restrictive.
STOCKHOLDER'S EQUITY AND OPTIONS
During February 1999, and subject to shareholder approval, the Company
granted 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
$300,000 and will be amortized to expense over the vesting period. As a result
of the grant, the Company's debt agreement requires the issuance of
approximately 38,000 additional warrants to its primary lender.
5
<PAGE> 7
SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
Net Sales 1999 1998
-------- --------
<S> <C> <C>
Direct to consumer $ 3,468 $ 3,104
Retail 4,522 3,409
International 1,629 1,395
Other 1,512 1,340
Eliminations (86) 205
-------- --------
$ 11,045 $ 9,453
======== ========
Operating profit (before minority interest)
Direct to consumer $ 561 $ 745
Retail 1,048 833
International 350 381
Other 740 595
-------- --------
2,699 2,554
General corporate expense 1,887 1,672
Interest expense, net 375 377
-------- --------
Income before income taxes and minority
interest $ 437 $ 505
======== ========
</TABLE>
6
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total net sales increased $1.5 million or 16.8% to $11.0 million for
the three months ended March 31, 1999, as compared to $9.5 million during the
three months ended March 31, 1998. The increase in revenue is primarily
attributable to increased volume in the retail segment. Sales in the retail
segment increased $1.1 million or 32.6% to $4.5 million, compared to $3.4
million in the same period in 1998 due to strong releases in the first quarter
of 1999. Sales in the direct to consumer segment increased $.4 million or 11.7%
to $3.5 million, as compared to $3.1 million for the same period in 1998 due to
a successful launch of the new greeting card continuity club, Integrity Notes.
International sales grew by 16.7% to $1.6 million, as compared to $1.4 million
in the same period in 1998. Sales in the Other segment increased by 12.8% to
$1.5 million, as compared to $1.3 million in the same period in 1998. New
product sales in all segments amounted to $2.9 million or 26.8% of net revenue
for the three months ended March 31, 1999, as compared to $1.9 million or 20.0%
of net revenue for the same period in 1998.
Gross profit increased to $5.8 million or 52.7% of sales, as compared
to $5.5 million or 57.7% of sales, for the three month periods ended March 31,
1999 and 1998, respectively. In the first quarter the cost of goods sold
increased, in part due to the sales increase but also reflecting a sales mix
with a higher-than-usual proportion of distributed and artist products, which
have lower margins. The sales mix is likely to even out over the course of the
year, returning to historical gross margins.
Marketing and fulfillment expenses increased 23.4% to $2.7 million or
24.1% of net sales for the three months ended March 31, 1999, as compared with
$2.2 million or 22.8% of net sales for the same period in 1998. The increase in
marketing and fulfillment expenses as a percent of sales is 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 quarter designed to further increase the Company's
market share also contributed to the overall increase in marketing and
fulfillment expenses.
General and administrative expenses decreased to $2.3 million or 21.1%
of net sales for the three months ended March 31, 1999, as compared to $2.4
million or 25.6% of net sales for the same period in 1998. The decrease from
the 1998 period is primarily attributable to cost controls put in place by
management and the ability of our current work force to demonstrate
productivity improvements to manage the increased volume.
Interest expense was relatively flat for the three months ended March
31, 1999 as compared with the same period in 1998.
The Company recorded an income tax provision of $156,000 and $6,000
for the three months ended March 31, 1999 and 1998, respectively. The Company's
effective tax rate for the first quarter of 1999 was 35.6%. The first quarter's
income tax provision effective rate is the product of applying current tax
rates against the taxable income generated by the Company. The Company has made
no adjustments to its valuation allowance of $500,000 against its deferred tax
asset since December 31, 1998.
7
<PAGE> 9
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.
During the first quarter the Company amended its existing $19 million
financing agreement to amend certain covenant restrictions for future periods.
For the periods ended March 31, 1999 and 1998, the Company had average
borrowings under the credit agreement of $12.7 million and $15.1 million at
average rates of 9.8% and 8.5%, respectively. At March 31, 1999, the Company
had $1.9 million available to borrow under this agreement. Scheduled principle
payments for indebtedness aggregated $526,000 and $496,000 for the three months
ended March 31, 1999 and 1998, respectively.
Cash generated from operations totaled $922,000 and $648,000 in the
three months ended March 31, 1999 and 1998, respectively. The use of cash
varies from quarter to quarter based, among other things, on product releases
and scheduled marketing promotions.
Capital expenditures totaled $57,000 and $114,000 for the three months
ended March 31, 1999 and 1998, respectively. Capital expenditures during 1999
and 1998 included computer equipment and capital improvements to existing
buildings.
Other significant uses of cash were $434,000 and $425,000 for
investment in product masters for the three months ended March 31, 1999 and
1998, respectively. Product masters, which include sound recordings, print
masters and video masters, both live action and animated, are amortized over
their future estimated useful lives using a method that reasonably relates to
the amount of net revenue expected to be realized. The cost of producing a
product master includes 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 and the cost of the studio
facility used. Current book value for product masters is $8.7 million. From
time to time, the Company analyzes the book value of its product masters and
adjusts such value, as necessary, for those product masters not expected to
recoup recording costs.
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
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<PAGE> 10
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
plans to perform a full scale Year 2000 simulation of its IT systems in May
1999.
Except for the Company's telephone system, which will be replaced with
a Year 2000 compliant telephone system in April 1999, the Company has
determined that all internal non-IT systems and products either are Year 2000
compliant or that a Year 2000 problem with such non-IT system or product will
not be material to the Company's operation. In making this determination, the
Company relied upon representations from certain third parties, including the
vendors of its significant studio and recording equipment.
The Company's business depends upon the accurate and timely
fulfillment of certain operations contracted to third-party service providers
and manufacturers, including Word in the retail market segment, LCS Industries,
Inc., located in Clifton, New Jersey, in the direct to consumer segment,
numerous international distributors in the international segment, and Eva-Tone,
Inc., located in Clearwater, Florida, in the production of musical recordings
from the Company's master recordings. In February 1999, the Company developed a
Year 2000 compliance questionnaire and solicited its principal suppliers,
distributors, contractors and service providers to determine such party's Year
2000 status. The Company's key US vendors and distributors have provided the
Company with assurances that their systems are compliant, as well as
contingency plans where necessary. The most significant distributors in the
international segment have not been able to provide 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 not made any significant
Year 2000 expenditures through the end of March 1999. The Company anticipates
spending 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. Upon a Year 2000 failure by 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
9
<PAGE> 11
able to timely fulfill its domestic orders in-house, and as a result, the
Company could suffer a significant decline in sales.
However, the most likely worst case Year 2000 scenario is that the
Company's international distributors will encounter Year 2000 problems and will
not be able to utilize their systems for some period of time to efficiently
sell and distribute the Company's products overseas. The Company is developing
a contingency plan to address this scenario pursuant to which the Company would
utilize alternate distributors and its foreign subsidiaries to fulfill
international orders. Currently, no individual international distributor
distributes an amount of product that is material to the Company's overall
results of operations or financial condition. However, due to the number and
diversity of environments in which these distributors operate, the Company
cannot be certain that it would be able to timely fulfill international orders
under these circumstances and that such a Year 2000 problem would not have a
material adverse effect on the Company's financial condition or results of
operation.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which the Company expects to complete actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, results of
further Year 2000 testing, adequate resolution of Year 2000 problems by
suppliers, distributors, contractors or service providers of the Company, the
adequacy of and ability to further develop and implement contingency plans and
similar uncertainties. The "forward-looking statements" contained in the
foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
10
<PAGE> 12
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).
10.1 Second Amendment to Loan and Security Agreement, dated as of
March 31, 1999, by and among Integrity Incorporated and Bank
Austria Creditanstalt Corporate Finance, Inc.
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, 1999.
</TABLE>
11
<PAGE> 13
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 7, 1999 /s/ P. Michael Coleman
- ------------------ -----------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: May 7, 1999 /s/ Alison S. Richardson
- ------------------ -----------------------------
Alison S. Richardson
Senior Vice President,
Finance and Administration
12
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is made as of the 3lst day of March, 1999, by and between
INTEGRITY INCORPORATED, a Delaware corporation (hereinafter referred to as
"Borrower"), and BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC., f/k/a
Creditanstalt Corporate Finance, Inc., a Delaware corporation (hereinafter
referred to as the "Lender").
WITNESSETH:
WHEREAS, Borrower and the Lender are party to that certain Loan and
Security Agreement dated as of August 2, 1996 (as amended, modified,
supplemented and restated from time to time, the "Loan Agreement") pursuant to
which the Lender made available to Borrower a revolving credit facility
permitting advances of up to Six Million Dollars ($6,000,000) at any one time
outstanding and a term loan in the principal amount of Thirteen Million Dollars
($13,000,000); and
WHEREAS, Borrower has requested that the Lender modify certain of the
financial covenants set forth in Article 8 of the Loan Agreement, and
WHEREAS, Borrower and the Lender desire to modify the Loan Agreement
according to the terms and conditions more particularly described in this
Amendment;
NOW, THEREFORE, in consideration of the foregoing premises, the terms
and conditions herein stated, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. DEFINED TERMS. Defined terms used herein, as indicated by the
initial capitalization thereof, shall have the meanings ascribed to such terms
in the Loan Agreement.
2. DEFINITION OF NET WORTH. The Loan Agreement is hereby amended by
deleting the definition of Net Worth in its entirety and by substituting
therefore a new definition of Net Worth to read as follows:
"Net Worth" shall mean, as to any Person, at any time, the excess of
such Person's total assets over Total Liabilities, excluding, however,
from the definition of assets (a) the amount of any write-up in the
book value of any asset resulting from a revaluation thereof
subsequent to the later to occur of (i) the Closing Date and (ii) the
date any such Person acquired such asset; (b) the amount of treasury
stock of such Person; (c) the
-1-
<PAGE> 2
amount of receivables from Affiliates of such Person; (d) unamortized
debt discount and expense of such Person, and (e) with respect to
Borrower and its consolidated Subsidiaries, for purposes of the Net
worth covenant in Section 8.1 only, the effect of any write-down of
select 1995 product masters not to exceed $2,000,000 for the fiscal
year ending December 31, 1999; in each case as determined in
accordance with GAAP on a consolidated basis for such Person and its
Subsidiaries.
3. FINANCIAL COVENANTS. The Loan Agreement is hereby further amended
by deleting Sections 8.1, 8.2, and 8.5 thereof in their entirety and by
substituting therefore new Sections 8.1, 8.2, and 8.5 to read as follows:
8.1 NET WORTH. Borrower and its consolidated Subsidiaries
shall maintain at all times during the applicable periods set forth
below, a Net Worth, on a consolidated basis, of not less than the
amount set forth opposite each such applicable period:
<TABLE>
<CAPTION>
Applicable Period Amount
----------------------- -----------
<S> <C>
01/01/99 - 03/31/99 $11,000,000
04/01/99 - 06/30/99 $11,500,000
07/01/99 - 09/30/99 $12,000,000
10/01/99 - 12/31/99 $12,500,000
01/01/00 - 12/31/00 $13,000,000
At all times thereafter $15,000,000
</TABLE>
8.2 CASH FLOW. Borrower and its Subsidiaries shall maintain as
of the end of each fiscal quarter of Borrower during the applicable
periods set forth below, a Cash Flow for the four fiscal quarter
period then ended of not less than the amount set forth opposite each
such applicable period:
<TABLE>
<CAPTION>
Applicable Period Amount
----------------------- ----------
<S> <C>
01/01/99 - 06/30/99 $6,000,000
07/01/99 - 12/31/99 S6,500,000
01/01/00 - 12/31/00 $7,000,000
At all times thereafter $7,500,000
</TABLE>
8.5 FIXED CHARGE COVERAGE RATIO. Borrower and its consolidated
Subsidiaries shall maintain, on a consolidated basis, as of the end of
each fiscal quarter of Borrower during the applicable period set forth
below, a Fixed Charge Coverage Ratio for the four fiscal quarter period
then ended of not less than the ratio set forth opposite each such
applicable period:
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Applicable Period Amount
----------------------- ---------
<S> <C>
01/01/99-06/30/99 0.65:1.00
07/01/99-09/30/99 0.90:1.00
10/01/99-12/31/99 1.10:1.00
01/01/00 -12/31/00 1.20:1.00
At all times thereafter 1.25:1.00
</TABLE>
4. AMENDMENT FEE. In consideration of the amendments set forth herein,
Borrower agrees to pay to Lender an amendment fee (the "Amendment Fee") in the
amount of $5,000, which shall be due and payable on the date of execution
hereof. Such fee shall be fully earned on payment thereof and shall not be
subject to proration or rebate for any reason.
5. CONDITIONS PRECEDENT. Subject to the terms and conditions hereof,
this Amendment and the amendments set forth herein shall not become effective
unless and until (a) this Amendment has been executed by both the Borrower and
the Lender and (b) Borrower shall have paid to Lender the Amendment Fee
described in Section 4 hereof.
6. REPRESENTATIONS AND WARRANTIES; NO DEFAULT.
(a) Borrower hereby represents and warrants to the Lender that
as of the date hereof, and after giving effect to this Amendment, (i) all of
Borrower's representations and warranties contained in the Loan Agreement, as
amended hereby, and the other Loan Documents are true and correct on and as of
the date hereof, and (ii) no Default or Event of Default has occurred and is
continuing as of such date under any Loan Document.
(b) Borrower hereby further represents and warrants to the
Lender that (i) Borrower has the power and authority to enter into this
Amendment and to perform all of its obligations hereunder; (ii) the execution
and delivery of this Amendment has been duly authorized by all necessary action
(corporate or otherwise) on the part of Borrower; and (iii) the execution and
delivery of this Amendment and performance thereof by Borrower does not and
will not violate the Certificate of Incorporation, By-laws or other
organizational documents of Borrower and does not and will not violate or
conflict with any law, order, writ, injunction, or decree of any court,
administrative agency or other governmental authority applicable to Borrower or
its properties.
7. NO CLAIMS; OFFSET. Borrower hereby represents, warrants,
acknowledges and agrees to and with the Lender that (a) Borrower does not hold
or claim any right of action, claim, cause of action or damages, either at law
or in equity, against the Lender which arises from, may arise from, allegedly
arise from, are based upon or are related in any manner whatsoever to the Loan
Agreement and the Loan Documents or which are
-3-
<PAGE> 4
based upon acts or omissions of the Lender in connection therewith and (b) the
Obligations are absolutely owed to the Lender, without offset, deduction or
counterclaim.
8. LIMITATION OF AMENDMENT. Except as expressly set forth herein, this
Amendment shall not be deemed to waive, amend or modify any term or condition
of the Loan Agreement or any other Loan Documents, each of which is hereby
ratified and reaffirmed and which shall remain in full force and effect, nor to
serve as a consent to any matter prohibited by the terms and conditions
thereof.
9. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which when fully executed shall be deemed to constitute
one and the same agreement. Any signature page to this Amendment may be
witnessed by a telecopy or other facsimile of any original signature page and
any signature page of any counterpart hereof may be appended to any other
counterpart hereof to form a completely executed counterpart hereof.
10. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the successors and permitted assigns of the parties
hereto.
11. SECTION REFERENCES. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreements among the parties hereto
evidenced hereby.
12. COSTS, EXPENSES AND TAXES. Borrower agrees to pay on demand all
costs and expenses of the Lender in connection with the preparation, execution,
delivery and enforcement of this Amendment and all other Amendment Documents
executed in connection herewith, and any other transactions contemplated
hereby, including, without limitation, reasonable attorneys' fees.
13. GOVERNING LAW. This Amendment shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed under seal as of the day and year first above written.
"BORROWER"
INTEGRITY INCORPORATED
By: /s/ P. Michael Coleman
-------------------------------
Name: P. Michael Coleman
Title: President
Attest:/s/ Allison S. Richardson
----------------------------
--------------------
Name: Allison S. Richardson
Title: Secretary
[CORPORATE SEAL]
"LENDER"
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: /s/ Scott Kray
-------------------------------
Name: Scott Kray
Title: Vice President
By: /s/ Stephen Hipp
-------------------------------
Name: Stephen Hipp
Title: Sr. Associate
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 656
<SECURITIES> 0
<RECEIVABLES> 6,287
<ALLOWANCES> 835
<INVENTORY> 3,970
<CURRENT-ASSETS> 14,838
<PP&E> 7,105
<DEPRECIATION> 3,712
<TOTAL-ASSETS> 30,007
<CURRENT-LIABILITIES> 4,818
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 30,007
<SALES> 9,040
<TOTAL-REVENUES> 11,045
<CGS> 5,223
<TOTAL-COSTS> 2,662
<OTHER-EXPENSES> 2,330
<LOSS-PROVISION> 835
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> 437
<INCOME-TAX> 156
<INCOME-CONTINUING> 223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
