<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
<TABLE>
<S> <C>
For the Quarterly Period Ended March 31, 2000 Commission File No. 000-24134
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</TABLE>
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
--------------
(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.
<TABLE>
<CAPTION>
Class Outstanding at May 10, 2000
- ----- ---------------------------
<S> <C>
Class A Common Stock, $0.01 par value 2,179,000
Class B Common Stock, $0.01 par value 3,435,000
</TABLE>
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FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Mar 31, 2000 Dec 31, 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash $ 974 $ 1,067
Trade receivables, less allowance for returns and doubtful accounts of $1,109
and $1,108 6,925 6,329
Other receivables 1,601 1,681
Inventories 4,595 4,754
Other current assets 2,237 2,456
---------- ----------
Total current assets 16,332 16,287
Property and equipment, net of accumulated depreciation of $4,086 and $3,956 3,799 3,664
Product masters, net of accumulated amortization of $12,997 and $11,649 6,606 6,941
Other assets 2,920 3,156
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Total assets $ 29,657 $ 30,048
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,999 $ 1,937
Accounts payable and accrued expenses 3,573 3,108
Royalties payable 2,119 774
Other current liabilities 1,163 1,493
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Total current liabilities 8,854 7,312
Long-term debt 4,394 6,768
Other long-term liabilities 26 52
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Total liabilities 13,274 14,132
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Commitments and contingencies 0 0
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Minority interest 1,199 1,166
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Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and
Outstanding 0 0
Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,179,000 shares issued and outstanding 22 22
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 13,847 13,847
Unearned compensation (313) (327)
Retained earnings 1,631 1,215
Equity adjustments from foreign currency translation (37) (41)
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Total stockholders' equity 15,184 14,750
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Total liabilities and stockholders' equity $ 29,657 $ 30,048
========== ==========
</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 PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
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<S> <C> <C>
Net sales $ 14,138 $ 11,045
Cost of sales 7,134 5,223
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Gross profit 7,004 5,822
Marketing and fulfillment expenses 3,363 2,662
General and administrative expenses 2,668 2,330
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Income from operations 973 830
Other expenses
Interest expense, net 262 375
Other expenses 16 18
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Income before minority interest and taxes 695 437
Provision for income taxes 259 156
Minority interest, less applicable taxes 20 58
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Net income $ 416 $ 223
========== ==========
Adjustments to determine comprehensive income
Foreign currency translation adjustments 4 15
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Comprehensive income $ 420 $ 238
========== ==========
NET INCOME PER SHARE
Basic $ 0.07 $ 0.04
========== ==========
Diluted $ 0.07 $ 0.04
========== ==========
Weighted average number of shares outstanding
Basic 5,614 5,514
Diluted 6,023 6,069
</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
2000 1999
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<S> <C> <C>
Cash flows from operating activities
Net income $ 416 $ 223
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 262 284
Amortization of product masters 1,353 830
Minority interest 20 58
Stock compensation 14 0
Changes in operating assets and liabilities
Trade receivables (596) (539)
Other receivables (170) (307)
Inventories 159 558
Other assets 384 942
Accounts payable, royalties payable and
Accrued expenses 1,810 (955)
Other current and non current liabilities (356) (157)
Other 17 (15)
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Net cash provided by operating activities 3,313 922
-------- --------
Cash flows from investing activities
Payments received on notes receivable 250 0
Purchases of property and equipment (265) (57)
Payments for product masters (1,018) (434)
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Net cash used in investing activities (1,033) (491)
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Cash flows from financing activities
Net (repayments) borrowings under line of credit (1,748) 22
Distributions to joint venture partner 0 (260)
Principal payments of long-term debt (625) (526)
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Net cash used in financing activities (2,373) (764)
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Net (decrease) increase in cash (93) (333)
Cash, beginning of year 1,067 989
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Cash, end of period $ 974 $ 656
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
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INTEGRITY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND MARCH 31, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
creative content, distribution and publishing of music cassette tapes and
compact discs, print music and related products, sold to the public primarily
through retail sales outlets and direct to consumer marketing. A principal
direct to consumer marketing method of distribution is continuity programs
whereby subscribers receive products at regular intervals.
Integrity Music Europe Ltd. was formed in 1988; Integrity Music Pty.
Ltd. was formed in 1991; and Integrity Media Asia Pte. Ltd. was formed in 1995.
These wholly-owned subsidiaries of the Company serve to expand the Company's
presence in Western Europe, Australia and New Zealand; and Singapore,
respectively. Celebration Hymnal LLC was formed in 1997 with Word
Entertainment, for the purpose of producing and promoting The Celebration
Hymnal. Word Entertainment's interest in the venture is presented as a minority
interest in these financial statements, as the venture is controlled by the
Company.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements contained in the Company's Annual Report, dated December
31, 1999. The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Operating results for the quarter ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, its wholly-owned subsidiaries, which include Integrity Music Pty.
Ltd., Integrity Music Europe, Ltd., Integrity Media Asia Pte. Ltd., and of the
Celebration Hymnal LLC. All significant intercompany accounts and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Provisions are made
based on estimates derived from historical data for sales returns and
allowances in the period in which the related products are shipped. The full
amount of the returns allowance is shown, along with the allowance for doubtful
accounts, as a reduction of accounts receivable in the accompanying financial
statements. Generally, revenue derived from licensing the use of songs in the
Company's song catalogs is recognized as payments are received from licensees.
4
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MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct, retail and e-commerce sales to customers. Marketing expenditures that
benefit future periods are capitalized and charged to operations using the
straight-line method over a period of three 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 of
approximately $1.4 million was expensed for the three months ended March 31,
2000 and 1999.
PRODUCT MASTERS
Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives using a method that
reasonably relates to the amount of net revenue expected to be realized.
Management regularly reviews the product masters amortization rates and adjusts
the rate based on management's estimates for future sales. In conjunction with
such analysis, any amounts that do not appear to be fully recoverable are
charged to expense during the period the loss becomes estimatable. The costs of
producing a product master include the cost of the musical talent, the cost of
the technical talent for engineering, directing and mixing, the cost of the
equipment used to record and produce the master and the cost of the studio
facility used.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average of common shares
outstanding assuming issuance of potential dilutive common shares related to
options and warrants.
NOTE 2 - LONG TERM DEBT
The Company's financing agreement includes a revolving credit facility
and a term loan that are payable through August 2002. There is $1.4 million and
$3.1 million outstanding under the credit facility and $5.6 and $6.25 million
outstanding under the term loan at March 31, 2000 and December 31, 1999,
respectively. At the Company's option, the loan carries an interest rate of the
bank's base rate plus 1 1/2%, or LIBOR plus 3%.
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NOTE 3 - 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 2000 1999
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<S> <C> <C>
Retail $ 7,232 $ 4,522
Direct to consumer 4,061 3,468
International 1,980 1,629
Other 1,557 1,512
Eliminations (692) (86)
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$ 14,138 $ 11,045
========== ==========
Operating profit (before minority interest)
------------------------------------------
Retail 1,430 1,048
Direct to consumer 647 561
International 293 350
Other 710 740
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Consolidated 3,080 2,699
General corporate expense (2,123) (1,887)
Interest expense, net (262) (375)
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Income before income taxes and minority
interest
$ 695 $ 437
========== ==========
</TABLE>
6
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales increased $3.1 million or 28.0% to $14.1 million for the
three months ended March 31, 2000, as compared to $11.0 million during the
three months ended March 31, 1999. The increase in revenue is primarily
attributable to increased volume in the retail segment. Sales in the retail
segment increased $2.7 million or 60.0% to $7.2 million, compared to $4.5
million in the same period in 1999. This increase was due primarily to the
release of the second WoW Worship album, WoW Orange, a collection of the best
selling praise and worship songs, created in partnership with Maranatha! and
Vineyard. Sales of WoW Orange totaled $2.8 million in the first quarter of
2000. The first WoW Worship album, WoW Blue, was released in the second quarter
of 1999. Sales in the direct to consumer segment increased by 17.1% to $4.1
million, compared to $3.5 million for the same period in 1999 mainly due to
sales through the Company's new television direct response program. Sales in
the television direct response program include initial product offerings under
a new continuity program "Worlds Best Praise and Worship". Sales in television
direct response also include one time sales of various other albums such as WoW
Worship. International sales grew by 21.5% to $2.0 million, as compared to $1.6
million in the same period in 1999. Sales in the Other segment increased by
3.0% to $1.6 million, as compared to $1.5 million in the same period in 1999.
New product sales in all segments totaled $5.1 million or 35.9% of net revenue
for the three months ended March 31, 2000, as compared to $2.9 million or 26.8%
of net revenue for the same period in 1999. The increase in new product sales
as a percentage of total sales is due primarily to the WoW Orange release
discussed above.
Gross profit increased to $7.0 million or 49.5% of sales, as compared
to $5.8 million or 52.7% of sales in the same period in 1999. Gross profit as a
percentage of sales decreased in the first quarter of 2000 compared to the same
period in 1999 mainly because of costs relating to the WoW Orange album, which
has a gross margin of approximately 45%. Other factors that contributed to the
change in the gross margin include the Company's changing sales mix, which is
trending towards greater sales in the retail segment. The retail segment
generally has lower gross margins since sales through this segment are
generally at wholesale prices. Historically, the Company's gross margins
benefited from higher sales in the direct to consumer segment where sales are
generally at retail value.
Marketing and fulfillment expenses increased 26.3% to $3.4 million or
23.6% of net sales for the three months ended March 31, 2000, as compared to
$2.7 million or 24.1% of net sales for the same period in 1999. The increase in
marketing and fulfillment expenses is primarily attributable to increased
fulfillment costs in the retail segment that now comprises 51% of consolidated
net sales. Fulfillment costs will continue to increase as a percent of
consolidated net sales if the Company's retail segment grows at a faster rate
than the other segments which do not incur this third party expense.
Additionally, fulfillment costs related to the WoW Orange album are at a higher
rate than other products due to the joint marketing agreement discussed above.
The distribution and fulfillment for the direct to consumer segments are
handled with in house personnel and the Company's own warehouse and shipping
facility. The Company contracts with a third party for some data management,
however, the customer service and actual fulfillment functions are performed in
house. Marketing costs as a percent of sales were also lower as compared to the
comparable period in 1999 as the expenses remained relatively flat. Marketing
expenses during 1999 included the expenses related to the initial release of
Integrity Notes in the first quarter of 1999.
General and administrative expenses increased to $2.7 million or 18.9%
of net sales for the three months ended March 31, 2000, as compared to $2.3
million or 21.1% of net sales for the same period in 1999. The decrease from
the 1999 period as a percentage of sales is primarily attributable to greater
sales volume that did not necessitate an increase in general and administrative
expenses.
Operating profit in the retail segment grew 36.5% to $1.4 million for
the three months ended March 31, 2000 from $1.0 million for the same period in
1999 due to the revenue increases discussed above, resulting from major product
releases during the quarter such as WoW Orange. Operating costs
7
<PAGE> 9
related to the retail segment, principally fulfillment expenses, were
consistent with the increase in sales. The lower gross margin in the retail
segment discussed above also contributed to the results for the segment.
Operating profit from the direct to consumer segment increased 15.3% to
$647,000 for the three months ended March 31, 2000 from $561,000 for the same
period in 1999 and is consistent with the 17.1% increase in revenue. Operating
profit in the international segment decreased by 16.3% to $293,000 for the
three months ended March 31, 2000 from $350,000 for the same period in 1999 due
to greater operating expenses in the international offices. Operating profit in
the Other segment was relatively flat.
Interest expense decreased $113,000 to $262,000 or 1.9% of net sales
for the three month period ended March 31, 2000, as compared to $375,000 or
3.4% of net sales for the same period in 1999. The decrease in the first three
months of 2000 was the result of lower average debt levels for the period. The
average interest rate for the three months ended March 31, 2000 and 1999 was
10.9% and 11.1%, respectively.
The Company recorded an income tax provision of $259,000 and $156,000
for the three months ended March 31, 2000 and 1999, respectively. The Company's
effective tax rate for the first quarter of 2000 was 37.3%.
Net income for the three months ended March 31, 2000 increased by
$193,000 to $416,000, as compared to $223,000 for the same period in 1999.
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 the production and recording of product masters
to build the Company's product master library and debt service. 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. For the periods ended March 31,
2000 and 1999, the Company had average daily borrowings under the credit
agreement of $5.1 million and $12.5 million at average rates of 10.9% and
11.1%, respectively. At March 31, 2000, the Company had $4.6 million available
to borrow under this agreement.
Cash generated from operations totaled $3.3 million and $922,000 for
the three months ended March 31, 2000 and 1999, respectively. The increase from
1999 to 2000 resulted primarily from increased earnings before depreciation and
amortization and the timing of payments for liabilities, principally royalties.
Investing activities used $1.0 million and $491,000 during the three
months ended March 31, 2000 and 1999, respectively. This consisted, partially,
of capital expenditures for computer equipment and capital improvements to
existing buildings totaled $265,000 and $57,000 for the three months ended
March 31, 2000 and 1999, respectively. The investments in product masters for
the three months ended March 31, 2000 and 1999 totaled $1.0 million and
$434,000, respectively. The increase in the investments in product masters
related to releases in the first quarter and the continued development of other
products by the Company.
The Company made principal payments on its term loan of $625,000 and
$526,000 in the three months ended March 31, 2000 and 1999, respectively, and
used excess cash from operations of $1.7 million to reduce the Company's
revolving credit facility.
During the three month period ended March 31, 2000, the company did
not make any distributions to its 50% partner in the Celebration Hymnal LLC
joint venture, Word Entertainment.
8
<PAGE> 10
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. There will be no material impact on the Company's financial
statements as a result of the issuance of this bulletin.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Item 3 disclosure made in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
9
<PAGE> 11
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).
4 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 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).
</TABLE>
(B) REPORT ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended
March 31, 2000.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRITY INCORPORATED
Date: May 10, 2000 /s/ P. Michael Coleman
-----------------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: May 10, 2000 /s/ Alison S. Richardson
-----------------------------------
Alison S. Richardson
Senior Vice President,
Finance and Administration
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 974
<SECURITIES> 0
<RECEIVABLES> 8,034
<ALLOWANCES> 1,109
<INVENTORY> 4,595
<CURRENT-ASSETS> 16,332
<PP&E> 7,885
<DEPRECIATION> 4,086
<TOTAL-ASSETS> 29,657
<CURRENT-LIABILITIES> 8,854
<BONDS> 0
0
0
<COMMON> 5,614
<OTHER-SE> 13,847
<TOTAL-LIABILITY-AND-EQUITY> 29,657
<SALES> 11,923
<TOTAL-REVENUES> 14,138
<CGS> 7,134
<TOTAL-COSTS> 3,363
<OTHER-EXPENSES> 2,668
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 262
<INCOME-PRETAX> 695
<INCOME-TAX> 259
<INCOME-CONTINUING> 416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 416
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
