<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 September 30, 2000 Commission File No. 000-24134
---------
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 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 November 10, 2000
----- --------------------------------
Class A Common Stock, $0.01 par value 2,179,000
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>
Sep 30, 2000 Dec 31, 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 1,711 $ 1,067
Trade receivables, less allowance for returns and doubtful accounts of $777
and $1,108 5,236 6,329
Other receivables 1,127 1,681
Inventories 3,976 4,754
Other current assets 1,942 2,456
---------- ----------
Total current assets 13,992 16,287
Property and equipment, net of accumulated depreciation of $4,333 and $3,956 3,989 3,664
Product masters, net of accumulated amortization of $15,759 and $11,649 5,699 6,941
Other assets 2,771 3,156
---------- ----------
Total assets $ 26,451 $ 30,048
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,063 $ 1,937
Accounts payable and accrued expenses 1,418 3,108
Royalties payable 1,374 774
Other current liabilities 1,226 1,493
---------- ----------
Total current liabilities 6,081 7,312
Long-term debt 3,142 6,768
Other long-term liabilities 14 52
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Total liabilities 9,237 14,132
---------- ----------
Commitments and contingencies 0 0
---------- ----------
Minority interest 1,321 1,166
---------- ----------
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 (286) (327)
Retained earnings 2,433 1,215
Equity adjustments from foreign currency translation (157) (41)
---------- ----------
Total stockholders' equity 15,893 14,750
---------- ----------
Total liabilities and stockholders' equity $ 26,451 $ 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 Nine months Ended
September 30 September 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 12,596 $ 11,547 $ 39,363 $ 33,105
Cost of sales 6,423 5,807 20,486 15,694
-------- -------- -------- --------
Gross profit 6,173 5,740 18,877 17,411
Marketing and fulfillment expenses 2,280 2,351 8,076 7,905
General and administrative expenses 2,614 2,321 7,846 7,016
-------- -------- -------- --------
Income from operations 1,279 1,068 2,955 2,490
Other expenses
Interest expense, net 241 359 755 1,038
Other expenses 24 64 81 58
-------- -------- -------- --------
Income before minority interest and taxes 1,014 645 2,119 1,394
Provision for (benefit from) income taxes 395 (10) 805 250
Minority interest, less applicable taxes 30 23 96 133
-------- -------- -------- --------
Net income $ 589 $ 632 $ 1,218 $ 1,011
======== ======== ======== ========
Adjustments to determine comprehensive income
Foreign currency translation adjustments 10 (9) (116) 11
-------- -------- -------- --------
Comprehensive income $ 599 $ 623 $ 1,102 $ 1,022
======== ======== ======== ========
NET INCOME PER SHARE
Basic $ 0.10 $ 0.11 $ 0.22 $ 0.18
======== ======== ======== ========
Diluted $ 0.10 $ 0.10 $ 0.20 $ 0.17
======== ======== ======== ========
Weighted average number of shares outstanding
Basic 5,614 5,614 5,614 5,569
Diluted 6,116 6,061 6,058 6,044
</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>
Nine months Ended Sep 30
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,218 $ 1,011
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 787 833
Amortization of product masters 4,110 2,517
Minority interest 96 133
Stock compensation 41 36
Changes in operating assets and liabilities
Trade receivables 1,093 (997)
Other receivables 54 859
Inventories 778 772
Other assets 673 987
Accounts payable, royalties payable and
Accrued expenses (1,090) (11)
Other current and non current liabilities (246) 35
Other (116) 11
-------- --------
Net cash provided by operating activities 7,398 6,186
-------- --------
Cash flows from investing activities
Payments received on notes receivable 500 0
Purchases of property and equipment (702) (319)
Payments for product masters (2,868) (2,581)
-------- --------
Net cash used in investing activities (3,070) (2,900)
-------- --------
Cash flows from financing activities
Net repayments under line of credit (1,746) (1,349)
Distributions to joint venture partner 0 (510)
Principal payments of long-term debt (1,938) (1,848)
-------- --------
Net cash used in financing activities (3,684) (3,707)
-------- --------
Net increase (decrease) in cash 644 (421)
Cash, beginning of year 1,067 989
-------- --------
Cash, end of period $ 1,711 $ 568
======== ========
</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
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 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 September 30, 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. The provision for
returns is based on historical unit data for sales returns. The allowance
represents the sales price, net of related royalties, and is recorded in the
period in which the related products are shipped. The full amount of the
provision for returns 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
<PAGE> 6
MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct, retail and e-commerce sales to customers. Marketing expenditures
associated with direct mail campaigns 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. Marketing expenses for the nine months ended
September 30, 2000 and 1999 approximated $3.6 million and $3.8 million,
respectively.
FULFILLMENT COSTS
Fulfillment expenses are primarily comprised of distribution fees paid
to third party distributors based on a percentage of sales. The services
provided by the third party distributor include sales, fulfillment and storage
of the Company's product for the retail segment. Distribution fees represented
approximately 57% of total fulfillment expense for the nine months ended
September 30, 2000. Also included in fulfillment expenses are fees paid to a
third party service provider on a transaction basis for data entry, generation
of invoices and cash processing.
Additionally, in the Direct to Consumer segment, the Company completes
the distribution and shipping function internally and includes a separate
surcharge to customers related to this service. These costs, which approximated
$534,000 for the nine months ended September 30, 2000, are recorded as a
component of Cost of Sales and the related customer fee is recorded as a
component of Net Sales.
IMPAIRMENT OF LONG-LIVED ASSETS
The company evaluates impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If the sum of the expected future undiscounted cash flows is
less that the carrying amount of the asset, an impairment loss would be
recognized. Measurement of an impairment loss for long-lived assets would be
based on the fair value of the asset.
RECORD MASTERS
Product masters, which include sound and video 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.
FOREIGN CURRENCIES
Assets and liabilities at foreign subsidiaries are recorded based on
their functional currencies. Amounts in foreign currencies are translated at the
applicable exchange rate at the balance sheet date using the rate in effect as
of the period end. Revenues and expenses of foreign subsidiaries are
5
<PAGE> 7
translated using the average rates applicable during the reporting period. The
effects of foreign currency translation adjustments are included as a component
of stockholders' equity and Comprehensive income.
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 was $1.4 million and
$3.1 million outstanding under the revolving credit facility and $4.3 and $6.25
million outstanding under the term loan at September 30, 2000 and December 31,
1999, respectively. At the Company's option, the loan carried an interest rate
of the bank's base rate plus 1 1/2%, or LIBOR plus 3% through August 2000.
Effective September 1, 2000, the interest rate was decreased to either the
bank's base rate plus 1/2%, or LIBOR plus 2% due to a favorable change in the
debt covenants of the loans.
NOTE 3 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net Sales
Retail $ 19,888 $ 15,514
Direct to consumer 10,277 9,768
International 5,486 5,085
Other 6,303 4,463
Eliminations (2,591) (1,725)
---------- ----------
$ 39,363 $ 33,105
========== ==========
Operating profit (before minority interest)
Retail $ 3,961 $ 3,093
Direct to consumer 1,766 1,437
International 933 1,009
Other 399 546
---------- ----------
Consolidated 7,059 6,085
General corporate expense (4,185) (3,653)
Interest expense, net (755) (1,038)
---------- ----------
Income before income taxes and minority interest
$ 2,119 $ 1,394
========== ==========
<CAPTION>
Three months ended September 30
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net Sales
Retail $ 5,813 $ 5,689
Direct to consumer 3,233 2,875
International 1,594 1,575
Other 2,324 1,994
Eliminations (368) (586)
---------- ----------
$ 12,596 $ 11,547
========== ==========
Operating profit (before minority interest)
Retail $ 1,404 $ 889
Direct to consumer 725 472
International 261 200
Other 240 427
---------- ----------
Consolidated 2,630 1,988
General corporate expense (1,375) (984)
Interest expense, net (241) (359)
---------- ----------
Income before income taxes and minority interest $ 1,014 $ 645
========== ==========
</TABLE>
6
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales increased $6.3 million or 18.9% to $39.4 million for the nine
months ended September 30, 2000, as compared to $33.1 million during the nine
months ended September 30, 1999. For the quarter ended September 30, 2000, net
sales increased $1.1 million or 9.1% to $12.6 million, from $11.5 million in the
same period in 1999. New product sales in all segments amounted to $8.9 million
or 23.2% of net revenue for the nine months ended September 30, 2000, as
compared to $8.8 million or 26.7% of net revenue for the same period in 1999.
Sales of WoW Worship (Orange), released late in the first quarter of 2000
accounted for $1.4 million of the increase in revenue for the three month period
and $3.4 million for the nine month period. During the nine month period ended
September 30, 2000, sales in the retail segment increased $4.4 million or 28.2%
to $19.9 million, compared to $15.5 million in the same period in 1999. For the
quarter ended September 30, 2000, sales in the retail segment increased 2.0% to
$5.8 million, compared to $5.7 million during the same period in 1999. The
increase in the nine months period was due to the continued strong sales of the
WoW Worship albums during the first nine months of 2000. Total WoW sales for the
nine months accounted for $6.0 million in 2000 as compared to $2.2 million in
1999. International sales for the nine month period grew by 7.9% to $5.5
million, as compared to $5.1 million in the same period in 1999, while
international sales for the three month period remained flat at $1.6 million.
The increase in International sales during the nine month period is mainly
attributable to increased sales in the Latin America division, as we continue to
focus on this market with specialized marketing and a dedicated sales division.
Direct to consumer sales increased by 5.2% to $10.3 million for the nine month
period ended September 30, 2000, compared to $9.8 million in the same period in
1999. For the quarter ended September 30, 2000, direct to consumer sales
increased by 12.5% to $3.2 million, compared to $2.9 million in the same period
in 1999. Sales in this segment for both the three and nine month periods ended
September 30, 2000 increased due to various programs implemented by management
to improve performance, including a new sales channel designed to attract new
direct consumers through television marketing. Direct to consumer sales in the
prior year's nine month period were negatively impacted by approximately
$200,000 due to adjustments to correct an inadvertent overstatement of shipping
and handling revenue related to system modifications.
Gross profit increased to $18.9 million or 48.0% of sales, as compared
to $17.4 million or 52.6% of sales, for the nine month periods ended September
30, 2000 and 1999, respectively. For the nine month period ending September 30,
2000, the overall sales mix included a high proportion of distributed and artist
products, which have lower gross margin percentages than concept products. Sales
of products with artist royalties and distributed products with additional
royalties represented $17.9 million and $11.6 million in sales for the nine
months ended September 30, 2000 and 1999, respectively. Furthermore, the gross
margin percentages in the retail and direct to consumer segments were negatively
impacted with the sales of WoW Worship (Orange) and WoW Worship (Blue). Although
the releases have generated $6.0 million in revenues for the nine months ended
September 30, 2000 the Company's gross margin is significantly lower due to
higher royalties. Gross profit for the quarter ended September 30, 2000 was $6.2
million or 49.0% of sales, as compared to $5.7 million or 49.7% of sales for the
same period in 1999. The decline in gross margin for the third quarter was the
result of the same factors which affected the nine month period, as discussed
above.
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The following table shows the gross margin by operating segment:
<TABLE>
<CAPTION>
Nine months ended Sep 30
------------------------
2000 1999
------ ------
<S> <C> <C>
Gross margin
Retail 46.2% 48.8%
Direct to consumer 52.7% 58.6%
International 57.1% 57.8%
Other 14.1% 23.8%
------ ------
Consolidated 48.0% 52.6%
<CAPTION>
Three months ended Sep 30
-------------------------
2000 1999
------ ------
<S> <C> <C>
Gross margin
Retail 50.7% 44.9%
Direct to consumer 50.6% 58.1%
International 64.1% 57.5%
Other 14.2% 42.6%
------ ------
Consolidated 49.0% 49.7%
</TABLE>
Based on the factors discussed above, management expects the trend of
lower gross margin to continue. The Company's gross margins are higher in the
direct to consumer segment where sales are generally at retail value. However,
in the third quarter of 2000 the gross margin in the direct to consumer and
retail channel were approximately equal. The direct to consumer segment gross
margin was lower due to a higher sales mix of distributed and artist products,
which generally have lower gross margins than concept products. The retail
segment gross margin was higher due to the proportion of concept products that
were released during the quarter. Gross profit in the direct to consumer segment
for the prior year was negatively impacted by approximately $200,000 as a result
of the billing adjustments discussed above.
Marketing and fulfillment expenses increased 2.2% to $8.1 million or
20.5% of net sales for the nine months ended September 30, 2000, as compared
with $7.9 million or 23.9% of net sales for the same period in 1999. For the
quarter ended September 30, 2000, marketing and fulfillment expenses were $2.3
million or 18.1% of net sales, compared to $2.4 million or 20.4% of net sales
for the same period in 1999. The decreases in marketing and fulfillment expenses
as a percent of sales are primarily attributable to fewer direct mail campaigns
in the direct to consumer segment and lower relative fulfillment expenses in the
retail segment.
General and administrative expenses increased by $830,000 or 11.8% to
$7.8 million for the nine months ended September 30, 2000, as compared to $7.0
million for the same period in 1999. For the quarter ended September 30, 2000,
general and administrative expenses were $2.6 million, compared to $2.3 million
for the same period in 1999. The increase in general and administrative cost is
attributable to increases in facility costs and infrastructure expense,
additions to senior management staff, and staff additions related to new
business development. These additions were made with anticipation of the
continued growth of the Company.
Operating profit in the retail segment was $4.0 million and $1.4
million for the nine and three months ended September 30, 2000, respectively,
compared to $3.1 million and $0.9 million for the comparable periods in 1999.
Sales and operating profit for the retail segment increased 28% for the nine
months due to continued strength from the WoW series and other new releases.
Operating profit from the direct to consumer segment was $1.8 million or 17.2%
of sales and $725,000 or 22.4% of sales for the nine and three months ended
September 30, 2000, respectively, compared to $1.4 million or 14.7% of sales and
$472,000 or 16.4 % of sales for the comparable periods in 1999. Direct to
consumer operating profit in the third quarter and the year to date period was
favorably impacted by lower marketing costs form the timing of releases and the
types of programs. Operating profit from the international segment was $933,000
and $261,000 for the nine and three months ended September 30, 2000,
respectively,
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<PAGE> 10
compared to $1.0 million and $200,000 for the comparable periods in 1999. The
decrease in the year to date operating profit for the International segment was
primarily the result of lower margins at the Company's U.K. subsidiary and
higher sales tax costs in Australia. Operating profit from the other segments
decreased to $399,000 and $240,000 for the nine and three months ended September
30, 2000 respectively compared to $546,000 and $427,000 for the comparable
periods in 1999. Operating profit in the other segment is also affected by
amounts charged to expense for record masters that do not appear to be fully
recoverable.
Interest expense decreased to $755,000 and $241,000 for the nine and
three months ended September 30, 2000 as compared with $1.0 million and $359,000
for the same periods in 1999. The decrease was the result of lower average debt
levels in the first nine months of 2000. The average effective interest rate,
which includes debt discount amortization, for the nine months ended September
30, 2000 and 1999 was 10.8% and 11.1%, respectively.
The Company recorded an income tax provision of $805,000 and $250,000
for the nine months ended September 30, 2000 and 1999, respectively. The prior
year's provision was favorably impacted due to a reduction of $180,000 in the
valuation allowance. The Company's effective tax rate for the first nine months
of 2000 was 38%. The period's income tax provision is the product of applying
the Company's annual expected tax rate against the year-to-date income of the
Company.
Net income for the nine months ended September 30, 2000 increased by
$207,000 to $1.2 million as compared to $1.0 million for the same period in
1999.
Decreases in foreign exchange rates during 2000 at all of the Company's
subsidiary locations has resulted in translation losses in the Company's Other
Comprehensive Income.
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 September 30, 2000 and
1999, the Company had average daily borrowings under the credit agreement of
$7.0 million and $12.5 million at average rates of 10.6% and 11.1%,
respectively. Interest expense includes $245,000 of non-cash amortization of
debt discount for the period ended September 30, 2000 as compared to $226,000
for the comparable period in 1999. At September 30, 2000, the Company had $4.6
million available to borrow under this agreement.
Cash generated from operations totaled $7.4 million and $6.2 million
for the nine months ended September 30, 2000 and 1999, respectively. The
increase from 1999 to 2000 resulted primarily from increased earnings before
depreciation and amortization and the timing of payments received for accounts
receivable, and paid for liabilities, principally royalties. The Company's
retail distribution agreement in 2000 provided for the earlier payment of
monthly trade receivables, and has resulted in decreased accounts receivable on
a monthly basis as compared to the prior periods.
Investing activities used $3.1 million and $2.9 million during the nine
months ended September 30, 2000 and 1999. This cash outflow consisted of capital
expenditures for computer equipment and capital improvements to existing
buildings totaling $702,000 and $319,000 for the nine months ended September 30,
2000 and 1999, respectively, and the investments in product masters for the nine
months ended September 30, 2000 and 1999 totaled $2.9 million and $2.6 million,
respectively. The increase in the investments in product masters related to
future new releases for 2000 and 2001 and the continued development of other
products by the Company. The Company received payment of $500,000 during the
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<PAGE> 11
nine months related to a notes receivable balance established from the sale of
certain product masters during 1999.
The Company made principal payments on its term loan of $1.9 million
and $1.8 million in the nine months ended September 30, 2000 and 1999,
respectively, and used excess cash from operations of $1.7 million to reduce the
Company's revolving credit facility.
During the nine month periods ended September 30, 2000 and 1999, the
company made distributions of $0 and $510,000 to its 50% partner in the
Celebration Hymnal LLC joint venture, Word Entertainment.
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. The required implementation of SAB 101 has been deferred until the
fourth quarter of 2000, although adoption would be as of January 1, 2000 if
applicable. The Company is monitoring on-going interpretations of SAB 101, but
at this time believes that there will be no material impact on the Company's
financial statements.
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.
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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
September 30, 2000.
11
<PAGE> 13
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: November 10, 2000 /s/ P. Michael Coleman
----------------------- --------------------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: November 10, 2000 /s/ Donald S. Ellington
----------------------- --------------------------------------
Don S. Ellington
Chief Financial Officer
12
