UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2003
Commission File No. 000-24134
INTEGRITY MEDIA, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 63-0952549
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1000 Cody Road
Mobile, Alabama 36695
(Address of Principal Executive Offices, Zip Code)
(251) 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes / / No /X/
The number of shares outstanding of each of the issuer's classes of
common stock, as of August 13, 2003, the latest practicable date, was as
follows:
Class Outstanding
----- -----------
Class A Common Stock, $0.01 par value 2,384,783
Class B Common Stock, $0.01 par value 3,385,000
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRITY MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS Jun 30, 2003 Dec 31, 2002
------------ ------------
(Unaudited)
Current Assets
Cash $ 3,151 $ 4,821
Trade receivables, less allowance for returns and doubtful accounts
of $1,912 and $2,415 5,127 6,842
Other receivables 104 67
Inventories 5,942 5,191
Other current assets 4,882 4,558
-------- --------
Total current assets 19,206 21,479
Property and equipment, net of accumulated depreciation of $6,478 and $6,055 10,450 7,337
Product masters, net of accumulated amortization of $20,948 and $19,387 4,239 3,806
Other assets 7,908 8,237
-------- --------
Total assets $ 41,803 $ 40,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,690 $ 2,690
Line of Credit 3,000 0
Accounts payable and accrued expenses 2,948 5,298
Royalties payable 4,931 6,256
Other current liabilities 1,131 997
-------- --------
Total current liabilities 14,700 15,241
Long-term debt 8,464 6,780
Other long-term liabilities 301 179
-------- --------
Total liabilities 23,465 22,200
-------- --------
Commitments and contingencies
Minority interest 466 606
-------- --------
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;
2,384,783 shares issued and outstanding 24 24
Class B common stock, $.01 par value, 10,500,000 shares
authorized; 3,385,000 shares issued and outstanding 34 34
Additional paid-in capital 13,001 12,956
Unearned compensation (426) (479)
Retained earnings 5,272 5,452
Equity adjustments from foreign translation (33) 66
-------- --------
Total stockholders' equity 17,872 18,053
-------- --------
Total liabilities and stockholders' equity $ 41,803 $ 40,859
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
INTEGRITY MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 13,384 $ 11,831 $ 31,944 $ 27,227
Cost of sales 6,678 4,996 16,297 13,173
-------- -------- -------- --------
Gross profit 6,706 6,835 15,647 14,054
Marketing and fulfillment expenses 3,228 3,161 6,446 5,905
General and administrative expenses 4,445 3,614 9,140 7,360
-------- -------- -------- --------
Income (loss) from operations (967) 60 61 789
Other expenses
Interest expense, net 103 97 205 140
Other expenses 16 43 37 97
-------- -------- -------- --------
(Loss) income before minority interest
and taxes (1,086) (80) (181) 552
(Benefit from) provision for income taxes (440) (30) (111) 182
Minority interest, less applicable taxes 50 68 110 143
-------- -------- -------- --------
Net (loss) income $ (696) $ (118) $ (180) $ 227
======== ======== ======== ========
Adjustments to determine comprehensive (loss)
income
Foreign currency translation adjustments (209) 35 (99) 102
-------- -------- -------- --------
Comprehensive (loss) income $ (905) $ (83) $ (279) $ 329
======== ======== ======== ========
Net (loss) income, basic $ (0.12) $ (0.02) $ (0.03) $ 0.04
======== ======== ======== ========
-------- -------- -------- --------
Net (loss) income, diluted $ (0.12) $ (0.02) $ (0.03) $ 0.04
======== ======== ======== ========
Weighted average number of shares outstanding
Basic 5,608 5,593 5,603 5,589
Diluted 5,608 5,593 5,603 6,007
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
INTEGRITY MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months ended June 30
------------------------
2003 2002
------- -------
Cash flows from operating activities
Net income (loss) $ (180) $ 227
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 1,035 621
Amortization of product masters 1,561 1,702
Minority interest 110 142
Stock compensation 53 53
Changes in operating assets and liabilities, net of the effects
from purchase of Sarepta Music (Pty) Ltd and M2
Communications LLC
Trade receivables (net) 1,832 1,315
Other receivables (38) 37
Inventories (611) (224)
Other assets (911) 5
Accounts payable, royalties payable and
Accrued expenses (3,453) (2,161)
Other current and non current liabilities 247 (569)
------- -------
Net cash provided by (used in) operating activities (355) 1,148
------- -------
Cash flows from investing activities
Purchases of property and equipment (3,529) (986)
Payments for product masters (1,993) (1,942)
Purchase of M2 Communications LLC, net of cash 0 (4,779)
Purchase of Sarepta Music (Pty) Ltd (191) 0
------- -------
Net cash used in investing activities (5,713) (7,707)
------- -------
Cash flows from financing activities
Net borrowings (repayments) under line of credit 3,000 0
Proceeds from issuance of stock 45 16
Principal payments of long-term debt (1,345) (1,040)
Borrowings under term facility 3,048 4,975
Distributions to joint venture partner (250) (250)
------- -------
Net cash provided by (used in) financing activities 4,498 3,701
------- -------
Effect of exchange rate changes on cash (100) 102
------- -------
Net increase (decrease) in cash (1,670) (2,756)
Cash, beginning of year 4,821 6,854
------- -------
Cash, end of period $ 3,151 $ 4,098
======= =======
Supplemental disclosures of cash flow information
Interest paid $ 220 $ 130
Income taxes paid $ 0 $ 148
Supplemental disclosure of non-cash investing activities:
On March 31, 2003, the Company purchased Sarepta Music (Pty) Ltd. In conjunction
with the purchase, the Company assumed all outstanding assets and liabilities as
of the purchase date.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
INTEGRITY MEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND JUNE 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Integrity Media, Inc. (the "Company") is a media/communications company
that produces, publishes and distributes Christian music, books and related
products. The Integrity Music Group consists of two areas: Integrity Music, the
leader in Praise and worship music, and M2 Communications, a Christian artist
label. The Integrity Music Group's product formats include cassettes, compact
discs, videos, DVDs and printed music. Integrity Music produces Praise and
Worship music in different musical styles for specific audiences such as live
worship music, gospel music and children's music. M2 Communications produces
Adult Contemporary/Pop music by several well-known Christian artists. The
Integrity Music Group sells all music-related products and Integrity Publishers,
Inc. sells all book products. Products are sold mainly 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 Limited was formed in 1988, Integrity Media
Australasia Pty Ltd (formerly Integrity Music PTY Limited) was formed in 1991,
Integrity Media Asia Pte Ltd was formed in 1995, and Sarepta Music (Pty) Ltd was
acquired in March 2003. These subsidiaries serve to expand the Company's
presence in Western Europe, Australia and New Zealand, Singapore and South
Africa, respectively, and all are wholly-owned by the Company. 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. Due to the
Company's ability to control the venture, the Company consolidates the venture
and Word Entertainment's interest in the joint venture is presented as minority
interest in these financial statements. Integrity Publishers, Inc. was formed in
August 2001 for the purpose of publishing and distributing Christian books. This
division began shipping its first books in the third quarter of 2002. Enlight,
Inc. was purchased in March 2002 to acquire certain book publishing trademarks
and domain names. M2 Communications L.L.C., an artist-based, independent
Christian music company, was purchased in June 2002. Integrity Direct, LLC was
formed December 31, 2002, to create a smoother interaction between the Company
and its direct sales to churches and individuals.
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 for the year ended December 31, 2002 contained in the
Company's Annual Report on Form 10-K. 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 and six months ended June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
For a summary of the Company's significant accounting policies, please
see the financial statements for the year ended December 31, 2002 contained in
the Company's Annual Report on Form 10-K.
4
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, restricted stock, convertible debt, or other stock agreements.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (SFAS 141), Business Combinations, and Statement No. 142 (SFAS
142), Goodwill and Other Intangible Assets. SFAS 141 supercedes APB 16, Business
Combinations, and requires the purchase method of accounting for all business
combinations initiated after June 30, 2001. SFAS 142 supercedes APB 17,
Intangible Assets and primarily requires that goodwill and indefinite lived
intangible assets will no longer be amortized and will be tested for impairment
at least annually at a reporting unit level. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS 141 and SFAS 142
had no effect on the Company's financial position, results of operations or cash
flows.
In August 2001, FASB issued SFAS No. 143, (SFAS 143), Accounting for
Asset Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires, among other things, that
the retirement obligations be recognized when they are incurred and displayed as
liabilities on the balance sheet. In addition, the asset's retirement costs are
to be capitalized as part of the asset's carrying amount and subsequently
allocated to expense over the asset's useful life. The adoption of SFAS No. 143
had no effect on the Company's financial position, results of operations or cash
flows.
In April 2002, FASB issued SFAS No. 145, (SFAS 145) Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which is effective for transactions occurring after May 15, 2002
and fiscal years beginning after May 15, 2002. SFAS 145 rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements and amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, as well as, amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Company has adopted SFAS 145, and
the extraordinary item in 2001 has been reclassified into operations.
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities,
such as restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. The Company's adoption of SFAS
146 did not have a significant impact on its financial position, results of
operations or cash flows.
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance of the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
has adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that the Company record a liability for the fair
value of such guarantees in the balance sheet. The Company believes that the
adoption of FIN No. 45 will not have a material impact on its financial
position, results of operations or cash flows.
5
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company believes that the adoption of FIN No.
46 will not have a significant impact on its financial position, results of
operations or cash flows.
The Company adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment
of FASB Statement No. 123." This Statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," effective January 1, 2003. SFAS No.
148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The amendments pertaining to the alternative
methods of transition are effective for financial statements for fiscal years
ended after December 15, 2002. The amendments to the disclosure requirements are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. As permitted by SFAS No. 148
and SFAS No. 123, we continue to apply the accounting provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for our stock option plans
and our employee stock purchase plan and the disclosure-only provisions of SFAS
No. 123 as amended by SFAS 148. We did not record stock-based compensation
expense in the six months ended June 30, 2003 and June 30, 2002, as all options
granted under our plans had an exercise price equal to fair market value. The
adoption of the additional disclosure requirement did not have a significant
impact on our reported results of operations, financial position or cash flows.
SFAS No. 148 requires us to provide pro forma disclosure of the impact
on our results of operations had we adopted the expense measurement provisions
of SFAS No. 123. SFAS No. 123 permits the use of either a fair value based
method or the intrinsic value method to measure the expense associated with our
stock option plans and our employee stock purchase plan. The pro forma impact on
our results of operations had we adopted the fair value based method of SFAS No.
123 using the Black-Scholes option-pricing model are shown below:
SIX MONTHS ENDED JUNE 30
2003 2002
Net (loss) income - as reported $ (180) $ 227
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 93 93
-------- --------
Pro forma net income (loss) $ (273) $ 134
======== ========
Net income (loss) per share:
Basic - as reported $ (0.03) $ 0.04
Diluted - as reported $ (0.03) $ 0.04
Basic - proforma $ (0.05) $ 0.02
Diluted - proforma $ (0.05) $ 0.02
6
NOTE 2 - LONG TERM DEBT
On April 25, 2001, the Company entered into a new $20 million,
five-year secured credit facility with LaSalle Bank. The credit agreement
included a $6 million line of credit, an $11 million secured term loan, and a $3
million mortgage term loan. Through this new credit facility, the Company
refinanced its previous credit facility with Bank Austria. Of the $11 million
initial term facility, $3.0 million was used to pay-off its previous credit
facility with Bank Austria, $3.4 million was used for stock warrant repurchases,
and $3.1 million expired, leaving $1.5 million available at December 31, 2001.
The $3.1 million portion expired on December 19, 2001 due to time and use
restrictions. On March 30, 2002, the credit facility was amended to decrease the
allowed borrowings under this secured term facility to $6.4 million and the
mortgage term loan was amended to increase the allowed borrowings for this
facility to $4.6 million. On June 28, 2002, the term facility was again amended
to increase total allowed borrowings to $9.4 million, an increase of $3.0
million. On June 28, 2002, this additional $3.0 million was then used to
partially fund the acquisition of M2 Communications. On December 31, 2002, the
mortgage term facility was amended to increase the allowed borrowings to $5.1
million. At June 30, 2003, the Company had available borrowings of $3.0 million
under the line of credit, zero available under the mortgage term loan, and zero
under the secured term loan. At June 30, 2003 there was $3.0 million outstanding
under the line of credit, $6.5 million outstanding under the secured term loan,
and $4.7 million outstanding under the mortgage term loan. At December 31, 2002,
there was zero outstanding under the line of credit, $7.6 million outstanding
under the secured term loan, and $1.8 million outstanding under the mortgage
term loan.
During the first half of 2003, the Company amended its credit facility
with LaSalle Bank. The Company is in compliance with all covenants as of June
30, 2003.
NOTE 3 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
Six Months Ended June 30
NET SALES 2003 2002
-------- --------
Retail $ 14,010 $ 12,279
Direct to Consumer 7,601 8,843
International 4,990 4,576
Book Publishing 2,288 0
Other 4,652 4,296
Eliminations (1,597) (2,767)
-------- --------
Consolidated $ 31,944 $ 27,227
======== ========
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Retail $ 1,628 $ 2,291
Direct to Consumer 1,282 714
International 525 726
Book Publishing (656) (902)
Other 1,296 1,538
Eliminations (46) 0
-------- --------
Consolidated 4,029 4,367
General corporate expense (4005) (3,675)
Interest expense, net (205) (140)
-------- --------
Income (loss) before income taxes and minority interest
$ (181) $ 552
======== ========
7
Three Months Ended June 30
NET SALES 2003 2002
-------- --------
Retail $ 5,771 $ 5,326
Direct to Consumer 3,667 3,973
International 2,733 2,293
Book Publishing 215 0
Other 1,560 1,614
Eliminations (562) (1,375)
-------- --------
Consolidated $ 13,384 $ 11,831
======== ========
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Retail $ 208 $ 867
Direct to Consumer 532 157
International 221 316
Book Publishing (679) (565)
Other 462 866
Eliminations (19) 0
-------- --------
Consolidated 725 1,641
General corporate expense (1708) (1,624)
Interest expense, net (103) (97)
-------- --------
Income (loss) before income taxes and minority interest
$ (1,086) $ (80)
======== ========
NOTE 4 - PURCHASE TRANSACTION
On June 28, 2002, the Company purchased all assets and assumed the
outstanding liabilities of M2 Communications, L.L.C. The Company paid, net of
cash acquired, $4.8 million to complete the transaction. The transaction was
funded partly from operating cash and the issuance of $3 million additional debt
through the Company's credit facility. The Company accounted for this
transaction under the purchase method of accounting and accordingly, allocated
the purchase price to cash, accounts receivable, fixed assets and intangibles.
The following pro-forma information presents the results of operations
of the Company as if the acquisition of M2 Communications, L.L.C. had been
completed as of January 1, 2002 (in thousands, except per share data):
For the Six Months Ending June 30, 2002
As Reported Pro-Forma (unaudited)
----------- ---------------------
Net Sales $27,227 $33,070
Net Income $227 $588
Basic EPS $0.04 $0.11
Diluted EPS $0.04 $0.10
For the Year Ended December 31, 2002
As Reported Pro-Forma (unaudited)
----------- ---------------------
Net Sales $66,345 $72,046
Net Income $2,216 $2,556
Basic EPS $0.40 $0.46
Diluted EPS $0.37 $0.43
On March 31, 2003, the Company purchased all assets and assumed the
outstanding liabilities of Sarepta Music (Pty) Ltd. The Company paid, net of
cash acquired, $191 thousand to complete the
8
transaction. The Company accounted for this transaction under the purchase
method of accounting and accordingly, allocated the purchase price to cash,
accounts receivable, fixed assets and intangibles.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SALES FOR THE SIX MONTHS ENDED JUNE 30, 2003
Net sales for the six months ended June 30, 2003, increased $4.7
million or 17.3%, from $27.2 million in 2002 to $31.9 million in 2003. The
increase was due to the incremental sales for Integrity Publishers, M2
Communications (M2), and Sarepta. Combined, these divisions had revenues of $7.5
million compared to none for the same period in 2002. Softness in our CBA retail
markets in the second quarter, absence of any major product releases, a sluggish
overall economy, and the outbreak of the Iraqi war had significant negative
impacts on revenues for the six-month period. Also negatively impacting sales
for the period was the continued decline of the Songs4Worship sales - down 45%
or $3.9 million from $8.7 million in 2002 to $4.8 million in 2003.
Sales in the Retail segment increased $1.7 million, or 14.1%, from
$12.3 million in 2002 to $14.0 million in 2003. This increase was due to M2
sales of $4.9 million in 2003 compared to none in 2002. Poor retail conditions,
especially in the CBA markets, had significant impacts on revenues for the
retail segment for the six months ended June 30, 2003.
Sales in the Direct to Consumer segment decreased $1.2 million, or
14.1%, from $8.8 million in 2002 to $7.6 million in 2003. A reduction of $2.6
million in Songs4Worship sales was the primary reason for the decrease.
International sales increased $414 thousand or 9.0%, from $4.6 million
in 2002 to $5.0 million in 2003 due primarily to Sarepta sales of $302 thousand.
Revenues in Singapore continue to be impacted by their poor economy and the
outbreak of the SARS virus. In Singapore, sales were down 29% for the six months
ended June 30, 2003 compared to the same period in 2002. Negatively impacting
International sales for the period was the reduction in International
Songs4Worship sales - down 17.4% from $1.2 million in 2002 to $974thousand for
the same period in 2003.
Book publishing sales were $2.3 million for the six-month period ended
June 30, 2003 compared to none for the same period in 2002. Absence of major new
book releases and a poor overall retail environment, especially in CBA,
contributed to lower than anticipated sales for the period.
Sales in the Other segment increased $356 thousand, or 8.3%, from $4.3
million in 2002 to $4.7 million in 2003. Copyright royalty revenue, the most
significant item in the Other category, which increased approximately $500
thousand for the period, accounted for the overall sales increase for this
segment.
Management is cautiously optimistic that retail conditions will
improve in the third and fourth quarters of 2003. The major product releases for
the year, both for Integrity Publishers and Integrity Music, are scheduled for
the third and fourth quarters. Though it is probable that the revenue shortfall
for the second quarter and six month period ended June 30, 2003 will not be
recovered, management is cautiously optimistic that the third and fourth quarter
2003 revenues will be close to original projections.
SALES FOR THE THREE MONTHS ENDED JUNE 30, 2003
Net sales for the quarter ended June 30, 2003 increased $1.6 million
or 13.1% to $13.4 million, from $11.8 million in the same period in 2002. The
increase was due to the incremental sales for Integrity Publishers, M2
Communications, and Sarepta. Combined, these divisions had revenues of $2.7
million compared to none for the same period in 2002. Integrity Publishers, a
start-up division which began in August, 2001, had no revenues until the third
quarter, 2002. M2 Communications and Sarepta were both acquired by the Company.
M2, acquired in late June 2002, did not recognize any revenue until third
9
quarter, 2002. For Sarepta, acquired on March 31, 2003, the Company recognized
revenues beginning with the second quarter, 2003. Softness in our CBA retail
markets, absence of any major product releases, a sluggish overall economy, and
the outbreak of the Iraqi war had significant negative impacts on revenues in
the quarter. Also negatively impacting sales for the quarter was the continued
decline of the Songs4Worship sales - down $1.9 million from $3.7 million in
second quarter, 2002 to $1.8 million in the second quarter 2003.
Sales in the Retail segment increased $445 thousand, or 8.4%, from
$5.3 million in 2002 to $5.8 million in 2003. This increase was primarily due to
sales of $2.2 million for M2. A poor retail environment, especially in our CBA
market, negatively impacted sales in this segment during the second quarter,
2003.
Sales in the Direct to Consumer segment decreased $306 thousand, or 8%,
from $4.0 million in 2002 to $3.7 million in 2003. A reduction of $981 thousand
in Songs4Worship sales was the primary reason for the decrease.
International sales increased $440 thousand or 19.2%, from $2.3 million
in 2002 to $2.7 million in 2003 due primarily to Sarepta sales of $302 thousand.
Book publishing sales were $215 thousand for the second quarter, 2003
compared to none in 2002. No new book releases and a poor overall retail
environment, especially in CBA, contributed to lower than anticipated sales for
the quarter. Higher than expected book returns in the second quarter of 2003
were also an indication of the poor retail environment.
Sales in the Other segment were flat - $1.6 million for both the second
quarter, 2002 and 2003. Copyright royalty revenue, the most significant item in
the Other category, held steady at $1.5 million for both comparative periods.
GROSS MARGINS FOR THE SIX MONTHS ENDED JUNE 30, 2003
Gross profit increased $1.6 million or 11.3%, from $14.1 million for
the six months ended June 30, 2002, compared to $15.6 million for the same
period in 2003 due primarily to the increase in revenues. Gross profit as a
percentage of sales decreased to 49.0% for the six-month period ended June 30,
2003 from 51.6% for the same period in 2002 mainly because the M2 products
carried lower gross margins and due to sales mix. In 2002, sales for the higher
margin direct to consumer segment were 32% of total sales. In 2003, that
percentage decreased to 24%.
The gross profit percentage in the Retail segment decreased
slightly to 45.0% for the six months ended June 30, 2003, from 45.3% in the same
period in 2002. The gross margin percentage in the Direct to Consumer segment
increased to 58.4% for the six-month period ended June 30, 2003, from 53.1% in
the same period of 2002, due to the reduction in the lower margin Songs4Worship
sales to Time Life. The gross profit percentage in the International segment
decreased slightly to 48.4% for the six-month period ended June 30, 2003, from
48.6% for the same period in 2002. The gross profit percentage in the Book
publishing segment was 52.4% for the six month ended June 30, 2003. In the Other
segment, gross profit percentage decreased to 30.9% for the six months ended
June 30, 2003, from 42.0% for the same period in 2002 due to favorable royalty
adjustments made in the previous year.
GROSS MARGINS FOR THE THREE MONTHS ENDED JUNE 30, 2003
Gross profit for the Company decreased $129 thousand or 1.9% from
$6.8 million for the quarter ended June 30, 2002, compared to $6.7 million for
the same period in 2003. Lower M2 gross margins, additional return reserves
booked for Integrity Publishers, and lower royalty expenses in 2002 were the
primary reasons for the decline. For these reasons, gross profit as a percentage
of sales decreased to 50.1% for the quarter ended June 30, 2003 from 57.8% for
the same period in 2002.
The gross profit percentage in the Retail segment decreased from 48.1 %
for the quarter ended June 30, 2002, to 45.9% in the same period in 2003 due to
M2 margins of 42.7%. The gross profit
10
percentage in the Direct to Consumer segment increased to 60.2% for the quarter
ended June 30, 2003, from 54.5% in the same period of 2002, due to reduction of
Songs4Worship sales to Time Life for the period. The gross profit percentage in
the International segment decreased to 46.3% for the quarter ended June 30,
2003, from 51.3% for the same period in 2002, due primarily to product mix. In
the Book Publishing segment, gross profit percentage was 46.5% for the quarter
ended June 30, 2003. Gross margins for Integrity Publishers were negatively
impacted in the quarter by the increase of approximately $400 thousand in their
reserve for returns. In the Other segment, gross profit percentage decreased to
34.5% for the quarter ended June 30, 2003, from 62.6% for the same period in
2002 due to favorable royalty expense adjustments in the prior year period.
The following table shows the gross margin by operating segment:
Six Months Ended June 30,
Gross margin 2003 2002
------ ------
Retail 45.0% 45.3%
Direct to Consumer 58.4% 53.1%
International 48.4% 48.6%
Book publishing 52.4% 0%
Other 30.9% 42.0%
Eliminations 9.0% 8.2%
------ ------
Consolidated 49.0% 51.6%
Three Months Ended June 30,
Gross margin 2003 2002
------ ------
Retail 45.9% 48.1%
Direct to Consumer 60.2% 54.5%
International 46.3% 51.3%
Book publishing 46.5% 0%
Other 34.5% 62.6%
Eliminations 9.8% 5.8%
------ ------
Consolidated 50.1% 57.8%
OTHER FINANCIAL ANALYSIS AND DISCUSSION
Marketing and fulfillment expenses increased $541 thousand or 9.2% to
$6.4 million or 20.1% of net sales for the six months ended June 30, 2003, as
compared to $5.9 million or 21.7% of net sales for the same period in 2002. The
increase in marketing and fulfillment expenses for the six months ended June 30,
2003 is primarily attributable to additional fulfillment expenses required by
the increased sales for the period. The decrease in marketing and fulfillment
expenses as a percentage of net sales for the six months ended June 30, 2003 is
due to lower marketing expenses in the Direct to Consumer segment for the six
months ended June 30, 2003 compared to the same period in 2002. For the quarter
ended June 30, 2003, marketing and fulfillment expenses remained relatively flat
at $3.2 million. As a percentage of sales, marketing and fulfillment expenses
were 23.9% for the quarter ended June 30, 2003, compared to 26.7% for the same
period in 2002 also due to lower marketing expenses incurred in the Direct to
Consumer segment incurred for the quarter ended June 30, 2003.
General and administrative expenses increased $1.8 million or 24.2% to
$9.1 million for the six months ended June 30, 2003, as compared to $7.4 million
for the same period in 2002. Of the $1.8 million increase for the period, 72%
was due to M2, Integrity Publishers, and Sarepta with a combined increase of
$1.3 million. M2 was not purchased until June 30, 2002, and therefore had no G&A
expenses in the prior year period. Sarepta was a first quarter, 2003,
acquisition. Integrity Publishers was still in a start-up mode in the prior year
period. The remaining $500 thousand increase for the period was spread
11
among several categories - primarily health insurance premiums, professional
fees, foreign exchange, travel expenses, and personnel. As a percentage of
sales, general and administrative expenses increased from 27.0% for the
six-month period ended June 30, 2002, to 28.6% for the same period in 2003.
For the quarter ended June 30, 2003, general and administrative
expenses increased $831 thousand, or 23.0%, from $3.6 million for the three
months ended June 30, 2003 compared to $4.4 million for the same period in 2002.
Of the $831 thousand increase, 67% of the increase was due to M2 Communications
and Sarepta with a combined increase of $557 thousand for the period. The
Company recognized no G&A expenses for M2 and Sarepta for the three-month period
ended June 30, 2002. General and administrative expenses for Integrity
Publishers declined $21 thousand for the second quarter, 2003, compared to the
same period, 2002. The remaining increase of $274 thousand for the period was
spread among several categories - primarily health insurance premiums,
professional fees, travel expenses, and personnel.
Operating profit in the Retail segment decreased $663 thousand or 28.9%
to $1.6 million, or 11.6% of net sales, for the six months ended June 30, 2003,
from $2.3 million or 18.7% of net sales in the same period in 2002. The decrease
is due to the reduction in retail sales in the Integrity Music division of the
Company. Operating profit in the Direct to Consumer segment increased $568
thousand or 79.6% to $1.3 million, or 16.9% of net sales, for the six months
ended June 30, 2003, from $714 thousand, or 8.1% of net sales, for the six
months ended June 30, 2002, due primarily to reduction in marketing expenses for
the 2003 period. Operating profit in the International segment decreased $201
thousand or 27.7%, to $525 thousand, or 10.5% of net sales, for the six-month
period ended June 30, 2003, from $726 thousand, or 15.9% of net sales, for the
same period in 2002. This reduction was primarily due to a decline in
Songs4Worship sales internationally and lower demand in Singapore. Integrity
Publishers, the book publishing subsidiary formed on June 29, 2001, recorded an
operating loss of $656 thousand or 28.7% of net sales for the six months ended
June 30, 2003 compared to an operating loss of $902 thousand for the same period
in 2002. Integrity Publishers was still in start-up mode for the six months
ended June 30, 2002 and had no revenues for that period. Operating profit in the
Other segment decreased $242 thousand or 15.7%, to $1.3 million, or 27.9% of net
sales, for the six months ended June 30, 2003, compared to $1.5 million, or
35.8% of net sales, for the same period in 2002 due primarily to a reduction in
royalty expenses in 2002.
Operating profit in the Retail segment decreased $659 thousand or
76.0% to $208 thousand, or 3.6% of net sales, for the three months ended June
30, 2003, from $867 thousand, or 16.3% of net sales, for the same period in
2002. The decrease is due primarily to the reduction in retail sales in the
Integrity Music division of the Company. Operating profit in the Direct to
Consumer segment increased $375 thousand or 238.9%, to $532 thousand or 14.5% of
net sales, for the three months ended June 30, 2003, from $157 thousand or 4.0%
of net sales, in the same period in 2002 due to a reduction of marketing
expenses in 2003. Operating profit in the International segment decreased $95
thousand or 30.1% to $221 thousand, or 8.1% of net sales, for the three-month
period ended June 30, 2003, from $316 thousand, or 13.8% of net sales, for the
same period in 2002 due to a decline in Songs4Worship sales and unfavorable
foreign currency fluctuations in the UK. The Book Publishing segment recorded an
operating loss of $679 thousand for the three months ended June 30, 2003
compared to an operating loss of $565 thousand for the same period in 2002. The
Book Publishing segment was still in start-up mode in 2002 and recorded no
revenues for the second quarter in 2002. Negatively impacting the 2003
performance in the second quarter was the poor retail sales environment
described earlier. Operating profit in the Other segment decreased $404 thousand
or 46.7% to $462 thousand, or 29.6% of net sales, for the three months ended
June 30, 2003, from $866 thousand, or 53.7% of net sales, for the same period in
2002. The decrease was primarily due to lower royalty expenses in 2002.
Net interest expense increased $65 thousand or 46.4% to $205 thousand,
or 0.6% of net sales, for the six-month period ended June 30, 2003, as compared
to $140 thousand, or 0.5% of net sales, for the same period in 2002. The
increase for the six months ended June 30, 2003 was due to higher average loan
balances in 2003. The average interest rates for the six months ended June 30,
2003 and 2002 were 3.8% and 4.75%, respectively. The average monthly loan
balances for the six months ended June 30, 2003 and 2002 were $11.7 million and
$5.5 million, respectively.
12
The Company recorded a benefit from income tax of $111 thousand for the
six months ended June 30, 2003, compared to a provision for income tax of $182
thousand for the same period in 2002. The Company's effective tax rate for the
first six months of 2003 was 38%, compared to 33% for the first six months of
2002. The Company expects that its effective tax rate for the year 2003 will be
approximately 35% to 37%.
Net loss for the six months ended June 30, 2003 was $181 thousand,
compared to net income of $227 thousand for the same period in 2002.
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 loan as needed. The Company's need for cash
varies from quarter to quarter based on product releases and scheduled marketing
promotions. 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, author and artist advances and debt service. It is from these
product masters that the Company's products are duplicated and distributed to
customers. The Company believes that its working capital and funds available
under its credit facility will be sufficient to fund its operating and capital
requirements for the fiscal year ending December 31, 2003 and beyond.
On April 25, 2001, the Company entered into a new $20 million,
five-year secured credit facility with LaSalle Bank. The credit agreement
included a $6 million line of credit, an $11 million secured term loan, and a $3
million mortgage term loan. Through this new credit facility, the Company
refinanced its previous credit facility with Bank Austria. Of the $11 million
initial term facility, $3.0 million was used for the pay-off to Bank Austria,
$3.4 million was used for stock warrant repurchases, and $3.1 million expired,
leaving $1.5 million available at December 31, 2001. The $3.1 million portion
expired on December 19, 2001 due to time and use restrictions. On March 30,
2002, the credit facility was amended to decrease the allowed borrowings under
this secured term facility to $6.4 million and the mortgage term loan was
amended to increase the allowed borrowings for this facility to $4.6 million. On
June 28, 2002, the term facility was again amended to increase total allowed
borrowings to $9.4 million, an increase of $3.0 million. On June 28, 2002, this
additional $3.0 million was then used to partially fund the acquisition of M2
Communications. On December 31, 2002, the mortgage term facility was amended to
increase the allowed borrowings to $5.1 million. At June 30, 2003, the Company
had available borrowings of $3.0 million under the line of credit, zero under
the mortgage term loan, and zero under the secured term loan.
At June 30, 2003, there was $3.0 million outstanding under the line of
credit, $6.5 million outstanding under the secured term loan, and $4.7 million
outstanding under the mortgage term loan. For the six months ended June 30,
2003, the Company had average daily borrowings under the LaSalle credit facility
of $11.7 million at an average interest rate of 3.8%. For the six months ended
June 30, 2002, the Company had average daily borrowings under the LaSalle
facility of $5.5 million at an average interest rate of 4.75%. At the Company's
option, the LaSalle credit facility bears interest at the bank's base rate plus
a margin ranging from 0.00% to .50%, or LIBOR plus a margin ranging from 2.25%
to 3.00%. The actual margin is a function of the Company's leverage ratio as
calculated quarterly.
Cash used in operating activities totaled $355 thousand for the six
months ended June 30, 2003, compared to cash provided by operations of $1.1
million for the six months ended June 30, 2002. The decrease from 2002 to 2003
resulted primarily from unfavorable changes in working capital accounts and a
decline in net income.
Investing activities used $5.7 million and $7.7 million during the six
months ended June 30, 2003 and 2002, respectively. Investing activities for the
six months ended June 30, 2003 consisted of the purchase of Sarepta Music (Pty)
Ltd for $191 thousand on March 31, 2003, capital expenditures for computer
equipment and capital improvements to existing buildings totaling $3.5 million
and investments in product masters totaling $2.0 million. Of the $3.5 million in
capital equipment and improvements for the
13
2003 period, $3.0 million relates to the completion of a new building and
expansion of parking facilities at the Company's corporate campus in Mobile. As
of July 1, 2003, the new building was essentially complete. Investing activities
for the six months ended June 30, 2002 consisted of the purchase of M2
Communications LLC for $4.8 million on June 28, 2002, capital expenditures for
computer equipment and capital improvements to existing buildings totaling $986
thousand, and investment in product masters totaling $1.9 million. The
investment in product masters for the six months ended June 30, 2003 relates
primarily to development of products scheduled for release within the next six
to eighteen months.
The Company announced on April 3, 2003 that it had completed the
purchase of Sarepta Music (Pty) Ltd, a leading Christian music distributor and
record label located in South Africa.
The Company made principal payments on its LaSalle facility of $1.3
million and $1.0 million in the six months ended June 30, 2003 and 2002,
respectively.
During the six months ended June 30, 2003 and 2002, the Company made
distributions to Word Entertainment, its 50% partner in the Celebration Hymnal
LLC joint venture, of $250 thousand.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (SFAS 141), Business Combinations, and Statement No. 142 (SFAS
142), Goodwill and Other Intangible Assets. SFAS 141 supercedes APB 16, Business
Combinations, and requires the purchase method of accounting for all business
combinations initiated after June 30, 2001. SFAS 142 supercedes APB 17,
Intangible Assets and primarily requires that goodwill and indefinite lived
intangible assets will no longer be amortized and will be tested for impairment
at least annually at a reporting unit level. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS 141 and SFAS 142
had no effect on the Company's financial position, results of operations or cash
flows.
In August 2001, FASB issued SFAS No. 143, (SFAS 143), Accounting for
Asset Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires, among other things, that
the retirement obligations be recognized when they are incurred and displayed as
liabilities on the balance sheet. In addition, the asset's retirement costs are
to be capitalized as part of the asset's carrying amount and subsequently
allocated to expense over the asset's useful life. The adoption of SFAS No. 143
had no effect on the Company's financial position, results of operations or cash
flows.
In April 2002, FASB issued SFAS No. 145, (SFAS 145) Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which is effective for transactions occurring after May 15, 2002
and fiscal years beginning after May 15, 2002. SFAS 145 rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements and amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, as well as, amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Company has adopted SFAS 145, and
the extraordinary item in 2001 has been reclassified into operations.
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities,
such as restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. The Company`s adoption of SFAS
146 did not have a significant impact on its financial position, results of
operations or cash flows.
14
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance of the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
has adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that the Company record a liability for the fair
value of such guarantees in the balance sheet. The Company believes that the
adoption of FIN No. 45 will not have a material impact on its financial
position, results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company believes that the adoption of FIN No.
46 will not have a significant impact on its financial position, results of
operations or cash flows.
The Company adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment
of FASB Statement No. 123." This Statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," effective January 1, 2003. SFAS No.
148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The amendments pertaining to the alternative
methods of transition are effective for financial statements for fiscal years
ended after December 15, 2002. The amendments to the disclosure requirements are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. As permitted by SFAS No. 148
and SFAS No. 123, we continue to apply the accounting provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for our stock option plans
and our employee stock purchase plan and the disclosure-only provisions of SFAS
No. 123 as amended by SFAS 148. We did not record stock-based compensation
expense in the three months ended June 30, 2003 and June 30, 2002, as all
options granted under our plans had an exercise price equal to fair market
value. The adoption of the additional disclosure requirement did not have a
significant impact on our reported results of operations, financial position or
cash flows.
SFAS No. 148 requires us to provide pro forma disclosure of the impact
on our results of operations had we adopted the expense measurement provisions
of SFAS No. 123. SFAS No. 123 permits the use of either a fair value based
method or the intrinsic value method to measure the expense associated with our
stock option plans and our employee stock purchase plan. The pro forma impact on
our results of operations had we adopted the fair value based method of SFAS No.
123 using the Black-Scholes option-pricing model are shown below:
15
SIX MONTHS ENDED JUNE 30
2003 2002
Net (loss) income - as reported $ (180) $ 227
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 93 93
-------- --------
Pro forma net income (loss) $ (273) $ 134
======== ========
Net income (loss) per share:
Basic - as reported $ (0.03) $ 0.04
Diluted - as reported $ (0.03) $ 0.04
Basic - proforma $ (0.05) $ 0.02
Diluted - proforma $ (0.05) $ 0.02
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this report including matters
discussed under the caption "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations," may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and similar expressions are intended to identify
such forward-looking statements. The Company's actual results may differ
materially from the results anticipated in these forward-looking statements due
to a variety of factors, including without limitation those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by these cautionary statements. Any forward-looking statements represent
management's estimates only as of the date of this report and should not be
relied upon as representing estimates as of any subsequent date. While the
Company may elect to update forward-looking statements at some point in the
future, the Company specifically disclaims any obligation to do so, even if its
estimates change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is limited to fluctuations in interest
rates as they pertain to the Company's borrowings under its credit facility. As
of April 25, 2001, the Company paid interest on borrowings at either LaSalle's
base rate or an Adjusted LIBOR, plus an Interest Rate Margin. The Interest Rate
Margin is based upon the Leverage Ratio as of the last day of a fiscal quarter.
Prior to April 25, 2001, under the Bank Austria credit facility, the Company
paid interest on borrowings at either the lender's base rate plus 0.75%, or
LIBOR plus 2%. Prior to September 2000, the interest rate was the bank's base
rate plus 1 1/2% or LIBOR plus 3%. In the event that interest rates were to
increase 100 basis points, the Company's interest expense would increase and
income before income tax would decrease by $54,509, assuming current debt levels
are maintained. (This amount is determined solely by considering the impact of
the hypothetical change in the interest rate on the Company's borrowing cost
without consideration of other factors such as actions management might take to
mitigate its exposure to interest rate changes.)
16
The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging
transactions in order to modify the risk from these foreign currency exchange
rate and commodity price fluctuations. The Company also does not use financial
instruments for trading purposes and is not a party to any leveraged
derivatives.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the President and Chief
Executive Officer ("CEO"), and the Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
as of the end of the period covered by this report, were effective in timely
bringing to their attention material information related to the Company required
to be included in the Company's periodic SEC filings. There has not been any
change in our internal control over financial reporting that occurred during our
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
17
PART II.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on May 23,
2003, the following matters were brought before and voted upon by stockholders:
1. A proposal to elect the following nominees to the Board of Directors to
serve until the 2004 annual meeting:
Class A Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 2,203,523 9,758 151,502
Jean C. Coleman 2,201,822 11,459 151,502
William A. Jolly 2,210,098 3,183 151,502
Charles V. Simpson 2,211,724 1,557 151,502
Heeth Varnedoe III 2,210,023 3,258 151,502
Jimmy M. Woodward 2,210,023 3,258 151,502
Class B Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
P. Michael Coleman 33,850,000 0 0
Jean C. Coleman 33,850,000 0 0
William A. Jolly 33,850,000 0 0
Charles V. Simpson 33,850,000 0 0
Heeth Varnedoe III 33,850,000 0 0
Jimmy M. Woodward 33,850,000 0 0
2. A proposal to ratify the selection of PricewaterhouseCoopers LLP as
independent auditors for the Company for the fiscal year ending
December 31, 2003:
Class A Common Stock
For Against Abstain Non-Votes
--- ------- ------- ---------
2,202,199 7,752 3,330 151,502
Class B Common Stock
For Against Abstain Non-Votes
--- ------- ------- ---------
33,850,000 0 0 0
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
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).
4.1 See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the
Certificate of Incorporation, as amended, and Bylaws, as amended,
of the Registrant defining rights of holders of Class A and Class
B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001).
10.1 Stock Purchase Agreement by and between Integrity Media, Inc. and
Anton Jacobus Bekker, Paul Michael Alcock and Sarepta Music (Pty)
Ltd dated March 18, 2003 (incorporated by reference from Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003).
31.1 Certification of Chief Executive Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Executive Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K
On May 5, 2003, Integrity Media, Inc. filed Form 8-K announcing
its financial results for the quarter ended March 31, 2003.
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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 MEDIA, INC.
Date: August 13, 2003 /s/ P. Michael Coleman
-----------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Date: August 13, 2003 /s/ Donald S. Ellington
-----------------------------------
Donald S. Ellington
Senior Vice President of Finance
and Administration
(Principal Financial and Accounting
Officer)
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