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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 March 31, 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 May 9, 2003, the latest practicable date, was as follows:
Class Outstanding
----- -----------
Class A Common Stock, $0.01 par value 2,314,783
Class B Common Stock, $0.01 par value 3,435,000
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRITY MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS Mar 31, 2003 Dec 31, 2002
------------ -----------
(Unaudited)
Current Assets
Cash $ 5,181 $ 4,821
Trade receivables, less allowance for returns and doubtful accounts
of $2,287 and $2,415 7,040 6,842
Other receivables 154 67
Inventories 5,527 5,191
Other current assets 4,416 4,558
-------- --------
Total current assets 22,318 21,479
Property and equipment, net of accumulated depreciation of $6,248 and $6,055 8,703 7,337
Product masters, net of accumulated amortization of $20,200 and $19,387 3,880 3,806
Other assets 8,140 8,237
-------- --------
Total assets $ 43,041 $ 40,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,690 $ 2,690
Line of Credit 500 0
Accounts payable and accrued expenses 4,319 5,298
Royalties payable 6,443 6,256
Other current liabilities 2,462 997
-------- --------
Total current liabilities 16,414 15,241
Long-term debt 6,988 6,780
Other long-term liabilities 268 179
-------- --------
Total liabilities 23,670 22,200
-------- --------
Commitments and contingencies
Minority interest 665 606
-------- --------
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;
2,364,783 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 12,956 12,956
Unearned compensation (452) (479)
Retained earnings 5,968 5,452
Equity adjustments from foreign translation 176 66
-------- --------
Total stockholders' equity 18,706 18,053
-------- --------
Total liabilities and stockholders' equity $ 43,041 $ 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 March 31
---------------------------
2003 2002
------- -------
Net sales $18,560 $15,396
Cost of sales 9,619 8,177
------- -------
Gross profit 8,941 7,219
Marketing and fulfillment expenses 3,218 2,744
General and administrative expenses 4,695 3,746
------- -------
Income from operations 1,028 729
Other expenses
Interest expense, net 102 43
Other expenses 21 54
------- -------
Income before minority interest and taxes 905 632
Provision for income taxes 329 212
Minority interest, less applicable taxes 60 75
------- -------
Net income $ 516 $ 345
======= =======
Adjustments to determine comprehensive income
Foreign currency translation adjustments 110 67
------- -------
Comprehensive income $ 626 $ 412
======= =======
Net income per share - Basic $ 0.09 $ 0.06
======= =======
Net income per share - Diluted $ 0.09 $ 0.06
======= =======
Weighted average number of shares outstanding
Basic 5,599 5,585
Diluted 5,954 6,006
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)
Three Months ended March 31
---------------------------
2003 2002
------- -------
Cash flows from operating activities
Net income $ 516 $ 345
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 486 289
Amortization of product masters 813 914
Minority interest 59 75
Stock compensation 27 28
Extraordinary loss on debt extinguishment 0 0
Changes in operating assets and liabilities, net of the effects
from purchase of Sarepta Music (Pty) Ltd 0
Trade receivables (net) (80) 380
Other receivables (87) 3
Inventories (196) 24
Other assets (358) 518
Accounts payable, royalties payable and
Accrued expenses (570) (339)
Other current and non current liabilities 1,550 (1,575)
------- -------
Net cash provided by operating activities 2,160 662
------- -------
Cash flows from investing activities
Purchases of property and equipment (1,552) (293)
Payments for product masters (889) (1,085)
Purchase of Sarepta Music (Pty) Ltd (191) 0
------- -------
Net cash used in investing activities (2,632) (1,378)
------- -------
Cash flows from financing activities
Net borrowings (repayments) under line of credit 500 0
Proceeds from issuance of stock 0 0
Principal payments of long-term debt (678) (376)
Borrowings under term facility 900 0
Distributions to joint venture partner 0 0
------- -------
Net cash provided by (used in) financing activities 722 (376)
------- -------
Effect of exchange rate changes on cash 110 67
------- -------
Net increase (decrease) in cash 360 (1,025)
Cash, beginning of year 4,821 6,854
------- -------
Cash, end of period $ 5,181 $ 5,829
======= =======
Supplemental disclosures of cash flow information
Interest paid $ 105 $ 57
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 Company is in the process of completing the final
valuation of this transaction. This should be completed during the second
quarter of 2003.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
INTEGRITY MEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND MARCH 31, 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 ended March 31, 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 believes that the
adoption of SFAS 146 will 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 three months ended March 31, 2003 and March 31, 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.
13 using the Black-Scholes option-pricing model are shown below:
THREE MONTHS ENDED MARCH 31
2003 2002
Net Income (Loss) - as reported $ 516 $ 345
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects $ 46 $ 46
------- -------
Pro forma net income (loss) $ 470 $ 299
======= =======
Net income (loss) per share:
Basic - as reported $ 0.09 $ 0.06
Diluted - as reported $ 0.09 $ 0.06
Basic - proforma $ 0.08 $ 0.05
Diluted - proforma $ 0.08 $ 0.05
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 March 31, 2003, the Company had available borrowings of $5.5 million
under the line of credit, $2.2 million available under the mortgage term loan,
and zero under the secured term loan. At March 31, 2003 there was $500,000
outstanding under the line of credit, $7.1 million outstanding under the secured
term loan, and $2.6 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 quarter of 2003, the Company amended its credit
facility with LaSalle Bank. The Company is in compliance with all covenants as
of March 31, 2003.
NOTE 3 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
Three Months Ended March 31
NET SALES 2003 2002
---------- ----------
Retail $ 8,239 $ 6,953
Direct to Consumer 3,934 4,870
International 2,257 2,283
Book Publishing 2,073 0
Other 3,092 2,682
Eliminations (1,035) (1,392)
-------- --------
Consolidated $ 18,560 $ 15,396
======== ========
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Retail $ 1,420 $ 1,424
Direct to Consumer 750 557
International 304 410
Book Publishing 23 (337)
Other 834 672
Eliminations 0 0
-------- --------
Consolidated 3,331 2,726
General corporate expense (2,324) (2,051)
Interest expense, net (102) (43)
-------- --------
Income before income taxes and minority interest $ 905 $ 632
======== ========
7
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 and January 1, 2001, respectively (in thousands,
except per share data):
For the Three Months Ending March 31, 2002
------------------------------------------
As Reported Pro-Forma (unaudited)
----------- ---------------------
Net Sales $15,396 $18,954
Net Income $ 345 $ 666
Basic EPS $ 0.06 $ 0.12
Diluted EPS $ 0.06 $ 0.11
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, $191,000 to complete the 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
Net sales for the three months ended March 31, 2003 increased $3.2
million or 20.6% to $18.6 million as compared to $15.4 million for the three
months ended March 31, 2002. The increase in net sales was due primarily to
sales of $2.7 million by M2 Communications and sales of $2.1 million by
Integrity Publishers. Neither M2 Communications, acquired in June 2002, nor
Integrity Publishers, formed in August 2001, had revenues in the prior year
period ended March 31, 2002. Also contributing to the increase were sales of
Integrity's iWorship products, released in the fourth quarter 2002, which
contributed $700,000 to sales in the first quarter of 2003. The first Integrity
iWorship album was certified Gold by the Recording Industry Association of
America in January 2003, less than three months after release. Negatively
impacting sales for the quarter was the decline in Songs4Worship sales, which
decreased 44% or $1.9 million from $4.3 million in the first quarter of 2002 to
$2.4 million in the first quarter of 2003.
Sales in the Retail segment increased $1.3 million or 18.5% to $8.2
million for the three months ended March 31, 2003, compared to $7.0 million in
the same period in 2002. The increase was due primarily to sales of Integrity's
iWorship products and sales by M2 Communications, which are recorded in this
segment. The primary areas negatively impacting sales for the quarter compared
to 2002 were decreases of $760,000 of Songs4Worship retail sales, decreases of
$453,000 in special markets and partnership sales, and decreases of $316,000 in
WoW Worship product sales. The Company has experienced a decline in retail sales
at the beginning of the second quarter of 2003, due to the outbreak of the Iraqi
war and overall economic conditions. Management cannot predict how long this
softness will continue or the overall financial impact for the remainder of
2003.
8
Sales in the Direct to Consumer segment decreased $936,000 or 19.2% to
$3.9 million for the three months ended March 31, 2003, compared to $4.9 million
in the same period in 2002. The decrease was due to a decrease of $1.1 million
in Songs4Worship sales.
International sales were relatively flat at $2.3 million for the three
months ended March 31, 2003 and 2002. Sales in Latin America and Singapore
continue to be impacted by poor economic conditions in these markets. Management
does not expect any significant economic improvements in these areas for the
remainder of 2003.
Book Publishing sales were $2.1 million for the three months ended
March 31, 2003 compared to none for the prior year period. Integrity Publishers,
the Company's book publishing subsidiary, was formed on June 29, 2001 and
released its first catalog of 16 titles in the second half of 2002. Integrity
Publishers' Spring 2003 release list includes titles by several popular
Christian authors such as George Barna, Ravi Zacharias and David Jeremiah.
Sales in the Other segment increased $410,000 or 15.3% to $3.1 million
for the three months ended March 31, 2003, compared to $2.7 million in the same
period in 2002. The increase in sales for the quarter ended March 31, 2003
compared to the same period in 2002 was due to increases in song copyright
income. The Other segment includes revenues from licensing of the Company's song
copyrights as well as certain expenses that are not charged to specific
segments. These expenses include reductions in the carrying value of product
masters as well as additions to the Company's reserves for product returns and
inventory obsolescence.
Gross profit increased $1.7 million or 23.9% to $8.9 million for the
three months ended March 31, 2003, compared to $7.2 million for the same period
in 2002 due primarily to the increase in sales for the quarter. Gross profit as
a percentage of sales increased to 48.2% for the three-month period ended March
31, 2003 from 46.9% for the same period in 2002 mainly because of the higher
margin sales of Integrity Publishers and the reduction of the low-margin
Songs4Worship sales to Time Life.
The gross profit percentage in the Retail segment increased to 44.3%
for the three months ended March 31, 2003, from 43.0% in the same period in
2002. The gross margin percentage in the Direct to Consumer segment increased to
56.8% for the three-month period ended March 31, 2003, from 52.0% in the same
period of 2002, due to the reduction in the lower margin Songs4Worship sales.
The gross profit percentage in the International segment increased to 50.9% for
the three-month period ended March 31, 2003, from 45.9% for the same period in
2002, due to product mix and the reduction in the lower margin Songs4Worship
sales. In the Other segment, the gross profit percentage decreased to 29.1% for
the three months ended March 31, 2003, from 29.6% for the same period in 2002.
The following table shows the gross margin by operating segment:
Three Months Ended March 31,
Gross margin 2003 2002
------------------------ ---------------------
Retail 44.3% 43.0%
Direct to Consumer 56.8% 52.0%
International 50.9% 45.9%
Book Publishing 53.0% 0
Other 29.1% 29.6%
Eliminations 8.5% 10.6%
------------------------ ---------------------
Consolidated 47.9% 46.9%
Marketing and fulfillment expenses increased $474,000 or 17.3% to $3.2
million or 17.3% of net sales for the three months ended March 31, 2003, as
compared to $2.7 million or 17.8% of net sales for the same period in 2002. The
increase in marketing and fulfillment expenses for the three months ended
9
March 31, 2003 is primarily attributable to the sales increases by Integrity
Publishers and M2 Communications discussed above.
General and administrative expenses increased $949,000 or 25.3% to $4.7
million or 25.3% of net sales for the three months ended March 31, 2003, as
compared to $3.7 million or 24.3% of net sales for the same period in 2002. The
increase for the three months ended March 31, 2003 is attributable also to
Integrity Publishers and M2 Communications, which had a combined increase of
$728,000.
Operating profit in the Retail segment remained relatively flat at $1.4
million. As a percent of net sales, operating profit was 17.2% for the three
months ended March 31, 2003, compared to 20.5% in the prior year period. The
decrease as a percentage of sales was due to an increase in general and
administrative expenses. Operating profit in the Direct to Consumer segment
increased $193,000 or 34.6% to $750,000, or 19.1% of net sales, for the three
months ended March 31, 2003, from $557,000, or 11.4% of net sales, in the same
period in 2002 due primarily to a reduction in marketing expenses. Operating
profit in the International segment decreased $106,000 or 25.9% to $304,000, or
13.5% of net sales, for the three-month period ended March 31, 2003, from
$410,000, or 18.0% of net sales, for the same period in 2002 due to increases in
general and administrative expenses. Integrity Publishers, the book-publishing
subsidiary formed on June 29, 2001, recorded an operating profit of $23,000, or
1.1%, for the three months ended March 31, 2003 compared to an operating loss of
$337,000 for the same period in 2002. The prior year period for Integrity
Publishers included only start-up expenses. Operating profit in the Other
segment increased $162,000 to $834,000, or 27.0% of net sales, for the three
months ended March 31, 2003, from $672,000, or 25.1% of net sales, for the same
period in 2002, due primarily to the increase in song copyright income.
Net interest expense increased $59,000 or 137.2% to $102,000, or 0.5%
of net sales, for the three-month period ended March 31, 2003, as compared to
$43,000, or 0.3% of net sales, for the same period in 2002. The increase for the
three months ended March 31, 2003 was due to a higher average of the Company's
loan balances in 2003.
The Company recorded income tax provisions of $329,000 and $212,000 for
the three months ended March 31, 2003 and 2002, respectively. The Company's
effective tax rate for the first three months of 2003 was 38.9%, compared to
38.1% for the first three months of 2002. The Company expects that its effective
tax rate for the year 2003 will be approximately 35% to 37%.
Net income for the three months ended March 31, 2003 increased $171,000
or 49.6% to $516,000, from $345,000 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
10
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 March 31, 2003, the Company had available borrowings of $5.5 million
under the line of credit, $2.2 million under the mortgage term loan, and zero
under the secured term loan.
At March 31, 2003, there was $500,000 outstanding under the line of
credit, $7.1 million outstanding under the secured term loan, and $2.6 million
outstanding under the mortgage term loan. For the three months ended March 31,
2003, the Company had average daily borrowings under the LaSalle credit facility
of $10.1 million at an average interest rate of 4.0%. For the three months ended
March 31, 2002, the Company had average daily borrowings under the LaSalle
facility of $4.9 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 generated from operations totaled $2.2 million and $662,000 for
the three months ended March 31, 2003 and 2002, respectively. The increase from
2002 to 2003 resulted primarily from favorable cash changes in working capital
accounts.
Investing activities used $2.6 million and $1.4 million during the
three months ended March 31, 2003 and 2002, respectively. Investing activities
for the three months ended March 31, 2003 consisted of the purchase of Sarepta
Music (Pty) Ltd for $191,000 on March 31, 2003, capital expenditures for
computer equipment and capital improvements to existing buildings totaling $1.6
million and investments in product masters totaling $889,000. Investing
activities for the three months ended March 31, 2002 consisted of capital
expenditures for computer equipment and capital improvements to existing
buildings totaling $293,000 and investments in product masters for $1.1 million.
The investment in product masters for the three months ended March 31, 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 $678,000
million and $376,000 in the three months ended March 31, 2003 and 2002,
respectively.
During the three months ended March 31, 2003 and 2002, the Company did
not make distributions to Word Entertainment, its 50% partner in the Celebration
Hymnal LLC joint venture.
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
11
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 believes that the
adoption of SFAS 146 will 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.
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,
12
"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 March 31,
2003 and March 31, 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:
THREE MONTHS ENDED MARCH 31
2003 2002
Net Income (Loss) - as reported $ 516 $ 345
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects $ 46 $ 46
---------- ----------
Pro forma net income (loss) $ 470 $ 299
========== ==========
Net income (loss) per share:
Basic - as reported $ 0.09 $ 0.06
Diluted - as reported $ 0.09 $ 0.06
Basic - proforma $ 0.08 $ 0.05
Diluted - proforma $ 0.08 $ 0.05
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.
13
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 $101,466, 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.)
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
Within ninety (90) days prior to the filing of this report, 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 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
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the most
recent evaluation conducted by the CEO and the CFO.
14
PART II.
OTHER INFORMATION
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.
99.1 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
99.2 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 There were no reports on Form 8-K filed for the
quarter ended March 31, 2003
15
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: May 13, 2003 /s/ P. Michael Coleman
- -------------------------------- ------------------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: May 13, 2003 /s/ Donald S. Ellington
- -------------------------------- ------------------------------------
Donald S. Ellington
Senior Vice President of Finance and
Administration
(Principal Financial and Accounting
Officer)
16
CERTIFICATIONS
I, P. Michael Coleman, Chairman, President and Chief Executive Officer
of Integrity Media, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrity
Media, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ P. Michael Coleman
----------------------
P. Michael Coleman
Chairman, President and Chief Executive Officer
17
I, Donald S. Ellington, Senior Vice President of Finance and
Administration of Integrity Media, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrity
Media, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Donald S. Ellington
------------------------
Donald S. Ellington
Senior Vice President of Finance and Administration
18