<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
-------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-24134
INTEGRITY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0952549
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
1000 CODY ROAD
MOBILE, ALABAMA 36695
(Address of principal executive offices)
334-633-9000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (assuming, for purposes of this calculation,
without conceding, that all executive officers and directors are "affiliates"),
was $3,758,437.50 at March 1, 1997, as reported by the Nasdaq National Market.
The number of shares of Registrant's Class A Common Stock, $.01 par value
per share, outstanding at March 1, 1997 was 2,079,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 9, 1997 are incorporated by reference into Part
III.
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PART I.
ITEM 1. BUSINESS.
INTRODUCTION
Integrity Incorporated (the "Company" or "Integrity") is a producer and
publisher of Christian lifestyle products developed to facilitate worship,
entertainment and education. Product formats include cassettes, compact discs,
videos and songbooks. The Company produces Christian music ranging from praise
and worship music, its largest category, to other styles of adult contemporary
Christian music and children's music. Integrity's products are sold primarily
through retail stores and direct to consumer throughout the United States and
in over 120 other countries worldwide. Integrity was organized in Alabama as a
corporation on May 1, 1987 and was reincorporated in Delaware on October 1,
1993.
Integrity's recorded music products fall into two broad categories: concept
products which are centered on a specific theme, such as praise and worship
music; and artist products, in which the artist is the focal point. In
addition to recorded music, Integrity produces Christian music video products,
including a children's music series and praise and worship music recorded
specifically for aerobic exercises. Integrity's products also include printed
music, such as song books and sheet music, designed primarily for distribution
to churches and choral groups. The Company distributes its products
domestically through two primary channels: direct to consumer programs and
retail markets.
PRODUCTS
Concept Products
Concept products are centered around a specific theme, such as praise and
worship music or inspirational instrumental music, rather than being focused on
a specific artist. The Company's original concept product series was Hosanna!
Music(R), recorded praise and worship music, which is composed of live
recordings sung by an audience and worship leader rather than a performing
artist. The Company's Hosanna! Music(R) series has proven to be a successful
product line having just produced its 76th recording.
The Company's concept product line has grown to eight concept series. The
Company's concept product offerings now include: Scripture Memory Songs(R), in
which actual Bible passages are used as lyrics in contemporary music intended
to facilitate Scripture memorization; Just-For-Kids(R), a series of children's
music tapes; Interludes(R), an instrumental series with varying themes designed
to transcend religious denominations; Quest(R), a spoken word series;
Sing-a-Long Praise(R), a product designed to teach five to seven year old
children praise and worship songs; and Alleluia! Music(R), a praise and worship
music product designed to build upon the Company's long-running success,
Hosanna! Music(R). The Praise! Walk(R) series is a product designed to aid
walkers in their exercise programs. In addition, the Company also offers the
Lullaby series of children's music and Praise! Aerobics(R).
Artist Products
In addition to concept products, the Company also produces artist recordings
which have recently included "Welcome Home" by Ron Kenoly, recipient of the
Dove Foundation's "Family Approved" seal of excellence. In addition, this
recording recently appeared on Billboard's HeatSeeker's Album Chart and debuted
as No. 9 on the Top Contemporary Christian Chart. The previous release by Ron
Kenoly was "Sing Out" which was the first Integrity title to enter Billboard's
Top 200. Billboard's Top 200 lists the 200 best selling albums in the nation
and includes all genres. Also by Ron Kenoly are "God is Able" and Integrity's
best selling recording, "Lift Him Up." The Company's artist recordings also
include: "There Is A Hope" by Alicia Williamson, a contemporary Christian
artist; "Truth Sings the Word," "Truth One," "Truth Praise," "Equation of
Love" and "Something to Hold On To," by Truth, an adult contemporary Christian
ensemble; "Woman Thou Art Loosed" with Bishop T. D. Jakes, which recently
reached the number one spot on Soundscan's Top Christian Albums Chart and Top
Praise and Worship Chart among Christian Bookstores; "Worship With Don Moen,"
"Rivers of Joy" and "Emmanuel Has Come" by Don Moen; and "Champion of Love,"
"Revive Us Again" and "God Can" by Alvin Slaughter.
Other Products
The Company has also produced numerous musical video products, including:
recordings of live performances by the Company's artists, such as Ron Kenoly's
videos "Welcome Home," "Sing Out", the first Hosanna! title to appear on
Billboard's Top 40 Music Video Chart, and "God is Able," ranked number
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one in 1994 on the CCM ("Contemporary Christian Magazine") video chart; a
popular children's music series, Just-For- Kids(R), featuring the Donut Man(R);
Praise! Aerobics(R), praise and worship music recorded specifically for aerobic
exercises; Bible Hits Video(R), Scripture songs interpreted in hip-hop fashion,
geared for children ages 7 to 14; The Adventures of the Royal Academy(R) , an
animated video series featuring Bible-based stories designed to teach in an
entertaining fashion; and Integrity Music Worship Software(R), designed to
assist music ministers in the selection of songs (over 5,000 featured),
planning rehearsals and services, and reviewing song usage tracking. The Donut
Man(R) video "After School" and the animated video collection The Adventures of
the Royal Academy(R) recently received the Dove Foundation's "Family Approved"
seal of excellence.
Integrity's Christian music products also include printed product lines such
as songbooks and sheet music designed primarily for distribution to churches
and choral groups. The Company produces "God With Us," winner of the Gospel
Music Association Dove Award in April 1994 for best musical and still at the
top of the non-seasonal musical charts for three years running; "We Hold These
Truths," a patriotic musical, has ranked among the top 10 during the patriotic
season; "Mighty Cross," nominated for the 1995 best musical Dove Award, "The
Name of Our God," ranked in November 1996 as number 4 in the Youth Collection
chart; and "A Christmas Masterpiece," ranked number 3 among the Adult Christmas
Collection chart. These musicals were ranked by The Church Music Report
("TCMR"). .
PRODUCT CREATION
The Company's product development process is based upon the creation of new
concept or artist products which are designed, scripted and marketed to respond
to a specific demand. Integrity conducts a planning process for each new
product in order to determine whether the final product is likely to be
successful in the market for which it is designed.
New product concepts are based on responses to surveys of the Company's
current customer base as well as other market and product research conducted by
the Company and by independent consultants. Once a new product concept has
been identified, Integrity assembles a creative team which includes one or more
artists and producers, generally employed on a freelance or contract basis, and
representatives of Integrity's creative, marketing and finance divisions.
Chris Long, senior vice president and general manager of Integrity Records and
Publishing Group, is responsible for the product creation process. Don Moen,
executive vice president - creative, works with Mr. Long providing strategic
input in the creative process. Both Mr. Moen and Mr. Long play a key part with
the creative team in the planning process, which includes finalizing the
concept for the recording or series and selecting the songs to be used. During
this initial planning, the creative team also develops a cost analysis for the
project including projected sales and profitability.
Following the development of the product concept, the product is recorded at
Integrity's studio in Mobile, Alabama, in live settings at churches or civic
auditoriums, or in independent studios in cities such as Los Angeles,
California or Nashville, Tennessee. A significant amount of recording is done
in independent studios. The studios in Mobile, Alabama are mainly used as a
post-production facility where the recordings are edited and mixed. The
manufacturers receive the master recordings from Integrity in digital format
and then produce a master to be used in the manufacturing process. The Company
reviews the final manufacturing master prior to production to ensure that the
quality of the recording has been maintained.
DISTRIBUTION
The Company distributes its products domestically through two primary
channels: direct to consumer and retail markets. In addition, the Company has
an international distribution network which reaches markets in over 120
countries.
Direct To Consumer
The Company's direct to consumer activities are based primarily on a variety
of methods designed to reach the consumer directly. Among the methods are
continuity clubs in which the member receives a selection every six to eight
weeks and is billed for each selection until the Company is instructed to
cancel the membership. This differs from certain other music clubs in which
members have a "negative option" allowing them to decline monthly selections
before they are mailed and in which their only obligation is to purchase a
certain number of products over a stated period of time.
The Company's potential direct to consumer database includes subscribers to
Christian magazines,
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purchasers of Christian mail order products and donors to Christian ministries.
When available, the Company obtains such mailing lists to conduct a one-time
solicitation of an approved direct mailing. Once a response is received by
Integrity, the customer's name is added to the Company's own mailing list.
Integrity also builds its direct to consumer database through space
advertisements in Christian magazines and through telemarketing.
The Company's first continuity club, Hosanna! Music(R) has just produced its
76th recording. Currently the Company operates seven continuity clubs,
including the Scripture Memory Songs(R), Praise Walk(R) and Just-For- Kids(R)
series. The clubs are launched with a mailing of a new product announcement
and solicitation to as many as 500,000 people. After the initial mailing, the
Company postpones further direct mail solicitation campaigns for up to six
months, utilizing the time to study the response and evaluate the
sustainability of the initial members. If the initial membership proves to be
sustainable based on product shipments, the Company will roll out the club in
an extensive direct mail effort to an average of 900,000 people.
Statistical, demographic and sales data on the continuity clubs is compiled
for the Company by an independent statistical consultant. The consultant
gathers information from numerous sources including periodic surveys to
Integrity's continuity club members and data from the Company's distribution
records.
In addition to continuity clubs, the Company's direct to consumer program
includes mail order catalog sales, telemarketing and one-time offers to active
customers. The mail order catalog and telemarketing programs are designed to
increase sales to the Company's current customers by increasing their awareness
of Integrity's full line of products, as well as to develop new customers for
Integrity products. In 1996, the Company began using television as another way
of reaching consumers. This led to the debut in early 1997 of the Company's
program "Lift Him Up," which is aired twice weekly on the Trinity Broadcasting
Network (TBN) and includes segments where consumers can dial in to purchase the
product offered that week.
Retail Markets
Integrity's retail sales activities are targeted at two markets, the
Christian bookstore ("CBA") market, and the general retail market. The Company
currently utilizes Word, Inc. ("Word") to serve these markets.
All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products which are shipped and invoiced based on orders
received directly from Word's sales force through a computerized order entry
system. Word services the Company's customers from one warehouse located in
Texas. As a result of the distribution agreement with Word, the Company also
has access to the Sony/Epic distribution system.
Retail sales efforts are supported by market research, point-of-purchase
advertising, radio promotion, and product publicity developed by Integrity's
own in-house staff.
International
The Company's international sales are made through a subsidiary located in
the United Kingdom, responsible for Europe; a subsidiary located in Australia,
responsible for Australia, New Zealand and the Solomon Islands; and a
subsidiary located in Singapore, responsible for Singapore and Burma . In
addition, products are sold to more than 60 independent distributors who are
licensed to manufacture Integrity products from master recordings and
distribute them in a country or region and approximately 18 importers to whom
the Company provides products. The Company's international distribution
network reaches markets in over 120 countries. The Company plans to expand
into various markets through importers, who would sell Company-provided
products, or through distributors licensed to produce Integrity products from a
master recording.
The Company also develops products specifically for certain markets. This
effort includes recording songs in indigenous languages as well as utilizing
local artists and local songs to produce the recordings. Integrity currently
produces products in the Russian, Spanish, Mandarin Chinese, French, German,
Portuguese and Indonesian languages. Integrity artists are also involved in
live performance tours to various countries, such as the recent trip to the
Philippines by Don Moen where his performances drew an audience of over 45,000
people.
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Church/Choral
The church/choral division can be segmented into two separate categories,
choral music and the Company's direct- to-church business. Choral music
includes numerous recordings and printed products designed primarily for sale
to churches, organizations or choral groups for their use in musical
performances at worship services and other events. All of the church/choral
marketing, sales and customer service is provided by the Company. During the
fourth quarter of 1996, Integrity appointed PraiseGathering Music Group, Inc.
to provide product development, marketing and production services for all of
Integrity's choral print products. The Word sales force supplies these choral
products to choral distributors as well as the CBA stores. Integrity maintains
its own direct to church sales channel for certain concept products and choral
music.
MUSIC PUBLISHING
The Company's song catalog has accumulated ownership rights for over 2,300
songs and has generated a significant amount of royalty income from use by
third parties. The Company publishes a majority of the songs appearing on
Integrity recordings and pays royalties to third parties for the remaining
songs.
Integrity places great emphasis on the development and maintenance of its
song catalog. Songs are selectively added to the song catalog based on the
concept or theme of a specific product design or because the Company believes
that the songs have the potential to be a part of a future Integrity product.
The Company believes that its efforts have produced a distinctive Christian
song catalog whose titles are used not only on recorded media and radio and
television programming, but also in church services.
The Company licenses the use of its songs to churches and other choral
groups through Christian Copyright Licensing, Inc. ("CCLI"). Through CCLI,
churches and choral groups in the United States are able to pay one licensing
fee for the use of numerous Christian music copyrights. The Company is paid a
percentage of the licensing fees collected by CCLI based on CCLI's estimates of
the percentage of Integrity songs utilized by the churches and choral groups.
WAREHOUSING AND FULFILLMENT
Integrity currently contracts with Word for its retail market warehousing,
physical inventory and distribution functions. Word is one of several
companies that provide this service in the CBA market. The contract with Word
extends through March 30, 2000. All retail market sales functions are
currently performed by Word's sales force. Direct to consumer fulfillment
services, excluding warehousing and physical inventory functions, for
Integrity's direct to consumer programs are provided by LCS Industries, Inc.
("LCS"), located in Clifton, New Jersey. In addition to managing the Company's
database of customer names, LCS also provides most of the fulfillment
activities of the direct to consumer operation, including order receipt and
processing, data entry, invoicing, mailing and customer service. Integrity's
own distribution center is responsible for its direct to consumer and
international warehousing, physical inventory and distribution functions.
COPYRIGHTS AND ROYALTY AGREEMENTS
The Company's music products are protected under applicable domestic and
international copyright laws. In addition, Integrity currently has ownership
rights to approximately 2,300 songs, which are also protected under copyright
law. In general, works that are protected under copyright laws are
proprietary, which means that for a fixed period of time the copyright owner
has the exclusive right to control the publication (or other reproduction) of
the copyrighted work. Subject to the compulsory licensing provisions of the
United States Copyright Act covering audio records, a copyright owner may
license others to publish, reproduce, or otherwise use its copyrighted work, on
an exclusive or nonexclusive basis, subject to limitations (such as duration
and territory) and upon such other terms and conditions, including royalty
payments, as the copyright owner may require. However, the Company operates in
an industry in which revenues are adversely affected by the unauthorized
reproduction of recordings for commercial sale, commonly referred to as
"piracy," and by home taping for personal use.
Integrity pays royalties in two different categories. The Integrity
songwriters are paid by Integrity's publishing division when their songs are
used on an Integrity product or by other companies when used on third party
products. Artists, producers and other song publishers are paid based on
Integrity's sales of products containing their works. Integrity owns the
majority of the songs it produces, and does not have to pay publisher royalties
to third parties for those songs.
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COMPETITION
The Company faces intense competition for discretionary consumer spending
from numerous other record companies and other forms of entertainment offered
by film companies, video companies and others. Integrity competes directly
with other record companies and music publishers that distribute Christian
music to Christian bookstores, as well as a number of secular record companies,
many of whom have substantially greater financial resources than the Company.
The Company competes with other record and music publishing companies, both
Christian and secular, on the basis of the Company's ability to sign
established and new artists and songwriters and gain access to distribution
channels.
Many of the Company's competitors have significantly longer operating
histories and several have greater revenues from their music product lines.
The Company's ability to continue to compete successfully will be largely
dependent upon its ability to build upon and maintain its reputation for
quality Christian music and other communication products.
EMPLOYEES
As of December 31, 1996, the Company employed 118 individuals, 98 of whom
are located at the Company's Mobile, Alabama, headquarters.
The Company has no collective bargaining agreements covering any of its
employees, has never experienced any material labor disruption and is unaware
of any efforts or plans to organize its employees. The Company considers
relations with its employees to be good.
GOVERNMENT REGULATION
The Company's direct to consumer program is subject to federal regulations
governing unfair methods of competition or unfair or deceptive acts and
practices. These regulations prohibit, in general, the solicitation of any
order for sale of merchandise through the mail unless at the time of
solicitation the seller has a reasonable basis to expect that he will be able
to ship the merchandise within the time period indicated or within thirty days
if no time period is indicated. If there is any delay in the applicable time
period, the seller is required under the regulations to give the buyer the
option to cancel the order and receive a prompt refund or consent to a delay in
shipment. Management believes that the Company is in full compliance with the
applicable federal regulations governing its direct to consumer programs.
ITEM 2. PROPERTIES.
The Company owns the approximately 25,000 square foot headquarters and
studio facility it occupies in Mobile, Alabama, which houses the executive
offices of Integrity as well as the management and sales staff. This facility
was constructed in 1983 and is pledged as security against the Company's senior
indebtedness. See "Management's Discussion and Analysis - Liquidity and
Capital Resources." In early 1995, the Company began construction of a 44,000
square foot headquarters expansion. As a result of general business
conditions, the Company decided to halt construction of its new facility at the
point when the building was secured from the elements. In 1996, construction
costs totaled $365,000. Total cost of construction of the new facility through
December 31, 1996 was $2.7 million.
Of this amount, approximately $1.2 million relates to a write-down of the
new facility in accordance with the provisions of FASB 121 - "Accounting for
the Impairment of Long-Lived Assets." See Note 6 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the year ended December 31, 1996.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Integrity's common stock is traded on The Nasdaq National Market under the
symbol ITGR. The table below sets forth the quarterly high and low last sales
price per share as reported on the Nasdaq National Market for the Class A
Common Stock from January 1, 1995 through December 31, 1996. The last sale
price of the Class A Common Stock on March 13, 1997 was $1.8125 per share.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1995
----------------
First Quarter 7.50 6.00
Second Quarter 7.00 4.25
Third Quarter 5.50 3.75
Fourth Quarter 4.375 2.125
Fiscal Year 1996
----------------
First Quarter 3.75 1.875
Second Quarter 3.13 1.875
Third Quarter 2.375 1.387
Fourth Quarter 3.00 1.125
</TABLE>
As of March 13, 1997, there were approximately 106 stockholders of record of
Integrity's Class A Common Stock and three stockholders of record of
Integrity's Class B Common Stock.
The current policy of Integrity's Board of Directors is to retain any future
earnings to provide funds for the operation and expansion of Integrity's
business, and, therefore, the Board of Directors does not anticipate paying any
cash dividends in the foreseeable future. In addition, Integrity's ability to
pay dividends is limited by its existing credit agreement and may be limited in
the future by the terms of then-existing credit facilities. See Note 6 to
Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical balance sheet and income statement data presented
below for each of the five years in the period ended December 31, 1996 have
been derived from the consolidated financial statements for the Company audited
by Price Waterhouse LLP, independent accountants.
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except share data)
----------------------------------------------------------
STATEMENT OF INCOME DATA: 1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 30,395 $ 36,277 $ 34,802 $ 29,127 $ 23,688
Cost of sales 14,981 15,547 12,636 10,291 7,868
-------- -------- --------- --------- --------
Gross profit 15,414 20,730 22,166 18,836 15,820
Marketing and fulfillment expenses 9,131 14,914 10,822 9,157 6,382
General and administrative expenses 7,545 7,959 6,373 5,278 6,272
Loss on impairment of long-lived assets 1,200 - - -
-------- -------- --------- --------- --------
(Loss) income from operations (2,462) (2,143) 4,971 4,401 3,166
Interest expense 1,804 1,027 244 561 284
Interest expense on related party notes
payable -- -- 281 -- --
Other (income) expense (153) 65 (10) -- 71
-------- -------- --------- --------- --------
(Loss) income before income taxes and (4,113) (3,235) 4,456 3,840 2,811
extraordinary item
(Benefit from) provision for Income taxes (654) (1,183) 1,644 -- --
(1) -------- -------- --------- --------- --------
Net (loss) income before extraordinary (3,459) (2,052) 2,812 3,840 2,811
item
Extraordinary item from early
extinguishment of debt less applicable
taxes of $47,000 (248) -- -- --
-------- -------- --------- --------- --------
Net (loss) income $ (3,707) $ (2,052) $ 2,812 3,840 2,811
======== ======== ========= ========= ========
Pro forma provision for income taxes (1) - 1,469 1,078
-------- -------- --------- --------- --------
Pro forma net income (1) - $ 2,371 $ 1,733
======== ======== ========= ========= ========
Net (loss) income per share before
extraordinary item $ (0.63) $ $ -- $ -- --
======== ======== ========= ========= ========
Net (loss) income per share (1)(2) $ (0.67) $ (0.37) $ 0.59 $ 0.52 --
======== ======== ========= ========= ========
Weighted average number of shares
outstanding(2) 5,514 5,514 4,744 4,533 --
======== ======== ========= ========= ========
</TABLE>
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<TABLE>
<CAPTION>
Year Ended December 31
(in thousands)
---------------------------------------------------------
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net working capital $10,467 $ (6,052) $ 9,079 $ 2,186 $ 2,509
Total assets 31,058 34,659 26,080 17,856 10,995
Total bank debt, notes payable to
former stockholders (3) 18,304 18,018 5,093 13,313 6,588
Stockholders' equity 10,487 12,693 14,800 748 1,242
</TABLE>
__________________________________
(1) The Company elected Subchapter S corporation status for federal and state
income tax purposes effective May 1, 1987. The Company terminated its election
to be taxed as a Subchapter S corporation effective September 1, 1993 and has
been subjected to federal and state income taxes from that date forward. The
pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes under FAS No. 109
as if the Company had been taxed as a C corporation for all periods presented.
(2) As adjusted to give retroactive effect to the reclassification of each
share of the Company's Class A Common Stock as 3,597.12 shares of Class B
Common Stock and the sale of additional shares (454,526 in 1994 at the initial
public offering price of $9.00 per share) necessary to fund a distribution of
certain previously taxed earnings to the Company's existing stockholders and to
pay a former stockholder under a stock purchase agreement. Distributions of
Subchapter S corporation dividends were $3.0 million in 1993. There were no
dividends granted during 1994, 1995 or 1996.
(3) Includes discount of $1,296,000 at December 31, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
included elsewhere herein.
OVERVIEW
The Company is a producer and publisher of Christian lifestyle products.
The Company's recorded music products fall into two broad categories: concept
products and artist products. Concept products are centered on a specific
theme, such as praise and worship, and artist products feature a specific
performer. In addition to audio recordings, Integrity produces Christian music
print and video products. The Company has an international distribution
network which reaches markets in over 120 countries. In addition, the Company
markets products directly to churches.
The following historical analysis shows the percentage of product sales by
distribution channel:
1996 1995 1994
------------------------------
Direct To 37.2% 45.1% 49.4%
Consumer
Retail Market 34.3 35.5 33.4
International 20.7 12.9 13.6
Church/choral 7.8 6.5 3.6
The Company also receives royalty income from the licensed use of songs
owned by Integrity, which was $2.9 million, $2.4 million and $2.3 million in
1996, 1995 and 1994 respectively.
The Company's quarterly operating results may fluctuate significantly due to
new product introductions, the timing of selling and marketing expenses and
changes in sales and product mixes.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of net sales for the periods indicated and the percentage change in such
operating results between periods.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage Change
Year Ended December 31 Year Ended (1)
--------------------------------------------------------
1996 1995 1994 96-95 95-94
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% (16.2)% 4.2%
Cost of Sales 49.3 42.9 36.3 (3.6) 23.0
----- ----- ---- ----- ------
Gross Profit 50.7 57.1 63.7 (25.7) (6.5)
Marketing and Fulfillment Expense 30.0 41.1 31.1 (38.8) 37.8
General and Administrative Expense
24.8 21.9 18.3 (4.8) 24.8
Loss on impairment of long-lived
assets 3.9% -- -- -- --
----- ----- ---- ----- ------
Income (loss) From Operations (8.1)% (5.9)% 14.3% 41.1% (143.1)%
===== ===== ==== ===== ======
</TABLE>
___________________________________
(1) Calculated as a percentage change from the accompanying selected financial
data.
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1996 COMPARED TO 1995
Net sales decreased 16.2% to $30.4 million in 1996 from $36.3 million in
1995, reflecting decreased retail and direct to consumer sales, which were
partially offset by increased international sales and copyright revenues. The
international and copyright divisions continued to grow with the international
division posting an increase of $1.4 million to $5.7 million in 1996, a 31.5%
increase primarily due to increased expansion overseas. The copyright division
posted an increase of $511,000, a 21.0% increase, to $2.9 million in 1996 due
to the acquisition of song copyrights during late 1995. The retail and direct
to consumer divisions posted decreases for 1996. The retail division decreased
$2.5 million to $9.5 million a 20.9% decrease as the Company experienced higher
returns in retail upon the transition of the sales force and distribution
functions to Word. The direct to consumer division decreased $4.9 million or
32.4% to $10.3 million primarily due to the significant reduction in mailings
sent to direct mail customers. Management decreased its marketing efforts in
conjunction with its cost streamlining business plan. Unit sales decreased by
24.4% to 3.4 million in 1996 from 4.5 million in 1995 due to fewer new album
releases and lower marketing expenditures. In 1996, new products accounted
for 1.6 million units, or 47.1% of the total units sold. The new products
offered were from existing product lines as well as new product lines featuring
new artists and several of Integrity's best-selling artists, such as Ron
Kenoly.
Gross profit decreased 25.6% to $15.4 million in 1996 from $20.7 million in
1995. Gross profit as a percentage of sales was 50.7% and 57.1% for the years
ended December 31, 1996 and 1995, respectively. Gross margins declined
primarily as a result of a charge of $1.7 million for record masters not
expected to recoup recording cost, including related inventory and supplies.
The increase in copyright revenue which carries a lower gross margin also
contributed to the decrease.
Marketing and fulfillment expenses decreased 38.8% to $9.1 million or 30.0%
of net sales in 1996, as compared with $14.9 million or 41.1% of net sales in
1995. This decrease was primarily the result of lower marketing expenses in
both the retail and direct to consumer divisions. The direct to consumer
division did fewer marketing promotions to focus on those promotions with a
greater probability of profitability. Both divisions also posted decreases in
fulfillment cost. Retail marketing campaigns included concept marketing and
new-artist promotions. Additionally, marketing expenses reflect the operation
of the Company's internal retail sales staff during the first half of 1996.
The internal sales force did not cover the additional fixed costs as
anticipated and in mid-1996, Integrity decided to transition retail sales
operations to Word's sales force.
General and administrative expenses decreased $500,000 to $7.5 million or
24.8% of net sales in 1996, compared with $8.0 million or 21.9% of net sales in
1995. The decrease in expenditures was due to personnel cuts and cost saving
measures implemented in 1995.
Operating expenses increased by $1.2 million during 1996 as a result of a
write-down of the Company's corporate headquarters under the provisions of SFAS
121 "Accounting for the Impairment of Long-Lived Assets."
In addition to the building write-down charge, 1996 also included a $1.7
million charge reflecting revised values for certain product masters, and
$300,000 in severance and other costs associated with the sales force
transition to Word.
As a result of the above, loss from operations was $2.5 million or 8.1% of
net sales in 1996, compared to loss of $2.1 million or 5.9% of net sales in
1995.
Interest expense increased to $1.8 million in 1996 compared with $1.0
million in 1995. The increase was a result of higher debt levels and higher
interest rates in 1996.
1995 COMPARED TO 1994
Net sales increased 4.2% to $36.3 million in 1995 from $34.8 million in
1994. The retail and church divisions continued to grow with the retail
division posting an increase of $1.2 million to $11.7 million in 1995, a 11.4%
increase. Unit sales decreased by 6.3% to 4.5 million in 1995 from 4.8 million
in 1994 due to fewer new album releases. In 1995, new products accounted for
2.1 million units, or 46.7% of the total units sold. The new products offered
were from existing product lines as well as new product lines featuring new
artists and several of Integrity's best-selling artists, such as Ron Kenoly.
Gross profit decreased 6.5% to $20.7 million in 1995 from $22.2 million in
1994. Gross profit as a percentage of sales was 57.1% and 63.7% for the years
ending December 31, 1995 and 1994, respectively. Gross margins declined as a
result of higher product costs and a higher volume of products
10
<PAGE> 12
sold through the Company's retail channel, which generally carry lower gross
margins. As a percentage of total net sales, retail sales increased to 32.4%
in 1995 from 30.2% in 1994; international sales decreased to 11.7% in 1995 from
12.3% in 1994, and the church division increased to 5.0% in 1995 from 3.3% in
1994.
Marketing and fulfillment expenses increased 37.8% to $14.9 million or 41.1%
of net sales in 1995, as compared with $10.8 million or 31.1% of net sales in
1994. This increase was primarily the result of increased marketing expenses
for concept products in the direct to consumer division and higher fulfillment
fees due to an increase in return costs. The higher than expected level of
returns primarily related to returns from Christian bookstores, as they were
monitoring their own inventory levels due to the general decline of sales in
all music retail markets during 1995. Retail marketing campaigns included
concept marketing and new-artist promotions. Additionally, marketing expenses
reflect the operation of the Company's internal retail sales staff for its
first full year in 1995. The sales force, while accelerating sales in the
retail market, did not cover the additional fixed costs as anticipated.
General and administrative expenses were $8.0 million or 21.9% of net sales
in 1995, compared with $6.4 million or 18.3% of net sales in 1994. The
increase was primarily due to staff expansion and the resulting increase in
employee related costs based on sales projections that did not materialize.
Management executed aggressive plans to reduce expenses early in the fourth
quarter that should bring administrative costs to lower levels.
The results for 1995 include charges of $659,000 reflecting revised values
for certain product masters, and $240,000 in severance and other costs
associated with downsizing. The higher valuations for inventory and product
masters had been based on sales and net income expectations that subsequently
weren't met, necessitating reassessments of their value.
As a result of the above, loss from operations was $2.1 million or 5.9% of
net sales in 1995, compared to income of $5.0 million or 14.3% of net sales in
1994.
Interest expense increased to $1.0 million in 1995 compared with $525,000 in
1994. The increase was a result of higher debt levels, primarily for the
expansion of the new corporate headquarters, acquisition of music copyrights,
lower than expected operating income, and higher interest rates in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations primarily through cash
generated from operations and by borrowings under a line of credit and term
notes as needed. The Company's need for cash historically has varied from
quarter to quarter based on product releases and scheduled marketing
promotions. The Company's principal uses of cash historically have been
operating expenses, capital expenditures and debt service. The most
significant cash outlays for investing purposes generally result from product
development which primarily involves the production and recording of the
Company's product master library. It is from these masters that the Company's
products are duplicated and then distributed to customers.
Cash generated from operations totaled $3.5 million, $433,000 and $2.9
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The increase from 1995 to 1996 resulted primarily from increased earnings
before charges for depreciation, amortization, a charge of $1.7 million
reflecting revised values for certain product masters and a $1.2 million
write-down of the corporate building. The increase in earnings before these
charges is primarily due to lower marketing and fulfillment cost in the direct
to consumer and retail divisions. The decrease from 1994 to 1995 resulted from
the general downturn in the market, higher than average returns and higher
costs of the products sold.
In accordance with industry practice, the Company's music products are sold
on a returnable basis. The Company's allowance for returns and doubtful
accounts is based on the historical results of operations of the Company. Due
to the nature of sales through direct to consumer continuity programs, the
Company has a somewhat higher product return and doubtful account exposure than
other music companies where the majority of sales are in traditional retail
markets. For the year ended December 31, 1996, bad debts and returns were
higher than anticipated in the direct to consumer division, resulting in higher
charges against income for returns and doubtful accounts. In the trade
division, the higher than expected level of returns primarily related to
returns from Christian bookstores, due to the general decline of sales in the
overall record and music industry as a whole, including secular markets.
Additionally, the Company experienced higher returns than normal in the retail
market during the transition of its sales force and retail distributor function
to Word. Following the transition period, returns declined to historical
levels.
11
<PAGE> 13
For the years ended December 31, 1996, 1995 and 1994, amounts charged
against income for returns and doubtful accounts were $7.3 million, $10.1
million and $7.7 million, respectively.
The Company signed a $19 million financing agreement with a bank on August
6, 1996. The credit agreement includes a $6 million revolving credit facility
and $13 million term loan. At the Company's option, the loan carries an
interest rate of the bank's base rate plus 1 1/2%, or LIBOR plus 3%. This
facility replaced all of the Company's long-term and short-term borrowings.
The lender received warrants exercisable for up to 12.5% of the Company's Class
A Common Stock, with an exercise price of $1.875, and the warrants expire in 10
years. Under the terms of the financing agreement, the lender cannot exercise
the warrants for two years (unless the Company undergoes a change in control.)
The Company believes that funds generated from operations will be sufficient to
satisfy its current operating requirements.
Capital expenditures totaled $583,000 and $2.6 million in the years ended
December 31, 1996 and 1995. During 1996, capital expenditures were primarily
the result of safeguarding the new building from the elements. In 1995,
significant capital expenditures resulted from the Company's purchase of
additional studio and computer equipment. Also, the Company began expanding
its headquarters facility in 1994, but decided to discontinue such construction
during 1995. The capital expenditure budget for 1997 is $150,000.
SEASONALITY
Retail sales are typically higher in the third and fourth quarters because
of holiday promotions. Direct to consumer sales are typically higher in the
first quarter as a result of significant marketing promotions in late December.
Direct to consumer promotions require a build up in inventory in the fourth
quarter and as a result, sales and accounts receivable increase in the first
quarter. It is important to note that sales from quarter to quarter depend
heavily on marketing promotions and new product releases. Accordingly, results
of operations in any one quarter may not be indicative of results of operations
for the entire year.
INFLATION
The impact of inflation on the Company's operating results has been moderate
in recent years, reflecting generally lower rates of inflation in the economy
and relative stability in the Company's cost of sales. In prior years, the
Company has been able to adjust its selling prices to substantially recover
increased costs. While inflation has not had, and the Company does not expect
that it will have, a material impact upon operating results, there is no
assurance that the Company's business will not be affected by inflation in the
future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in Part IV, Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
12
<PAGE> 14
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Proposal I - Election of Directors -
Certain Information Concerning Nominees," "Proposal I - Election of Directors -
Executive Officers of the Company" and "Other Matters - Filings Under Section
16(a)" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Proposal I - Election of Directors -
Executive Compensation" in the Company's 1997 Proxy Statement is incorporated
herein by reference. In no event shall the information contained in the proxy
statement under the sections "Stockholder Return Comparison" or "Compensation
Committee Report on Executive Compensation" be incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Proposal I - Election of Directors -
Beneficial Owners of More Than Five Percent of the Company's Common Stock;
Shares Held by Directors and Executive Officers" in the Company's 1997 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Proposal I - Election of Directors -
Certain Transactions" in the Company's 1997 Proxy Statement is incorporated
herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: PAGE NO.
-----------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants 14
Consolidated Balance Sheets at December 31, 1996 and 1995 15
Consolidated Statement of Operations for the three years ended December 31, 1996 16
Consolidated Statement of Changes in Stockholders' Equity for the three years ended
December 31, 1996 17
Consolidated Statement of Cash Flows for the three years ended December 31, 1996 18
Notes to Consolidated Financial Statements 19
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
For the three years ended December 31, 1996
VIII--Valuation and Qualifying Accounts and Reserves 28
</TABLE>
13
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of Integrity Incorporated
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under item 14(a)(1) and (2) on page 13 present fairly,
in all material respects, the financial position of Integrity Incorporated and
its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, GA
February 14, 1997
14
<PAGE> 16
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31
-----------------------
ASSETS 1996 1995
-----------------------
<S> <C> <C>
Current Assets
Cash $ 1,131 $ 1,045
Trade receivables, less allowance for returns and doubtful accounts of $1,684 4,195 5,191
and $1,676
Other receivables 943 1,927
Inventories 4,219 4,068
Other current assets 3,562 3,474
------- ---------
Total current assets 14,050 15,705
Property and equipment 3,709 4,936
Product masters, net of accumulated amortization of $3,813 and $3,161 8,601 9,986
Non-compete agreement, net of accumulated amortization of $895 and $645 355 605
Other assets 4,343 3,427
------- ---------
Total assets $31,058 $ 34,659
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,470 $18,018
Accounts payable and accrued expenses 1,826 2,384
Royalties payable 136 960
Other current liabilities 151 395
------- ---------
Total current liabilities 3,583 21,757
Long-term debt 16,834
Deferred revenue 154 209
------- ---------
Total liabilities 20,571 21,966
------- ---------
Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding
Class A common stock, $.01 par value; 7,500,000 shares authorized; 21 21
2,079,000 shares issued and outstanding
Class B common stock, $.01 par value, 10,500,000 shares authorized; 34 34
3,435,000 shares issued and outstanding
Additional paid-in capital 13,428 12,035
(Accumulated deficit) retained earnings (2,945) 762
Equity adjustments from foreign translation (51) (159)
------- ---------
Total stockholders' equity 10,487 12,693
------- ---------
Total liabilities and stockholders' equity $31,058 $ 34,659
======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 17
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<Caption
Year Ended December 31
------------------------------------
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Net sales $30,395 $ 36,277 $ 34,802
Cost of sales 14,981 15,547 12,636
------- -------- ---------
Gross profit 15,414 20,730 22,166
Marketing and fulfillment expenses 9,131 14,914 10,822
General and administrative expenses 7,545 7,959 6,373
Loss on impairment of long-lived assets 1,200 -- --
------- -------- ---------
(Loss) income from operations (2,462) (2,143) 4,971
Other (income) expense
Interest expense 1,804 1,027 244
Interest expense on related party notes payable -- -- 281
Other (income) expense (153) 65 (10)
------- -------- ---------
(Loss) income before taxes and extraordinary item (4,113) (3,235) 4,456
(Benefit from) provision for income taxes (654) (1,183) 1,644
------- -------- ---------
(Loss) income before extraordinary item (3,459) (2,052) 2,812
Extraordinary item from early extinguishment of debt
less applicable taxes of $47,000 (248) -- --
------- -------- ---------
Net (loss) income $(3,707) $ (2,052) $2,812
======= ======== =========
Loss per share before extraordinary item $ (0.63) $ -- $ --
Extraordinary loss (0.04) -- --
------- -------- ---------
Net (loss) income per share (note 1) $ (0.67) $ (0.37) $ 0.59
======= ======== =========
Weighted average number of shares outstanding (note 1)
5,514 5,514 4,744
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 18
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
---------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 973
Cancellation of Class A stock (973)
Issuance of Class B stock 3,500,000 $ 35
Dissolution of partnership
Net proceeds from initial public 2,014,000 $ 20
offering
Conversion of common stock 65,000 1 (65,000) (1)
Net income
Distributions
Translation adjustments --------- ---- --------- ----
BALANCE, DECEMBER 31, 1994 2,079,000 21 3,435,000 34
Net loss
Translation adjustments --------- ---- --------- ----
BALANCE, DECEMBER 31, 1995 2,079,000 21 3,435,000 34
Net loss
Issuance of stock warrants
Translation adjustments --------- ---- --------- ----
BALANCE, DECEMBER 31, 1996 2,079,000 $ 21 3,435,000 $ 34
========= ==== ========= ====
<CAPTION>
(Accumulated Equity
Additional Deficit) Adjustments
Partner's Paid-In Retained from
-------------------------------------------------------------------
Capital Capital Earnings Translations Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 200 $ 655 $ 2 $ (109) $ 748
Cancellation of Class A stock
Issuance of Class B stock (35)
Dissolution of partnership (200) (200)
Net proceeds from initial public 14,414 14,434
offering
Conversion of common stock
Net income 2,812 2,812
Distributions (2,999) (2,999)
Translation adjustments 5 5
----- -------- ---------- ------- --------
BALANCE, DECEMBER 31, 1994 12,035 2,814 (104) 14,800
Net loss (2,052) (2,052)
Translation adjustments (55) (55)
----- -------- ---------- ------- --------
BALANCE, DECEMBER 31, 1995 0 12,035 762 (159) 12,693
Net loss (3,707) (3,707)
Issuance of stock warrants 1,393 1,393
Translation adjustments 108 108
----- -------- ---------- ------- --------
BALANCE, DECEMBER 31, 1996 $ 0 $ 13,428 $ (2,945) $ (51) $ 10,487
===== ======== ========== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $(3,707) $(2,052) $2,812
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization 860 898 892
Loss on impairment of building 1,200 -- --
Amortization of product masters 4,714 3,234 1,230
Extraordinary loss on debt extinguishment 295 -- --
Increase in allowance for returns and doubtful accounts 24 257 56
Changes in operating assets and liabilities
Decrease (increase) in trade receivables 972 954 (1,140)
(Increase) decrease in other receivables 984 (1,261) (294)
Decrease (increase) in stockholders' receivable 1,000
Decrease (increase) in inventories (151) 83 (2,006)
Decrease (increase) in other current assets (88) 614 (2,095)
(Decrease) increase in accounts payable, royalties payable and accrued (1,382) (1,528) 1,692
(Decrease) increase in other current liabilities and deferred revenue (299) (711) 700
Equity adjustments from translation 108 (55) 5
------- ------- ------
Net cash provided by operating activities 3,530 433 2,852
------- ------- ------
Cash flows from investing activities
Purchases of property and equipment (583) (2,633) (1,456)
Payments for product masters (3,329) (7,068) (4,079)
Increase in noncurrent other assets (475) (2,377) (446)
------- ------- ------
Net cash used in investing activities (4,387) (12,078) (5,981)
------- ------- ------
Cash flows from financing activities
Net borrowings (repayments) under line of credit (12,018) 13,799 (1,954)
Proceeds from issuance of long-term debt 14,000 4,500 45
Principal payments of long-term debt (400) (2,545) (2,295)
Loan issuance cost (639) (464) --
Principal payments on related party debt -- (2,829) (4,016)
Partners' capital (distributions) contributions -- -- (200)
Proceeds from issuance of stock, net -- -- 11,435
------- ------- ------
Net cash provided by financing activities 943 12,461 3,015
------- ------- ------
Increase (decrease) in cash 86 816 (114)
Cash, beginning of year 1,045 229 343
------- ------- ------
Cash, end of year $ 1,131 $ 1,045 $ 229
======= ======= ======
Supplemental disclosures of cash flow information
Interest paid $ 1,638 $ 899 $ 581
Income taxes paid $ 0 $ 693 $1,141
======= ======= ======
Noncash financing activities
Issuance of stock purchase warrants for debt $ 1,393 -- --
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE> 20
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes, compact discs, print music
and related products, primarily by direct to consumer marketing and wholesale
trade methods. A principal direct to consumer marketing method of distribution
is continuity programs whereby subscribers receive products at regular
intervals.
Integrity Music Europe Limited was formed in 1988, Integrity Music PTY
Limited was formed in 1991 and Integrity Media Asia Pte Ltd was formed in 1995
to expand the Company's presence in Western Europe, Australia, New Zealand and
Singapore. All of these subsidiaries are wholly-owned by the Company.
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Provision is made for sales
returns and allowances in the period in which the related products are shipped
based on estimates derived from historical data. The full amount of the
returns allowance is shown, along with the allowance for doubtful accounts, as
a reduction of accounts receivable in the accompanying financial statements.
Generally, revenue derived from licensing the use of songs in the Company's
song catalogs is recognized as payments are received from licensees.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of average cost or market using the first-in, first-out method.
MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct sales to customers. Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized. Other marketing costs are expensed the
first time advertising takes place. Prepaid Marketing costs, including
artwork, printing and direct mail packages, are included in assets in the
accompanying financial statements and approximated $861,000 and $894,000 at
December 31, 1996 and 1995, respectively. Marketing costs expensed for the
three years ended December 31, 1996 approximated $6,099,000, $6,479,000 and
$6,756,000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method. The
useful lives of the property and equipment range from three to thirty- seven
years. Repairs and maintenance costs which do not increase the useful lives of
the assets are charged to expense as incurred. Additions, improvements and
expenditures that significantly add to the productivity or extend the life of
an asset are capitalized. When assets are replaced or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is reflected in income.
DEFERRED REVENUE
Revenue recognition on prepayments of recorded product and print music
subscriptions are deferred until the product is shipped.
PRODUCT MASTERS
Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives, using a method that
reasonably relates to the amount of net revenue expected to be realized. The
portion of the cost of product masters recoverable from artist royalties
recorded in the
19
<PAGE> 21
consolidated balance sheet at December 31, 1996 and 1995, were $419,000 and
$435,000, respectively. The costs of producing a product master include the
cost of the musical talent, the cost of the technical talent for engineering,
directing and mixing, costs for the use of the equipment to record and produce
the master and studio facility charges.
ADVANCE ROYALTIES
Royalties earned by publishers, producers, songwriters, or other artists are
charged to expense in the period in which the related product sale occurs.
Advance royalties paid are capitalized if the past performance and current
popularity of the artist to whom the advance is made provide a sound basis for
estimating that such amounts will be recoverable from future royalties to be
earned by the artist. Any portion of advances that subsequently appear not to
be fully recoverable from future royalties are charged to expense during the
period the loss becomes evident.
INCOME TAXES
The Company adopted SFAS 109, "Accounting for Income Taxes," effective
September 1, 1993. SFAS 109 requires the asset and liability approach of
accounting for income taxes. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities.
EARNINGS PER SHARE
Net income (loss) per share is computed by dividing net income by the
weighted average number of shares outstanding during the year. To date,
outstanding stock options and warrants have not had a material dilutive effect.
Fully diluted earnings per share is not presented because it approximates
primary earnings per share.
SIGNIFICANT ESTIMATES
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music, video and publishing-
related products in order to evaluate the ultimate recoverability of product
masters and artist advances recorded as assets in the consolidated balance
sheet. Management periodically reviews such estimates and it is reasonable
possible that management's assessment of recoverability of product masters and
artist advances may change based on actual results and other factors.
RECLASSIFICATIONS
Certain amounts in the consolidated balance sheet and statement of income
have been reclassified to conform to current year presentation.
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
December 31
(in thousands)
---------------------
1996 1995
---------------------
Prepaid supplies $ 1,626 $ 1,096
Prepaid marketing costs 861 894
Other 1,075 1,484
------- -------
$ 3,562 $ 3,474
======= =======
20
<PAGE> 22
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of:
December 31
(in thousands)
-----------------------
1996 1995
-----------------------
Land $ 625 $ 625
Buildings and leasehold
improvements 1,118 1,137
Data processing and other equipment 1,178 1,132
Studio equipment 609 894
Construction in progress 1,474 2,309
Furniture and fixtures 1,281 1,214
------- -------
6,285 7,311
Less - accumulated depreciation (2,576) (2,375)
------- -------
$ 3,709 $ 4,936
======= =======
Depreciation expense approximated $600,000, $648,000 and $520,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Additionally, the Company recorded a charge to earnings of $1.2 million
related to the write-down of its Corporate headquarters.
Construction in progress relates to the Company's new corporate headquarters.
Upon completion of the exterior phase, the Company temporarily halted
construction and plans to resume construction. (See Note 4.)
4. IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," (SFAS 121).
SFAS 121 requires that long-lived assets to be held and used by an entity, be
reviewed for impairment, whenever events or changes in circumstances indicate
that the carrying amount of the asset(s) may not be recoverable. The
discontinuance of construction of the Company's corporate headquarters facility
was due to losses from operations, and as a consequence of not finding a buyer
or a lessee for the building, a write-down to fair market value was required
under SFAS 121. The undiscounted future cash flows further indicated that a
write-down to fair market value was required under SFAS 121. This write-down
resulted in a charge to income before income taxes of $1.2 million which is
included in the Consolidated Statement of Operations as "Loss on Impairment of
Long-Lived Assets."
5. OTHER ASSETS
Other assets consist of the following:
December 31
(in thousands)
----------------------
1996 1995
----------------------
Music copyrights $ 2,340 $ 2,506
Other 2,003 921
------- -------
$ 4,343 $ 3,427
======= =======
The music copyrights are being amortized over their future estimated useful
lives, which approximates fifteen years. Accumulated amortization at December
31, 1996 approximates $244,000.
21
<PAGE> 23
6. DEBT
In August 1996, the Company entered into a $19 million credit agreement with
a financial institution. The credit agreement includes a $6 million revolving
credit facility (the Revolver) and $13 million term loan (the Term Loan)
maturing on August 6, 2002. At the Company's option, the credit agreement
carries an interest rate of the bank's base rate plus 1 1/2%, or LIBOR plus
3%. At December 31, 1996, the interest rates on the Revolver were $4 million
at 8.5% and $2 million at 9.75%; and on the Term Loan, $12.5 million at 8.7%
and $250,000 at 9.75%. This facility replaced all of the Company's long-term
and short-term financing.
At December 31, 1996, the Company had approximately $51,000 remaining under
its unused revolving credit facility.
The Company, in conjunction with the 1996 financing, issued warrants to
purchase 805,288 shares of Class A Common Stock which were outstanding at
December 31, 1996. Each warrant shall entitle the record holder thereof to
purchase one fully paid share of Class A Common Stock (for an aggregate of
805,288 shares) or one-fourth fully paid share of convertible preferred stock
(for an aggregate of 201,322 shares) at the exercise price of $1.875. The
warrants are exercisable on August 6, 1998. The warrants had an estimated fair
value of $1.73 or $1,393,000, which is recorded as a discount to the Revolver
and Term Loan. At December 31, 1996, the book value of the discount is
$1,296,000 net of accumulated amortization of $97,000.
Prior to signing this agreement, the Company had a revolving/term loan and a
term loan under an agreement which provided for maximum borrowings of $15.0 and
$3.0 million, respectively. Outstanding borrowings under the revolving/term
loan were $13.8 million at December 31, 1995. The revolving/term loan incurred
interest equal to the prime rate plus 1%. Amounts outstanding under the term
loan were $2.7 million at December 31, 1995. Interest on the term loan accrued
at 9.35% per annum. During 1996, the Company recorded an extraordinary loss of
$248,000, net of applicable income taxes of $47,000 related to the early
retirement of this debt.
The Revolver and Term Loan contain certain restrictive covenants with
respect to the Company, including, among other things, maintenance of working
capital, limitations on the payments of dividends, the occurrence of additional
indebtedness, certain liens and require the maintenance of certain financial
ratios. Substantially all of the Company's assets are pledged as collateral
for these loans.
Primarily as a result of net losses experienced in 1996, the Company was in
non-compliance with certain of these debt covenants at December 31, 1996. The
Company has obtained waivers for the conditions of default as of December 31,
1996, and has renegotiated covenants under the financing agreement for future
periods.
Aggregate principal maturities of long-term debt at December 31, 1996 are as
follows:
Total
Fiscal Year (in thousands)
--------------
1997 $ 1,470
1998 1,958
1999 2,348
2000 2,563
2001 2,875
2002 and thereafter 7,090
-------
$18,304
=======
The Company experienced an increase in working capital during 1996 as
compared to 1995 as a result of the Company's ability to obtain long-term
financing. The Company believes that funds generated from operations will be
sufficient to satisfy its current operating requirements.
At December 31, 1996, approximately $647,000, net of accumulated
amortization of $46,000, of loan
22
<PAGE> 24
issuance costs, included in other assets, are being amortized over the term of
the debt agreements.
7. INCOME TAXES
The components of the (benefit) provision for income taxes for the three
years ended December 31, 1996 are as follows:
Year Ended December 31
(in thousands)
---------------------------------------------
1996 1995 1994
---------------------------------------------
Current (benefit) provision
Federal $ (192) $ (935) $1,743
State - (101) 158
------ ------- ------
(192) (1,036) 1,901
------ ------- ------
Deferred (benefit) provision
Federal (458) (130) (230)
State (51) (17) (27)
------ ------- ------
(509) (147) (257)
------ ------- ------
Total (benefit) provision,
including extraordinary item $ (701) $(1,183) $1,644
====== ======= ======
The Company's benefit for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 34% to the loss before income
taxes and extraordinary item of $4,113,000 for the year ended December 31, 1996
and to the loss before income taxes of $3,235,000 for the year ended December
31, 1995, as follows (in thousands):
December 31
1996 1995
------------------
Income tax benefit at statutory rates $1,398 $ 1,099
State tax benefit, net of federal taxes 163 107
Release of foreign tax credits 159 --
Nondeductible expenses (69) (25)
Other, net 70 2
Valuation allowance (1,067) --
------ -------
Benefit for income taxes before
extraordinary item $ 654 $ 1,183
====== =======
There were no significant differences between the Company's provision for
income taxes and the amounts expected using statutory rates for the year ended
December 31, 1994.
Deferred income taxes are recorded to reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
23
<PAGE> 25
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows (in thousands):
December 31
-------------------
1996 1995
-------------------
Deferred Assets
Net operating loss carryforward $ 677 $ --
Reserves for returns and allowances 631 631
Impairment of long-lived assets 456 --
Foreign tax credits 276 --
Other 372 391
------ ------
2,412 1,022
Deferred Liabilities
Prepaid marketing expenses (327) (410)
Other (207) (210)
------ ------
(534) (620)
------ ------
Deferred asset before allowance 1,878 402
Valuation allowance for deferred tax
assets (1,067) --
------ ------
Net deferred asset reported $ 811 $ 402
====== ======
Even though the Company has incurred tax losses for the past two fiscal
years, management believes that it is more likely than not that it will
generate taxable income sufficient to realize a portion of the tax benefit
associated with future deductible temporary differences and NOL carryforwards
prior to their expiration. Operating profits were lower in 1995 and 1996
primarily due to write-downs including the impairment of corporate
headquarters, a write-down of certain product masters and certain
reorganization charges related to the Company's decision to lower staffing
levels and outsource its retail sales force. There can be no assurance,
however that the Company will generate a specific level of continuing earnings.
Due to the uncertainties of achieving certain levels of future taxable income,
management believes that a partial valuation allowance of $1,067,000 is
appropriate given the uncertainty of estimates surrounding future taxable
income.
8. EMPLOYEE BENEFITS
Effective January 1, 1988 the Company's Board of Directors established a
Profit Sharing Plan (the "Plan"). The Plan is a non-contributory defined
contribution plan covering substantially all employees of the Company. An
employee is eligible to participate in the Plan after one year of service, as
defined.
The Company contributed approximately $166,000 to the Plan during the year
ended December 31, 1994. The Company did not make contributions to the Plan
during the years ended December 31, 1996 and 1995 as contributions are at the
discretion of the Board of Directors.
Effective February 2, 1995, the Company's Board of Directors established the
Integrity 401k Plan ("401k Plan"). The 401k Plan is a qualifying 401k Plan
covering substantially all employees of the Company. An employee is eligible
to participate in the 401k Plan after one year of service and is allowed to
make elective contributions of up to 12% of their annual salary. Company
contributions to the 401k Plan are discretionary and are determined annually by
the Company's Board of Directors. The Company contributed approximately
$57,000 and $54,000 during the years ended December 31, 1996 and 1995,
respectively.
24
<PAGE> 26
9. RELATED PARTY TRANSACTIONS
At December 31, 1994 the Company had outstanding notes payable to a former
stockholder of approximately $2.4 million. These notes were repaid during
1995.
During 1992, the Company entered into non-compete agreements and a
consulting agreement with a former employee. The non-compete agreement is in
effect through September 1998. As consideration for the non-compete agreement,
the Company issued a $450,000 and $800,000 note payable to the Seller which
were both repaid in 1995. The consulting agreement with the Seller was for a
period of three years ended December 31, 1995 and required the Company to make
payments to the Seller of $110,000 in 1993 and $142,000 in 1994 and 1995.
Interest expense related to these notes approximated $75,000 and $293,000
for the two years ended December 31, 1995.
Worship International ("Worship"), a not-for-profit charitable organization,
of which the principal stockholder of the Company is a member of the board of
directors, received from the Company $477,000 and $445,000 for the two years
ended December 31, 1995. The Company donated $6,500 of inventory to Worship
during 1996. Additionally, the Company advanced Worship $180,000 during 1995
which was repaid prior to December 31, 1995.
One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $206,000, $144,000
and $127,000 for the three years ended December 31, 1996. Amounts due to the
officer at December 31, 1996 and 1995 approximate $31,000 and $25,000,
respectively.
10. SEGMENT REPORTING
The Company is a multinational corporation with wholly-owned subsidiaries in
the United States, Australia, the United Kingdom and Singapore. Transfers
between companies primarily represent inter-company export sales of U.S.
produced goods and are accounted for based on established sales prices between
the related companies. Intercompany sales and profits are eliminated during
consolidation. In computing earnings from operations for foreign subsidiaries,
no allocations of general corporate expenses, interest or income taxes have
been made.
INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The Company sells its
products throughout the world and operates primarily in the U.S. Export sales
are handled through the Company's international sales division and through
certain foreign subsidiaries. Geographic financial information is as follows
(in thousands):
<TABLE>
<CAPTION>
1996 United States Europe Australia Other Consolidated
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 24,673 1,763 1,638 2,321 30,395
Net income (loss) (4,731) 82 29 913 (3,707)
Identifiable assets 28,687 1,220 630 521 31,058
1995 United States Europe Australia Other Consolidated
----------------------------------------------------------------------------------------------------------
Net Sales 31,845 1,575 1,504 1,353 36,277
Net income (loss) (2,433) (55) (33) 469 (2,052)
Identifiable assets 32,880 940 613 226 34,659
1994 United States Europe Australia Other Consolidated
----------------------------------------------------------------------------------------------------------
Net Sales 30,534 1,558 1,409 1,301 34,802
Net income 2,302 10 9 491 2,812
Identifiable assets 25,098 611 371 0 26,080
</TABLE>
25
<PAGE> 27
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1996 Three Months Ended
(in thousands, except per share data)
--------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
--------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $9,762 $ 6,432 $ 7,682 $6,519
Gross profit 5,414 3,979 4,451 1,570
Net income (loss)
before extraordinary
item 50 (397) 287 (3,399)
Net income (loss) 50 (397) 39 (3,399)
Net income (loss) per
share before
extraordinary item .01 (.07) .05 (.62)
Net income (loss) per
share .01 (.07) .01 (.62)
</TABLE>
<TABLE>
<CAPTION>
1995 Three Months Ended
(in thousands, except per share data)
--------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
--------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $10,093 $ 9,442 $ 9,093 $7,649
Gross profit 6,432 6,125 4,285 3,888
Net income (loss) 829 (445) (1,070) (1,366)
Net income (loss) .15 (.08) (.19) (.25)
per share
</TABLE>
Any difference between the above quarterly results and the final results as
reported herein are attributed to a tax valuation allowance charged against the
deferred tax asset during the fourth quarter 1996.
12. STOCKHOLDERS' EQUITY
The Company completed an initial public offering of 2,014,000 newly
authorized shares of Class A Common Stock (Offering) in July 1994. The Company
amended its certificate of incorporation (Amendment) to reclassify all of the
shares of its Class A common stock outstanding immediately prior to the
Offering as Class B common stock (Reclassification), increase the number of
authorized shares of all classes of its capital stock and provide for the
voting rights of its Class A and Class B common stock. The Reclassification
provided that each of the 973 shares of its Class A common stock outstanding
immediately prior to the Offering be reclassified as 3,597.12 shares of Class B
common stock. Such Reclassification resulted in 3,500,000 shares of Class B
common stock outstanding with such shares being the only shares of the
Company's common stock outstanding prior to the Offering. The Amendment also
increased the number of authorized shares of the Company's Class A common stock
to 7,500,000. Class B common stock to 10,500,000 and Preferred Stock to
500,000. In addition, the Amendment provided that each holder of the Company's
Class B common stock is entitled to 10 votes per share. Holders of Class A
common stock are entitled to one vote per share. The rights of each share of
Class A and Class B stock are identical in all respects except voting
privileges. No dividends were declared or paid during the years ended December
31, 1996 and 1995.
13. STOCK COMPENSATION PLANS
In 1994 the Company adopted the Integrity Music, Inc. Long-term Incentive
Plan (the "Incentive Plan"), which permits grants of incentive stock options,
non-qualified stock options (options), stock appreciation rights (SARs),
performance shares, restricted stock and other stock-based awards. The
Incentive Plan, which is administered by the Compensation Committee, authorizes
the issuance of up to 525,000 shares of Class A Common Stock in connection with
such awards. Under the Incentive Plan, options may not be
26
<PAGE> 28
granted at less than market value on the date of grant. Options vest over five
years from date of grant at 20% per year. At December 31, 1996, there were
360,000 options outstanding under the Plan, granted at fair market value at
date of grant, including 190,000 units granted and 81,000 units canceled in
1996, and no options were exercised. Options granted in 1995 were 94,000. At
December 31, 1996, 55,400 options are exercisable and 304,600 options are not
exercisable as they have not yet vested. The options and warrants outstanding
at December 31, 1996 are exercisable at prices ranging from $1.875 to $9.00 per
share for a total exercise price of $3,213,000.
During 1995 and 1994, the Compensation Committee granted rights under the
Executive Stock Purchase Plan permitting certain employees to purchase shares
of common stock. Under this Plan, there were 50,000 shares of Class A common
stock and 0 shares of Class B common stock reserved at December 31, 1996.
The Company has adopted the 1994 Stock Option Plan for Outside Directors.
Under this plan each director (other than employees, former employees or
immediate family members of current or former employees) automatically will
receive on the day following each annual meeting of stockholders options to
purchase 1,000 shares of Class A common stock which vest immediately. Such
options have an exercise price equal to 100% of the fair market value of the
Class A Common Stock at the date of grant. Subsequent to the Company's initial
public offering, options for 2,000 shares of Class A common stock were granted
at $9 per share (fair market value at date of grant). The day following the
1996 and 1995 annual meetings of stockholders, 3,000 additional shares of class
A common stock each year were granted to outside directors. At December 31,
1996, 8,000 shares were exercisable under this plan.
Effective December 28, 1995, the Company's Board of Directors adopted the
1995 Cash Incentive Plan. Awards shall be granted by the Company's
Compensation Committee and any award shall be expressed in a number of units
payable only in cash. Vesting is one-fifth of the units of an award on each
anniversary of the date of grant until vested in full. Participants shall
become vested in full six months after the occurrence of a change in control
(as defined by the agreement) of the Company. The value of all units shall be
measured as the difference between the fair market value of the Company's stock
on the grant date and the fair market value of the Company's stock on any given
date subsequent to the grant date. To the extent the fair market value of the
stock exceeds the fair market value at the date of grant, compensation expense
will be charged to the Company's statement of operations. As of December 31,
1996, 167,500 awards have been granted. At December 31, 1996, no liability or
provision has been made as there was no increase in the fair market value of
the stock between the grant date and the end of the year.
The Company accounts for its stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" under which no compensation expense
is recognized. In 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) for
disclosure purposes; accordingly, no compensation expense has been recognized
in the results of operations for its stock option plans as required by APB
Opinion No. 25.
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for stock options granted
in 1996 and 1995, respectively; annual dividends of zero for both years,
expected volatility of 70% for both years, risk-free interest rate equal to the
yield of a five year government bond on the various option issuance dates, and
expected life of 5 years for all grants. The weighted-average fair value of
the stock options granted in 1996 and 1995 was $.83 and $1.99, respectively.
Under the above model, the total value of stock options granted in 1996 and
1995 was $161,000 and $193,000, respectively, which would be amortized ratably
on a pro forma basis over the five year option vesting period. Had the Company
determined compensation cost for these plans in accordance with SFAS No. 123,
the Company's pro forma net loss and loss per share would have been $3,778,000
and $.69 in 1996 and $2,091,000 and $.38 in 1995. The SFAS No. 123 method of
accounting does not apply to options granted prior to January 1, 1995, and,
accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
27
<PAGE> 29
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules of the Company are
set forth herewith:
INTEGRITY INCORPORATED
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
--------------------------------
Balance at Charged to Charged to
Beg. of costs and other Balance at end
Description Period expenses Accounts Deductions(1) of Period
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
Allowance for returns
and doubtful accounts $ 925 $ 6,340 $(5,901) $ 1,363
1994
Allowance for returns
and doubtful accounts 1,363 7,770 (7,714) 1,419
1995
Allowance for returns
and doubtful accounts 1,419 10,090 (9,833) 1,676
1996
Allowance for returns
and doubtful accounts 1,676 7,311 (7,303) 1,684
</TABLE>
(1) Represents write-offs during the respective period for product
returns and uncollectible accounts.
All other schedules have been omitted, as they are not required under the
related instructions, are inapplicable, or because the information required is
included in the consolidated financial statements or notes thereto.
28
<PAGE> 30
3. EXHIBITS
The exhibits indicated below are either incorporated by reference herein or
are bound separately and accompany the copies of this report filed with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. Copies of such exhibits will be furnished to any requesting
stockholder of the Company upon payment of the costs of copying and
transmitting the same.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------------------------------------------------------------------------------------------------------------------------
<S> <C>
3(i) Certificate of Incorporation of the Registrant, as amended (incorporated by reference
from Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated
July 21, 1995 (incorporated by reference from Exhibit 3(i).1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by reference from Exhibit 3(ii) to
the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
amendments thereto, originally filed on May 6, 1994).
4.1 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 4.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-
78582), and amendments thereto, originally filed on May 6, 1994).
10.1 Agreement dated as of June 1, 1994, by and between Integrity Music, Inc. and LCS
Industries, Inc. (Portions of the foregoing have been granted confidential
treatment.) (incorporated by reference from Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582), and amendments thereto,
originally filed on May 6, 1994).
10.2 Form of Continuity Club Membership Agreement (incorporated by reference from Exhibit
10.25 to the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
amendments thereto, originally filed on May 6, 1994).
10.3 Form of Tax Indemnification Agreement by and between Integrity Music, Inc. and P.
Michael Coleman (incorporated by reference from Exhibit 10.41 to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582), and amendments thereto,
originally filed on May 6, 1994).
10.4 Loan and Security Agreement with First Union National Bank of Tennessee dated April
12, 1995 (incorporated by reference from Exhibit 10.49 to the Registrants' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.5 Amendment No. 1, dated September 29, 1995 to the Loan and Security Agreement between
First Union National Bank of Tennessee and the Registrant, dated April 12, 1995
(incorporated by reference from Exhibit 10.52 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
10.6 Loan Agreement dated September 29, 1995, between Whitney Bank and the Registrant
(incorporated by reference from Exhibit 10.53 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
10.7 Loan and Security Agreement, dated as of August 2, 1996, by and among Integrity
Incorporated and Creditanstalt Corporate Finance, Inc., (incorporated by reference
from Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
</TABLE>
29
<PAGE> 31
<TABLE>
<S> <C>
10.8 Stock Pledge Agreement, dated as of August 2, 1996, by Integrity Incorporated in
favor of Creditanstalt Corporate Finance, Inc., (incorporated by reference from
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10.9 Conditional Assignment and Trademark Security Agreement, dated August 2, 1996,
between Integrity Incorporated and Creditanstalt Corporate Finance, Inc.
(incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.10 Collateral Assignment and Agreement, dated as of August 2, 1996, by and between
Integrity Incorporated and Creditanstalt Corporate Finance, Inc., (incorporated by
reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
10.11 Copyright Security Agreement, dated as of August 2, 1996, made by Integrity
Incorporated in favor of Creditanstalt Corporate Finance, Inc., (incorporated by
reference from Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
10.12 Warrant Agreement, dated August 2, 1996, made by Integrity Incorporated in favor of
Creditanstalt Corporate Finance, Inc., (incorporated by reference from Exhibit 10.6
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996).
10.13 Product Distribution Agreement by and between Integrity Incorporated and Word, Inc.,
dated as of April 1, 1996. (The foregoing is the subject of a request for
confidential treatment.) (incorporated by reference from Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.14 First Amendment to Loan and Security Agreement, dated as of February 14, 1997, by
and among Integrity Incorporated and Creditanstalt Corporate Finance, Inc.
10.15 Amended and Restated Stock Pledge Agreement, dated as of January 22, 1997, by
Integrity Incorporated in favor of Creditanstalt Corporate Finance, Inc.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.16 Integrity Music, Inc. Profit Sharing Plan (incorporated by reference from Exhibit
10.42 to the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
amendments thereto, originally filed on May 6, 1994).
10.17 1994 Management Incentive Plan (incorporated by reference from Exhibit 10.43 to the
Registrant's Registration Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
10.18 Integrity Music, Inc. Long-Term Incentive Plan (incorporated by reference) from
Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-
86126) filed on November 7, 1994).
10.19 Form of Stock Option Agreement under the Integrity Music, Inc. Long-Term Incentive
Plan (incorporated by reference from Exhibit 10.45 to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments thereto, originally filed
on May 6, 1994).
10.20 Integrity Music, Inc. 1994 Stock Option Plan for Outside Directors (incorporated by
reference from Exhibit 4(c) to the Registrant's Registration Statement on Form S-8
(File No. 33-86128) filed on November 7, 1994).
10.21 Form of Indemnification Agreement (incorporated by reference from Exhibit 10.47 to
the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
amendments thereto, originally filed on May 6, 1994).
</TABLE>
30
<PAGE> 32
<TABLE>
<S> <C>
10.22 Integrity Music, Inc. Employee Stock Purchase Plan (incorporated by reference from
Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-
84584) filed on September 29, 1994).
10.23 Integrity Music, Inc. 401(k) Employee Savings Plan (incorporated by reference from
Exhibit 10.50 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995).
10.24 Defined Contribution Master Plan and Trust Agreement relating to Non-Standardized
Profit Sharing Plan (incorporated by reference from Exhibit 10.51 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
10.25 Form of Key Employee Change in Control Agreement (incorporated by reference from
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.26 Integrity Incorporated 1995 Cash Incentive Plan (incorporated by reference from
Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.27 Integrity Incorporated Severance Agreement (incorporated by reference from Exhibit
10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).
10.28 Employment Agreement by and among Integrity Incorporated and Jerry Weimer dated as of
March 28, 1996.
11 Statement Re Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K
The Registrant filed no reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 1996.
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 14, 1997.
INTEGRITY INCORPORATED
BY: /s/ P. MICHAEL COLEMAN
----------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities indicated on March 14,
1997.
Signature Title
--------- -----
/s/ P. Michael Coleman
------------------------ Chairman, President and Chief Executive Officer
P. Michael Coleman (Principal Executive Officer)
/s/ Alison S. Richardson
------------------------ Vice President, Corporate Controller
Alison S. Richardson (Principal Financial and Accounting Officer)
/s/ Jean C. Coleman
------------------------ Director
Jean C. Coleman
/s/ John B. Ellis
------------------------ Director
John B. Ellis
/s/ Charles V. Simpson
------------------------ Director
Charles V. Simpson
/s/ Heeth Varnedoe III
------------------------ Director
Heeth Varnedoe III
32
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made as of the 14th day of February, 1997, by and between INTEGRITY
INCORPORATED, a Delaware corporation (hereinafter referred to as "Borrower"),
and CREDITANSTALT CORPORATE FINANCE, INC., a Delaware corporation (hereinafter
referred to as the "Lender").
W I T N E S S E T H :
WHEREAS, Borrower and the Lender are party to that certain Loan and
Security Agreement dated as of August 2, 1996 (the "Loan Agreement") pursuant to
which the Lender made available to Borrower a revolving credit facility
permitting advances of up to Six Million Dollars ($6,000,000) at any one time
outstanding and a term loan in the principal amount of Thirteen Million Dollars
($13,000,000); and
WHEREAS, Borrower has requested that the Lender modify the financial
covenants set forth in Section 8 of the Loan Agreement; and
WHEREAS, Borrower and the Lender desire to restrict the ability of Borrower
and its Subsidiaries to transfer any assets to Borrower's Australian Subsidiary,
Integrity Music Pty Ltd, upon the terms and conditions set forth below;
WHEREAS, Borrower and the Lender desire to modify the Loan Agreement
according to the terms and conditions more particularly described in this
Amendment;
NOW, THEREFORE, in consideration of the foregoing premises, the terms and
conditions herein stated, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Defined terms used herein, as indicated by the
initial capitalization thereof, shall have the meanings ascribed to such terms
in the Loan Agreement, except to the extent that such terms are amended by this
Amendment.
2. Certain Definitions.
(a) Section 1.1 of the Loan Agreement is hereby amended by
inserting the following new definition in its correct alphabetical order:
"Australian Subsidiary" shall mean Integrity Music Pty Ltd, an
Australian corporation which is a wholly-owned subsidiary of Borrower.
<PAGE> 2
(b) Section 1.1 of the Loan Agreement is hereby amended by
deleting the definition of "Capital Expenditures" set forth on page 3 of the
Loan Agreement in its entirety.
3. Additional Collateral. The Loan Agreement is hereby further amended
by deleting Section 4.2(b) thereof in its entirety and by substituting therefore
a new Section 4.2(b) to read as follows:
(b) Stock Pledge Agreement. Borrower shall execute and deliver
a stock pledge agreement, substantially in the form of Exhibit D
attached hereto (the "Stock Pledge Agreement"), in favor of Lender,
pledging to Lender all of the issued and outstanding shares of Capital
Stock of Subsidiaries (other than the Foreign Subsidiaries) and
sixty-five percent (65%) of the issued and outstanding shares of the
Foreign Subsidiaries other than the Australian Subsidiary.
4. Financial Covenants. The Loan Agreement is hereby further amended
by deleting Sections 8.1 through 8.5 thereof in their entirety and by
substituting therefore new Sections 8.1 through 8.5 to read as follows:
8.1 Net Worth. Borrower and its consolidated Subsidiaries shall
maintain at all times during the applicable periods set forth below, a
Net Worth, on a consolidated basis, of not less than the amount set
forth opposite each such applicable period:
<TABLE>
<CAPTION>
APPLICABLE PERIOD AMOUNT
----------------------- -----------
<S> <C>
01/01/97 - 12/31/97 $10,000,000
01/01/98 - 12/31/98 $11,000,000
01/01/99 - 12/31/99 $13,000,000
01/01/00 - 12/31/00 $15,000,000
At all times thereafter $17,000,000
</TABLE>
8.2 Cash Flow. Borrower and its Subsidiaries shall maintain as
of the end of each fiscal quarter of Borrower during the applicable
periods set forth below, a Cash Flow for such fiscal quarter, in the
case of the fiscal quarter ending on March 31, 1997, and for the four
fiscal quarter period then ended, in the case of each fiscal quarter
thereafter, of not less than the amount set forth opposite each such
applicable period:
2
<PAGE> 3
<TABLE>
<CAPTION>
APPLICABLE PERIOD AMOUNT
------------------- ----------
<S> <C>
01/01/97 - 03/31/97 $1,000,000
04/01/97 - 09/30/97 $4,000,000
10/01/97 - 12/31/97 $5,500,000
01/01/98 - 06/30/98 $6,000,000
07/01/98 - 12/31/98 $6,500,000
01/01/99 - 12/31/99 $7,000,000
At all times thereafter $7,500,000
</TABLE>
8.3 Leverage Ratio. Borrower and its consolidated Subsidiaries
shall maintain, on a consolidated basis, as of the end of each fiscal
quarter of Borrower during the applicable periods set forth below a
Leverage Ratio for each such quarter of not greater than the ratio set
forth below opposite the applicable period during which such quarter
occurs:
<TABLE>
<CAPTION>
APPLICABLE PERIOD RATIO
----------------------- -------
<S> <C>
01/01/97 - 03/31/97 2.0:1.0
04/01/97 - 12/31/97 1.8:1.0
01/01/98 - 12/31/98 1.5:1.0
01/01/99 - 12/31/99 1.2:1.0
01/01/00 - 12/31/00 1.1:1.0
At all times thereafter 1.0:1.0
</TABLE>
8.4 Interest Coverage Ratio. Borrower and its consolidated
Subsidiaries shall maintain, on a consolidated basis, as of the end of
each fiscal quarter of Borrower during the applicable periods set
forth below, an Interest Coverage Ratio for such fiscal quarter, in
the case of each fiscal quarter ending on or prior to June 30, 1997,
and for the four fiscal quarter period then ended, in the case of each
fiscal quarter thereafter, of not less than the ratio set forth below
opposite each such applicable period:
<TABLE>
<CAPTION>
APPLICABLE PERIOD RATIO
----------------------- ---------
<S> <C>
01/01/97 - 09/30/97 2.50:1.00
10/01/97 - 12/31/97 3.50:1.00
At all times thereafter 4.00:1.00
</TABLE>
8.5 Fixed Charge Coverage Ratio. Borrower and its consolidated
Subsidiaries shall maintain, on a consolidated basis, as of the end of
each fiscal quarter of Borrower during the applicable period set forth
below, a Fixed Charge Coverage Ratio for such fiscal quarter, in the
case of each fiscal quarter ending on or prior to September 30, 1997,
and for the four fiscal quarter period then ended, in the
3
<PAGE> 4
case of each fiscal quarter thereafter, of not less than the ratio set
forth opposite each such applicable period:
<TABLE>
<CAPTION>
APPLICABLE PERIOD RATIO
----------------------- ---------
<S> <C>
01/01/97 - 12/31/97 1.00:1.00
01/01/98 - 12/31/99 1.10:1.00
01/01/00 - 12/31/00 1.20:1.00
At all times thereafter 1.25:1.00
</TABLE>
5. Additional Documentation. The Loan Agreement is hereby further
amended by deleting Section 6.14 thereof in its entirety and by substituting
therefore a new Section 6.14 to read as follows:
6.14 Additional Documentation. Promptly upon the request of
Lender, (a) execute and deliver to Lender a stock pledge agreement,
pledging to Lender as security for the Obligations sixty-five percent
(65%) of the issued and outstanding shares of capital stock of the
Australian Subsidiary; and (b) cause Integrity Music to execute and
deliver to Lender a guaranty of the Obligations and a security
agreement granting to lender a Lien on substantially all of its assets
as security for the Obligations.
6. Amendment Fee. In consideration of the amendments set forth herein,
Borrower agrees to pay to Lender an amendment fee (the "Amendment Fee") in the
amount of $20,000, which shall be due and payable on the date of execution
hereof. Such fee shall be fully earned on payment thereof and shall not be
subject to proration or rebate for any reason.
7. Conditions Precedent. Subject to the terms and conditions hereof,
this Amendment and the amendments set forth herein shall not become effective
unless and until (a) this Amendment has been executed by both the Borrower and
the Lender and (b) Borrower shall have paid to Lender the amendment fee
described in Section 6 hereof.
8. Representations and Warranties; No Default.
(a) Borrower hereby represents and warrants to the Lender that as
of the date hereof, and after giving effect to this Amendment, (i) all of
Borrower's representations and warranties contained in the Loan Agreement, as
amended hereby, and the other Loan Documents are true and correct on and as of
the date hereof, and (ii) no Default or Event of Default has occurred and is
continuing as of such date under any Loan Document.
(b) Borrower hereby further represents and warrants to the
Lender that (i) Borrower has the power and authority to enter into this
Amendment and to perform all of its obligations hereunder; (ii) the execution
and delivery of this Amendment has been duly authorized by all necessary action
(corporate or otherwise) on the part of Borrower; and (iii) the execution and
delivery of this Amendment and performance thereof by Borrower does not and will
not violate the
4
<PAGE> 5
Certificate of Incorporation, By-laws or other organizational documents of
Borrower and does not and will not violate or conflict with any law, order,
writ, injunction, or decree of any court, administrative agency or other
governmental authority applicable to Borrower or its properties.
9. No Claims; Offset. Borrower hereby represents, warrants, acknowledges
and agrees to and with the Lender that (a) Borrower does not hold or claim any
right of action, claim, cause of action or damages, either at law or in equity,
against the Lender which arises from, may arise from, allegedly arise from, are
based upon or are related in any manner whatsoever to the Loan Agreement and the
Loan Documents or which are based upon acts or omissions of the Lender in
connection therewith and (b) the Obligations are absolutely owed to the Lender,
without offset, deduction or counterclaim.
10. Limitation of Amendment. Except as expressly set forth herein, this
Amendment shall not be deemed to waive, amend or modify any term or condition of
the Loan Agreement or any other Loan Documents, each of which is hereby ratified
and reaffirmed and which shall remain in full force and effect, nor to serve as
a consent to any matter prohibited by the terms and conditions thereof.
11. Counterparts. This Amendment may be executed in two or more
counterparts, each of which when fully executed shall be deemed to constitute
one and the same agreement. Any signature page to this Amendment may be
witnessed by a telecopy or other facsimile of any original signature page and
any signature page of any counterpart hereof may be appended to any other
counterpart hereof to form a completely executed counterpart hereof.
12. Successors and Assigns. This Amendment shall be binding upon and inure
to the benefit of the successors and permitted assigns of the parties hereto.
13. Section References. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreements among the parties hereto evidenced hereby.
14. Costs, Expenses and Taxes. Borrower agrees to pay on demand all costs
and expenses of the Lender in connection with the preparation, execution,
delivery and enforcement of this Amendment and all other Amendment Documents
executed in connection herewith, and any other transactions contemplated hereby,
including, without limitation, reasonable attorneys' fees.
15. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed under seal as of the day and year first above written.
"BORROWER"
INTEGRITY INCORPORATED
By: /s/ P. Michael Coleman
-------------------------------
Name: P. Michael Coleman
Title:
Attest: /s/ Alvin S. Richardson
--------------------------
Name: Alvin S. Richardson
Title:
[CORPORATE SEAL]
"LENDER"
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ Joseph P. Longosz
------------------------------
Name: Joseph P. Longosz
Title: Vice President
By: /s/ Scott Kray
------------------------------
Name: Scott Kray
Title: Senior Associate
6
<PAGE> 1
EXHIBIT 10.15
AMENDED AND RESTATED STOCK PLEDGE AGREEMENT
THIS AMENDED AND RESTATED STOCK PLEDGE AGREEMENT (this "Agreement") is
made as of January 22, 1997, by INTEGRITY INCORPORATED, a Delaware corporation
("Pledgor"), in favor of CREDITANSTALT CORPORATE FINANCE, INC. (the "Lender")
under the Loan Agreement referred to below.
W I T N E S S E T H :
WHEREAS, Pledgor has entered into a Loan and Security Agreement, dated as
of August 2, 1996 (as the same may be amended, modified or supplemented from
time to time, the "Loan Agreement"), pursuant to which the Lender agreed,
subject to the terms and conditions set forth therein, to make certain loans to
Pledgor in the aggregate principal amount of up to $19,000,000; and
WHEREAS, Pledgor owns all of the issued and outstanding shares of capital
stock ("Shares") of each of Pledgor's subsidiaries (each, a "Subsidiary" and
collectively, the "Subsidiaries"); and
WHEREAS, pursuant to a Stock Pledge Agreement dated as of August 2, 1996,
Pledgor pledged certain or all of the Shares to the Lender to secure Pledgor's
obligations to the Lender under the Loan Agreement and the other Loan
Documents; and
WHEREAS, Pledgor and the Lender desire to amend and restate the Stock
Pledge Agreement;
NOW, THEREFORE, in order to induce the Lender to continue to make Loans
subject to the terms and conditions of the Loan Agreement, and for other good
and valuable consideration, the receipt, adequacy and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. When used herein, the following terms shall have the
following respective meanings:
"Collateral" shall have the meaning given such term in Section 2
hereof.
"Event of Default" shall mean the occurrence of any one or more of
the following events:
(a) the occurrence of any Event of Default under, and as such term
is defined in, the Loan Agreement; or
(b) any of the Collateral shall be attached or levied upon or seized
in any legal proceedings, or held by virtue of any lien or distress, or
any other event or condition shall occur or exist which shall result in
the Lender no longer having a perfected, first priority security interest
in the Collateral, subject only to Permitted Liens; or
(c) default by the Pledgor in the observance or performance of any
covenant or agreement contained in this Agreement or any other Loan
Document to which Pledgor is a party; or
<PAGE> 2
(d) this Agreement ceases to be in full force and effect or Pledgor
renounces or disputes any of its obligations hereunder.
"Foreign Subsidiaries" shall mean Integrity Music Europe, Limited, a
U.K. private company, and Integrity Media Asia Pte Ltd, a Singapore
private company.
"Pledged Stock" shall have the meaning given such term in Section 2
hereof.
"Property Act" means the Conveyancing and Law of Property Act,
Chapter 61 of Singapore.
"Stock" shall mean all shares, options, interests, participations or
other equivalents (howsoever designated) of or in a corporation, whether
voting or non-voting, including, without limitation, common stock,
warrants, preferred stock, convertible debentures and all agreements,
instruments and documents convertible, in whole or in part, into any one
or more or all of the foregoing.
Except to the extent otherwise defined herein, all other capitalized terms
contained in this Agreement shall have the meanings ascribed to such terms in
the Loan Agreement.
2. Pledge. Pledgor hereby pledges, conveys, hypothecates, mortgages,
charges, assigns, sets over, delivers and grants to the Lender as security for
the payment and performance when due of all the Obligations, a security
interest in all of Pledgor's right, title and interest in and to the following,
whether now owned or hereafter acquired (collectively, the "Collateral"): (i)
all of the Shares and all additional Stock of each of the Subsidiaries (other
than the Foreign Subsidiaries) from time to time acquired by Pledgor in any
manner from and after the date hereof and (ii) all of the Shares of the Foreign
Subsidiaries set forth on Exhibit A attached hereto and incorporated herein by
reference and all additional Stock of each of the Foreign Subsidiaries from
time to time acquired by Pledgor in any manner from and after the date hereof
(the Shares pledged pursuant to clauses (i) and (ii) above being hereinafter
collectively referred to as the "Pledged Stock"), including, without
limitation, all stock rights, rights to subscribe, stock splits, stock
dividends, new securities and certificates, subscriptions, additions and
replacements declared or issued with respect to or on account of any Pledged
Stock, together with all proceeds thereof and all cash, additional securities
and other property at any time and from time to time receivable or otherwise
distributed in respect of or in exchange for any and all such Pledged Stock.
3. Representations and Warranties of Pledgor. Pledgor hereby represents
and warrants to the Lender as follows:
(a) Corporate Existence and Qualification. Pledgor is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware, and Pledgor is duly qualified as a foreign
corporation in good standing in the State of Alabama. Pledgor is duly
qualified as a foreign corporation in good standing in each other state
wherein the conduct of its business or the ownership of its property
requires such qualification except where the failure to maintain such
2
<PAGE> 3
qualification or good standing could not reasonably be expected to result
in a Material Adverse Effect;
(b) Authority; Valid and Binding Effect. Pledgor has the corporate
power and authority to execute, deliver and perform its obligations under
this Agreement and the Loan Documents to which it is a party, and has
taken all necessary and appropriate corporate action to authorize the
execution, delivery and performance of this Agreement and such Loan
Documents to which it is a party. This Agreement and the other Loan
Documents to which Pledgor is a party constitute the valid and legally
binding obligations of Pledgor, enforceable against Pledgor in accordance
with their respective terms except that enforceability may be limited by
bankruptcy, insolvency and other laws affecting creditor's rights
generally and except that the availability of certain remedies may be
limited by general principles of equity;
(c) No Conflict. The execution, delivery and performance by Pledgor
of this Agreement (a) are not in contravention of any provisions of
Applicable Law the violation of which might have a Material Adverse
Effect; (b) will not violate or result in a default under any agreement
or indenture to which the Pledgor is a party or by which Pledgor is
bound, the violation or default of which might have a Material Adverse
Effect; (c) do not contravene the Certificate of Incorporation or By-laws
of Pledgor; and (d) will not result in or require the creation or
imposition of any Lien on any of the property or assets of Pledgor other
than Liens in favor of the Lender created by this Agreement;
(d) Governmental Action. The execution, delivery and performance of
this Agreement do not require any registration with, consent or approval
of, or any notice to, or other action to, with or by any Governmental
Authority, the failure of which to obtain might have a Material Adverse
Effect, except for (i) filings, consents or notices which have been
obtained and a copy thereof furnished to Lender; and (ii) filings
necessary to perfect the Liens granted by this Agreement;
(e) Security Interest. This Agreement and the pledge of the
Collateral pursuant hereto create a valid and, together with and upon the
physical delivery of certificates evidencing the Pledged Stock to the
Lender, perfected first priority security interest in the Collateral in
favor of the Lender securing the payment of the Obligations, and all
filings and all other actions necessary or desirable to perfect such
security interest have been taken;
(f) Title. Pledgor is the legal and equitable owner of, and has the
complete and unconditional authority to pledge, the Collateral and holds
the same free and clear of any and all liens, claims, charges,
encumbrances and security interests of any nature whatsoever, except for
Permitted Liens; no effective financing statement or other instrument
similar in effect covering all or any part of the Collateral is on file
in any recording office, except such as may have been filed in favor of
the Lender relating to this Agreement; Pledgor has not granted or given
any proxy, power of attorney, option or right of first refusal with
respect to any of the Collateral except to the Lender; and Pledgor is not
a party to any agreement which restricts its right to vote, assign,
pledge, transfer or give a proxy or power of attorney with respect to any
of the Collateral or any interest therein;
3
<PAGE> 4
(g) Shares. Except as specifically set forth on Exhibit A hereto,
the Pledged Stock constitutes one hundred percent (100%) of the issued
and outstanding Shares of the Subsidiaries (other than the Foreign
Subsidiaries) and sixty-five percent (65%) of the issued and outstanding
Shares of the Foreign Subsidiaries, all of which Shares have been duly
authorized, are validly issued in full compliance with all applicable
securities laws and other Applicable Law, and are fully paid and
nonassessable; and there are no existing options, warrants or commitments
of any kind or nature or any outstanding securities or other instruments
convertible into shares of any class of voting stock of the Subsidiaries,
and no stock of the Subsidiaries is held in treasury of such
Subsidiaries; and
(h) No Violation of Securities Laws. Pledgor's execution and
delivery of this Agreement does not directly or indirectly violate or
result in a violation of any securities laws.
4. Covenants and Agreements of Pledgor. Pledgor covenants and agrees as
follows:
(a) Delivery of Certificates. Pledgor shall have delivered to the
Lender all certificates evidencing the Collateral, accompanied by
executed stock powers in blank, and by such other instruments or
documents as the Lender or its counsel may reasonably request;
(b) After Acquired Collateral Delivery. Promptly, and in any event
within ten (10) days after Pledgor acquires any additional Stock or
receives or is issued any Stock or other securities or property in
respect of any of the Collateral, whether or not for value paid for it,
Pledgor shall, subject to Section 5(a) hereof, (i) deliver such Stock or
other securities or property (including, but not limited to, any and all
certificates evidencing any such Stock or securities) to the Lender
together with stock powers or other appropriate instruments of transfer,
executed in blank, all to be held subject to the terms of this Agreement;
and (ii) execute and deliver such pledge agreements, security agreements,
financing statements or other instruments, documents or agreements as may
be necessary or appropriate to confirm, evidence or perfect the security
interests granted hereby; provided, however, that nothing contained in
this Section 4(b) shall require Pledgor to Pledge in excess of sixty-five
percent (65%) of the issued and outstanding Shares of any Foreign
Subsidiary;
(c) No New Stock. Except as permitted by the Loan Agreement,
Pledgor will not, subsequent to the date of this Agreement, cause or
permit the Subsidiaries to issue any Stock or securities convertible into
Stock, unless and except upon first having obtained the prior written
consent of the Lender;
(d) Taxes. Pledgor will pay all taxes, assessments and charges
levied, assessed or imposed upon the Collateral owned by it prior to the
date on which penalties attach thereto, except where the same may be
contested in good faith by appropriate proceedings and for which adequate
reserves have been established;
(e) No Transfer. Other than as permitted under Section 7.3 of the
Loan Agreement, Pledgor will not sell, assign, transfer or otherwise
dispose of all or any portion of the Collateral owned by Pledgor, or any
rights therein, without the prior written consent of the Lender;
4
<PAGE> 5
(f) No Amendments. Without the prior written consent of the Lender,
Pledgor will not approve or consent to any changes to the Certificate or
Articles of Incorporation or By-Laws of any Subsidiary which would in any
way impair or diminish the rights of the Lender hereunder;
(g) Right to Perform. In the event that Pledgor fails or refuses to
perform any of its obligations set forth herein, the Lender shall have
the right, without obligation, to do all things it deems necessary or
advisable to discharge the same, and any sums paid by the Lender, or the
cost thereof, including without limitation, attorneys' fees, shall
constitute Obligations, be secured by the Collateral and bear interest as
provided in the Loan Agreement until paid;
(h) No Obligation. Pledgor acknowledges and agrees that nothing
contained herein shall obligate the Lender or any Lender or impose a duty
upon the Lender or any Lender to assume any duties or obligations of
Pledgor with respect to any of the Collateral; and
(i) Further Assurances. Pledgor agrees at anytime and from time to
time, at Pledgor's expense, to execute and deliver all further
instruments and documents and to perform all acts and do all things that
may be reasonably necessary or desirable or that the Lender may request,
now or hereafter, to evidence, preserve or protect the creation,
attachment or perfection of the security interests herein granted to the
Lender or to enable the Lender to exercise and enforce its rights and
remedies hereunder with respect to the Collateral including, without
limitation, all action specified in Section 6 hereof. The obligations of
Pledgor under this Section 4(i) shall, with respect to Integrity Media
Asia Pte Ltd, be in addition to and not in substitution for the covenants
for any further assurance deemed to be included herein by virtue of the
Property Act.
5. Distributions; Etc.
(a) Right of Pledgor to Receive Distributions. So long as no Event
of Default exists hereunder or under the Loan Agreement, or would exist
upon the payment of the distribution amounts described in this Section
5(a), Pledgor shall have the right to receive cash distributions declared
and paid with respect to the Collateral owned by Pledgor, to the extent
such distributions are permitted by the Loan Agreement. Any and all
stock or liquidating distributions, other distributions in property,
return of capital or other distributions made on or in respect of
Collateral, whether resulting from a subdivision, combination or
reclassification of the outstanding capital stock of any Subsidiary or
received in exchange for Collateral or any part thereof or as a result of
any merger, consolidation, acquisition or other exchange of assets to
which any Subsidiary may be a party or otherwise, shall be and become
part of the Collateral pledged hereunder and, if received by Pledgor,
shall be received in trust, for the benefit of the Lender, shall be
segregated from other funds of Pledgor and shall be forthwith paid over
to the Lender as Collateral in the same form as so received (together
with any necessary endorsements.)
(b) Holding Collateral; Exchanges. The Lender may hold any of the
Collateral, endorsed or assigned in blank, and may deliver any of the
Collateral to Pledgor for the purpose of
5
<PAGE> 6
making denominational exchanges or registrations or transfers or for such
other reasonable purpose in furtherance of this Agreement as the Lender
may deem desirable. The Lender shall have the right, if reasonably
necessary or desirable in order to perfect or maintain the perfection of
the Lien created hereby, without notice to Pledgor, to transfer to or
register in the name of the Lender or any of its nominees, any or all of
the Collateral; provided that notwithstanding the foregoing, until any
transfer of beneficial ownership with respect to the Collateral pursuant
to any exercise of remedies under Section 6 hereof, Pledgor shall continue
to be the beneficial owner of the Collateral. In addition, the Lender
shall have the right at any time to exchange certificates or instruments
representing or evidencing Collateral for certificates or instruments of
smaller or larger denominations.
(c) Termination of Pledgor's Right to Receive Distributions. Upon
and after the occurrence of any Event of Default and during the
continuation thereof, all rights of Pledgor to receive any cash
distributions pursuant to Section 5(a) hereof shall cease, and all such
rights shall thereupon become vested in the Lender and the Lender shall
have the sole and exclusive right to receive and retain the distributions
which Pledgor would otherwise be authorized to receive and retain
pursuant to Section 5(a) hereof. In such event, Pledgor shall pay over
to the Lender any distributions received by it with respect to the
Collateral and any and all money and other property paid over to or
received by the Lender pursuant to the provisions of this Section 5(c)
shall be retained by the Lender as Collateral hereunder and/or shall be
applied to the repayment of the Obligations in accordance with the
provisions hereof.
6. Remedies. Upon and after an Event of Default, the Lender shall have
the following rights and remedies:
(a) Set-Off. The right of Lender to set-off, without notice to
Pledgor, any and all deposits at any time credited by or due from Lender
to Pledgor whether in a general or special, time or demand, final or
provisional account or any other account or represented by a certificate
of deposit and whether or not matured or contingent.
(b) Secured Creditor. All of the rights and remedies of a secured
party under the Uniform Commercial Code of the state where such rights
and remedies are asserted, or under other applicable law all of which
rights and remedies shall be cumulative, and none of which shall be
exclusive, to the extent permitted by law, in addition to any other
rights and remedies contained in this Agreement.
(c) Right of Sale. The Lender may, without demand and without
advertisement, notice or legal process of any kind (except as may be
required by law), all of which Pledgor waives, at any time or times (i)
apply any cash distributions received by the Lender pursuant to Section
5(c) hereof to the Obligations; and (ii) if following such application
there remains outstanding any Obligations, sell the remaining Collateral,
or any part thereof, at public or private sale or at any broker's board
or on any securities exchange, for cash, upon credit or for future
delivery as the Lender shall deem appropriate. At any such sale, the
Collateral, or any portion thereof, to be sold may be sold in one lot as
an entirety or in separate parcels, as the Lender may (in its sole and
absolute discretion)
6
<PAGE> 7
determine. The Lender shall not be obligated to make any sale of the
Collateral if it shall determine not to do so, regardless of the fact that
notice of the sale of the Collateral may have been given. In case the
sale of all or part of the Collateral is made on credit or for future
delivery, the Collateral so sold may be retained by the Lender until the
sale price is paid by the purchaser or purchasers thereof, but the Lender
shall not incur any liability in case any such purchaser or purchasers
shall fail to take up and pay for the Collateral so sold and, in case of
any such failure, such Collateral may be sold again. At any sale or sales
made pursuant to this Section 6, the Lender may, to the maximum extent
permitted by Applicable Law, bid for and purchase, free from any claim or
right of whatever kind, including any equity of redemption, of Pledgor,
any such demand, notice, claim, right or equity being hereby expressly
waived and released, any or all of the Collateral offered for sale, and
may make any payment on the account thereof by using any claim for moneys
then due and payable to the Lender or any Lender by Pledgor as a credit
against the purchase price; and the Lender, upon compliance with the terms
of sale, may hold, retain and dispose of the Collateral without further
accountability therefor to the Pledgor or any third party. The Lender
shall be authorized at any sale (if, on the advice of counsel, it deems it
advisable to do so) to restrict the prospective bidders or purchasers to
Persons who will represent and agree that they are purchasing the
Collateral for their own account for investment and not with a view to the
distribution or resale thereof, and upon consummation of any sale the
Lender shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof the Collateral so sold. Each purchaser at
any sale shall hold the property sold absolutely free from any claim or
right on the part of Pledgor, and Pledgor hereby waives (to the extent
permitted by law) all rights of redemption, stay and/or appraisal which
Pledgor now has or may have at any time in the future under any rule of
law or statute now existing or hereafter enacted. The proceeds realized
from the sale of any Collateral shall be applied first to the costs,
expenses and attorneys' fees and expenses actually incurred by Lender for
collection and for acquisition, completion, protection, removal, sale and
delivery of the Collateral; second, to interest due upon any of the
Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Pledgor shall remain liable to the Lender therefor
in accordance with the terms of the Loan Agreement. If any surplus shall
remain, the Lender shall pay such surplus to the Person legally entitled
thereto. The provisions of this Section 6(c) shall be qualified with
respect to Integrity Media Asia Pte Ltd. by the following: (1) the
restriction in Section 25 of the Property Act on the exercise of the
statutory power of sale shall not apply to any exercise by the Lender of
its power of sale or other disposal or of other powers conferred under
Section 24 of the Property Act which shall arise; (2) the statutory power
under Section 29 of the Property Act of appointing a receiver of the
Collateral or the income thereof, immediately upon any such default by the
Pledgor; (3) a writing by an officer or agent of the Lender in favor of a
purchaser that either or both of the foregoing such powers has arisen and
is exercisable shall be conclusive evidence of that fact; and (4) the
powers and protections conferred by this Agreement in relation to the
Collateral or any part thereof on the Lender shall be in addition to and
not in substitution for the powers and protections conferred on mortgagees
or chargees under the Property Act, which shall apply to the security
created by this Agreement except insofar as they are expressly or
impliedly excluded. Where there is any ambiguity or conflict between the
powers contained in the Property Act and those conferred by this Agreement
as aforesaid, then the terms of this Agreement shall prevail.
(d) Notice. Any notice required to be given by the Lender of a
sale, or other disposition of the Collateral or any other intended action
by the Lender, given to Pledgor in the manner specified in Section 9(i)
at least ten (10) days prior to the date of such intended action, shall
constitute
7
<PAGE> 8
commercially reasonable and fair notice thereof to Pledgor.
(e) Securities Laws. In view of the position of Pledgor in relation
to the securities now or hereafter included in the Collateral, or because
of other present or future circumstances, a question may arise under the
securities laws with respect to any disposition of the Collateral
permitted hereunder. Pledgor understands that compliance with the
securities laws may very strictly limit the course of the Lender's conduct
if the Lender attempts to dispose of all or any part of the Collateral and
may also limit the extent to which or the manner in which any subsequent
transferee of any Collateral may dispose of the same. The Pledgor will
not attempt to hold the Lender responsible for selling all or any part of
the Collateral at a price less than that available on any public or
private market, and Pledgor agrees that even if the Lender shall accept
the first offer received or does not approach more than one possible
purchaser such sale shall still be deemed commercially reasonable. Without
limiting the generality of the foregoing, Pledgor clearly understands and
agrees that the Lender shall be entitled to place all or any part of the
Collateral for private placement by an investment banking firm, that any
such investment banking firm may purchase all or any part of the
Collateral for its own account, and that the Lender shall be entitled to
place all or any part of the Collateral privately with a purchaser or
purchasers, notwithstanding the existence of a public or private market
upon which the quotations or sales prices may exceed substantially the
price at which the Lender sells.
7. Power of Attorney; Proxy.
(a) Appointment of the Lender as Pledgor's Attorney-In-Fact.
Pledgor irrevocably designates, makes, constitutes and appoints the
Lender (and all Persons designated by the Lender), as its true and lawful
attorney (and agent-in-fact) and the Lender, or the Lender's agent, may,
without notice to Pledgor, in the name of Pledgor or the Lender: (i) at
such time or times thereafter as the Lender or said agent, in its
discretion may determine, endorse the name of Pledgor upon any checks,
notes, acceptance, money orders, certificates, drafts or other forms of
payment of security that come into the Lender's possession; and (ii)
after the occurrence of an Event of Default, (1) transfer the Collateral
on the books of Pledgor with full power of substitution in the premises,
and (2) do all acts and things necessary, in the Lender's discretion, to
fulfill the obligations of Pledgor under this Agreement.
(b) Irrevocable Proxy. Upon the delivery from the Lender to Pledgor
following the occurrence of any Event of Default of notice affirmatively
assuming voting rights with respect to the Stock included in the
Collateral, the Lender, or its nominee, without notice or demand of any
kind to Pledgor, shall have the sole and exclusive right to exercise all
voting powers pertaining to any and all of the Collateral (and to give
written consents in lieu of voting thereon) and may exercise such power
in such manner as the Lender, in its sole discretion, shall determine.
THIS PROXY IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE. The exercise
by the Lender of any of its rights and remedies under this Section shall
not be deemed a disposition of Collateral under Article 9 of the Uniform
Commercial Code nor an acceptance by the Lender of any of the Collateral
in satisfaction of any of the Obligations.
8. Release and Termination. Pledgor acknowledges and agrees that this
Agreement shall continue in full force and effect unless and until all
Obligations have been fully and irrevocably paid and
8
<PAGE> 9
performed and all financing arrangements between Pledgor and the Lender have
been terminated. After this Agreement has terminated, the Lender, at Pledgor's
expense, shall return all Collateral then in its possession and control to
Pledgor.
9. Miscellaneous.
(a) Modification of Agreement; Sale of Interest. This Agreement may
not be modified, altered or amended, except by an agreement in writing
signed by Pledgor and the Lender. Pledgor may not sell, assign or
transfer this Agreement or any portion thereof, including, without
limitation, Pledgor's rights, title, interests, remedies, powers, and/or
duties hereunder. Pledgor hereby consents to the Lender's assignment and
transfer of this Agreement including, without limitation, the Lender's
rights, title, interests, remedies, powers, and/or duties hereunder upon
the appointment of any successor to the Lender. Pledgor also hereby
consents to the assignment or transfer, at any time or times hereafter,
of the beneficial interests granted under this Agreement or of any
portion thereof, upon the participation, sale, assignment, transfer, or
other disposition by the Lender of Loans made by it, or any portion
thereof, in accordance with the Loan Agreement.
(b) Expenses. Pledgor will upon demand pay to the Lender the amount
of all reasonable expenses, including, without limitation, the reasonable
fees and expenses of its counsel, that the Lender may actually incur in
connection with (i) the administration of this Agreement, (ii) the
custody, preservation or sale of or the collection from, or other
realization upon, any of the Collateral, (iii) the exercise, enforcement
of any rights of the Lender hereunder, and/or (iv) the failure by Pledgor
to perform or observe any of the provisions hereof.
(c) Loan Document. This Agreement shall be construed as a Loan
Document and shall be subject to all of the benefits, terms and
conditions of the Loan Agreement with respect thereto.
(d) Waiver by the Lender. Each and every right and remedy granted
to the Lender under this Agreement, or any other document delivered
hereunder or in connection herewith or allowed it by law or in equity,
shall be cumulative and may be exercised from time to time. The failure
of the Lender, at any time or times hereafter, to require strict
performance of any provision of this Agreement by Pledgor, shall not
waive, affect or diminish any right of the Lender thereafter to demand
strict compliance and performance therewith. Any suspension or waiver by
the Lender of an Event of Default by Pledgor under this Agreement shall
not suspend, waive or affect any other Event of Default by Pledgor under
this Agreement, whether the same is prior or subsequent thereto and
whether of the same or of a different type. None of the undertakings,
agreements, warranties, covenants and representations of Pledgor
contained in this Agreement and no Event of Default hereunder shall be
deemed to have been suspended or waived by the Lender, unless such
suspension or waiver is by an instrument in writing signed by a duly
authorized representative of the Lender and directed to such Pledgor
specifying such suspension or waiver.
(e) Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions
of this Agreement.
9
<PAGE> 10
(f) Parties. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of Pledgor and the
Lender, for the benefit of the Lender. This provision, however, shall
not be deemed to modify Section 9(a) hereof.
(g) Conflict of Terms. Except as otherwise provided in this
Agreement by specific reference to the applicable provision of the Loan
Agreement, if any provision contained in this Agreement is in conflict
with, or inconsistent with, any provision in the Loan Agreement, the
provision contained in the Loan Agreement shall govern and control.
(h) Waivers by Pledgor. Except as otherwise provided for in this
Agreement, Pledgor hereby waives (i) presentment, demand and protest and
notice of presentment, protest, default, non-payment, maturity, release,
compromise, settlement, extension or renewal of any or all commercial
paper, accounts, contract rights, documents, instruments, chattel paper
and guaranties at any time held by the Lender on which Pledgor may in any
way be liable and hereby ratifies and confirms whatever the Lender may do
in this regard; (ii) any bond or security which might be required by any
court prior to allowing the Lender to exercise the Lender's remedies; and
(iii) the benefit of all valuation, appraisement and exemption laws.
(i) Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been
given or made when (i) delivered to Borrower in the manner set forth in
Section 12.7 of the Loan Agreement, in the case of notices to Pledgor; and
(ii) delivered to the Lender in the manner set forth in Section 12.7 of
the Loan Agreement in the case of notices to the Lender.
(j) Survival. All representations, warranties and covenants made
herein shall survive the execution and delivery of all of this Agreement
and the other Loan Documents. The terms and provisions of this Agreement
shall continue in full force and effect until all of the Obligations have
been paid in full and the Lender has terminated the Loan Agreement in
writing, whichever last occurs; provided, further, that Pledgor's
obligations under Section 9(b) shall survive the repayment of the
Obligations and the termination of this Agreement.
(k) Time of the Essence. Time is of the essence in this Agreement.
(l) Section Titles. The section titles contained in this Agreement
are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties
hereto.
(m) Reinstatement. This Agreement shall continue to be effective,
or be reinstated, as the case may be, if at any time payment, or any part
thereof, of any of the Obligations is rescinded or must otherwise be
restored or returned by Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization Pledgor, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or
custodian, trustee or similar officer for, Pledgor or any part of its
respective property, or otherwise, all as though such payments had not
been made.
(n) Counterparts. This Agreement may be executed in two (2) or more
counterparts,
10
<PAGE> 11
each of which when fully executed shall be an original and all of said
counterparts taken together, shall constitute one and the same agreement.
Any signature page to this Agreement may be witnessed by a telecopy or
facsimile of any original signature page and any signature page of any
counterpart hereof may be appended to any other counterpart hereof to form
a completely executed counterpart hereof.
(o) GOVERNING LAW; JURISDICTION. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. PLEDGOR HEREBY (A) SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN
NEW YORK CITY FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS AGREEMENT; (B) AGREES THAT SECTIONS 5-1401 AND 5-1402 OF
THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK SHALL APPLY TO THIS
AGREEMENT; AND (C) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE REGARDING THE
LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.
(p) WAIVER OF JURY TRIAL. AFTER REVIEWING THIS PROVISION
SPECIFICALLY WITH ITS COUNSEL, PLEDGOR HEREBY KNOWINGLY, INTELLIGENTLY
AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LEGAL PROCEEDING BASED ON OR ARISING OUT OF,
UNDER, IN CONNECTION WITH, OR RELATING TO THIS AGREEMENT, ANY OF THE
OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, THE TRANSACTIONS
CONTEMPLATED HEREBY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF PLEDGOR OR THE
LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER MAKING
THE LOANS TO PLEDGOR.
________________
Initials
11
<PAGE> 12
IN WITNESS WHEREOF, Pledgor has caused its duly authorized officers to set
their respective hands and the seal of the Pledgor as of the date first above
written.
"Pledgor"
INTEGRITY INCORPORATED
a Delaware corporation
By: /s/ Michael Coleman
--------------------------------
Name:
Title:
Attest: /s/
----------------------------
Name:
Title:
[CORPORATE SEAL]
<PAGE> 13
EXHIBIT A
<TABLE>
<CAPTION>
Percentage of
Number of Class of Certificate Outstanding
Subsidiary Shares Shares No. Capital Stock
---------- ------ ------ --- ------------
<S> <C> <C> <C> <C>
1. Integrity Music, Inc. 1,000 Common 1 100%
2. Integrity at Home Incorporated 100 Common 1 100%
3. Integrity Distribution
Company, Inc. 100 Common 1 100%
4. Integrity Music Europe Limited 650 Ordinary 8 65%
5. Integrity Media Asia Pte Ltd 195,000 Ordinary 4 65%
</TABLE>
<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 28th ay
of March, 1996, by and among Integrity Incorporated, a Delaware corporation,
("Employer") and Jerry Weimer, an individual residing in Mobile, Alabama
("Employee").
In consideration of the promises, covenants and conditions set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Employee and Employer agree as
follows:
1. Employment.
Employee hereby employs Employee and Employee hereby accepts employment in
the position of Executive Vice President/Chief Operating Officer (the
"Position") upon the terms and conditions hereinafter set forth.
2. Services.
During the term of employment hereunder, Employee shall devote his full
professional time and energy to the performance of his duties as Executive Vice
President/Chief Operating Officer and shall use his best efforts in the
performance of the same; provided that, in addition to annual paid vacation to
which Employee will be entitled as provided in paragraph 3(c), Employee may take
up to four weeks of unpaid leave per fiscal year to work with Inspiration
Cruises, the scheduling of such leave to be subject to the approval of the Chief
Executive Officer of Employer. Employer and Employee agree that Employee's
duties in the Position shall be determined by Employer and may be altered by
Employer from time to time at its sole discretion. Employer and Employee
acknowledge and agree that Employee's initial duties in the Position shall
consist of, among other things, general oversight of the following areas of the
Employer's business: product development; sales and marketing; and operations
and distribution.
3. Compensation.
For and in consideration of the promises and covenants made herein and the
services to be provided hereunder, Employer agrees to compensate Employee as
follows:
(a) Salary. Employer shall pay to Employee an annual salary in the amount
of One Hundred Seventy Five Thousand Dollars and No Cents
($175,000.00), less taxes and other normal withholdings. Said salary
shall be paid to Employee in equal semi-monthly installments.
(b) Benefits. Employee shall be entitled to receive or participate in all
employment benefits or benefit plans generally made available by
Employer
<PAGE> 2
to its employees, if any, to the same extent and under the same
conditions as other covered employees.
(c) Vacation. Employee shall be entitled to four weeks of paid vacation
per fiscal year.
(d) Bonus. As long as Employee holds an executive officer position with
Employer, Employee shall be eligible to receive cash bonuses under the
executive cash bonus compensation system established from time to time
by the Employer. Under such system, cash bonuses are awarded in the
judgment of the Compensation Committee of the Board of Directors of
the Employer based on the achievement of budgeted targets and the
individual performance of the Employee.
4. Term and Termination.
Employee's employment with Employer shall begin on the 28th day of March,
1996 and shall continue until terminated as provided in this Agreement. Employee
acknowledges and agrees that this Agreement, and his employment with Employer,
shall be terminated upon the occurrence of any of the following events:
(a) Employee's death;
(b) Employee becoming or remaining Disabled for substantially continuous
period of six months. For purposes of this Paragraph, the term
"Disabled" shall mean Employee's inability to perform the essential
functions of his position with or without reasonable accommodation;
(c) Mutual written agreement between Employer and Employee to terminate;
(d) After Employee has been employed by Employer for at least eighteen
(18) months, upon six (6) months prior written notice of termination
from Employer to Employee for any reason or no reason at all.
Provided: Employer, at its sole discretion, may elect to pay to
Employee an amount equal to Employee's salary for six (6) months in
lieu of providing the notice set forth in this subparagraph; or
(e) Immediately upon written notice of termination from Employer "for
cause." For purposes of this Agreement, a termination shall be
considered to be "for cause" if it occurs in conjunction with a
determination by Employer that Employee has committed or engaged in
either (i) any act that constitutes, on the part of Employee, fraud,
dishonesty, breach of fiduciary duty, a felony or gross misfeasance of
duty; or (ii) conduct by Employee in his office with the Employer that
is grossly inappropriate and demonstrably likely to lead to material
injury to Employer, as determined by the Board
-2-
<PAGE> 3
of Directors of Employer acting reasonably and in good faith;
provided, that in the case of (ii) above, such conduct shall not
constitute "cause" unless Employer's Board of Directors shall have
delivered to Employee notice setting forth with specificity (A) the
conduct deemed to qualify as "cause", (B) reasonable action that would
remedy such objection, and (C) a reasonable time (not less than thirty
(30) days) within which Employee may take such remedial action, and
Employee shall not have taken such specified remedial action within
the specified time.
5. Change in Control.
Contemporaneously with their execution of this Agreement, Employer and
Employee have agreed to and executed a separate agreement entitled Key Employee
Change in Control Agreement ("Change in Control Agreement"). The Change in
Control Agreement, which is attached hereto as Exhibit A, is hereby expressly
incorporated into and made a part of this Agreement as if its terms were set
forth in full herein.
6. Non-disclosure of Confidential Information.
(a) Definitions.
The following definitions shall apply to this Agreement:
(i) "Trade Secrets" means all secret, proprietary or confidential
information regarding Employer or its business, including any and all
information not generally known to, or ascertainable by, persons not
employed by Employer, the disclosure or knowledge of which would
permit those persons to derive actual or potential economic value
therefrom or to cause economic or financial harm to Employer. Such
information shall include, but not be limited to, financial
information, strategic plans and forecasts, marketing plans and
forecasts, customer lists, mailing lists, computer software (including
without limitation, source code, object code and manuals), customer
billing or order information, technical information regarding
Employer's products or services, prices offered to or paid by
customers, purchase and supply information, current and future
development and expansion or contraction plans of Employer, sales and
marketing plans and techniques, information concerning personnel
assignments and operations of Employer and matters concerning the
financial affairs, future plans and management of Employer. "Trade
Secrets" shall not include information that has become generally
available to the public by the act of one who has the right to
disclose such information without violating a legal right of Employer.
(ii) "Confidential Information" means information, other than
Trade Secrets, which relates to Employer, Employer's activities,
-3-
<PAGE> 4
Employer's business or Employer's suppliers or customers that is not
generally known by persons not employed by Employer and which is or
has been disclosed to Employee or of which Employee became aware as a
consequence of or through his relationship to Employer. "Confidential
Information" shall not include information that has become generally
available to the public by the act of one who has the right to
disclose such information without violating any legal right of
Employer.
(iii) "Documents" means originals or copies of handbooks,
manuals, files, memoranda, correspondence, notes, photographs, slides,
overheads, audio or visual tapes, cassettes, or disks, and records
maintained on computer or other electronic media.
(b) Covenant Regarding Non-disclosure of Trade Secrets or
Confidential Information.
Employee covenants and agrees that: (i) during his employment with
Employer he will not use or disclose any Trade Secrets or Confidential
Information of Employer other than as necessary in connection with the
performance of his duties as an employee of Employer; and (ii) for a
period of two (2) years immediately following the termination of his
employment with Employer, Employee shall not, directly or indirectly,
transmit or disclose any Trade Secret or Confidential Information of
Employer to any person and shall not make use of any such Trade Secret
or Confidential Information, directly or indirectly, for himself or
others, without the prior written consent of Employer, except for a
disclosure that is required by any law or order, in which case
Employee shall provide Employer prior written notice of such
requirement and an opportunity to contest such disclosure. However, to
the extent that such information is a "trade secret" as that term is
defined under a state or federal law, this subparagraph is not
intended to, and does not, limit Employer's rights or remedies
thereunder and the time period for prohibition on disclosure or use of
such information is until such information becomes generally known to
the public through the act of one who has the right to disclose such
information without violating a legal right of Employer.
(c) Return of Information.
Employee agrees that he shall return all Trade Secrets, Confidential
Information or other property of Employer immediately upon the
termination of his employment with Employer, including all handbooks,
training materials, reports, policy statements, programs, customer
lists, mailing lists and other documents provided by Employer or
acquired by Employee as a result of his employment with Employer, and
all copies thereof.
-4-
<PAGE> 5
7. Inventions and Other Developments.
All inventions, formulas, techniques, processes, concepts, systems and
programs, mailing lists and customer lists and compilations, whether or not
patented or patentable, or subject to copyright, made or conceived, individually
or in conjunction with others, by Employee during the term of his employment
with Employer that relate to activities or proposed activities of Employer or
that result from work performed by Employee for Employer are the sole and
exclusive property of Employer; provided, that Employee shall retain all rights
to, and may copyright in his name, all songs written by Employee. Employee
further agrees that, subject to the proviso in the immediately preceding
sentence, upon request by Employer, he will assign title to any such inventions,
formulas, techniques, processes, concepts, systems and programs, and lists and
compilations to Employer and will sign any and all documents necessary to effect
such assignment.
8. Non-recruitment of Employees Covenant.
Employee agrees that he will not, for so long as he is employed by
Employer, and for a period of two (2) years immediately following the
termination of his employment, solicit or induce, or attempt to solicit or
induce, any employee of the Employer to terminate his or her relationship with
Employer or to enter into an employment or agency relationship with Employee or
with any other person or entity other than Employer.
9. Covenant Not to Compete.
Employee expressly covenants and agrees that during the term of his
employment with Employer and for a period of two (2) years immediately following
the termination of said employment for any reason, he will not, directly or
indirectly, seek, obtain or accept a "Competitive Position" in the "Restricted
Territory" with a "Competitor" of Employer. For purposes of this Agreement, a
"Competitor" of Employer is any business, individual, partnership, joint
venture, association, firm, corporation or other entity engaged, wholly or in
part, in the production, publishing or distribution of Christian music or
Christian videos; a "Competitive Position" is any employment with a "Competitor"
of Employer in a position in which Employee will use or is likely to use any
Confidential Information or Trade Secrets (as those terms are defined in
Paragraph 6 of this Agreement), or in which Employee has managerial duties for
such "Competitor" of Employer that are the same as or substantially similar to
those actually performed by Employee for Employer with respect to Employer's
direct response business or Employer's praise and worship music business; and
"Restricted Territory" is the geographical area set forth in Exhibit B to this
Agreement. Nothing contained in this Paragraph is intended to prevent Employee
from investing in stock or other securities listed on a national securities
exchange or actively traded on the over the counter market of any Competitor;
provided, however, that Employee shall not hold more than a total of five
percent (5%) of all issued and outstanding stock or other securities of any such
corporation.
-5-
<PAGE> 6
10. Relief.
Employee acknowledges that the covenants and promises contained in this
Agreement are reasonable and necessary means of protecting and preserving
Employer's goodwill and its interest in the confidentiality and proprietary
value of its Trade Secrets and Confidential Information. Employee further
acknowledges that the same are reasonable and necessary means of protecting
Employer from unfair competition by Employee. Employee agrees that any breach of
the covenants or promises contained in paragraphs 6, 7, 8 or 9 will leave
Employer with no adequate remedy at law and may cause Employer to suffer
irreparable damage and injury. Employee further agrees that any breach of these
covenants or promises will entitle Employer to injunctive relief in any court of
competent jurisdiction without the necessity of posting any bond. Employee also
agrees that any such injunctive relief shall be in addition to any damages that
may be recoverable by Employer as a result of such breach. Employer agrees that
Employee will be entitled to seek a declaratory judgment as to the
enforceability of any of the covenants or promises contained in paragraphs 6, 7,
8 or 9.
Employee further agrees that no failure or delay by Employer in exercising,
enforcing or asserting any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise of any such right, power or privilege.
11. Severability.
The covenants and other provisions set forth in this Agreement shall be
considered and construed as separate and independent covenants and provisions.
Should any covenant or provision, or any part thereof, be held invalid, void or
unenforceable in any court of competent jurisdiction, such invalidity, voidness
or unenforceability shall not render invalid, void or unenforceable any other
part, covenant or provision of this Agreement. If any portion of the foregoing
covenants or provisions is found to be invalid or unenforceable by a court of
competent jurisdiction because its duration, territory, definition of activities
or definition of information covered is invalid or unreasonable in scope, the
invalid or unreasonable term shall be eliminated, redefined, or replaced with a
new enforceable term such that the intent of Employer and Employee in agreeing
to the covenants and provisions of this Agreement will not be impaired and the
covenant or provision in question shall be enforceable to the fullest extent of
the applicable laws.
12. Disputes and Governing Law.
Employer and Employee agree that, except as provided in paragraph 10
hereof, any dispute arising in connection with, or relating to, this Agreement
or the termination of this Agreement, to the maximum extent allowable by
applicable law, shall be subject to resolution through informal methods and,
failing such efforts, through arbitration. Either party may notify the other
party of the existence of a dispute by written notice. The parties shall
thereafter attempt in good faith to resolve their differences within the thirty
-6-
<PAGE> 7
(30) days after the receipt of such notice. If the dispute cannot be resolved
within the thirty (30) day period, either party may file a written demand for
arbitration with the other party. The arbitration shall proceed in accordance
with the terms of the Federal Arbitration Act and the rules and procedures of
the American Arbitration Association. The parties will attempt to choose an
arbitrator acceptable to the Employer and Employee, but if agreement on an
arbitrator cannot be reached within ten (10) days after either party files a
written demand for arbitration, a single arbitrator shall be appointed through
the American Arbitration Association's procedures to resolve the dispute.
Employer and Employee agree that in the event that arbitration is
necessary, the arbitrator shall apply the substantive laws of the state of
Alabama and any applicable federal law. The place for the arbitration shall be
Mobile, Alabama.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgment
of a court of competent jurisdiction in the state of Alabama.
13. Assignment.
This Agreement may not be assigned by Employee to any other person or
entity but may be assigned by Employer at its discretion to any successor to
all, or any part, of the stock or assets of Employer or to any lender of
Employer.
14. Titles.
The titles, headings and captions used in this Agreement are for
convenience of reference only and shall in no way limit, define, expand, or
otherwise affect the meaning or construction of any provision of this Agreement.
15. Entire Agreement.
This Agreement is intended by the Parties hereto to be the final expression
of their agreement with respect to the subject matter hereof and represents the
complete and exclusive statement of the terms of their agreement,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. Except as expressly noted herein, this Agreement supersedes any
former agreements between the Parties governing the same subject matter. This
Agreement may be modified only by a written instrument signed by each of the
Parties hereto.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the undersigned set their hands and seals as of the ___
day of May, 1996.
INTEGRITY INCORPORATED JERRY WEIMER
/s/ P. Michael Coleman /s/ Jerry Weimer [SEAL]
- -------------------------------- -------------------------
NAME: P. Michael Coleman JERRY WEIMER
TITLE: Chairman, President and
Chief Executive Officer
ATTEST:
/s/ Alison S. Richardson
- -------------------------------
Secretary
[CORPORATE SEAL]
-8-
<PAGE> 9
EXHIBIT A
KEY EMPLOYEE CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made and entered into as of the 28th day of March, 1996,
by and between INTEGRITY INCORPORATED (the "Company") and Jerry Weimer (the
"Employee").
W I T N E S S E T H:
WHEREAS Employee is entering the employ of Company in the position of
Executive Vice President/Chief Operating Officer; and
WHEREAS Company wants to induce Employee to remain in said position and to
retain his objectivity during circumstances relating to potential changes in
control by providing Employee a measure of security; and
WHEREAS Company wants to have the benefits of the Employee's full time and
attention directed to the affairs of Company without diversion due to concerns
about a possible change in control; and
WHEREAS, the Company wants to position itself to attract and retain able
managers by adopting compensation practices competitive with peer companies by
providing similar severance benefits consistent with its policy of competitive
employment and compensation practices;
NOW, THEREFORE, in consideration of ONE DOLLAR and other good and valuable
considerations from each to the other, receipt whereof being hereby
acknowledged, Company and Employee agree as follows:
1. Supplemental Employment Benefit. In the event that Employee is employed
by Company at the time of a Change in Control (as hereinafter defined in Section
6) Employee shall be entitled to the supplemental employment benefits
hereinafter provided if Employee's employment with Company terminates within 18
months after the Change in Control has occurred,
(a) involuntarily, other than an involuntary termination for cause and
other than occurring as the result of the death, disability, or
termination at or after attaining normal retirement age,
(b) voluntarily, following
-1-
<PAGE> 10
(i) any reduction of more than 10% in Employee's combined base
salary and annual bonus from that for the calendar year immediately
preceding the Change in Control,
(ii) any relocation to an office of the Company or an affiliate
of the Company more than 100 surface miles (i.e., surface miles using
standard surface transportation such as public streets, roads and
highways by the shortest route available) from the office where
Employee was principally located at the time of the Change in Control
or any increase in Employee's required travel of more than 100 surface
miles (as defined above) due to a reassignment of Employee to another
office of the Company or to an affiliate of the Company,
(iii) any material reduction in the level of responsibility,
position (including status, office, title, reporting relationships or
working conditions), authority or duties of Employee from that held by
the Employee immediately preceding the Change in Control, or
(iv) any material reduction in the aggregate fringe benefits and
perquisites available to Employee immediately preceding the Change in
Control not offset by salary or annual bonus increases, or
(c) voluntarily if, following a Change in Control, any successor
or acquiror of Company either announces that it will not honor or
cause Company to honor the terms of this Agreement or if, at any time,
fails to confirm in writing to Employee within fifteen (15) business
days of a written request by Employee that it will honor and will
cause Company to honor the terms of this Agreement.
As soon as practicable and in no event more than sixty (60) days after
a termination described in (a), (b) or (c) above, Company shall pay to Employee
the Severance Payment specified in Section 2 and shall provide the Benefits
specified in Section 3 on an uninterrupted basis. For purposes hereof a
termination shall be considered to be "for cause" if it occurs in conjunction
with a determination by Company that Employee has committed or engaged in either
(i) any act that constitutes, on the part of Employee, (A) fraud, dishonesty, a
felony or gross malfeasance of duty, and (B) that directly results in material
injury to the Company; or (ii) conduct by Employee in his office with the
Company that is grossly inappropriate and demonstrably likely to lead to
material injury to the Company, as determined by the Board of Directors of the
Company (the "Board") acting reasonably and in good faith; provided, however,
that in the case of (ii) above, such conduct shall not constitute "cause" unless
the Board shall have delivered to the Employee notice setting forth with
specificity (A) the conduct deemed to qualify as "cause", (B) reasonable action
that would remedy such objection, and (C) a reasonable time (not less than
thirty (30) days) within which the Employee may take such remedial action, and
the Employee shall not have taken such specified remedial action within such
-2-
<PAGE> 11
specified reasonable time. For purposes hereof, (i) the Employee shall be
considered "disabled" if Employee is eligible for benefits under the Company's
long term disability plan (or would be eligible if not for an applicable
exclusion period, waiting period, preexisting condition, reduction in benefits
due to other sources of funds such as social security or worker's compensation,
and any other similar limitation) and (ii) "normal retirement age" shall mean
age 65. In the event Company takes the position that a termination has occurred
"for cause" it shall so notify Employee in writing at the time of such
termination. If for any reason, or no reason, Company takes the position that
some or all of the benefits provided hereunder are not due and owing to Employee
or that it will not pay Employee any or all of the benefits provided hereunder,
either Employee or Company may submit the resolution of such dispute to
arbitration as provided in Section 5. Notwithstanding any dispute regarding this
Agreement, however, Company shall pay to Employee the Severance Payment and
continue to make the Benefits available during the period specified herein,
unless and until it is determined by arbitration proceedings pursuant to Section
5 that Employee is not entitled to all or a portion of the amount paid and/or to
continuation of the Benefits, at which time Employee shall reimburse Company all
amounts to which Employee is determined not to be entitled, plus an amount equal
to the legal rate of interest specified under the laws of the State of Alabama
for situations where there is an obligation to pay interest and no express
contract to pay interest at a specified rate.
2. Amount of Severance Payment. Subject to the limitation of Section 4, the
Severance Payment shall be an amount equal to the greater of (i) the aggregate
amount the Employee was to receive as salary under his Employment Agreement, of
which this Agreement is a part, for the first two years of the term of the
Employment Agreement, less all amounts actually paid to the Employee pursuant
thereto and (ii) one-half of Employee's annual base salary. For purposes of this
section, Employee's annual base salary shall be the greater of (i) his salary
immediately prior to the Change in Control, or (ii) his salary at the time of
his termination. In the event that, but for the payment of any or all of the
Severance Payment, Company would qualify for favorable pooling accounting
treatment with respect to the transaction constituting a Change in Control or
any other transaction, Employee shall not be entitled to payment of the portion
of the Severance Payment that would create the failure to so qualify.
3. Life, Medical and Other Benefits.
For a period of six (6) months following a termination of employment under
circumstances entitling Employee to payment of the Severance Payment, Company
shall make available to Employee (and his spouse and other qualified dependents)
basic life insurance, long-term disability insurance and benefits, health
insurance and other medical benefits ("Benefits") available to Employee
immediately preceding the Change in Control and such Benefits shall be made
available under the same terms and conditions (e.g., employee contributions for
certain benefits that are in effect for active employees who are similarly
situated) as continue to be available for comparable employees of Company during
the period provided in this Section 3 with such changes as may be applicable to
-3-
<PAGE> 12
such other employees. Notwithstanding the foregoing, Company shall not be
entitled to reduce the coverage available to the Employee, his spouse and other
qualified dependents or modify any of the terms and conditions thereof without
the written consent of Employee provided, however, that Company may provide a
substantially equivalent form of Benefit for any particular Benefit.
Notwithstanding the foregoing, Employee's rights to the foregoing benefits shall
terminate as to any benefit for which he becomes eligible that provides
substantially similar benefits on substantially similar terms through a program
of a subsequent employer or otherwise (such as through coverage obtained by
Employee's spouse).
4. Limitation.
(a) It is intended that all amounts payable hereunder, together with
all other amounts payable to Employee upon or in connection with a
Change in Control, are reasonable compensation for Employee's service
to Company and its subsidiaries. Notwithstanding the foregoing, if the
independent accounting firm that was approved by the shareholders in
the annual shareholders' meeting immediately prior to the Change in
Control ("Accounting Firm"), opines that payment of any or all of the
Severance Payment and the Benefits together with any other amounts
received by Employee that must be included in such determination,
would result in the denial of any deduction or the imposition of an
excise tax under Sections 280G and 4999 of the Code, then Company will
reduce the amount otherwise due and owing to Employee under this
Agreement by the smallest amount necessary to avoid the imposition of
any excise tax or the denial of any deduction. Such opinion shall be
based upon the proposed regulations under Code Sections 280G and 4999
or substantial authority within the meaning of Code Section 6662, and
shall set forth with particularity the smallest amount by which the
payment due Employee hereunder would have to be reduced to avoid the
imposition of any excise tax or the denial of any deduction pursuant
to Code Sections 280G and 4999 and shall demonstrate the relation of
such amount to the amounts set forth above.
(b) Company may reduce the Severance Payment and Benefits pursuant to
this Section 4 only if within sixty (60) days following the Employee's
termination it provides Employee with the opinion of the Accounting
Firm described in paragraph (a) above. Employee shall, if he agrees
with the determination of Accounting Firm, notify Company in writing
of the payments and/or Benefits that he wishes to have reduced in
order to comply with the provisions of this Section 4. In the event
that Employee fails to designate an order of priority for the
application of any such reduction, such reduction shall be made in the
order of priority determined by Company. In the event that Employee
does not agree with the opinion or calculation presented and he is
unable to resolve any dispute with
-4-
<PAGE> 13
Company regarding such disagreement within a period of thirty (30)
days of receipt of the opinion referenced above, Employee may submit
the resolution of this matter to arbitration pursuant to Section 5 or
take such other steps as he may deem advisable to enforce his
position.
5. Arbitration. The parties agree that all disputes that may arise
between them relating to the interpretation or performance of this Agreement,
including matters relating to any funding arrangements for the benefits provided
under this Agreement, to the maximum extent allowed by applicable law, shall be
determined by binding arbitration through an arbitrator chosen as provided in
this Section 5. Either party may notify the other party of the existence of a
dispute by written notice in accordance with Section 12 herein. The arbitration
shall proceed in accordance with the provisions of the Federal Arbitration Act
and the rules and procedures of the American Arbitration Association. If the
parties can agree to an arbitrator, the dispute may be resolved by a single
arbitrator. Otherwise, each party shall designate an arbitrator and a third
arbitrator shall be appointed by the two arbitrators selected by the parties. If
either party shall fail to appoint an arbitrator within thirty (30) days after
it is notified to do so, then the arbitration shall be conducted by a single
arbitrator. All arbitrators shall be selected from a panel proposed by the
American Arbitration Association. The parties agree that the arbitrators shall
apply the laws of the State of Alabama and any applicable federal law. Unless
otherwise agreed by the parties, all arbitration proceedings shall be held in
Mobile, Alabama. The award of the arbitrators shall be issued within sixty (60)
days of the close of the hearing or the submission of post-hearing memoranda,
whichever is later, and shall include each arbitrator's individual vote. The
award of the arbitrators shall be binding and conclusive upon the parties.
Either party shall have the right to have the award made the judgment of a court
of competent jurisdiction in the State of Alabama. At least thirty (30) days
prior to the arbitration, the Company shall provide Employee with an offer to
resolve the dispute and to pay Employee whatever benefits to which the Company
believes he is entitled. If the arbitrators' award is greater than the amount of
the Company's offer, Employee shall be entitled to payment by the Company of all
of his attorneys' fees, expenses and costs incurred in connection with the
arbitration, including the Employee's portion of the arbitrators' fees. If the
arbitrators' award is equal to or less than the Company's offer, the parties
shall be responsible for their own attorneys' fees, expenses and costs and shall
share the expenses of the arbitrators.
6. Change in Control. "Change in Control" means and includes each of the
following:
(a) A change of control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
the 1934 Act regardless of whether the Company is subject to such
reporting requirement;
(b) A change of control of the Company through a transaction or series
of transactions, such that any person (as that term is used in Section
13
-5-
<PAGE> 14
and 14(d)(2) of the 1934 Act), excluding affiliates of the Company as
of the date of this Agreement, is or becomes the beneficial owner (as
that term is used in Section 13(d) of the 1934 Act) directly or
indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding
securities;
(c) Any consolidation, merger or share exchange involving the Company
in which the Company is not the continuing or surviving corporation or
pursuant to which shares of Company stock would be converted into
cash, securities or other property, other than a merger of the Company
in which the holders of the shares of Company stock immediately before
the merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger;
(d) The stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
(e) Substantially all of the assets of the Company are sold or
otherwise transferred to parties that are not within a "controlled
group of corporations" (as defined in Section 1563 of the Code) in
which the Company is a member.
7. Other Employee Benefits. The benefits hereunder shall not be affected
by or reduced because of any other benefits to which Employee may be entitled by
reason of his continuing employment with Company or the termination of his
employment with Company, and no other such benefit by reason of such employment
shall be so affected or reduced because of the benefits bestowed by this
Agreement except as hereinafter specifically provided. Employee shall not be
entitled to duplicative health, medical, life, disability and other insurance
benefits or to severance payments specifically made only with respect to
termination of employment under any employment, retention or severance pay
agreement, plan or other arrangement. In addition, the payment of benefits to
Employee under Section 2 shall not entitle Employee to payments under the other
plans or arrangements providing similar benefits except to the extent such other
plans or arrangements provide additional benefits to those provided herein.
8. Withholding; Set-off. All amounts payable by Company hereunder shall
be subject to withholding of such amounts related to taxes as Company may be
legally obligated to withhold. The right of Employee to receive benefits under
this Agreement, however, shall be absolute and shall not be subject to any
set-off, counterclaim, recoupment, defense, duty to mitigate or other rights
Company may have against him or anyone else.
9. Subsequent Employment. Employee's right to receive benefits under
this Agreement shall not be reduced by reason of Employee's employment with any
other employer after terminating employment with the Company (except as set
forth in Section
-6-
<PAGE> 15
3). Any compensation for services rendered or consulting fees earned after the
date of termination shall not diminish Employee's right to receive all amounts
due hereunder.
10. Employee's Indemnity. Employee shall be entitled to the benefits of the
indemnity provided by Company's articles of incorporation, bylaws or otherwise
immediately prior to the Change in Control, and any subsequent changes to the
articles of incorporation, bylaws, or otherwise reducing the indemnity granted
to officers shall not affect the rights granted hereunder. Company may not
reduce these indemnity benefits confirmed to Employee hereunder without the
written consent of Employee.
11. Term. Without the consent of the Employee, the terms of this Agreement
may be terminated or amended by Company following the first anniversary of the
date hereof at any time prior to the first to occur of (i) a Change in Control,
(ii) the public announcement of a proposal for a transaction that, if
consummated, would constitute a Change in Control, or (iii) the Board of
Directors learns of a proposal for a transaction that, if consummated, would
constitute a Change in Control. Upon the occurrence of any of the foregoing
events, this Agreement shall continue as in effect at such time without
termination or further change by Company until the earlier of (x) 18 months
following any Change in Control, or (y) the final withdrawal or termination of a
proposal under item (ii) or (iii) that, had it been consummated, would have
constituted a Change in Control, at which time this Agreement may, once again,
be amended or terminated by Company until one of the events in (i), (ii) or
(iii) occurs. Notwithstanding the foregoing, in the event of a Change in
Control, upon Employee's termination of employment entitling him to benefits
under Sections 1 and 2, this Agreement may not be amended or terminated by
Company until all of the obligations and liabilities are satisfied. For purposes
of Sections 1, 2 and 3, Employee's base salary and benefits, and for purposes of
Section 10, Employee's indemnity immediately prior to an event causing this
Agreement to be non-amendable by Company alone shall be considered to be
Employee's base salary, benefits or indemnity immediately prior to the Change in
Control if such salary, benefits or indemnity prior to the event is greater. In
addition, action that would be described in Section 1(b)(ii) or (iii) if
occurring following a Change in Control shall be considered to have so occurred
if occurring following an event causing this Agreement to become non-amendable
if there ultimately is a Change in Control.
12. Notices. Notices, which must be in writing, will be considered
effective upon receipt and shall be sent to Company at its headquarters office,
attention Chief Executive Officer, or to Employee at the address set forth
below. Either party may notify the other of any change in the address for
notice. If the Employee is the Chief Executive Officer, notice to the Company
shall be sent to any outside director of the Company's Board of Directors.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Alabama applicable to agreements made
and entirely to be performed therein.
-7-
<PAGE> 16
14. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the successors (including any successor to Company by reason
of any Change in Control), heirs, personal representatives and assigns of the
parties hereto.
15. Employment With Related Parties. Employment with any present or future
parent, subsidiary or affiliate of Company or any successor to substantially all
of the business of Company shall be considered employment with Company for all
purposes of this Agreement.
16. Not Contract for Employment. Nothing in this Agreement shall be deemed
to give Employee the right to be retained in the service of Company or to deny
Company any right it may have to discharge, or demote Employee at any time.
17. Severability. The invalidity and unenforceability of any particular
provision of this Agreement shall not affect any other provision of the
Agreement and the Agreement shall be construed in all respects as if the invalid
or unenforceable provision were omitted.
18. No Assignment or Alienation of Benefits by Employees. The Employee
shall not have any power or right to transfer, assign, anticipate, hypothecate,
mortgage, commute, modify or otherwise encumber in advance any of the benefits
payable under this Agreement, nor shall these benefits be subject to seizure for
the payment of debt, judgment, alimony or separate maintenance owed by the
Employee, or any person claiming through the Employee, or be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise. Any
attempted assignment, anticipation, hypothecation, transfer, or other disposal
of the benefits hereunder, shall be void.
19. Miscellaneous. No provisions of this Agreement may be waived or
discharged unless such waiver or discharge is agreed to in writing signed by
Employee and Company. No waiver by either party hereto at any time of any breach
by the other party hereto of, or compliance with any condition or provision of
this Agreement to be performed by the other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, expressed
or implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
20. Headings. The headings herein are for convenience only and shall have
no significance in the interpretation of this Agreement.
-8-
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
under their respective seals as of the date written above.
INTEGRITY INCORPORATED
By: /s/ P. Michael Coleman
-----------------------------
Title: Chairman, President and
------------------------------
Chief Executive Officer
------------------------------
ATTEST:
By: /s/ Brenda Nichols
-------------------------
[CORPORATE SEAL]
JERRY WEIMER
/s/ Jerry Weimer
--------------------------------
Address: 1485 Brockton Lane E.
------------------------
Mobile, Alabama 36695
--------------------------------
-9-
<PAGE> 18
EXHIBIT B
"Restricted Territory" shall mean the United States.
<PAGE> 1
EXHIBIT 11
Integrity Incorporated
Statement of Computation of Per Share Loss
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Loss before extraordinary item $(3,459)
Assumed interest reduction (1) 65
-----------------
Adjusted loss before extraordinary item $(3,394)
=================
Weighted average number of shares outstanding
during the period 5,514
Net additional shares issuable (2) 70
-----------------
Adjusted shares outstanding 5,584
=================
Loss per share before extraordinary item $ (0.61)
=================
Net loss applicable to common stock $(3,707)
Assumed interest reduction (1) 65
-----------------
Adjusted loss applicable to common stock $(3,642)
=================
Weighted average number of shares outstanding
during the period 5,514
Net additional shares issuable (2) 70
-----------------
Adjusted shares outstanding 5,584
=================
Loss per share before extraordinary item $(0.65)
=================
</TABLE>
(1) Amount derived as 9.75% interest rate, multiplied by amount of debt
assumed to be repaid (i.e. $665,000) at the beginning of fiscal 1996 under the
modified treasury stock method.
(2) Weighted average number of options and warrants outstanding at December 31,
1996 less the 20% limitation on assumed repurchase.
This calculation is submitted in accordance with the rules and regulations of
the Securities and Exchange Commission. Under generally accepted accounting
principles this presentation would not be made because the effect is
antidilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Integrity Music, Inc.
Integrity Music Europe Limited
Integrity Music Pty, Ltd.
Integrity Media Asia Pte. Ltd.
<PAGE> 1
EXHIBIT 23
Consent of Price Waterhouse LLP
Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (numbers 33-86126, 33-86128 and 33-84584) of Integrity
Incorporated of our report dated February 14, 1997 appearing on page 14 of this
Form 10-K.
PRICE WATERHOUSE LLP
March 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,131
<SECURITIES> 0
<RECEIVABLES> 4,195
<ALLOWANCES> 1,684
<INVENTORY> 4,219
<CURRENT-ASSETS> 14,050
<PP&E> 6,285
<DEPRECIATION> 2,576
<TOTAL-ASSETS> 31,058
<CURRENT-LIABILITIES> 3,583
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 31,058
<SALES> 27,495
<TOTAL-REVENUES> 30,395
<CGS> 14,981
<TOTAL-COSTS> 9,131
<OTHER-EXPENSES> 8,745
<LOSS-PROVISION> 7,311
<INTEREST-EXPENSE> (1,804)
<INCOME-PRETAX> (4,113)
<INCOME-TAX> (654)
<INCOME-CONTINUING> (3,459)
<DISCONTINUED> 0
<EXTRAORDINARY> (248)
<CHANGES> 0
<NET-INCOME> (3,707)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.67)
</TABLE>
