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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION 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)
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION NUMBER 63-0952549
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. X Yes 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. [X]
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 $7,977,200 at March 12, 1999, as reported by the Nasdaq SmallCap Market.
The number of shares of Registrant's Class A Common Stock, $.01 par
value per share, outstanding at March 12, 1999 was 2,079,000.
The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 12, 1999 was 3,435,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 7, 1999 are incorporated by reference into Part
III.
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Integrity Incorporated (the "Company" or "Integrity") to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including without limitation those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factor's Affecting Future Performance." All written or
oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by these cautionary statements.
PART 1.
ITEM 1. BUSINESS
INTRODUCTION
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
consumers throughout the United States and internationally in over 140 other
countries worldwide. The Company has determined that its business is operated
in segments based on these distribution channels. For specific information
regarding the financial performance of each segment, see Note 9 to Notes to
Consolidated Financial Statements.
Integrity's recorded music products fall into two broad categories (i)
concept products which are centered on a specific theme, such as praise and
worship music and (ii) 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 songbooks and sheet music, designed primarily for
distribution to churches and choral groups.
Integrity was organized in Alabama as a corporation on May 1, 1987 and
was reincorporated in Delaware on October 1, 1993.
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 88th recording.
The Company's concept product line now includes: FairHope Records(R),
designed for budget-conscious customers, featuring classic praise and worship
titles grouped according to themes; Urban Praise(R) series songs of worship for
the African-American community; and Integrity Notes(R), a series of greeting
cards for general occasions and specialty cards related to seasonal events,
featuring verses from our praise and worship songs.
Artist Products
In addition to concept products, the Company also produces artist
recordings which have recently included "Live From The Potter's House" with
T.D. Jakes, "God Is Good" with Don Moen, "Holy Fire" with Paul Wilbur and
"Majesty" with Ron Kenoly. Previous recordings by Ron Kenoly include Welcome
Home, recipient of the Dove Foundation "Family Approved" seal of excellence;
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"Sing Out," the first Integrity title to enter Billboard's Top 200; "God is
Able", "High Places" and "Lift Him Up," which has received Gold certification
by the Recording Industry Association of America. Previous recordings by Don
Moen include the Gold-certified "Give Thanks", "Worship With Don Moen", and
"God Will Make A Way". Previous recordings by Paul Wilbur include "Shalom
Jerusalem" and "Up to Zion". A previous recording by T. D. Jakes was "Woman,
Thou Art Loosed".
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 "Majesty", "High Places", "Welcome Home", "Sing Out", the
first HOSANNA! title to appear on Billboard's Top 40 Music Video Chart, and the
Gold-certified videos "Lift Him Up" and "God is Able". The popular children's
music series Just-For-Kids(R), featuring the Donut Man(R), includes nine
Gold-certified and one Platinum-certified videos. Other videos include the
Gold-certified Praise! Aerobics(R), praise and worship music recorded
specifically for aerobic exercises and "Woman Thou Art Loosed" with T. D.
Jakes. Other products include 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.
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 five years running; "Let Your
Glory Fall", ranked among the top 10 in the non-seasonal musical charts; "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; "Because We Believe", ranked among the top 10 in the youth non-seasonal
musical charts; and the recently released "God For Us", a sequel to "God With
Us". These musicals were ranked by The Church Music Report ("TCMR"). Other
printed music products include "The Celebration Hymnal", a joint venture with
Word Entertainment, featuring over 700 songs and hymns.
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. The executive vice president/creative director is
responsible for the product creation process and the vice president of the
Creative Group provides significant input in the creative process. Both 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, a member of the finance department
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 140
countries.
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Direct To Consumer
The Company's direct to consumer activities are based 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. Shipments continue 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, purchasers of Christian mail order products
and donors to Christian ministries. When available, the Company obtains new
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 88th recording. Currently the Company operates several continuity
clubs, including the Integrity Notes(R), and Urban Praise(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.
In addition to continuity clubs, the Company's direct to consumer
program includes mail order catalog sales, telemarketing, one-time offers to
active customers, and sales through the Internet. 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. This program also
includes direct sales to churches of products such as choral music and printed
products, including "The Celebration Hymnal", which features over 700 songs and
hymns, introduced in 1997 in a joint venture with Word Entertainment.
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 Entertainment ("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
Tennessee. During 1998, SoundScan ranked Word as the number 2 distribution
company in the CBA market. SoundScan also ranked Integrity as the number two
record label in CBA, from the number three position in 1997. As a result of the
distribution agreement with Word, the Company also has access to the Sony/Epic
distribution system for sales in the general market.
Retail sales efforts are supported by Integrity's own in-house staff
for marketing, covering such things as point-of-purchase advertising, radio
promotion, and product publicity.
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 Myanmar
(formerly known as 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 140 countries. The
Company continually evaluates ways to expand into various markets through
importers or through distributors licensed to produce Integrity products from a
master recording. For specific financial information regarding the geographic
areas that the Company's international distribution network reaches, see Note 9
to Notes to Consolidated Financial Statements.
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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.
MUSIC PUBLISHING
The Company's song catalog has accumulated ownership rights for over
2,400 songs and has generated a significant amount of royalty income from use
by third parties. A majority of the songs appearing on Integrity recordings are
published out of the Company's song catalog.
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 current
contract with Word extends through March 30, 2000. All retail market sales
functions are currently performed by Word's sales force. Most 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. Some of the data
fulfillment services for direct to consumer are handled by Integrity's own
staff in Mobile. In addition to managing most of 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 and payment processing. Integrity's own distribution center
located in Mobile 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 2,400 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.
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.
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The Company competes with other record and music publishing companies, both
Christian and secular, on the basis of the Company's ability to produce new
products that are attractive to consumers, 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, 1998, the Company employed 149 individuals, 123 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 and unfair or deceptive
acts and practices in or affecting commerce. 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
indebtedness.
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, 1998.
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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 SmallCap 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 and The Nasdaq
SmallCap Market for the Class A Common Stock from January 1, 1997 through
March 12, 1999. The last sale price of the Class A Common Stock on March 12,
1999 was $4.00 per share.
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
Fiscal Year 1997
----------------
First Quarter 2.125 1.25
Second Quarter 2.375 1.5
Third Quarter 2.25 1.625
Fourth Quarter 2.00 1.125
Fiscal Year 1998
----------------
First Quarter 2.00 1.00
Second Quarter 3.75 1.63
Third Quarter 3.63 2.50
Fourth Quarter 12.25 1.50
Fiscal Year 1999
----------------
First Quarter (through
March 12, 1999) 7.25 3.50
</TABLE>
As of March 12, 1999, there were approximately 101 stockholders of
record and 1,800 beneficial stockholders 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 5 to the
financial statements.
The Company's Class A Common Stock moved to The Nasdaq SmallCap Market
effective October 2, 1998.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical balance sheet and statement of operations
presented below for each of the five years in the period ended December 31,
1998 have been derived from the consolidated financial statements for the
Company audited by PricewaterhouseCoopers 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.
Year Ended December 31
(in thousands, except per share data)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 38,847 $ 34,954 $ 31,975 $ 37,671 $ 35,972
Cost of sales 17,985 15,236 14,981 15,547 12,636
-------- -------- -------- -------- --------
Gross profit 20,862 19,718 16,994 22,124 23,336
Marketing and fulfillment expenses 9,023 9,450 10,711 16,308 11,992
General and administrative expenses 8,557 7,796 7,545 7,959 6,373
Loss on impairment of long-lived assets 0 0 1,200 0 0
-------- -------- -------- -------- --------
Income (loss) from operations 3,282 2,472 (2,462) (2,143) 4,971
Interest expense (net) 1,529 1,790 1,804 1,027 525
Other (income) expense 0 3 (153) 65 (10)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item,
minority interest and taxes 1,753 679 (4,113) (3,235) 4,456
Income tax (expense) benefit 369 0 654 1,183 (1,644)
Minority interest (268) (37) 0 0 0
-------- -------- -------- -------- --------
Income (loss) before extraordinary item 1,854 642 (3,459) (2,052) 2,812
Extraordinary item from early
extinguishment of debt less applicable
taxes of $47 0 0 (248) 0 0
-------- -------- -------- -------- --------
Net income (loss) $ 1,854 $ 642 $ (3,707) $ (2,052) $ 2,812
======== ======== ======== ======== ========
Basic EPS
Income (loss) before extraordinary item $ 0.34 $ 0.12 $ (0.63) $ (0.37) $ 0.59
Extraordinary item 0 0 (0.04) 0 0
-------- -------- -------- -------- --------
Net income (loss) $ 0.34 $ 0.12 $ (0.67) $ (0.37) $ 0.59
======== ======== ======== ======== ========
Diluted EPS
Income before extraordinary item $ 0.32 $ 0.12 $ (0.63) $ (0.37) $ 0.59
Extraordinary item 0 0 (0.04) 0 0
-------- -------- -------- -------- --------
Net income $ 0.32 $ 0.12 $ (0.67) $ (0.37) $ 0.59
======== ======== ======== ======== ========
Weighted average number of shares
outstanding
Basic 5,514 5,514 5,514 5,514 4,744
Diluted 5,805 5,514 5,514 5,514 4,744
</TABLE>
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As of December 31
(in thousands)
<TABLE>
<CAPTION>
BALANCE SHEET DATA 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net working capital $ 9,827 $ 9,905 $ 10,467 $ (6,052) $ 9,079
Total assets 31,617 30,775 $ 31,058 34,659 26,080
Total bank debt(3) 12,968 15,117 18,304 18,018 5,093
Stockholders' equity 12,981 11,196 10,487 12,693 14,800
</TABLE>
(3) Includes discount of $832 at December 31, 1998, $1,064 at December 31,
1997 and $1,296 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. Some of the Company's concept products are Hosanna! Music
and Just-For-Kids. The Company has several artists under contract, including
leaders in Christian music such as Don Moen, Ron Kenoly and Paul Wilbur. In
addition to audio recordings, Integrity produces Christian music songsheets,
software and video products. The Company has determined that its reportable
segments are those that are based on the Company's distribution channels. These
distribution channels are Retail, Direct to consumers, International and Other
channels. The Retail channel primarily represents sales to Christian bookstores
either directly from the Company or through third party distributors. Direct to
consumers primarily represents sales from direct mail programs but also
includes Internet sales, special event sales, and sales of choral and print
products directly to churches, including sales of the Celebration Hymnal
through a joint venture controlled by the Company. The International channel
represents an international distribution network that reaches markets in over
140 countries. All transactions with foreign entities, whether they are shipped
from the U.S. or one of the Company's three subsidiaries in Singapore, the
United Kingdom and Australia are reported in the segment. Christian bookstores
are the primary distribution channel for this segment, but there are also
direct mail and other techniques used for these markets. Other channels include
copyright revenue, excess inventory and other small distribution sales.
The following historical analysis shows the percentage of sales by
segment:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Direct to Consumer 34.6% 33.2% 35.0%
Retail Markets 37.8% 40.7% 34.2%
International 16.5% 18.2% 20.3%
Other 11.1% 7.9% 10.5%
</TABLE>
The Company's quarterly operating results may fluctuate significantly
due to new product introductions, the timing of selling and marketing expenses,
seasonality 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.
Percentage of Net Sales
Year Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 46.3% 43.6% 46.9%
----- ----- -----
Gross Profit 53.7% 56.4% 53.1%
Marketing and Fulfillment
Expenses 23.2% 27.0% 33.5%
General and Administrative
Expenses 22.0% 22.3% 23.6%
Loss on impairment of building
0 0 3.8%
----- ----- -----
Income (loss) from operations
before taxes and minority
interest 8.5% 7.1% (7.8)%
===== ===== =====
</TABLE>
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THE YEAR ENDED DECEMBER 31, 1998 ("1998") COMPARED TO THE YEAR ENDED DECEMBER
31, 1997 ("1997")
Net sales increased 11.1% to $38.8 million in 1998 from $35.0 million
in 1997, mainly attributable to strong unit sales during 1998. Unit sales
increased by 31.4% to 6.7 million in 1998, from 5.1 million in 1997 due to 54
major releases and strong catalog sales from prior releases such as "Shout To
The Lord", "God Can" and "Let Your Glory Fall". In 1998, new products accounted
for 2.0 million units, or 30.0% of the total units sold. The new products
offered were from existing product lines as well as new product lines featuring
several of Integrity's best-selling artists, such as Don Moen, Ron Kenoly and
Paul Wilbur. Sales in the direct to consumer segment increased 15.8% to $13.4
million, compared to $11.6 million in 1997. The increase in the direct to
consumer segment was mainly due to increases in direct sales to churches of The
Celebration Hymnal. Copyright and royalty income increased $618,000 to $4.3
million or 16.9%, compared to $3.7 million in 1997. Revenues across the
Company's other segments were relatively flat from year to year. Bad debts and
returns were $5.0 million in 1998 as compared to $6.0 million in 1997.
Gross profit increased 5.8% to $20.9 million in 1998 from $19.7
million in 1997 due primarily to the increase in sales discussed above. Gross
profit as a percentage of sales was 53.7% and 56.4% for the years ended
December 31, 1998 and 1997, respectively. The decrease in gross profit as a
percentage of sales was primarily the result of a $700,000 write-down of
certain older product masters that are no longer expected to recoup their costs
as well as several bulk sales of older products at reduced prices during 1998.
Marketing and fulfillment expenses decreased 4.5% to $9.0 million or
23.2% of net sales in 1998, as compared with $9.5 million or 27.0% of net sales
in 1997. This decrease was primarily attributable to lower, but more productive
and targeted, marketing expenses in the direct to consumer segment.
General and administrative expenses increased 9.8% to $8.6 million or
22.0% of net sales in 1998, compared to $7.8 million or 22.3% of net sales in
1997. The increase in expenditures was mainly attributable to increases in
personnel costs required to support the growth in the business.
As a result of the above, income from operations was $3.3 million or
8.5% of net sales in 1998, compared with $2.5 million or 7.1% of net sales in
1997.
Interest expense decreased to $1.5 million in 1998 compared with $1.8
million in 1997. The decrease was a result of lower average debt balances in
1998.
The Company recorded a net benefit from income taxes during 1998 of
approximately $369,000 primarily as a result of a $750,000 reduction in the
valuation allowance against deferred tax assets. This non-cash benefit is the
result of two consecutive years of profitability coupled with management's
expectations to generate taxable income in future periods to utilize those
deferred tax assets, primarily net operating loss carry-forwards.
THE YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")
Net sales increased 9.3% to $35.0 million in 1997 from $32.0 million
in 1996, mainly attributable to increased unit sales during 1997. Unit sales
increased by 50.0% to 5.1 million in 1997 from 3.4 million in 1996 due to 48
major releases and strong catalog sales from prior releases such as "Shout To
The Lord" and "Revival at Brownsville". In 1997, new products accounted for 2.1
million units, or 41.2% of the total units sold. The new products offered were
from existing product lines as well as new product lines featuring several of
Integrity's best-selling artists, such as Ron Kenoly. Sales in the retail
segment increased 30% to $14.2 million, compared to $11.0 million in 1996
primarily due to the success of the new products released in 1997. The Company
also experienced strong increases in copyright revenues, from $2.9 million in
1996 to $3.7 million in 1997. The direct to consumer segment increased $0.4
million, or 3.6% to $11.6 million, compared to $11.2 million in 1996, mainly as
a result of the Company's focus on smaller, yet more profitable direct to
consumer advertising mailings. Sales in the international segment were
relatively flat from year to year. Bad debts and returns were $6.0 million in
1997 as compared to $7.3 million in 1996.
Gross profit increased 16.0% to $19.7 million in 1997 from $16.9
million in 1996 due primarily to the sales increases discussed above. Gross
profit as a percentage of sales was 56.4% and 53.1% for the years ended
December 31, 1997 and 1996, respectively. The increase in gross profit as a
percentage of sales was primarily the result of a $1.7 million write down of
certain product masters in 1996 with no comparable amount in 1997.
10
<PAGE> 12
Marketing and fulfillment expenses decreased 11.8% to $9.5 million or
27.0% of net sales in 1997, as compared with $10.7 million or 33.5% of net
sales in 1996. This decrease was primarily attributable to lower, but more
productive and targeted, marketing expenses in the direct to consumer segment.
General and administrative expenses increased 3.3% to $7.8 million or
22.3% of net sales in 1997, compared to $7.5 million or 23.6% of net sales in
1996. The increase in expenses was mainly attributable to the Company's
addition in late 1996 of a distribution center responsible for direct to
consumer, church and international warehousing, physical inventory and
distribution functions.
Operating expenses were higher by $1.2 million 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".
As a result of the above, income from operations was $2.5 million or
7.1% of net sales in 1997, compared with loss of $2.5 million or (7.8%) of net
sales in 1996.
Interest expense was relatively flat from year to year.
The Company did not record any provision for or benefit from income
taxes during 1997 as current period income was offset by net operating loss
carryforwards. After careful review by management, it was determined that the
remaining valuation allowance of $1.3 million at December 31, 1997 was still
required as it was not more likely than not, based on past operating
performance and current plans, that such amount would not be utilized in the
future.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations through cash
generated from operations and from borrowings under a line of credit and term
notes as needed. The Company's need for cash varies from quarter to quarter
based on product releases and scheduled marketing promotions. The Company's
principal uses of cash historically have been the production and recording of
product masters to build the Company's product master library and debt service.
It is from these product masters that the Company's products are duplicated and
distributed to customers. The Company believes that its working capital and
funds available under its credit facility will be sufficient to fund its
operating and capital requirements for the foreseeable future.
Cash generated from operations totaled $7.3 million, $6.4 million and
$3.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase from 1997 to 1998 resulted primarily from increased
earnings before depreciation and amortization. The increase from 1996 to 1997
resulted primarily from increased earnings before charges for depreciation and
amortization, primarily due to lower marketing and fulfillment costs in the
direct to consumer and retail segments.
Capital expenditures totaled $0.5 million, $0.3 million and $0.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998 and 1997, capital expenditures were primarily for computer
equipment and general improvements on the Company's corporate headquarters. The
Company also invested $4.2 million, $3.3 million and $3.3 million in new
product masters during 1998, 1997 and 1996, respectively. The Company expects
its investments in capital expenditures and product masters during 1999 to
remain relatively consistent with 1998 levels.
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 warrants became
exercisable in August 1998. During the years ended December 31, 1998 and 1997,
the Company made payments of $2.3 million and $1.7 million, respectively, under
such agreements. At December 31, 1998, the Company had available borrowings of
$1.9 million under such agreements.
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
11
<PAGE> 13
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.
YEAR 2000 COMPLIANCE
The Year 2000 Problem
The Company is devoting resources throughout its business operations
to minimize the risk of potential disruption from the "Year 2000" problem. This
problem is a result of computer programs having been written using two digits
rather than four to define the applicable year. Information technology ("IT")
systems that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
and system failures. The problem also extends to certain operating and control
systems that rely on embedded chip systems. In addition, like every other
business enterprise, the Company is at risk from Year 2000 failures on the part
of its major business counterparts, including suppliers, distributors,
contractors and service providers, as well as potential failures in public and
private infrastructure service, including electricity, water, gas,
transportation and communications.
State of Readiness
If the Company or its significant suppliers, distributors, contractors
and service providers do not successfully achieve Year 2000 compliance, the
Company's financial condition and results of operations could be materially and
adversely affected, resulting from, among other things, the Company's inability
in a timely manner:
- to efficiently manufacture, sell and ship existing products
to distributors,
- to collect accounts receivable, and
- to produce and effectively market new products.
In December 1998, the Company formed a Year 2000 committee to identify
and address any potential Year 2000 problems with the Company's internal IT
systems, non-IT systems and products, as well as with its suppliers,
distributors, contractors and service providers. This phase involved a review
of all IT and significant non-IT systems and Company products, and testing of
the Company's IT systems and significant non-IT systems. The Company completed
this phase in February 1999 and determined that its internal IT systems are
Year 2000 compliant, including all in-house software. In addition, the Company
plans to perform a full scale Year 2000 simulation of its IT systems in May
1999.
Except for the Company's telephone system which will be replaced with
a Year 2000 compliant telephone system in April 1999, the Company has
determined that all internal non-IT systems and products either are Year 2000
compliant or a Year 2000 problem with such non-IT system or product will not be
material to the Company's operation. In making this determination, the Company
relied upon representations from certain third parties, including the vendors
of its significant studio and recording equipment.
As described in Item 1, the Company's business depends upon the
accurate and timely fulfillment of certain operations contracted to third-party
service providers and manufacturers, including Word in the retail market
segment, LCS in the direct to consumer segment, numerous international
distributors in the international segment, and Eva-Tone in the production of
musical recordings from the Company's master recordings. In February 1999, the
Company developed a Year 2000 compliance questionnaire and solicited its
principal suppliers, distributors, contractors and service providers to
determine such party's Year 2000 status. As of March 1999, Word and Eva-
12
<PAGE> 14
Tone have provided assurances that their systems are Year 2000 compliant. In
addition, Eva-Tone indicated that all of its suppliers were Year 2000
compliant, and that in April 1999 it would perform a Year 2000 simulation
involving actual orders with its suppliers and vendors. LCS has indicated that
although the system it currently uses to fulfill its contract obligations with
the Company is not Year 2000 compliant, it will move these operations to its
existing Year 2000 compliant system in May 1999. Most significant distributors
in the international segment have not been able to provide any assurances their
systems are or will become Year 2000 compliant.
Costs to Address Year 2000
The total cost associated with the Company's Year 2000 remediation is
not expected to exceed $40,000 or be material to the Company's financial
condition or results of operations. The Company has not employed any outside
consultants regarding Year 2000 remediation, and has not made any significant
Year 2000 expenditures through the end of March 1999. The Company anticipates
spending approximately $25,000 in April 1999 to replace its non-Year 2000
compliant telephone system. All other Year 2000 remediation costs will be
incurred in the form of compensation and benefits of internal employees working
on the Company's Year 2000 project.
The Company's Year 2000 Risks and Contingency Plan
There can be no assurance that unanticipated or undiscovered Year 2000
compliance problems will not have a material adverse effect on the Company's
financial condition or results of operations. Such problems could result in a
diversion of resources away from the Company's core business, and the Company's
inability to efficiently sell and ship products to distributors, collect
accounts receivable in a timely manner, and produce and market new products.
These issues could in turn lead to significant additional operating costs and a
decrease in product sales, as well as damage the Company's reputation in the
industry. Upon a Year 2000 failure by one of the Company's domestic contractors
or service providers, including Word, LCS or Eva-Tone, the Company's
contingency plan includes utilizing alternate distributors, contractors and
service providers and moving certain fulfillment functions in-house, such as
order and payment processing. However, because of the volume of transactions
that could be required to be performed upon the failure of a contractor such as
LCS, the Company can not be certain it would be able to timely fulfill its
domestic orders in-house, and as a result, the Company could suffer a
significant decline in sales.
However, the most reasonably likely worst case Year 2000 scenario is
that the Company's international distributors will encounter Year 2000 problems
and will not be able to utilize their systems to efficiently sell and
distribute the Company's products overseas. The Company is developing a
contingency plan to address this scenario pursuant to which the Company would
utilize alternate distributors and its foreign subsidiaries to fulfill
international orders. However, due to the number and diversity of environments
in which these distributors operate, the Company can not be certain that it
would be able to timely fulfill international orders under these circumstances
and that such a Year 2000 problem would not have a material adverse effect on
the Company's financial condition or results of operation.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which the Company expects to complete actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, results of
further Year 2000 testing, adequate resolution of Year 2000 problems by
suppliers, distributors, contractors or service providers of the Company, the
adequacy of and ability to further develop and implement contingency plans and
similar uncertainties. The "forward-looking statements" contained in the
foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
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<PAGE> 15
RISK FACTORS
OUR COMPETITION INCLUDES OTHER MUSIC COMPANIES AND GENERAL ENTERTAINMENT
COMPANIES
We face intense competition for discretionary consumer spending from
numerous other music companies and entertainment companies that utilize various
formats, including audio recordings, film, video, and other media.
Our products compete directly with the products of other record
companies and music publishers that distribute Christian music to Christian
bookstores, as well as a number of secular music companies. Many of these
competitors have substantially greater financial resources than we have. This
provides them with the ability to launch more new products, spend more on
marketing those products, and pay more to artists and songwriters for new music
and songs. Our ability to continue to compete successfully will be largely
dependent upon our ability to successfully develop and launch new products that
build upon and maintain our reputation for quality Christian music and other
communication products.
OUR INDUSTRY IS SUBJECT TO CONSUMER TASTES AND DEMANDS
We operate in the recorded music, video productions and printed music
industries. These industries involve a substantial degree of risk. Each music
or video recording or printed product is an individual artistic work. Consumer
taste, which is unpredictable and constantly changing, primarily determines the
commercial success of any such work. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of such success,
or the popularity of any particular artist.
Furthermore, we must invest significant amounts for product
development prior to the release of any product. These costs may not be
recovered if the release is unsuccessful. Changes in the timing of new releases
can also cause significant fluctuations in our quarterly operating results
because of the marketing costs involved in launching a new product and the
delay in receiving any sales revenue from the new product. There can be no
assurance that our products will be successful releases or that any product
will generate revenues sufficient to cover the cost of product development. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR BUSINESS IS DEPENDENT ON ACCESS TO DISTRIBUTION CHANNELS
We distribute our products through three primary channels:
- Direct to Consumer
- Retail Sales; and
- License Arrangements.
If our access to any of these channels is interrupted, our sales could be
significantly affected.
The direct to consumer channel is based on a variety of methods, but
primarily is composed of our continuity clubs. The performance of these clubs
could be affected by a number of factors including:
- the maturity of our mailing lists such that consumers no
longer desire our products and cancel their participation;
- our failure to expand and revise our mailing lists to include
new potential customers, or the inability to secure new mailing lists
from which to build ours;
- our failure to offer new and appealing products to these
customers; and
- increases in the cost of mailing and shipping, or increased
regulation of mail order sales.
Currently, we rely on Word's sales force to perform all retail market
sales functions for us, pursuant to a contract with them that extends through
March 30, 2000. Failure to successfully renegotiate this contract with Word or
failure of Word to fulfill the terms under this contract will immediately and
adversely affect our sales.
In addition to our retail distribution channel, our international
distribution channel also relies heavily on third parties to sell and deliver
our products. We cannot quickly replace these third parties should they fail to
perform, nor can we assume their duties in a timely manner. As a result,
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<PAGE> 16
the failure by any of these parties to fulfill their duties effectively and
efficiently will immediately and adversely affect our sales.
INCREASES IN COSTS OF MAILING, PAPER, PRINTING AND DELIVERY WILL SIGNIFICANTLY
INCREASE OUR COSTS OF GOODS SOLD
Increases in postal rates, as well as in paper, printing and delivery
costs would affect our direct response programs. We generally ship orders by
third class mail with the United States Postal Service. We rely heavily on
discounts from the basic postal rate structure, such as discounts for bulk
mailings, sorting by zip code, and carrier routes.
Any increase in postal rates, papers and printing or delivery costs
could adversely affect our earnings.
WE DEPEND ON OUR SENIOR EXECUTIVES WHO HAVE EXPERIENCE UNIQUE TO OUR INDUSTRY
Our success has been largely dependent on the skills, experience and
efforts of our senior management and especially our Chairman, President and
Chief Executive Officer, P. Michael Coleman. Although we have employment
agreements with some of our senior executives, they could still choose to leave
the Company at any time. If they did we would have significant difficulty
replacing them with individuals who had an equal level of experience in the
Christian products market. This could affect our daily operations, creative
development and ultimately our financial performance.
OUR CHANGE TO THE SMALLCAP MARKET MAY NOT RESULT IN AN ACTIVE TRADING MARKET
On February 23, 1998, new listing and maintenance rules for inclusion
on both the Nasdaq National Market and The Nasdaq SmallCap Market became
effective. Under the new rules, the market value of our publicly-traded shares
failed to meet the listing requirements for the Nasdaq National Market. As a
result, our Class A Common Stock has been moved to The Nasdaq SmallCap Market.
The transition to The Nasdaq SmallCap Market became effective on October 2,
1998. We can not be certain that our transition to and position in The SmallCap
Market will result in an active trading market for our Class A Common Stock.
OUR COMPANY IS CONTROLLED BY THE COLEMAN FAMILY
Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 65,100 shares of Class A Common Stock
and all 3,435,000 shares of Class B Common Stock outstanding. This represents
approximately 94.3% of the total voting power of all classes of our voting
stock. As a result, Mr. Coleman is able to elect all of our directors, amend
our Amended Certificate of Incorporation (the "Amended Certificate"), effect or
prevent a merger, sale of assets or other business acquisition or disposition,
and otherwise control the outcome of actions requiring stockholder approval.
See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions."
THE CLASS A COMMON STOCK HAS LIMITED VOTING RIGHTS
Our Amended Certificate limits the voting rights of our Class A Common
Stock. Each share of our Class A Common Stock is entitled to one vote, while
each share of our Class B Common Stock is entitled to ten votes on all matters
with respect to which our stockholders have a right to vote. Both classes of
our stock generally vote together as a single class. The shares of Class B
Common Stock are convertible into shares of Class A Common Stock on a
share-for-share basis at the election of the holder. Also, our Class B Common
Stock must be converted to shares of Class A Common Stock automatically if it
is transferred, except for transfers to or for the benefit of certain of Mr.
Coleman's relatives. We do not have the authority to issue additional Class B
Common Stock except as dividends or distributions on outstanding Class B Common
Stock proportional to dividends or distributions on Class A Common Stock.
The disproportionate voting rights between our classes of stock could
adversely affect the market price of our Class A Common Stock. The
disproportionate voting rights may also make us a
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<PAGE> 17
less attractive target for a takeover than we otherwise might be, and render
more difficult or discourage a merger proposal, a tender offer, or a proxy
contest even if such actions were favored by holders of our Class A Common
Stock.
Holders of Class A Common Stock may be deprived of an opportunity to
sell their shares at a premium over the then prevailing market price due to the
disproportionate voting rights between the two classes of stock.
CERTAIN PROVISIONS OF OUR AMENDED CERTIFICATE COULD DISCOURAGE A TAKE-OVER OF
INTEGRITY
Our Board of Directors is authorized to issue shares of preferred
stock. Our Board of Directors, without approval of the stockholders, is also
authorized to establish the following provisions of any preferred stock:
voting, dividend, redemption, conversion, liquidation, and other provisions.
The issuance of preferred stock could adversely affect the voting
power or other rights of the holders of our common stock. Further, the issuance
of preferred stock could make more difficult, or discourage, a third party's
attempt to acquire control of us. Finally, we are also subject to the Delaware
Business Combination Statute, which may render more difficult a change in our
control.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE
From time to time there may be significant volatility in the market
price of the Class A Common Stock. Our quarterly operating results or those of
other similar companies, changes in the conditions in the economy or the
financial markets, projections and statements by industry analysts or other
third parties could cause the price of the Class A Common Stock to fluctuate
substantially.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to fluctuations in interest rates
as it pertains to the Company's borrowings under its credit facility. The
Company pays interest on borrowings at either the lender's offered rate plus 1
1/2%, or LIBOR plus 3%. If the interest rates on the Company's borrowings
average 100 basis points more in 1999 than they did in 1998, the Company's
interest expense would increase and income before income taxes would decrease
by $121,000. This amount is determined solely by considering the impact of the
hypothetical change in the interest rate on the Company's borrowing cost
without consideration for other factors such as actions management might take
to mitigate its exposure to interest rate changes.
The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging
transactions in order to modify the risk from these foreign currency exchange
rate and commodity price fluctuations. The Company also does not use financial
instruments for trading purposes and is not a party to any leveraged
derivatives.
ITEM 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.
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<PAGE> 18
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 - Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 1999 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 1999 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 1999 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 1999 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 18
Consolidated Balance Sheets at December 31, 1998 and 1997 19
Consolidated Statement of Operations for the three years ended December 31, 1998 20
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December
31, 1998 21
Consolidated Statement of Cash Flows for the three years ended December 31, 1998 22
Notes to Consolidated Financial Statements 23
2. Financial Statement Schedules:
For the three years ended December 31, 1998 34
II - Valuation and Qualifying Accounts and Reserves
</TABLE>
17
<PAGE> 19
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 17 present fairly, in
all material respects, the financial position of Integrity Incorporated and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Atlanta, GA
February 19, 1999
18
<PAGE> 20
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Current Assets
Cash $ 989 $ 523
Trade receivables, less allowance for returns and doubtful accounts of $696
and $812 4,913 4,258
Other receivables 1,637 2,033
Inventories 4,528 5,524
Other current assets 3,831 2,706
-------- --------
Total current assets 15,898 15,044
Property and equipment, net of accumulated depreciation of $3,575 and $3,085 3,473 3,499
Product masters, net of accumulated amortization of $11,325 and $7,537 9,050 8,618
Other assets 3,196 3,614
-------- --------
Total assets $ 31,617 $ 30,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,847 $ 1,838
Accounts payable and accrued expenses 2,732 2,156
Royalties payable 569 908
Other current liabilities 923 237
-------- --------
Total current liabilities 6,071 5,139
Long-term debt 11,121 13,279
Other long-term liabilities 60 207
-------- --------
Total liabilities 17,252 18,625
-------- --------
Commitments and contingencies -- --
Minority interest 1,384 954
-------- --------
Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and
outstanding 0 0
Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,079,000 shares issued and outstanding 21 21
Class B common stock, $.01 par value, 10,500,000 shares authorized;
3,435,000 shares issued and outstanding 34 34
Additional paid-in capital 13,428 13,428
Accumulated deficit (449) (2,303)
Equity adjustments from foreign translation (53) 16
-------- --------
Total stockholders' equity 12,981 11,196
-------- --------
Total liabilities and stockholders' equity $ 31,617 $ 30,775
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE> 21
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 38,847 $ 34,954 $ 31,975
Cost of sales 17,985 15,236 14,981
-------- -------- --------
Gross profit 20,862 19,718 16,994
Marketing and fulfillment expenses 9,023 9,450 10,711
General and administrative expenses 8,557 7,796 7,545
Loss on impairment of long-lived assets 0 0 1,200
-------- -------- --------
Income (loss) from operations 3,282 2,472 (2,462)
Other expenses (income)
Interest expense, net 1,529 1,790 1,804
Other expenses (income) 0 3 (153)
-------- -------- --------
Income (loss) before extraordinary item,
minority interest and taxes 1,753 679 (4,113)
Benefit from income taxes 369 0 654
Minority interest, less applicable taxes (268) (37) 0
-------- -------- --------
Income (loss) before extraordinary item 1,854 642 (3,459)
Extraordinary item from early extinguishment of
debt, less applicable taxes of $47 0 0 (248)
-------- -------- --------
Net income (loss) $ 1,854 $ 642 $ (3,707)
======== ======== ========
Adjustments to determine comprehensive income
Foreign currency translation adjustments (69) 67 108
-------- -------- --------
Comprehensive income $ 1,785 $ 709 $ (3,599)
======== ======== ========
BASIC EPS
Income (loss) before extraordinary item 0.34 0.12 (0.63)
Extraordinary item 0 0 (0.04)
-------- -------- --------
Net income (loss) $ 0.34 $ 0.12 $ (0.67)
======== ======== ========
DILUTED EPS
Income (loss) before extraordinary item 0.32 0.12 (0.63)
Extraordinary item 0 0 (0.04)
-------- -------- --------
Net income (loss) $ 0.32 $ 0.12 $ (0.67)
======== ======== ========
Weighted average number of shares outstanding (note 1)
Basic 5,514 5,514 5,514
Diluted 5,805 5,514 5,514
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
20
<PAGE> 22
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Class A Class B (Accum.
Common Stock Common Stock Additional Deficit) Equity Adj.
Paid-in Retained From Total
Shares Amount Shares Amount Capital Earnings Translations -----
------ ------ ------ ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,079,000 21 3,435,000 34 12,035 762 (159) 12,693
Net loss (3,707) (3,707)
Issue of stock warrants 1,393 1,393
Translation adjustments 108 108
----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,079,000 21 3,435,000 34 13,428 (2,945) (51) 10,487
Net income 642 642
Translation adjustments 67 67
----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,079,000 21 3,435,000 34 13,428 (2,303) 16 11,196
Net income 1,854 1,854
Translation adjustments (69) (69)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,079,000 $ 21 3,435,000 $ 34 $ 13,428 $ (449) $ (53) 12,981
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
21
<PAGE> 23
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,854 $ 642 $ (3,707)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 1,202 1,331 860
Loss on impairment of long-lived assets 0 0 1,200
Amortization of product masters 3,787 3,250 4,714
Extraordinary loss on debt extinguishment 0 0 295
Minority interest 268 37 0
Deferred income tax benefit (527) 0 (509)
Changes in operating assets and liabilities
Trade receivables (655) (63) 996
Other receivables 396 (1,090) 984
Inventories 996 (382) (151)
Other assets (691) 1,337 (54)
Accounts payable, royalties payable and
accrued expenses 200 1,109 (1,382)
Other current and non current liabilities 468 206 (191)
-------- -------- ---------
Net cash provided by operating activities 7,298 6,377 3,055
-------- -------- ---------
Cash flows from investing activities
Purchases of property and equipment (463) (299) (583)
Payments for product masters (4,220) (3,267) (3,329)
-------- -------- ---------
Net cash used in investing activities (4,683) (3,566) (3,912)
-------- -------- ---------
Cash flows from financing activities
Net (repayments) borrowings under line of credit 169 (2,040) (12,018)
Proceeds from issuance of long-term debt 0 300 14,000
Principal payments of long-term debt (2,318) (1,679) (400)
Loan issuance cost 0 0 (639)
-------- -------- ---------
Net cash (used) provided by financing activities (2,149) (3,419) 943
-------- -------- ---------
Net (decrease) increase in cash 466 (608) 86
Cash, beginning of year 523 1,131 1,045
-------- -------- ---------
Cash, end of year $ 989 $ 523 $ 1,131
======== ======== =========
Supplemental disclosures of cash flow information
Interest paid $ 1,355 $ 1,790 $ 1,638
Income taxes paid $ 0 $ 37 $ 0
Noncash financing activities
Issuance of stock purchase warrants for debt $ 0 $ 0 $ 1,393
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
22
<PAGE> 24
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes and 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.
These subsidiaries serve to expand the Company's presence in Western Europe;
Australia and New Zealand; and Singapore, respectively, and all are
wholly-owned by the Company. Celebration Hymnal LLC was formed in 1997 as a
50/50 joint venture with Word Entertainment, for the purpose of producing and
promoting The Celebration Hymnal. Word Entertainment's interest in the joint
venture is presented as minority interest in these financial statements.
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company controls
the operations of the joint venture through its majority position on the Board
of Directors of The Celebration Hymnal LLC.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use and which have
original maturities of three months or less.
INVENTORIES
Inventories, which consist principally of finished goods such as
compact discs, cassette tapes, videos and print products, 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 $1,326,000 and $1,119,000 at December 31,
1998 and 1997, respectively. Marketing costs expensed for the three years ended
December 31, 1998, 1997 and 1996 approximated $4,455,000, $4,626,000 and
$6,099,000, respectively.
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 buildings are 14 to 25 years; leasehold improvements, 2
years; data processing equipment, 5 years; studio equipment, 5 years; and
furniture and fixtures, 5 to 7 years. Repairs and maintenance costs which do
not increase the useful lives of the assets are charged to expense as incurred.
Additions,
23
<PAGE> 25
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.
PRODUCT MASTERS
Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives, using a method that
reasonably relates to the amount of net revenue expected to be realized.
Management periodically reviews the product masters amortization rates and
adjusts the amortization rate based on management's estimates for future sales.
In conjunction with such analysis, any amounts that do not appear to be fully
recoverable are charged to expense during the period the loss becomes evident.
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 demonstrates such
amounts will be recoverable from future royalties to be earned by the artist.
Such capitalized amounts are included as a component of product masters in the
consolidated balance sheet. Any portion of advances that subsequently appear
not to be recoverable from future royalties are charged to expense during the
period the loss becomes evident. The amount of capitalized advance royalties
aggregated $1,256,000 and $889,000 at December 31, 1998 and December 31, 1997,
respectively.
INCOME TAXES
The Company recognizes 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. Management includes the
consideration of future events to assess the likelihood that the tax benefits
will be realized in the future.
STOCK-BASED COMPENSATION PLANS
The Company has elected to account for its stock-based compensation
plans under Accounting Principals Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) with the associated disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (SFAS No. 123) in Note 11. SFAS No. 123 requires that
companies which elect to not account for stock-based compensation as prescribed
by that statement shall disclose among other things, pro forma effects on net
income and net income per share as if SFAS No. 123 had been adopted. Under APB
No. 25, because the exercise price of the Company's employee stock options
equal the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by weighted average of common shares
outstanding assuming issuance of potential dilutive common shares related to
options, warrants, convertible debt, or other stock agreements.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS 130 establishes standards for the reporting and display of comprehensive
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value. The carrying amount
24
<PAGE> 26
of long-term debt approximates fair value based on current rates of interest
available to the Company for loans of similar maturities.
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. Management periodically reviews such
estimates and it is 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 have been reclassified to conform to current year
presentation.
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31
(in thousands)
1998 1997
------- -------
<S> <C> <C>
Prepaid supplies $ 1,780 $ 1,087
Prepaid marketing costs 1,326 1,119
Deferred tax assets 642 81
Other 83 419
------- -------
$ 3,831 $ 2,706
======= =======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31
(in thousands)
1998 1997
------- -------
Land $ 625 $ 625
Buildings and leasehold improvements 2,633 2,611
Data processing and other equipment 1,354 1,105
Studio equipment 1,062 950
Furniture and fixtures 1,374 1,293
------- -------
7,048 6,584
Less - accumulated depreciation (3,575) (3,085)
------- -------
$ 3,473 $ 3,499
======= =======
</TABLE>
Depreciation expense approximated $499,000, $509,000 and $600,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
During 1996, the Company recorded a charge to earnings of $1.2 million
related to the abandonment of its Corporate headquarters construction project
prior to completion.
25
<PAGE> 27
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31
(in thousands)
1998 1997
------- -------
<S> <C> <C>
Music copyrights, net of accumulated
amortization $ 2,014 $ 2,191
Deferred tax assets 494 528
Other 688 895
------- -------
$ 3,196 $ 3,614
======= =======
</TABLE>
The music copyrights are being amortized over their future estimated
useful lives, which approximates fifteen years. Accumulated amortization at
December 31, 1998 and December 31, 1997 approximates $588,000 and $416,000,
respectively.
5. 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, 1998, the interest rates on the $4.1 million
outstanding Revolver were 9.25%; and on the $9.5 million outstanding Term Loan
were 8.22%. At December 31, 1997 the interest rates on the $3.9 million
outstanding revolver were 8.9% and on the $11.6 million outstanding term loan
were 8.8%.
At December 31, 1998, the Company had approximately $1.9 million of
available funds under the Revolver.
The Company, in conjunction with the 1996 financing, issued warrants
which are outstanding at December 31, 1998, to purchase 805,288 shares of Class
A Common Stock. Each warrant entitles 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 subject to
adjustment upon the issuance of additional shares of common stock by the
Company. As a result of the issuance of shares of Class A Common Stock
associated with the exercise of stock options and certain restricted stock
grants, the Company expects that the warrants will be adjusted in the near
future. The warrants became exercisable on August 6, 1998. On the date of
issuance, 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. Such discount is
being accreted to interest expense on a straightline basis over the term of the
facility. At December 31, 1998, the book value of the discount is $832,000 net
of accumulated amortization of $561,000.
Prior to the current credit 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. 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 incurrence 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. The Company is in compliance with these debt covenants at December
31, 1998.
26
<PAGE> 28
Aggregate principal maturities of long-term debt at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Total
-----
Fiscal Year (in thousands)
----------- --------------
<S> <C>
1999 $ 1,847
2000 2,563
2001 2,875
2002 6,515
--------
$ 13,800
Discount 832
--------
$ 12,968
========
</TABLE>
At December 31, 1998, approximately $415,000, net of accumulated
amortization of $280,000, of loan issuance costs, included in other assets, are
being amortized over the term of the debt agreements.
6. INCOME TAXES
The components of the benefit (provision) for income taxes for the
three years ended December 31, 1998 are as follows, including an extraordinary
item benefit of $47,000 in 1996:
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands)
1998 1997 1996
----- ---- -----
<S> <C> <C> <C>
Current (provision) benefit
Federal $(138) $ 0 $ 192
State (20) 0 0
----- --- -----
(158) 0 192
----- --- -----
Deferred benefit
Federal 464 0 458
State 63 0 51
----- --- -----
527 0 509
----- --- -----
Total benefit $ 369 $ 0 $ 701
===== === =====
</TABLE>
The provision (benefit) for income taxes differs from the amount
computed by applying the U. S. federal income tax rate (34%) because of the
effect of the following items:
<TABLE>
<CAPTION>
December 31
(in thousands)
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rates $ 596 $ 231 $(1,398)
State tax provision (benefit), net of federal taxes 70 27 (163)
Utilization of foreign tax credits 0 0 (159)
Nondeductible expenses 15 (2) 69
Other, net (265) (58) (70)
Change in valuation allowance (785) (198) 1,067
------ ----- ------
Benefit for income taxes before extraordinary item $ (369) $ 0 $ (654)
====== ===== ======
</TABLE>
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.
27
<PAGE> 29
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
------- -------
<S> <C> <C>
Deferred Assets
Net operating loss carryforward $ 413 $ 844
Reserves for returns and allowances 258 299
Impairment of building and depreciation 494 550
Write down of product masters 295 67
Tax credits 618 510
Non compete agreement 206 193
Other 100 211
------- -------
2,384 2,674
------- -------
Deferred tax liabilities
Prepaid marketing expenses (380) (293)
Other (368) (487)
------- -------
(748) (780)
------- -------
Deferred tax asset before valuation allowance 1,636 1,894
Valuation allowance for deferred tax assets (500) (1,285)
------- -------
Net deferred tax asset $ 1,136 $ 609
Current portion (642) (81)
------- -------
Long term portion $ 494 $ 528
======= =======
</TABLE>
As of December 31, 1998, the Company's net operating loss
carryforwards available to reduce taxable income for federal and state income
tax purposes approximate $1,087,000. The Company's net operating loss
carryforwards expire in periods 2001 to 2011. During the year ended December
31, 1998, the Company utilized approximately $1,135,000 of its net operating
loss carryforward.
Management believes that it is more likely than not that it will
generate taxable income sufficient to realize the net deferred tax asset
recorded at December 31, 1998. Management believes that a valuation allowance
of $500,000 as of December 31, 1998 is appropriate given the uncertainty of
estimates surrounding future taxable income. There can be no assurance, however
that the Company will generate a specific level of continuing earnings. For the
year ended December 31, 1998, the Company reduced its valuation allowance by
$785,000. Such reduction in the valuation allowance was the result of two
consecutive years of profitability coupled with management's current
projections that sufficient taxable income will realize the remaining deferred
tax assets.
7. EMPLOYEE BENEFITS
The Company maintains a non-contributory defined contribution Profit
Sharing Plan (the "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 has not made contributions to the Plan during the years
ended December 31, 1998 and 1996 as contributions are at the discretion of the
Board of Directors. The Company did make a contribution to the Plan during the
year ended December 31, 1997.
The Company also provides a qualifying 401k Plan ("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
$102,000; $175,000 and $57,000 during the years ended December 31, 1998, 1997
and 1996, respectively. The Board of Directors amended the 401(k) Plan in 1997
to include qualified non-elective contributions to satisfy minimum
contributions.
8. RELATED PARTY TRANSACTIONS
Integrity Worship Ministries, formerly known as Worship International
("Worship"), a not-for-profit charitable organization, of which the principal
stockholder of the Company is a member of the
28
<PAGE> 30
board of directors. The Company donated $7,895, $12,642 and $6,500 of inventory
to Worship during 1998, 1997 and 1996, respectively.
One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $208,149, $197,831
and $206,000 for the three years ended December 31, 1998, 1997 and 1996.
Amounts due to the officer at December 31, 1998 and 1997 approximate $57,957
and $8,800, respectively. Due from this officer at December 31, 1998 is $49,817
advanced against future royalties.
9. 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 recorded.
During 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (FAS 131). FAS 131 amends the
way the companies report information about operating segments. The Company has
retroactively applied the provisions of FAS 131 to all periods presented.
The Company has determined that its reportable segments are those that
are based on the Company's distribution channels. These distribution channels
are Retail, Direct to consumers, International and Other channels. The Retail
channel primarily represents sales to Christian bookstores and others either
directly from the Company or through third party distributors. Direct to
consumers primarily represents sales from direct mail programs but also
includes Internet sales, special event sales, and sales direct to churches,
including through the Company's hymnal joint venture. The International channel
represents all transactions with foreign entities, whether they are shipped
from the US or one of the Company's three foreign subsidiaries. Christian
bookstores are the primary distribution channel for this segment, but there are
also direct mail and other techniques used for these markets. The other
channels segment includes copyright revenue from the song catalog, excess
inventory and other small distribution sales.
The accounting policies of the reportable segments are the same as
those described in Note 1 of Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on net
revenues and operating income before taxes. Intersegment sales are not
significant.
29
<PAGE> 31
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES
Direct to consumer $ 13,430 $ 11,602 $ 11,199
Retail 14,702 14,214 10,951
International 6,392 6,346 6,501
Other 6,534 4,700 5,716
Eliminations (2,211) (1,908) (2,392)
-------- -------- --------
Consolidated $ 38,847 $ 34,954 $ 31,975
======== ======== ========
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Direct to consumer 2,954 3,158 295
Retail 3,018 3,121 1,081
International 1,436 1,452 1,197
Other 1,798 278 1,829
-------- -------- --------
Consolidated 9,206 8,009 4,402
General corporate expense 5,924 5,540 6,711
Interest expense, net 1,529 1,790 1,804
-------- -------- --------
Income (loss) before income taxes
and minority interest $ 1,753 $ 679 $ (4,113)
======== ======== ========
IDENTIFIABLE ASSETS
Direct to consumer $ 0 $ 0
Retail 0 0
International 2,596 2,218
Other 1,993 2,191
General corporate assets 27,028 26,366
-------- --------
Total assets $ 31,617 $ 30,775
======== ========
</TABLE>
The Company does not allocate any separate assets to its retail or
direct to consumer segments as those segments are managed based on profit
centers. The primary assets used in these segments are product masters and
other intangibles which are shared among all segments. The Company does not
track property and equipment usage by segments.
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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES
United States $ 32,464 $ 29,875 $ 26,253
Europe 1,956 1,638 1,763
Australia 1,011 1,267 1,638
Asia 938 0 0
Other 2,478 2,174 2,321
-------- -------- --------
$ 38,847 $ 34,954 $ 31,975
======== ======== ========
IDENTIFIABLE ASSETS
United States $ 29,021 $ 28,557
Europe 1,368 1,104
Australia 494 565
Asia 734 0
Other 0 549
-------- --------
$ 31,617 $ 30,775
======== ========
</TABLE>
30
<PAGE> 32
10. STOCKHOLDERS' EQUITY
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 as to voting privileges. No dividends were declared or paid
during the years ended December 31, 1998 and 1997.
11. STOCK COMPENSATION PLANS
The Company has two stock option plans, which provide for the granting
of stock options to officers, employees and non-employee directors. The
Long-term Incentive Plan (the "Incentive Plan") permits grants of not only
incentive stock options, but also non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and other stock based
awards. The Incentive Plan is authorized to issue up to 525,000 shares of Class
A Common Stock in connection with such awards. Under the Incentive Plan, awards
may not be granted at less than the market value at the date of the grant, and
vesting terms are generally five years. The 1994 Stock Option Plan for Outside
Directors (the "Directors' Plan"), grants 1,000 options to purchase Class A
Common stock annually to Directors following the annual meeting. Such options
have an exercise price equal to the fair market value at grant date and are
exercisable six months from date of grant.
The Executive Stock Purchase Plan permits certain employees to
purchase shares of common stock from the Company. Under this Plan, there are
50,000 shares of Class A common stock reserved at December 31, 1998.
Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan. Awards may be granted by the Company's
Compensation Committee and any award made is 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 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 is 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, 1998,
127,500 awards have been granted. At December 31, 1998, a provision was
recorded in the amount of $123,930 for the difference in the fair market value
of the stock between the grant date and the end of the year.
The Company accounts for stock-based compensation plans under APB 25,
"Accounting for Stock Issued to Employees". As a result, the Company has
recognized compensation expense only for the 1995 Cash Incentive Plan discussed
above. The Company is not required to recognize compensation expense for the
other option plans as the exercise price is equal to, or greater than, the fair
market value at the date of grant. The Company has adopted the disclosure
provisions of SFAS 123, "Accounting for Stock Based Compensation: (FAS 123)."
Had compensation cost for the Company's stock-based incentive compensation
plans been determined based on the fair value at the grant dates for awards
under these plans consistent with the methodology prescribed by FAS 123 and if
these values had been recorded in the statement of operations, the Company's
net income (loss) and per share results would have been reduced to the pro
forma amounts indicated below for the years ended December 31, 1998, 1997, and
1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $ 1,854,000 $ 642,000 $(3,707,000)
Pro forma 1,785,000 543,000 (3,778,000)
Basic EPS As reported 0.34 0.12 (0.67)
Pro forma 0.32 0.10 (0.69)
Diluted EPS As reported 0.32 0.12 (0.67)
Pro forma 0.31 0.10 (0.69)
</TABLE>
These pro forma amounts represent the estimated fair value of stock
options issued during 1998, 1997 and 1995 and are being amortized to expense
over the applicable vesting period. Additional options may be granted in future
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1998, 1997 and
31
<PAGE> 33
1996, respectively: Dividend yields of 0%, expected volatility of 70% each
year, risk-free interest rates that approximate the yield of a five year
government bond, and a specific vesting period for each option.
The following table summarizes the changes in the number of shares
under option:
<TABLE>
<CAPTION>
Total Weighted
shares average
EXERCISE PRICE RANGES under option price
$0.50 - $2.00 $2.01 - $5.00 $5.01 - $10.00 option per share
------------- ------------- -------------- ------ ------------
<S> <C> <C> <C> <C> <C>
Outstanding at 12/31/95 50,000 206,000 256,000 6.14
Granted 120,000 73,000 0 193,000 2.20
Exercised 0 0 0 0
Forfeited 0 0 (81,000) (81,000) 8.32
------- ------- ------- ------- ----
Outstanding at 12/31/96 120,000 123,000 125,000 368,000 3.60
Granted 141,027 0 0 141,027 1.74
Exercised 0 0 0 0
Forfeited (35,000) 0 (113,000) (148,000) 7.21
------- ------- ------- ------- ----
Outstanding at 12/31/97 226,027 123,000 12,000 361,027 1.39
Granted 20,000 13,000 0 33,000 1.64
Exercised 0 0 0 0
Forfeited (60,000) 0 0 (60,000) 1.58
------- ------- ------- ------- ----
Outstanding at 12/31/98 186,027 136,000 12,000 334,027 1.38
======= ======= ======= ======= ====
Exercisable at 12/31/98 128,805
=======
Plan shares available for future
grants 215,973
=======
</TABLE>
The Company also has 805,288 warrants outstanding at December 31, 1998
at an exercise price of $1.875. These warrants were issued in 1996 with an
estimated fair value of $1,393,000 and have a life of ten years.
The weighted-average fair value of options granted is $1.32, $1.01,
and $0.83 for the years ended December 31, 1998, 1997 and 1996, respectively.
The weighted average remaining contractual life for all options outstanding is
7.7 years.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceeding and other claims which may
arise in the ordinary course of business. However, the company is not party to
any material legal proceedings. The Company's commitments under lease
agreements for equipment are not significant.
13. SUBSEQUENT EVENT
During February 1999, the Company granted 100,000 shares of restricted
stock to an officer which have a fair value of approximately $300,000. The
restricted stock vests after an additional seven years of employment by the
officer. The grant is subject to shareholder approval. As a result of this
grant, the Company's debt agreement requires the issuance of approximately
38,000 additional warrants to its primary lender at the fair value.
32
<PAGE> 34
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998 Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Sales $ 9,453 $ 9,678 $ 10,196 $ 9,520
Gross Profit 5,456 5,650 4,939 4,817
Net Income 454 174 442 784
Basic earnings per share $ .09 $ .03 $ .08 $ .14
Diluted earnings per share $ .08 $ .03 $ .08 $ .13
1998 Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------- ------- -------- -------
Net Sales $ 8,674 $ 8,451 $ 9,157 $ 8,672
Gross Profit 4,964 4,951 4,969 4,834
Net Income (loss) 184 (163) 275 346
Basic earnings (loss) per share
$ .03 $ (.03) $ .06 $ .06
Diluted earnings (loss) per share
$ .03 $ (.03) $ .06 $ .06
</TABLE>
33
<PAGE> 35
2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedules of the Company are set
forth herewith:
INTEGRITY INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Charged to
Balance at Beg. costs and Balance at
Description Of Period expenses Deductions(1) end of Period
----------- --------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
1996
Allowance for returns and
doubtful accounts 1,676 7,311 (7,303) 1,684
1997
Allowance for returns and
doubtful accounts 1,684 5,174 (6,046) 812
1998
Allowance for returns and
doubtful accounts 812 4,852 (4,968) 696
</TABLE>
(1) Represents write-offs during the respective period for product returns
and uncollectible accounts.
<TABLE>
<CAPTION>
Charged to
Balance at Beg. costs and Balance at
Description Of Period expenses Adjustments end of Period
----------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
1996
Valuation on deferred tax
assets 0 1,067 1,067
1997
Valuation on deferred tax
assets 1,067 218 1,285
1998
Valuation on deferred tax
assets 1,285 (785) 500
</TABLE>
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.
34
<PAGE> 36
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
Exhibit Description
<TABLE>
<CAPTION>
Exhibit
Number
<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 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, 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).
10.5 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).
10.6 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).
10.7 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).
</TABLE>
35
<PAGE> 37
<TABLE>
<S> <C>
10.8 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).
10.9 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).
10.10 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).
10.11 First Amendment to Loan and Security Agreement, dated as
of February 14, 1997, by and among Integrity
Incorporated and Creditanstalt Corporate Finance, Inc.
(incorporated by reference from Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.12 Amended and Restated Stock Pledge Agreement, dated as of
January 22, 1997, by Integrity Incorporated in favor
of Creditanstalt Corporate Finance, Inc.
(incorporated by reference from Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996). EXECUTIVE COMPENSATION
PLANS AND ARRANGEMENTS
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Amendment Number three to the Integrity Music, Inc.
401(k) Employee Savings Plan, dated as of April 2, 1997
(incorporated by reference from Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
10.22 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).
10.23 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).
</TABLE>
36
<PAGE> 38
<TABLE>
<S> <C>
10.24 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).
10.25 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).
10.26 Employment Agreement by and among Integrity Incorporated
and Jerry Weimer dated as of March 28, 1996
(incorporated by reference from Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.27 Employment Agreement by and among Integrity Incorporated
and Don Moen dated as of October 1, 1998.
10.28 Employment Agreement by and among Integrity Incorporated
and Daniel McGuffey dated as of January 1, 1998.
11 Statement of Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountant
27 Financial Data Schedule (for SEC 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, 1998.
37
<PAGE> 39
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 12, 1999.
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 12,
1999.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ P. Michael Coleman
- ---------------------------------------------
P. Michael Coleman Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Alison S. Richardson
- ---------------------------------------------
Alison S. Richardson Senior Vice President, Finance and Administration
(Principal Financial and Accounting Officer)
/s/ Jean C. Coleman
- ---------------------------------------------
Jean C. Coleman Director
/s/ John B. Ellis
- ---------------------------------------------
John B. Ellis Director
/s/ Charles V. Simpson
- ---------------------------------------------
Charles V. Simpson Director
/s/ Heeth Varnedoe III
- ---------------------------------------------
Heeth Varnedoe III Director
</TABLE>
38
<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 1st
day of October, 1998, by and among INTEGRITY INCORPORATED, a Delaware
corporation, ("Employer") and DONALD J. MOEN, an individual currently 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.
Employer hereby employs Employee and Employee hereby accepts
employment in the position of Executive Vice President, Creative Director (the
"Position") upon the terms and conditions hereinafter set forth.
2. Services and Appearances.
(a) General Services. During the term of employment hereunder and
except as otherwise provided herein, Employee shall devote
his full professional time and energy to the performance of
his duties as Executive Vice President, Creative Director and
shall use his best efforts in the performance of the same.
Employee will report directly to the Chief Operating Officer,
serve on the Executive Committee (defined herein as a
committee consisting of Employee, the President of Employer
and the Executive Vice President-Chief Operating Officer of
Employer), and participate in all Senior Management meetings.
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, providing creative direction for the product planning
and production of all Employer's music and technology product
lines (and management control of the foregoing, except for
technology products); convening and coordinating Employer's
creative team; overseeing songwriter relationships and song
development; pioneering new product concepts and championing
research and development of those new concepts (searching for
new and fresh developments in music that Employer should
pursue, then developing and maintaining the relevant
relationships and contacts in these areas); participating on
creative teams (such as the PraiseGathering/Print Development
team) and in the various product development meetings, and
quarterly company-wide creative planning sessions.
<PAGE> 2
(b) Attendance at Industry and Employer Events. During the term
of employment hereunder, Employee agrees to attend various
industry and Employer events, as Employee and the Executive
Committee members of Employer (the "Executive Committee")
deem appropriate (e.g. CBA, GMA, NRB and choral reading
sessions); and Employee will perform at those events when in
Employee's judgment such performance is in the best interest
of Employer and Employee's career as an artist.
(c) Attendance at Other Events. As a corporate representative,
Employee will at times appear at certain events or on
television/radio programs, or provide material for published
articles proclaiming the mission of Employer, what God is
doing today and other ministry-related topics. Employee and
the Executive Committee will determine what events are
appropriate investments of Employee's time and energy.
(d) Participation as Host, Narrator or Worship Leader. Employee
acknowledges that in his Position, Employee will, from time
to time, be asked to participate in recorded and print
projects as a host, narrator or worship leader. Such projects
are not subject to the Artist Agreement, separately executed
by and between Employee and Employer as of the date hereof.
Employee and Employer will agree in writing, prior to the
commencement of any project on which Employee performs in any
capacity, whether or not the project will be subject to the
Artist Agreement.
(e) Availability to Tour.
(i) In addition to other appearances Employee makes as a
senior officer of Employer, if requested by Employer, Employee agrees
to make himself available to tour on behalf of Employer. Providing
Employee is in reasonable compliance with this touring provision,
Employee shall have the option to accept or reject any specific
opportunities or requests. Employer agrees that a minimum per concert
honorarium paid by the promoter or host is appropriate whenever
Employer uses Employee's name, image or likeness to promote a tour.
Employer will not require Employee to accept any concert appearances
where Employee will not receive an appropriate honorarium (e.g., for
an extended international tour, approximately $3,000 per concert).
When it is beneficial to Employer's mission (as to be determined by
Employee and the Executive Committee) for Laura Moen to accompany
Employee on certain dates or tours, her reasonable travel expenses
will be paid. If the travel is international, Employer will pay (or
require the promoter or host to pay) for Business Class airfare for
Ms. Moen.
(ii) In the event that Employer acts as promoter of a
tour, Employer shall agree in advance on a minimum per concert
honorarium. Following the tour,
- 2 -
<PAGE> 3
after gross revenue from the tour has been reduced by all expenses of
the tour, including Employee's honorarium, Employer will pay Employee
twenty percent (20%) of the profit, if any. If there is no profit,
then Employer shall have no further obligation to Employee.
(iii) While Employee will be allowed great personal
latitude in setting Employee's appearance and travel schedule,
Employee agrees to submit himself to the review and counsel of the
Executive Committee with regard to all decisions regarding allocation
of Employee's professional time and energies.
(f) Employee will be allowed to make personal appearances, not to
exceed one weekend each month, for which Employee shall not
be financially accountable to Employer and for which Employee
can retain any fees or honorariums, provided Employee is
personally responsible for all direct costs of such
appearances. Employee's secretary, provided by Employer, may
assist Employee in the booking and coordination of these
events, at no cost or expense to Employee.
(g) Employee will be expected to maintain reasonable office hours
and when away from the office, to communicate with Employee's
staff and secretary at reasonable intervals. Executive
Committee members should always be able to reach Employee by
telephone within twenty-four (24) hours. Employee is,
however, allowed and encouraged to schedule and take up to
five (5) days per month away from the office to devote
concentrated time to Employee's songwriting activities.
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) Signing Bonus. Employer has paid to Employee a
non-refundable, non-recoupable cash bonus of Twenty-Five
Thousand Dollars and No Cents ($25,000), less taxes and other
normal withholdings.
(b) Base Compensation. Employer shall pay to Employee an annual
base salary in the amount of One Hundred and Forty Three
Thousand Five Hundred and Eighty-One Dollars and No Cents
($143,581), less taxes and other normal withholdings. Said
salary shall be paid to Employee in equal semi-monthly
installments. The annual base salary referred to in this
Section 3(a) shall hereinafter be referred to as the "Annual
Base Compensation."
(c) Benefits. Employee shall be entitled to receive or
participate in all employment benefits or benefit plans as
generally made available by
- 3 -
<PAGE> 4
Employer to its employees, if any, to the same extent and
under the same terms and conditions as other covered
employees having comparable position and stature.
(d) Vacation.
(i) Employee shall be entitled to four weeks (20 days)
of paid vacation per fiscal year.
(ii) Employee will also be allowed up to three (3) weeks
per year for touring and personal engagements, independent of
Employer. While Employee will have great latitude in determining the
advisability and time of such engagements, these dates will be subject
to the approval by the Executive Committee in advance, taking into
account Employee's executive responsibility and recording and writing
commitments to Employer. In such event, Employee shall pay all costs
associated with these dates and after deduction of all expenses,
Employee shall pay twenty percent (20%) of any profits to Employer.
(e) Bonus. Employee shall become a participant in Employer's
Senior Management Bonus Plan, at fifteen percent (15%) of
Employee's Annual Base Compensation, and in accordance with
the terms of such Bonus Plan as such terms are defined
therein.
(f) Options. Employer has granted to Employee incentive stock
options to purchase 59,722 shares of the Employer's Class A
Common Stock pursuant to the Integrity Incorporated Amended
and Restated Long-Term Incentive Plan, effective as of May 3,
1996, at an exercise price equal to the fair market value of
the Class A Common Stock as of the date of grant.
(g) 1995 Cash Incentive Plan. Employee is a participant in
Employer's 1995 Cash Incentive Plan, which is attached hereto
as Exhibit A and is hereby expressly incorporated into and
made a part of this Agreement as if its terms were set forth
in full herein.
4. Term and Termination.
Employee's employment with Employer shall continue for a period of
three (3) years from the 1st day of October, 1998, unless earlier 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;
- 4 -
<PAGE> 5
(b) Employee becoming or remaining Disabled for a 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; or
(d) Immediately upon written notice of termination from Employer
for "cause." For purposes of this Agreement, "cause" shall
mean (i) Employee's conviction of, confession to, or plea of
guilty or nolo contendere to, any felony or any crime
involving an act of dishonesty, fraud, misappropriation,
embezzlement, or moral turpitude; (ii) any fraudulent,
dishonest or disloyal conduct by Employee that results in an
injury, monetary or otherwise, to the Employer; (iii)
Employee's possession of illegal drugs or excessive use of
drugs, intoxicating liquors or narcotics; (iv) misconduct or
gross negligence by Employee in connection with the
performance of his duties hereunder that results in an
injury, monetary or otherwise, to the Employer; (v) failure
by the Employee to substantially perform his duties hereunder
within a reasonable time after receiving written notice of
non-performance from Employer; or (vi) a material breach of
this Agreement by Employee; provided, however, that in the
case of (ii) through (vi) above, the determination that
Employee's conduct constitutes "cause" shall be made by the
Board of Directors of the Employer acting reasonably and in
good faith and; provided further, that in the case of (vi)
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 fifteen
(15) days) within which the Employee may take such remedial
action, and the Employee shall not have taken such specified
remedial action within such specified reasonable time.
In the event that Employee's employment with Employer terminates pursuant to a
change of control, the terms and conditions of the Key Employee Change in
Control Agreement, set forth in Section 6 to this Agreement, shall govern,
including but not limited to the definition of "cause" therein.
5. Severance.
Employer and Employee have agreed to and executed a separate agreement
entitled Severance Agreement ("Severance Agreement"). The Severance Agreement,
which is attached hereto as Exhibit B, is hereby expressly incorporated into
and made a part of this Agreement as if its terms were set forth in full
herein; provided that to the
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<PAGE> 6
extent there are inconsistencies between the terms of the Severance Agreement
and the terms of this Agreement, including defined terms, the provisions of
this Agreement shall govern.
6. Change in Control.
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 C, is hereby expressly incorporated into and made a part of this
Agreement as if its terms were set forth in full herein.
7. 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, new
product concepts and ideas under consideration or planned for
development, 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 any legal
right of Employer.
(ii) "Confidential Information" means
information, other than Trade Secrets, which relates to
Employer, Employer's activities, 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
- 6 -
<PAGE> 7
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.
8. Inventions and Other Developments.
- 7 -
<PAGE> 8
All rights and obligations relating to 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 shall be the property of the Employer and,
to the extent covered, shall be as set forth in the Exclusive Artist Agreement
and the Exclusive Songwriter Agreement, each of which has been executed
contemporaneously with this Agreement and is hereby expressly incorporated into
and made part of this Agreement as if its terms were set forth in full herein.
9. 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, (i) any employee of the Employer to terminate his or her relationship
with Employer or (ii) any current or former employee to enter into an
employment or agency relationship with Employee or with any other person or
entity other than Employer.
10. 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 7 of this Agreement), or in which Employee has creative or
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 music business (including Employee being an executive
producer, producer or creating any like product of Employer for any Competitor
of Employer, but excluding any activities pursuant to the Exclusive Songwriter
Agreement and Exclusive Artist Agreement); and "Restricted Territory" is the
geographical area set forth in Exhibit D 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. In consideration
of Employee's full compliance with all the terms and conditions of this
provision, Employer shall pay to Employee, for the corresponding two
- 8 -
<PAGE> 9
(2) year period, Employee's Annual Base Compensation (at the annual rate in
effect during the last full year of Employee's employment) and shall provide
fully paid medical and dental benefits, equal to or equivalent to the coverage
then currently provided to Employer's senior management personnel.
11. 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 7, 8, 9 or 10 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.
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.
12. 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.
13. Governing Law and Disputes.
This Agreement shall be governed and construed in accordance with the
laws of the State of Alabama.
- 9 -
<PAGE> 10
Employer and Employee agree that, except as provided in paragraph 11
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
(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.
14. 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.
15. 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.
16. 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 for the 1995 Cash Incentive Plan as expressly
noted herein, this Agreement supersedes any former agreements between the
Parties governing the same subject matter, including the Letter Agreement,
dated October 23, 1998. This Agreement may be modified only by a written
instrument signed by each of the Parties hereto.
- 10 -
<PAGE> 11
IN WITNESS WHEREOF, the undersigned set their hands and seals as of
the 1st day of October, 1998.
INTEGRITY INCORPORATED DON MOEN
/s/ /s/ [SEAL]
- ---------------------------------- ----------------------------
NAME: DON MOEN
TITLE:
ATTEST:
/s/
- ----------------------------------
Secretary
[CORPORATE SEAL]
- 11 -
<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 1st
day of January, 1998, by and among Integrity Incorporated, a Delaware
corporation, ("Employer") and Danny McGuffey, an individual currently residing
in Nashville, Tennessee ("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 Senior Vice President and General Manager,
Integrity Label Group (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 Senior
Vice President and General Manager, Integrity Label Group and shall use his
best efforts in the performance of the same. 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 retail sales,
marketing, packaging, and special markets.
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) Base Compensation. Employer shall pay to Employee an annual
base salary in the amount of One Hundred Sixteen Thousand
Dollars and No Cents ($116,000.00), less taxes and other
normal withholdings. Said salary shall be paid to Employee in
equal semi-monthly installments. Employer shall pay to
Employee a minimum annual bonus in the amount of Ten Thousand
Dollars and No Cents ($10,000.00), less taxes and other
normal withholdings. Said bonus shall be paid to Employee in
equal quarterly installments. The annual base salary and
annual bonus referred to in this Section 3(a) shall
hereinafter be referred to as the "Annual Base Compensation."
The Annual Base Compensation may be increased for merit or
cost of living during the term of the Agreement at the
discretion of Employer.
<PAGE> 2
(b) Benefits. Employee shall be entitled to receive or
participate in all employment benefits or benefit plans
listed on Schedule 1 as generally made available by Employer
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 three weeks of paid
vacation per fiscal year.
(d) Bonus. Employee shall be entitled to receive cash bonuses
pursuant to the general terms outlined in the offer letter
dated 12/20/96. Bonus targets will be adjusted annually based
on approved operating plan.
(e) Options. Employer shall have granted, as part of the original
offer letter dated 12/20/96, incentive stock options to
purchase 50,000 shares of the Employer's Class A Common Stock
pursuant to the Employer's Incentive Stock Option Plan.
4. Term and Termination.
Employee's employment with Employer shall begin on the 1st day of
January, 1997. The term of this Agreement, however, shall begin on the 1st day
of January, 1998 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) 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 or (ii) conduct by Employee in his
office with the Employer
<PAGE> 3
that is grossly inappropriate and demonstrably likely to lead
to material injury to Employer, as determined by the Board 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 within the specified
time.
5. Severance Payment.
If Employee's employment with Employer is terminated pursuant to
Section 4(d), the Employee shall be entitled to receive as a severance benefit
aggregate Severance Payments in an amount equal to the greater of (i) the
amount the Employee was to receive as Annual Base Compensation under his
Employment Agreement multiplied by 3 less 1/12 of such Annual Base Compensation
amount for each full month of the Employee's service with the Employer after
the date of this Agreement and (ii) one-half of Employee's Annual Base
Compensation, less, in the case of either (i) or (ii), any amount paid in lieu
of termination notice under Section 4(d). The Severance Payments may be made by
the Employer as semi-monthly salary continuation payments or as a lump sum
payment within ninety (90) days after termination of Employee's employment with
Employer, as determined by the Employer in its sole and absolute discretion.
6. 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.
7. 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,
<PAGE> 4
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, 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
<PAGE> 5
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.
8. 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.
9. 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.
10. 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
<PAGE> 6
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 7 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 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.
11. 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 7, 8, 9 or 10 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 7,
8, 9 or 10.
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.
12. 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
<PAGE> 7
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.
13. Disputes and Governing Law.
Employer and Employee agree that, except as provided in paragraph 11
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
(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.
14. 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.
15. 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.
<PAGE> 8
16. 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.
IN WITNESS WHEREOF, the undersigned set their hands and seals as of
the 1st day of January, 1998.
INTEGRITY INCORPORATED DANNY McGUFFEY
/s/ /s/ [SEAL]
- ------------------------------ ----------------------------------
NAME: DANNY McGUFFEY
TITLE:
ATTEST:
/s/
- ------------------------------
Secretary
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of issued
shares each period 5,514,000 5,514,000 5,514,000
Common stock equivalents, computed
using treasury stock method 291,000 0 0
--------- --------- ---------
5,805,000 5,514,000 5,514,000
========= ========= =========
Shares used in
Basic EPS 5,514,000 5,514,000 5,514,000
Diluted EPS 5,805,000 5,514,000 5,514,000
</TABLE>
39
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Integrity Music, Inc.
Integrity Music Europe Limited
Integrity Music Pty. Ltd.
Integrity Media Asia Pte. Ltd.
Celebration Hymnal LLC
40
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-86126, Nos. 33-86128 and Nos. 33-84584) of
Integrity Incorporated of our report dated February 19, 1999 appearing on page
18 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 989
<SECURITIES> 0
<RECEIVABLES> 5,609
<ALLOWANCES> 696
<INVENTORY> 4,528
<CURRENT-ASSETS> 15,898
<PP&E> 7,048
<DEPRECIATION> 3,575
<TOTAL-ASSETS> 31,617
<CURRENT-LIABILITIES> 6,071
<BONDS> 0
0
0
<COMMON> 5,514
<OTHER-SE> 13,428
<TOTAL-LIABILITY-AND-EQUITY> 31,617
<SALES> 32,069
<TOTAL-REVENUES> 38,847
<CGS> 17,985
<TOTAL-COSTS> 9,023
<OTHER-EXPENSES> 8,557
<LOSS-PROVISION> 4,852
<INTEREST-EXPENSE> 1,529
<INCOME-PRETAX> 1,753
<INCOME-TAX> (369)
<INCOME-CONTINUING> 1,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854
<EPS-PRIMARY> .34
<EPS-DILUTED> .32
</TABLE>
