<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999 Commission File No. 0-24134
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INTEGRITY INCORPORATED
----------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0952549
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Cody Road
Mobile, Alabama 36695
(Address of principal executive offices, zip)
(334) 633-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 10, 1999
- ----- ------------------------------
<S> <C>
Class A Common Stock, $0.01 par value 2,179,000
Class B Common Stock, $0.01 par value 3,435,000
</TABLE>
<PAGE> 2
FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
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<S> <C> <C>
ASSETS (Unaudited)
Current Assets
Cash $ 1,101 $ 989
Trade receivables, less allowance for returns and doubtful accounts of $1,080
and $696 5,921 4,913
Other receivables 996 1,637
Inventories 4,114 4,528
Other current assets 2,925 3,831
--------- ---------
Total current assets 15,057 15,898
Property and equipment, net of accumulated depreciation of $3,840 and $3,575 3,440 3,473
Product masters, net of accumulated amortization of $10,663 and $11,325 9,063 9,050
Other assets 3,046 3,196
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Total assets $ 30,606 $ 31,617
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,106 $ 1,847
Accounts payable and accrued expenses 2,593 2,732
Royalties payable 771 569
Other current liabilities 1,134 923
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Total current liabilities 5,604 6,071
Long-term debt 10,386 11,121
Other long-term liabilities 52 60
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Total liabilities 16,042 17,252
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Commitments and contingencies -- --
Minority interest 1,049 1,384
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Stockholders' Equity
Preferred stock, $.01 par value; 500,000 shares authorized, none issued and
Outstanding 0 0
Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,179,000 and 2,179,000 shares issued and outstanding 22 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 13,914 13,428
Unearned compensation (352) 0
Accumulated Deficit (70) (449)
Equity adjustments from foreign currency translation (33) (53)
--------- ---------
Total stockholders' equity 13,515 12,981
--------- ---------
Total liabilities and stockholders' equity $ 30,606 $ 31,617
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 10,513 $ 9,678 $ 21,558 $ 19,131
Cost of sales 4,664 4,028 9,887 8,025
--------- --------- --------- ---------
Gross profit 5,849 5,650 11,671 11,106
Marketing and fulfillment expenses 2,892 2,575 5,554 4,732
General and administrative expenses 2,365 2,330 4,695 4,746
--------- --------- --------- ---------
Income from operations 592 745 1,422 1,628
Other expenses
Interest expense, net 304 400 679 777
Other expenses (24) (22) (6) 4
--------- --------- --------- ---------
Income before minority interest and taxes 312 367 749 847
Provision for income taxes 104 83 260 96
Minority interest, less applicable taxes 52 110 110 122
--------- --------- --------- ---------
Net income $ 156 $ 174 $ 379 $ 629
========= ========= ========= =========
Adjustments to determine comprehensive income
Foreign currency translation adjustments (5) (7) 20 6
--------- --------- --------- ---------
Comprehensive income $ 151 $ 167 $ 399 $ 635
========= ========= ========= =========
EARNINGS PER SHARE
Basic $ 0.03 $ 0.03 $ 0.07 $ 0.11
========= ========= ========= =========
Diluted $ 0.03 $ 0.03 $ 0.06 $ 0.11
========= ========= ========= =========
Weighted average number of shares outstanding
Basic 5,580 5,514 5,543 5,514
Diluted 6,004 5,514 6,041 5,514
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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INTEGRITY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months Ended June 30
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 379 $ 629
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 558 466
Amortization of product masters 1,336 1,080
Minority interest 110 122
Stock compensation 23 0
Changes in operating assets and liabilities
Trade receivables (1,008) (1,413)
Other receivables (1) (120)
Inventories 414 1,075
Other assets 1,588 228
Accounts payable, royalties payable and
Accrued expenses 63 (431)
Other current and non current liabilities 223 411
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Net cash provided by operating activities 3,685 2,047
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Cash flows from investing activities
Purchases of property and equipment (232) (182)
Distributions to joint venture partner (510) 0
Payments for product masters (1,349) (1,120)
--------- ---------
Net cash used in investing activities (2,091) (1,302)
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Cash flows from financing activities
Net (repayments) borrowings under line of credit (317) 575
Principal payments of long-term debt (1,165) (1,326)
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Net cash used in financing activities (1,482) (751)
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Net (decrease) increase in cash 112 (6)
Cash, beginning of year 989 523
--------- ---------
Cash, end of period $ 1,101 $ 517
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
3
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INTEGRITY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF 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 Ltd. was formed in 1988; Integrity Music Pty.
Ltd. was formed in 1991; and Integrity Media Asia Pte. Ltd. was formed in 1995.
These wholly-owned subsidiaries of the Company serve to expand the Company's
presence in Western Europe, Australia and New Zealand; and Singapore,
respectively. Celebration Hymnal LLC was formed in 1997 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 a minority interest in these financial statements, as the joint
venture is controlled by the Company.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements contained in the Company's Annual Report, dated December
31, 1998. The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments and the nonrecurring billing adjustment described below, considered
necessary for a fair presentation of results for the interim period, have been
included.
During the six months ended June 30, 1999, the Company recorded
certain adjustments to correct an inadvertent overstatement of shipping and
handling revenue resulting from software modifications carried out last year.
This situation, which affected only one portion of the Company's direct to
consumer segment, had no impact on customers, has been rectified, and had an
immaterial impact on all prior periods. The impact of these adjustments in 1999
was to reduce net sales by $.3 million and $.2 million, gross profit by $.3
million and $.2 million and net income by $.2 million and $.1 million for the
three and six month periods ended June 30, 1999, respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Operating results for the quarter ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. Certain amounts in the prior years' financial statements
have been reclassified to conform with the current year presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company, the Celebration Hymnal LLC, and its wholly-owned subsidiaries, which
include Integrity Music Pty. Ltd., Integrity Music Europe, Ltd., Integrity
Media Asia Pte. Ltd. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Provisions are made
based on estimates derived from historical data for sales returns and
allowances in the period in which the related products are shipped. 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.
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. Marketing costs expensed for the six months ended June
30, 1999 and 1998 approximated $2.9 million and $2.4 million, respectively.
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 regularly reviews the product masters amortization rates and adjusts
the rate based on management's estimates for future sales. In conjunction with
such analysis, any amounts that do not appear to be fully recoverable are
charged to expense during the period the loss becomes estimatable. The costs of
producing a product master include the cost of the musical talent, the cost of
the technical talent for engineering, directing and mixing, the cost of the
equipment used to record and produce the master and the cost of the studio
facility used.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average of common shares outstanding for
the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average of common shares
outstanding assuming issuance of potential dilutive common shares related to
options and warrants.
LONG TERM DEBT
The Company has a $19 million credit agreement with a financial
institution, which includes a $6 million revolving credit facility and a $13
million 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%. The lender holds warrants exercisable for approximately 12.5%
of the Company's Class A common stock. The warrants have an exercise price of
$1.875 and expire August 6, 2006. Under the terms of the financing agreement,
the warrants became exercisable in August 1998. During the six months ended
June 30, 1999, the Company amended its credit agreement to adjust certain
covenant restrictions for future periods. The nature of the revised covenants
are consistent with the previous covenants; however, the financial ratios are
somewhat less restrictive.
STOCKHOLDERS' EQUITY AND OPTIONS
During February 1999 the Company granted to an officer 100,000 shares
of restricted Class A Common Stock, which was issued in May 1999. The
restricted stock cliff vests after an additional seven years of employment by
the officer. The fair value of the stock on the date of grant was approximately
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<PAGE> 7
$375,000 and is being amortized to expense over the vesting period. As a result
of the grant, the Company's debt agreement required the issuance of
approximately 35,000 additional warrants to its primary lender with terms that
are consistent with their initial grant. The fair value of these warrants of
approximately $109,000 has been recorded as additional discount on the
long-term debt. The fair value of the warrants was determined based on a
Black-Scholes option pricing model with the following assumptions: dividend
yield at 0%, risk-free interest rate of 5.5%, expected life of 5 years, and
volatility of 95%.
SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
<TABLE>
<CAPTION>
Six months ended June 30
Net Sales 1999 1998
--------- ---- ----
<S> <C> <C>
Direct to consumer $ 6,893 $ 6,748
Retail 9,825 7,595
International 3,510 3,008
Other 2,469 3,118
Eliminations (1,139) (1,338)
-------- --------
$ 21,558 $ 19,131
======== ========
Operating profit (before minority interest)
Direct to consumer $ 965 $ 1,161
Retail 2,204 2,007
International 809 641
Other 119 306
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Consolidated 4,097 4,115
General corporate expense 2,669 2,491
Interest expense, net 679 777
-------- --------
Income before income taxes and minority
interest $ 749 $ 847
======== ========
<CAPTION>
Three months ended June 30
Net Sales 1999 1998
--------- ---- ----
<S> <C> <C>
Direct to consumer $ 3,425 $ 3,644
Retail 5,303 4,186
International 1,881 1,613
Other 957 1,778
Eliminations (1,053) (1,543)
-------- --------
$ 10,513 $ 9,678
======== ========
Operating profit (before minority interest)
Direct to consumer $ 404 $ 416
Retail 1,156 1,174
International 459 260
Other (41) 278
-------- --------
Consolidated 1,978 2,128
General corporate expense 1,362 1,361
Interest expense, net 304 400
-------- --------
Income before income taxes and minority
interest $ 312 $ 367
======== ========
</TABLE>
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales increased $2.5 million or 13.1% to $21.6 million for the six
months ended June 30, 1999, as compared to $19.1 million during the six months
ended June 30, 1998. For the quarter ended June 30, 1999, net sales increased
$800,000 or 8.3% to $10.5 million, from $9.7 million in the same period in
1998. New product sales in all segments amounted to $5.9 million or 27.4% of
net revenue for the six months ended June 30, 1999, as compared to $4.8 million
or 26.9% of net revenue for the same period in 1998. The increases in revenue
for both the three and six month periods are primarily attributable to
increased volume in the retail segment. During the six month period ended June
30, 1999, sales in the retail segment increased $2.2 million or 28.9% to $9.8
million, compared to $7.6 million in the same period in 1998. For the quarter
ended June 30, 1999, sales in the retail segment increased 26.1% to $5.3
million, compared to $4.2 million during the same period in 1998. The increase
in the three month and six months periods were both due to strong releases
during the first six months of 1999. A leading product in the retail segment is
WOW, a double CD, that accounted for $1.0 million in sales in the second
quarter. International sales for the six month period grew by 16.7% to $3.5
million, as compared to $3.0 million in the same period in 1998, while
international sales for the three month period increased 18.8% to $1.9 million
in 1999. International sales growth was experienced in all significant
territories including Singapore where revenue increased 28.5% during the six
month period. Direct to consumer sales were relatively flat for the six month
period at $6.8 million and decreased by approximately $219,000 to $3.4 million
during the three month period ended June 30, 1999. Direct to consumer sales
were negatively impacted by approximately $300,000 and $200,000 during the
three and six month periods ended June 30, 1999 due to adjustments to correct
an inadvertent overstatement of shipping and handling revenue related to system
modifications carried out last year. This situation, which affected only one
portion of the Company's direct to consumer segment, had no impact on
customers, has been rectified, and had an immaterial impact on all prior
periods.
Gross profit increased to $11.7 million or 54.2% of sales, as compared
to $11.1 million or 58.1% of sales, for the six month periods ended June 30,
1999 and 1998, respectively. During the first six months, the sales mix
included a higher-than-usual proportion of distributed and artist products,
which have lower gross margin percentages. The gross margin percentages in the
retail segment were negatively impacted with the sales of WOW. Although the
album has generated significant revenues, it was created in partnership with
two other record companies, and, as a result, the Company's margin is
significantly lower due to higher royalties. Gross profit was also negatively
impacted by approximately $300,000 and $200,000 during the three and six month
periods ended June 30, 1999, as a result of the billing adjustments in the
direct-to-consumer segment discussed above. Management expects that the sales
mix is likely to continue to focus in the retail segment over the course of the
year, which may keep gross margins lower than in previous years. Gross profit
for the quarter ended June 30, 1999 was $5.8 million or 55.2% of sales, as
compared to $5.7 million or 58.8% of sales for the same period in 1998. The
factors that contributed to the decrease during the three month period are
consistent with those described above. While gross margins for the retail
segment are lower, operating profit margins from the retail segment were 22.4%
and 26.4% for the six months ended June 30, 1999 and June 30, 1998,
respectively, compared with 14.0% and 17.2% for the direct to consumer segment
for the same periods.
Marketing and fulfillment expenses increased 19.1% to $5.6 million or
25.9% of net sales for the six months ended June 30, 1999, as compared with
$4.7 million or 24.6% of net sales for the same period in 1998. For the quarter
ended June 30, 1999, marketing and fulfillment expenses were $2.9 million or
27.6% of net sales, compared to $2.6 million or 26.8% of net sales for the same
period in 1998. The increases in marketing and fulfillment expenses as a
percent of sales are primarily attributable to increased marketing for
Integrity Notes, a new greeting card continuity series in the direct to
consumer division. Other new marketing programs launched during the six months
designed to further increase the Company's market share also contributed to the
overall increase in marketing and fulfillment expenses.
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General and administrative expenses remained constant at $4.7 million
or 21.8% of net sales for the six months ended June 30, 1999, as compared to
$4.7 million or 24.6% of net sales for the same period in 1998. For the quarter
ended June 30, 1999, general and administrative expenses were $2.4 million or
22.9% of net sales, compared to $2.3 million or 23.7% of net sales for the same
period in 1998.
Interest expense decreased to $304,000 and $679,000 for the three and
six months ended June 30, 1999 as compared with $400,000 and $777,000 for the
same periods in 1998. The decrease was the result of lower average debt levels
in the first six months of 1999. The average interest rate for the six months
ended June 30, 1999 and 1998 was 10.3% and 9.4%, respectively.
The Company recorded an income tax provision of $260,000 and $96,000
for the six months ended June 30, 1999 and 1998, respectively. The Company's
effective tax rate for the first six months of 1999 was 37.1%. The period's
income tax provision effective rate is the product of applying current tax
rates against the taxable income generated by the Company. The Company has made
no adjustments to its valuation allowance of $500,000 against its deferred tax
asset since December 31, 1998.
Net income for the quarter and for the year-to-date period was also
reduced by approximately $200,000 and $100,000 respectively, as a result of the
non-recurring billing adjustment discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically and will continue to finance its
operations primarily through cash generated from operations and from borrowings
under a line of credit and term notes as needed. The Company's principal uses
of cash historically have been debt service and the production and recording of
product masters to build the Company's product master library. The Company
believes that funds generated from operations, together with existing cash and
available borrowings under its Credit Agreement will be sufficient to finance
its current operations and planned capital expenditure requirements and
internal growth for the foreseeable future.
Late in the first quarter the Company revised its existing $19 million
financing agreements to implement less restrictive financial covenants so that
it has more flexibility in making future operating decisions, capital
expenditures and product development. For the periods ended June 30, 1999 and
1998, the Company had average borrowings under the credit agreement of $13.1
million and $16.5 million at average rates of 10.3% and 9.4%, respectively. At
June 30, 1999, the Company had $2.2 million available to borrow under this
agreement. Cash generated from operations totaled $3.7 million and $2.0 million
in the six months ended June 30, 1999 and 1998, respectively. The use of cash
varies from quarter to quarter based, among other things, on product releases
and scheduled marketing promotions.
The Company's primary uses of cash are to (1) repay existing debt and
(2) to invest in the development of product masters to maintain the Company's
quality creative releases. The Company made principle payments on its term loan
of $1.0 million and $750,000 for the six months ended June 30, 1999 and 1998,
respectively. The investments in product masters for the six months ended June
30, 1999 and 1998 totaled $1.3 and $1.1 million, respectively. The current book
value for product masters is $9.1 million.
Capital expenditures for computer equipment and capital improvements
to existing buildings totaled $232,000 and $182,000 for the six months ended
June 30, 1999 and 1998, respectively.
During the six month period ended June 30, 1999, the Company made
distributions in the aggregate of $510,000 to its 50% partner in the
Celebration Hymnal LLC joint venture, Word Entertainment.
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<PAGE> 10
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.
During 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
performed a successful full scale Year 2000 simulation of its IT systems in May
1999.
The Company has determined that all internal non-IT systems and
products either are Year 2000 compliant or that 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.
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 Industries,
Inc., located in Clifton, New Jersey, in the direct to consumer segment,
numerous international distributors in the international segment, and Eva-Tone,
Inc., located in Clearwater, Florida, 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. The Company's key US vendors and distributors have provided the
Company with assurances that their systems are compliant, as well as
contingency plans where necessary. The most significant distributors in the
international segment have not provided 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 to 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 spent approximately
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<PAGE> 11
$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. Notwithstanding the positive confirmations received from all
significant domestic contractors or service providers, should a Year 2000
failure occur at 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 cannot 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 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 for some period of time 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. Currently, no individual international distributor
distributes an amount of product that is material to the Company's overall
results of operations or financial condition. However, due to the number and
diversity of environments in which these distributors operate, the Company
cannot 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.
10
<PAGE> 12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on May 7,
1999, the following matters were brought before and voted upon by stockholders:
1. A proposal to elect the following to the Board of Directors to serve
until the 2000 annual meeting:
<TABLE>
<CAPTION>
Class A Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
<S> <C> <C> <C>
P. Michael Coleman 1,927,271 51,250 100,479
Jean C. Coleman 1,928,471 49,850 100,679
Charles V. Simpson 1,927,621 50,700 100,679
Heeth Varnedoe III 1,928,671 49,650 100,679
Jimmy M. Woodward 1,927,471 50,850 100,679
<CAPTION>
Class B Common Stock
For Withhold Authority Non-Votes
--- ------------------ ---------
<S> <C> <C> <C>
P. Michael Coleman 34,350,000 0 0
Jean C. Coleman 34,350,000 0 0
Charles V. Simpson 34,350,000 0 0
Heeth Varnedoe III 34,350,000 0 0
Jimmy M. Woodward 34,350,000 0 0
</TABLE>
2. A proposal to approve the 1999 Long-Term Incentive Plan, as described
in the related Proxy Statement of the Company:
<TABLE>
<CAPTION>
Class A
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
405,002 282,235 2,153 1,389,610
<CAPTION>
Class B
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
34,350,000 0 0 0
</TABLE>
3. A proposal to ratify the selection of PricewaterhouseCoopers LLP as
independent auditors for the Company for the fiscal year ending
December 31, 1999:
<TABLE>
<CAPTION>
Class A
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
<CAPTION>
1,974,511 1,910 1,900 100,679
<CAPTION>
Class B
-------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
34,350,000 0 0 0
</TABLE>
11
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT NUMBER
EXHIBIT DESCRIPTION
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation
of the Registrant, dated July 21, 1995, (incorporated by
reference from Exhibit 3(i).1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference from Exhibit 3(ii) to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582), and
amendments thereto, originally filed on May 6, 1994).
10.1 Integrity Incorporated 1999 Long-Term Incentive Plan, as
approved by the Stockholders of the Corporation on May 7,
1999.
27 Financial Data Schedule (for SEC use only).
(B) REPORT ON FORM 8-K
There were no reports on Form 8-K filed for the quarter
ended June 30, 1999.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRITY INCORPORATED
Date: August 10, 1999 /s/ P. Michael Coleman
- ---------------------- ------------------------
P. Michael Coleman
Chairman, President and Chief
Executive Officer
Date: August 10, 1999 /s/ Alison S. Richardson
- ---------------------- ------------------------
Alison S. Richardson
Senior Vice President,
Finance and Administration
13
<PAGE> 1
EXHIBIT 10.1
INTEGRITY INCORPORATED
1999 LONG-TERM INCENTIVE PLAN
ARTICLE 1
PURPOSE
1.1 GENERAL. The purpose of the Integrity Incorporated 1999 Long-Term
Incentive Plan (the "Plan") is to promote the success, and enhance the value,
of Integrity Incorporated (the "Company"), by linking the personal interests of
its employees, officers and directors to those of Company stockholders and by
providing such persons with an incentive for outstanding performance. The Plan
is further intended to provide flexibility to the Company in its ability to
motivate, attract, and retain the services of employees, officers and directors
upon whose judgment, interest, and special effort the successful conduct of the
Company's operation is largely dependent. Accordingly, the Plan permits the
grant of incentive awards from time to time to selected employees, officers and
directors.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan shall be effective as of the date upon
which it shall be approved by the Board (the "Effective Date"). However, the
Plan shall be submitted to the stockholders of the Company for approval within
12 months of the Board's approval thereof. No Incentive Stock Options granted
under the Plan may be exercised prior to approval of the Plan by the
stockholders and if the stockholders fail to approve the Plan within 12 months
of the Board's approval thereof, any Incentive Stock Options previously granted
hereunder shall be automatically converted to Non-Qualified Stock Options
without any further act. In the discretion of the Committee, Awards may be made
to Covered Employees which Awards are intended to constitute qualified
performance-based compensation under Code Section 162(m). Any such Awards shall
be contingent upon the stockholders having approved the Plan.
ARTICLE 3
DEFINITIONS
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Section 1.1 unless a clearly different meaning is required by the
context. The following words and phrases shall have the following meanings:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Share Award or Other Stock-Based
Award, or any other right or interest relating to Stock or cash,
granted to a Participant under the Plan.
<PAGE> 2
(b) "Award Agreement" means any written agreement, contract,
or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means and includes each of the
following:
(1) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the 1934 Act) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the 1934 Act) of
50% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for
purposes of this subsection (1), the following acquisitions
shall not constitute a Change of Control: (i) any acquisition
by a Person who is on the Effective Date the beneficial owner
of 50% or more of the Outstanding Company Voting Securities,
(ii) any acquisition directly from the Company, (iii) any
acquisition by the Company, (iv) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by
the Company, or (v) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i) and
(ii) of subsection (3) of this definition; or
(2) Individuals who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the Effective Date whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) Consummation of a reorganization, merger,
consolidation or share exchange, or sale or other disposition
of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners of
the Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or
indirectly, more than
-2-
<PAGE> 3
50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election
of directors of the corporation resulting from such Business
Combination (including, without limitation, a corporation
which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Voting
Securities, and (ii) at least a majority of the members of
the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination.
(e) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Committee" means the committee of the Board described in
Article 4.
(g) "Company" means Integrity Incorporated, a Delaware
corporation.
(h) "Covered Employee" means a covered employee as defined in
Code Section 162(m)(3).
(i) "Disability" means any illness or other physical or
mental condition of a Participant that renders the Participant
incapable of performing his customary and usual duties for the
Company, or any medically determinable illness or other physical or
mental condition resulting from a bodily injury, disease or mental
disorder which, in the judgment of the Committee, is permanent and
continuous in nature. The Committee may require such medical or other
evidence as it deems necessary to judge the nature and permanency of
the Participant's condition. Notwithstanding the above, with respect
to an Incentive Stock Option, Disability shall mean Permanent and
Total Disability as defined in Section 22(e)(3) of the Code.
(j) "Effective Date" has the meaning assigned such term in
Section 2.1.
(k) "Fair Market Value", on any date, means the closing sales
price of the Stock as reported on a securities exchange or the Nasdaq
National Market or Nasdaq Small Cap Market on such date or, in the
absence of reported sales on such date, the closing sales price on the
immediately preceding date on which sales were reported, provided that
if it is determined that the fair market value is not properly
reflected by such market quotations, Fair Market Value will be
determined by such other method as the Committee determines in good
faith to be reasonable.
-3-
<PAGE> 4
(l) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor
provision thereto.
(m) "Non-Qualified Stock Option" means an Option that is not
an Incentive Stock Option.
(n) "Option" means a right granted to a Participant under
Article 7 of the Plan to purchase Stock at a specified price during
specified time periods. An Option may be either an Incentive Stock
Option or a Non-Qualified Stock Option.
(o) "Other Stock-Based Award" means a right, granted to a
Participant under Article 11, that relates to or is valued by
reference to Stock or other Awards relating to Stock.
(p) "Parent" means a corporation which owns or beneficially
owns a majority of the outstanding voting stock or voting power of the
Company. For Incentive Stock Options, the term shall have the same
meaning as set forth in Code Section 424(e).
(q) "Participant" means a person who, as an employee, officer
or director of the Company or any Subsidiary, has been granted an
Award under the Plan.
(r) "Performance Share" means a right granted to a
Participant under Article 9, to receive cash, Stock, or other Awards,
the payment of which is contingent upon achieving certain performance
goals established by the Committee.
(s) "Plan" means the Integrity Incorporated 1999 Long-Term
Incentive Plan, as amended from time to time.
(t) "Restricted Stock Award" means Stock granted to a
Participant under Article 10 that is subject to certain restrictions
and to risk of forfeiture.
(u) "Stock" means the $0.01 par value Class A common stock of
the Company and such other securities of the Company as may be
substituted for Stock pursuant to Article 13.
(v) "Stock Appreciation Right" or "SAR" means a right granted
to a Participant under Article 8 to receive a payment equal to the
difference between the Fair Market Value of a share of Stock as of the
date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(w) "Subsidiary" means any corporation, limited liability
company,
-4-
<PAGE> 5
partnership or other entity of which a majority of the outstanding
voting stock or voting power is beneficially owned directly or
indirectly by the Company. For Incentive Stock Options, the term shall
have the meaning set forth in Code Section 424(f).
(x) "1933 Act" means the Securities Act of 1933, as amended
from time to time.
(y) "1934 Act" means the Securities Exchange Act of 1934, as
amended from time to time.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board or, at the discretion of the Board from time to time, by
the Board. The Committee shall consist of two or more members of the Board. It
is intended that the directors appointed to serve on the Committee shall be
"non-employee directors" (within the meaning of Rule 16b-3 promulgated under
the 1934 Act) and "outside directors" (within the meaning of Code Section
162(m) and the regulations thereunder) to the extent that Rule 16b-3 and, if
necessary for relief from the limitation under Code Section 162(m) and such
relief is sought by the Company, Code Section 162(m), respectively, are
applicable. However, the mere fact that a Committee member shall fail to
qualify under either of the foregoing requirements shall not invalidate any
Award made by the Committee which Award is otherwise validly made under the
Plan. The members of the Committee shall be appointed by, and may be changed at
any time and from time to time in the discretion of, the Board. During any time
that the Board is acting as administrator of the Plan, it shall have all the
powers of the Committee hereunder, and any reference herein to the Committee
(other than in this Section 4.1) shall include the Board.
4.2 ACTION BY THE COMMITTEE. For purposes of administering the Plan,
the following rules of procedure shall govern the Committee. A majority of the
Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved
unanimously in writing by the members of the Committee in lieu of a meeting,
shall be deemed the acts of the Committee. Each member of the Committee is
entitled to, in good faith, rely or act upon any report or other information
furnished to that member by any officer or other employee of the Company or any
Parent or Subsidiary, the Company's independent certified public accountants,
or any executive compensation consultant or other professional retained by the
Company to assist in the administration of the Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants;
-5-
<PAGE> 6
(b) Determine the type or types of Awards to be granted to
each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted
under the Plan, including but not limited to, the exercise price,
grant price, or purchase price, any restrictions or limitations on the
Award, any schedule for lapse of forfeiture restrictions or
restrictions on the exercisability of an Award, and accelerations or
waivers thereof, based in each case on such considerations as the
Committee in its sole discretion determines;
(e) Accelerate the vesting or lapse of restrictions of any
outstanding Award, based in each case on such considerations as the
Committee in its sole discretion determines;
(f) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(h) Decide all other matters that must be determined in
connection with an Award;
(i) Establish, adopt or revise any rules and regulations as
it may deem necessary or advisable to administer the Plan;
(j) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan; and
(k) Amend the Plan or any Award Agreement as provided herein.
4.4. DECISIONS BINDING. The Committee's interpretation of the Plan,
any Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding,
and conclusive on all parties.
-6-
<PAGE> 7
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section
13.1, the aggregate number of shares of Stock reserved and available for Awards
or which may be used to provide a basis of measurement for or to determine the
value of an Award (such as with a Stock Appreciation Right or Performance Share
Award) shall be 400,000, of which not more than 50% may be granted as Awards of
Restricted Stock or unrestricted Stock Awards.
5.2. LAPSED AWARDS. To the extent that an Award is canceled,
terminates, expires or lapses for any reason, any shares of Stock subject to
the Award will again be available for the grant of an Award under the Plan and
shares subject to SARs or other Awards settled in cash will be available for
the grant of an Award under the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4. LIMITATION ON AWARDS. Notwithstanding any provision in the Plan
to the contrary (but subject to adjustment as provided in Section 13.1), the
maximum number of shares of Stock with respect to one or more Options and/or
SARs that may be granted during any one calendar year under the Plan to any one
Participant shall be 200,000. The maximum fair market value (measured as of the
date of grant) of any Awards other than Options and SARs that may be received
by any one Participant (less any consideration paid by the Participant for such
Award) during any one calendar year under the Plan shall be $5,000,000.
ARTICLE 6
ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are
employees, officers or directors of the Company or a Parent or Subsidiary.
ARTICLE 7
STOCK OPTIONS
7.1. GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee, provided that
the exercise price for an Option shall not be less than the Fair
Market Value as of the date of the grant.
-7-
<PAGE> 8
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part. The Committee also shall determine the performance
or other conditions, if any, that must be satisfied before all or part
of an Option may be exercised. The Committee may waive any exercise
provisions at any time in whole or in part based upon factors as the
Committee may determine in its sole discretion so that the Option
becomes exerciseable at an earlier date.
(c) PAYMENT. The Committee shall determine the methods by
which the exercise price of an Option may be paid, the form of
payment, including, without limitation, cash, shares of Stock, or
other property (including "cashless exercise" arrangements), and the
methods by which shares of Stock shall be delivered or deemed to be
delivered to Participants; provided that if shares of Stock
surrendered in payment of the exercise price were themselves acquired
otherwise than on the open market, such shares shall have been held by
the Participant for at least six months.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The
Award Agreement shall include such provisions, not inconsistent with
the Plan, as may be specified by the Committee.
7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock
Options granted under the Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for
any Incentive Stock Option shall not be less than the Fair Market
Value as of the date of the grant.
(b) EXERCISE. In no event may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the earliest of the following circumstances; provided, however,
that the Committee may, prior to the lapse of the Incentive Stock
Option under the circumstances described in paragraphs (3), (4) and
(5) below, provide in writing that the Option will extend until a
later date, but if Option is exercised after the dates specified in
paragraphs (3), (4) and (5) below, it will automatically become a
Non-Qualified Stock Option:
(1) The Incentive Stock Option shall lapse as of the
option expiration date set forth in the Award Agreement.
(2) The Incentive Stock Option shall lapse ten years
after it is granted, unless an earlier time is set in the
Award Agreement.
-8-
<PAGE> 9
(3) If the Participant terminates employment for any
reason other than as provided in paragraph (4) or (5) below,
the Incentive Stock Option shall lapse, unless it is
previously exercised, three months after the Participant's
termination of employment.
(4) If the Participant terminates employment by
reason of his Disability, the Incentive Stock Option shall
lapse, unless it is previously exercised, one year after the
Participant's termination of employment.
(5) If the Participant dies while employed, or
during the three-month period described in paragraph (3) or
during the one-year period described in paragraph (4) and
before the Option otherwise lapses, the Option shall lapse
one year after the Participant's death. Upon the
Participant's death, any exercisable Incentive Stock Options
may be exercised by the Participant's beneficiary, determined
in accordance with Section 12.6.
Unless the exercisability of the Incentive Stock Option is
accelerated as provided in Article 12, if a Participant exercises an
Option after termination of employment, the Option may be exercised
only with respect to the shares that were otherwise vested on the
Participant's termination of employment.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.00.
(e) TEN PERCENT OWNERS. No Incentive Stock Option shall be
granted to any individual who, at the date of grant, owns stock
possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary unless
the exercise price per share of such Option is at least 110% of the
Fair Market Value per share of Stock at the date of grant and the
Option expires no later than five years after the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to the Plan after the day
immediately prior to the tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant or, in
the case of the Participant's Disability, by the Participant's
guardian or legal representative.
(h) DIRECTORS. The Committee may not grant an Incentive Stock
Option to a non-employee director. The Committee may grant an
Incentive Stock
-9-
<PAGE> 10
Option to a director who is also an employee of the Company or Parent
or Subsidiary but only in that individual's position as an employee
and not as a director.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the
right to receive the excess, if any, of:
(1) The Fair Market Value of one share of Stock
on the date of exercise; over
(2) The grant price of the Stock Appreciation
Right as determined by the Committee.
(b) OTHER TERMS. All awards of Stock Appreciation Rights
shall be evidenced by an Award Agreement. The terms, methods of
exercise, methods of settlement, form of consideration payable in
settlement, and any other terms and conditions of any Stock
Appreciation Right shall be determined by the Committee at the time of
the grant of the Award and shall be reflected in the Award Agreement.
ARTICLE 9
PERFORMANCE SHARES
9.1. GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Committee. The Committee shall have the complete discretion to
determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Committee, and payable to, or
exercisable by, the Participant to whom the Performance Shares are granted, in
whole or in part, as the Committee shall establish at grant or thereafter. The
Committee shall set performance goals and other terms or conditions to payment
of the Performance Shares in its discretion which, depending on the extent to
which they are met, will determine the number and value of Performance Shares
that will be paid to the Participant.
9.3. OTHER TERMS. Performance Shares may be payable in cash, Stock, or
-10-
<PAGE> 11
other property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10
RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to make
Awards of Restricted Stock to Participants in such amounts and subject to such
terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions as the Committee
may impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, upon the satisfaction of performance
goals or otherwise, as the Committee determines at the time of the grant of the
Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Committee at
the time of the grant of the Award or thereafter, upon termination of
employment during the applicable restriction period or upon failure to satisfy
a performance goal during the applicable restriction period, Restricted Stock
that is at that time subject to restrictions shall be forfeited and reacquired
by the Company; provided, however, that the Committee may provide in any Award
Agreement that restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in the event of terminations resulting
from specified causes, and the Committee may in other cases waive in whole or
in part restrictions or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing shares of Restricted Stock are
registered in the name of the Participant, certificates must bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such Restricted Stock.
ARTICLE 11
OTHER STOCK-BASED AWARDS
11.1. GRANT OF OTHER STOCK-BASED AWARDS. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants such
other Awards that are payable in, valued in whole or in part by reference to,
or otherwise based on or related to shares of Stock, as deemed by the Committee
to be consistent with the purposes of the Plan, including without limitation
shares of Stock awarded purely as a "bonus" and not subject to any restrictions
or conditions, convertible or exchangeable debt securities, other rights
convertible or exchangeable into shares of Stock, and Awards valued by
reference to book value of shares of Stock or the value of securities of or the
-11-
<PAGE> 12
performance of specified Parents or Subsidiaries. The Committee shall determine
the terms and conditions of such Awards.
ARTICLE 12
PROVISIONS APPLICABLE TO AWARDS
12.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under
the Plan may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. If an Award is granted in substitution for another Award, the
Committee may require the surrender of such other Award in consideration of the
grant of the new Award. Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from
the grant of such other Awards.
12.2. EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Award for a payment in cash, Stock,
or another Award (subject to Section 13.1), based on the terms and conditions
the Committee determines and communicates to the Participant at the time the
offer is made, and after taking into account the tax, securities and accounting
effects of such an exchange.
12.3. TERM OF AWARD. The term of each Award shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant
(or, if Section 7.2(e) applies, five years from the date of its grant).
12.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and
any applicable law or Award Agreement, payments or transfers to be made by the
Company or a Parent or Subsidiary on the grant or exercise of an Award may be
made in such form as the Committee determines at or after the time of grant,
including without limitation, cash, Stock, other Awards, or other property, or
any combination, and may be made in a single payment or transfer, in
installments, or on a deferred basis, in each case determined in accordance
with rules adopted by, and at the discretion of, the Committee.
12.5. LIMITS ON TRANSFER. No right or interest of a Participant in any
unexercised or restricted Award may be pledged, encumbered, or hypothecated to
or in favor of any party other than the Company or a Parent or Subsidiary, or
shall be subject to any lien, obligation, or liability of such Participant to
any other party other than the Company or a Parent or Subsidiary. No
unexercised or restricted Award shall be assignable or transferable by a
Participant other than by will or the laws of descent and distribution or,
except in the case of an Incentive Stock Option, pursuant to a domestic
relations order that would satisfy Section 414(p)(1)(A) of the Code if such
Section applied to an Award under the Plan; provided, however, that the
Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not
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<PAGE> 13
result in accelerated taxation, (ii) does not cause any Option intended to be
an incentive stock option to fail to be described in Code Section 422(b), and
(iii) is otherwise appropriate and desirable, taking into account any factors
deemed relevant, including without limitation, any state or federal tax or
securities laws or regulations applicable to transferable Awards.
12.6 BENEFICIARIES. Notwithstanding Section 12.5, a Participant may,
in the manner determined by the Committee, designate a beneficiary to exercise
the rights of the Participant and to receive any distribution with respect to
any Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject
to all terms and conditions of the Plan and any Award Agreement applicable to
the Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee. If no beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's estate. Subject to the
foregoing, a beneficiary designation may be changed or revoked by a Participant
at any time provided the change or revocation is filed with the Committee.
12.7. STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with federal or state
securities laws, rules and regulations and the rules of any national securities
exchange or automated quotation system on which the Stock is listed, quoted, or
traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock.
12.8. ACCELERATION UPON A CHANGE IN CONTROL. Except as otherwise
provided in the Award Agreement, upon the occurrence of a Change in Control,
all outstanding Options, Stock Appreciation Rights, and other Awards in the
nature of rights that may be exercised shall become fully exercisable and all
restrictions on outstanding Awards shall lapse; provided, however that such
acceleration will not occur if, in the opinion of the Company's accountants,
such acceleration would preclude the use of "pooling of interest" accounting
treatment for a Change in Control transaction that (a) would otherwise qualify
for such accounting treatment, and (b) is contingent upon qualifying for such
accounting treatment. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the excess
Options shall be deemed to be Non-Qualified Stock Options.
12.9. ACCELERATION UPON CERTAIN EVENTS NOT CONSTITUTING A CHANGE IN
CONTROL. In the event of the occurrence of any circumstance, transaction or
event not constituting a Change in Control (as defined in Section 3.1) but
which the Board of Directors deems to be, or to be reasonably likely to lead
to, an effective change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of the 1934
Act, the Committee may in its sole discretion declare all outstanding Options,
Stock Appreciation Rights, and other Awards in the nature of rights that may be
exercised to be fully exercisable, and/or all
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<PAGE> 14
restrictions on all outstanding Awards to have lapsed, in each case, as of such
date as the Committee may, in its sole discretion, declare, which may be on or
before the consummation of such transaction or event. To the extent that this
provision causes Incentive Stock Options to exceed the dollar limitation set
forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified
Stock Options.
12.10. ACCELERATION FOR ANY OTHER REASON. Regardless of whether an
event has occurred as described in Section 12.8 or 12.9 above, the Committee
may in its sole discretion at any time determine that all or a portion of a
Participant's Options, Stock Appreciation Rights, and other Awards in the
nature of rights that may be exercised shall become fully or partially
exercisable, and/or that all or a part of the restrictions on all or a portion
of the outstanding Awards shall lapse, in each case, as of such date as the
Committee may, in its sole discretion, declare. The Committee may discriminate
among Participants and among Awards granted to a Participant in exercising its
discretion pursuant to this Section 12.10.
12.11 EFFECT OF ACCELERATION. If an Award is accelerated under Section
12.8 or 12.9, the Committee may, in its sole discretion, provide (i) that the
Award will expire after a designated period of time after such acceleration to
the extent not then exercised, (ii) that the Award will be settled in cash
rather than Stock, (iii) that the Award will be assumed by another party to the
transaction giving rise to the acceleration or otherwise be equitably converted
in connection with such transaction, or (iv) any combination of the foregoing.
The Committee's determination need not be uniform and may be different for
different Participants whether or not such Participants are similarly situated.
12.12. PERFORMANCE GOALS. The Committee may determine that any Award
granted pursuant to this Plan to a Participant (including, but not limited to,
Participants who are Covered Employees) shall be determined solely on the basis
of (a) the achievement by the Company or a Parent or Subsidiary of a specified
target return, or target growth in return, on equity or assets, (b) the
Company's stock price, (c) the achievement by an individual or a business unit
of the Company, Parent or Subsidiary of a specified target, or target growth
in, revenues, net income or earnings per share, (d) the achievement of
objectively determinable goals with respect to service or product delivery,
service or product quality, customer satisfaction, meeting budgets and/or
retention of employees, or (e) any combination of the goals set forth in (a)
through (d) above. If an Award is made on such basis, the Committee shall
establish goals prior to the beginning of the period for which such performance
goal relates (or such later date as may be permitted under Code Section 162(m)
or the regulations thereunder) and the Committee may for any reason reduce (but
not increase) any Award, notwithstanding the achievement of a specified goal.
Any payment of an Award granted with performance goals shall be conditioned on
the written certification of the Committee in each case that the performance
goals and any other material conditions were satisfied.
12.13. TERMINATION OF EMPLOYMENT. Whether military, government or
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<PAGE> 15
other service or other leave of absence shall constitute a termination of
employment shall be determined in each case by the Committee at its discretion,
and any determination by the Committee shall be final and conclusive. A
termination of employment shall not occur in a circumstance in which a
Participant transfers from the Company to one of its Parents or Subsidiaries,
transfers from a Parent or Subsidiary to the Company, or transfers from one
Parent or Subsidiary to another Parent or Subsidiary.
ARTICLE 13
CHANGES IN CAPITAL STRUCTURE
13.1. GENERAL. In the event a stock dividend is declared upon the
Stock, the authorization limits under Section 5.1 and 5.4 shall be increased
proportionately, and the shares of Stock then subject to each Award shall be
increased proportionately without any change in the aggregate purchase price
therefor. In the event the Stock shall be changed into or exchanged for a
different number or class of shares of stock or securities of the Company or of
another corporation, whether through reorganization, recapitalization,
reclassification, share exchange, stock split-up, combination of shares, merger
or consolidation, the authorization limits under Section 5.1 and 5.4 shall be
adjusted proportionately, and there shall be substituted for each such share of
Stock then subject to each Award the number and class of shares into which each
outstanding share of Stock shall be so exchanged, all without any change in the
aggregate purchase price for the shares then subject to each Award, or, subject
to Section 15.2, there shall be made such other equitable adjustment as the
Committee shall approve.
ARTICLE 14
AMENDMENT, MODIFICATION AND TERMINATION
14.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the
Committee may, at any time and from time to time, amend, modify or terminate
the Plan without stockholder approval; provided, however, that the Board or
Committee may condition any amendment or modification on the approval of
stockholders of the Company if such approval is necessary or deemed advisable
with respect to tax, securities or other applicable laws, policies or
regulations.
14.2 AWARDS PREVIOUSLY GRANTED. At any time and from time to time, the
Committee may amend, modify or terminate any outstanding Award without approval
of the Participant; provided, however, that, subject to the terms of the
applicable Award Agreement, such amendment, modification or termination shall
not, without the Participant's consent, reduce or diminish the value of such
Award determined as if the Award had been exercised, vested, cashed in or
otherwise settled on the date of such amendment or termination, and provided
further that, except as otherwise permitted in the Plan, the exercise price of
any Option may not be reduced and the original term of any Option may not be
extended. No termination, amendment, or modification of the Plan shall
adversely affect any Award previously granted under the Plan, without the
written
-15-
<PAGE> 16
consent of the Participant.
ARTICLE 15
GENERAL PROVISIONS
15.1. NO RIGHTS TO AWARDS. No Participant or eligible participant
shall have any claim to be granted any Award under the Plan, and neither the
Company nor the Committee is obligated to treat Participants or eligible
participants uniformly.
15.2. NO STOCKHOLDER RIGHTS. No Award gives the Participant any of the
rights of a stockholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
15.3. WITHHOLDING. The Company or any Parent or Subsidiary shall have
the authority and the right to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy federal, state, and local
taxes (including the Participant's FICA obligation) required by law to be
withheld with respect to any taxable event arising as a result of the Plan.
With respect to withholding required upon any taxable event under the Plan, the
Committee may, at the time the Award is granted or thereafter, require that any
such withholding requirement be satisfied, in whole or in part, by withholding
shares of Stock having a Fair Market Value on the date of withholding equal to
the amount required to be withheld for tax purposes, all in accordance with
such procedures as the Committee establishes.
15.4. NO RIGHT TO CONTINUED SERVICE. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Parent or Subsidiary to terminate any Participant's employment or status as
an officer or director at any time, nor confer upon any Participant any right
to continue as an employee, officer or director of the Company or any Parent or
Subsidiary.
l5.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Company or any Parent or
Subsidiary.
15.6. INDEMNIFICATION. To the extent allowable under applicable law,
each member of the Committee shall be indemnified and held harmless by the
Company from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by such member in connection with or resulting from any
claim, action, suit, or proceeding to which such member may be a party or in
which he may be involved by reason of any action or failure to act under the
Plan and against and from any and all amounts paid by such member in
satisfaction of judgment in such action, suit, or proceeding against him
provided he gives the Company an opportunity, at its own expense, to handle and
defend the same before he undertakes to handle and defend it on his own behalf.
The foregoing
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<PAGE> 17
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or
any power that the Company may have to indemnify them or hold them harmless.
15.7. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall
be taken into account in determining any benefits under any pension,
retirement, savings, profit sharing, group insurance, welfare or benefit plan
of the Company or any Parent or Subsidiary unless provided otherwise in such
other plan.
15.8. EXPENSES. The expenses of administering the Plan shall be
borne by the Company and its Parents or Subsidiaries.
15.9. TITLES AND HEADINGS. The titles and headings of the Sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
15.10. GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
15.11. FRACTIONAL SHARES. No fractional shares of Stock shall be
issued and the Committee shall determine, in its discretion, whether cash shall
be given in lieu of fractional shares or whether such fractional shares shall
be eliminated by rounding up.
15.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the 1933 Act, or any state securities act, any of the shares of
Stock paid under the Plan. The shares paid under the Plan may in certain
circumstances be exempt from registration under the 1933 Act, and the Company
may restrict the transfer of such shares in such manner as it deems advisable
to ensure the availability of any such exemption.
15.13. GOVERNING LAW. To the extent not governed by federal law, the
Plan and all Award Agreements shall be construed in accordance with and
governed by the laws of the State of Delaware.
15.14 ADDITIONAL PROVISIONS. Each Award Agreement may contain such
other terms and conditions as the Committee may determine; provided that such
other terms and conditions are not inconsistent with the provisions of this
Plan.
The foregoing is hereby acknowledged as being the Integrity
Incorporated 1999 Long-Term Incentive Plan as adopted by the Board of Directors
of the Company on February 11, 1999, and to be submitted to the Company's
stockholders at the 1999 Annual Meeting of Stockholders.
Integrity Incorporated
By: /s/ P. Michael Coleman
---------------------------
Its: President
---------------------------
-17-
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