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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, 1999
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 $6,323,438 at March 13, 2000, 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 13, 2000 was 2,179,000.
The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 13, 2000 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 11, 2000 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 printed music. The Company produces
praise and worship music in different musical styles for specific audiences such
as children's music, urban music, youth music and live worship for adult
audiences. Integrity's products are sold primarily through retail stores and
direct to consumers throughout the United States and internationally in 143
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 for certain praise and worship artists. Integrity's products also
include software and 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
Praise and worship concept products are centered around a specific
theme or event 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 98th
recording.
The Company's concept product line now includes: Hosanna! Music(R),
Urban Praise(R) and FairHope Records(R), designed for budget-conscious
customers, featuring classic praise and worship titles grouped according to
themes; World's Best Praise and Worship(R) series; 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, "Jerusalem Arise" with Paul Wilbur and
"We Offer Praises" with Ron Kenoly. Previous Integrity produced recordings by
Ron Kenoly include "Welcome Home," recipient of the Dove Foundation's "Family
Approved" seal of excellence; "Sing Out," the first Integrity title to enter
Billboard's Top 200;
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"God is Able", "High Places", "Majesty" 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", "Up to Zion" and "Holy Fire." 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 "We Offer Praises", "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 six years running; "God For Us',
"It Took A Lamb" and "Let Your Glory Fall", ranked among the top 10 in the
adult collection non-seasonal musical charts; "Mighty Cross", nominated for the
1995 best musical Dove Award; and "Because We Believe", ranked among the top 10
in the youth non-seasonal musical charts. 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.
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 that reaches markets in 143 countries.
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.
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The Company maintains a database of potential direct to consumer
customers that 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, television advertising and Internet
marketing.
The Company's first continuity club, Hosanna! Music(R) has just
produced its 98th recording. Currently the Company operates several continuity
clubs, including the Integrity Notes(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, television offers 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 division 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 1999, SoundScan ranked Word as the number one distribution
company in the CBA market. SoundScan also ranked Integrity as the number two
record label in CBA for two consecutive years, up from the number three
position in 1997. The distribution agreement with Word also offers the Company
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. The Company also utilizes the marketing
expertise of several outside marketing firms.
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; a
subsidiary located in Singapore, responsible for Singapore and Myanmar
(formerly known as Burma); and an office located at the Company's headquarters
in Mobile, Alabama, responsible for Latin America. 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 143
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.
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.
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MUSIC PUBLISHING
The Company's song catalog has accumulated ownership rights for over
2,700 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 emphasizes 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. Integrity
recently signed a four-year renewal of this contract with Word. All retail
market sales functions are currently performed by Word's sales force. Many
direct to consumer fulfillment services, excluding warehousing and physical
inventory functions, for Integrity's direct to consumer programs are provided
by Client Logic (formerly known as LCS Industries, Inc.), located in Clifton,
New Jersey. Some of the order entry and 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, Client Logic 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 2,700 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. Despite these protections, the
Company's revenues may be 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 the Company's competitors have substantially greater
financial resources than the Company. The Company competes 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.
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Many of the Company's competitors have significantly longer operating
histories and 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 and maintain its reputation for quality Christian music and
other communication products.
EMPLOYEES
As of December 31, 1999, the Company employed 150 individuals, 122 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 generally
prohibit 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 regulations require the seller 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 a 25,000 square foot headquarters and studio facility
in Mobile, Alabama, which houses its executive offices, management and sales
staff. This facility was constructed in 1983 and is pledged as security for the
Company's indebtedness. The Company leases a 30,000 square foot building
located in Mobile, Alabama, which houses its distribution and warehousing
center.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings that
management believes will have a material effect on Integrity's business,
financial condition or results of operations.
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, 1999.
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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 sales
price as reported on The Nasdaq National Market and The Nasdaq SmallCap Market
for the Class A Common Stock from January 1, 1998 through March 13, 2000. The
last sale price of the Class A Common Stock on March 13, 2000 was $3.125 per
share.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
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 $ 7.25 $3.375
Second Quarter 4.50 2.096
Third Quarter 4.125 2.75
Fourth Quarter 3.688 2.781
Fiscal Year 2000
First Quarter (through March
13, 2000) $ 4.00 $2.813
</TABLE>
As of March 13, 2000, there were approximately 108 stockholders of
record and approximately 1,600 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 was listed on The Nasdaq SmallCap
Market effective October 2, 1998. Prior to that time, the Company's Class A
Common Stock was listed on The Nasdaq National Market.
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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,
1999 have been derived from the Company's audited consolidated financial
statements.
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except per share data)
STATEMENT OF OPERATIONS 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 45,571 $ 38,847 $ 34,954 $ 31,975 $ 37,671
Cost of sales 21,936 17,985 15,236 14,981 15,547
-------- -------- -------- -------- --------
Gross profit 23,635 20,862 19,718 16,994 22,124
Marketing and fulfillment expenses 10,404 9,023 9,450 10,711 16,308
General and administrative expenses
9,751 8,557 7,796 7,545 7,959
Loss on impairment of long-lived assets 0 0 0 1,200 0
-------- -------- -------- -------- --------
Income (loss) from operations 3,480 3,282 2,472 (2,462) (2,143)
Interest expense (net) 1,292 1,529 1,790 1,804 1,027
Other (income) expense (352) 0 3 (153) 65
-------- -------- -------- -------- --------
Income (loss) before extraordinary item,
minority interest and taxes 2,540 1,753 679 (4,113) (3,235)
Income tax (expense) benefit (692) 369 0 654 1,183
Minority interest, net of tax (184) (268) (37) 0 0
-------- -------- -------- -------- --------
Income (loss) before extraordinary item 1,664 1,854 642 (3,459) (2,052)
Extraordinary item from early
extinguishment of debt less applicable
taxes of $47 0 0 0 (248) 0
-------- -------- -------- -------- --------
Net income (loss) $ 1,664 $ 1,854 $ 642 $ (3,707) $ (2,052)
======== ======== ======== ======== ========
Basic EPS
Income (loss) before extraordinary item $ 0.30 $ 0.34 $ 0.12 $ (0.63) $ (0.37)
Extraordinary item 0 0 0 (0.04) 0
-------- -------- -------- -------- --------
Net income (loss) $ 0.30 $ 0.34 $ 0.12 $ (0.67) $ (0.37)
======== ======== ======== ======== ========
Diluted EPS
Income (loss) before extraordinary item
$ 0.28 $ 0.32 $ 0.12 $ (0.63) $ (0.37)
Extraordinary item 0 0 0 (0.04) 0
-------- -------- -------- -------- --------
Net income $ 0.28 $ 0.32 $ 0.12 $ (0.67) $ (0.37)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding
Basic 5,579 5,514 5,514 5,514 5,514
Diluted 6,032 5,805 5,514 5,514 5,514
<CAPTION>
As of December 31
(in thousands)
BALANCE SHEET DATA 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net working capital $ 8,975 $ 9,827 $ 9,905 $ 10,467 $ (6,052)
Total assets 30,048 31,617 30,775 31,058 34,659
Total bank debt (3) 8,705 12,968 15,117 18,304 18,018
Stockholders' equity 14,750 12,981 11,196 10,487 12,693
</TABLE>
(3) Includes discount of $649 at December 31, 1999, $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(R) and Just-For-Kids(R). 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, television 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 143 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. The Other segment includes copyright revenue and other distribution
sales.
The following historical analysis shows the percentage of sales by
segment:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Direct to Consumer 31.1% 34.6% 33.2%
Retail Markets 45.9% 37.8% 40.7%
International 15.9% 16.5% 18.2%
Other 7.1% 11.1% 7.9%
</TABLE>
The Company's 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.
<TABLE>
<CAPTION>
Percentage of Net Sales
Year Ended December 31
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 48.1% 46.3% 43.6%
----- ----- -----
Gross Profit 51.9% 53.7% 56.4%
Marketing and Fulfillment
Expenses 22.8% 23.2% 27.0%
General and Administrative
Expenses 21.4% 22.0% 22.3%
----- ----- -----
Income from operations before
taxes and minority interest
7.6% 8.5% 7.1%
===== ===== =====
</TABLE>
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THE YEAR ENDED DECEMBER 31, 1999 ("1999") COMPARED TO THE YEAR ENDED DECEMBER
31, 1998 ("1998")
Net sales increased 17.5% to $45.6 million in 1999 from $38.8 million
in 1998, mainly attributable to a 42.1% increase in the retail segment to $20.9
million in 1999 from $14.7 million in 1998. Unit sales increased by 6% to 7.1
million in 1999 from 6.7 million in 1998 due to 63 major releases, including
WoW Worship and Shout To The Lord 2000, and strong product catalog sales from
prior releases such as Shout To The Lord and Jerusalem Arise. In 1999, new
products accounted for 2.4 million units, or 33.8% 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. One of our best selling albums for the year was WoW
Worship, a collection of the best selling praise and worship songs, created in
partnership with Maranatha! and Vineyard. Sales in the direct to consumer
segment increased 6% to $14.2 million, compared to $13.4 million in 1998 due to
increased sales of Integrity Notes, a greeting card continuity club. Direct to
consumer sales were negatively impacted by approximately $200,000 during the
year 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. Revenues from the international segment increased
10.9% to $7.2 million from $6.4 million in 1998, mainly due to strong increases
in Australia and the U.K. However, because of the 42.1% increase in the retail
segment, international sales as a percent of total sales decreased to 15.9%
from 16.5% in 1998. Sales from the Other segment decreased from $6.5 million to
$6.2 million due largely to decreases in copyright revenues, which decreased
from $4.3 million in 1998 to $4.2 million. Bad debts and returns were $4.7
million in 1999 as compared to $5.0 million in 1998.
Gross profit increased 11.4% to $23.6 million in 1999 from $20.9
million in 1998 due primarily to revenue increases discussed above. Gross
profit as a percentage of sales was 52.2% and 53.7% for the years ended
December 31, 1999 and 1998, respectively. The decrease in gross profit as a
percentage of sales was primarily the result of the sales mix including a
higher portion of distributed and artist products, which have lower gross
margin percentages, than the comparable period last year. The gross margin
percentages in the retail segment were negatively impacted with the sales of
WoW Worship. 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
in the direct to consumer segment was negatively impacted by approximately
$200,000 as a result of the billing adjustments discussed above. Management
expects that the sales mix is likely to continue to focus in the retail
segment, which may keep gross margins lower than in previous years. Charges
against product masters are the result of management's periodic estimates of
the eventual realizability of production costs and aggregated $640,000 and
$700,000 for the years ended December 31, 1999 and 1998, respectively. Such
amounts are included in cost of sales, but are not specifically allocated to
the segments.
Operating profit in the retail segment grew 35% to $4.1 million during
1999 from $3.0 million due to the revenue increases discussed above, resulting
from several major product releases during the year, including the WoW Worship
and Shout To The Lord 2000. Operating costs related to the retail segment,
principally fulfillment expenses, were consistent with the increase in sales.
The lower gross margin in the retail segment discussed above also contributed
to the results for the segment. Operating profit from the direct to consumer
segment decreased 31% to $2.0 million during 1999 from $3.0 million as a result
of the $200,000 billing adjustment discussed above and increased direct
marketing costs. Operating profit in the international segment grew 28% to $1.8
million during 1999 from $1.4 million due to continued steady growth in sales
(13%) and controlled cost of goods sold. Operating profit in the Other segment
was relatively flat.
Marketing and fulfillment expenses increased 15.5% to $10.4 million or
22.8% of net sales in 1999 as compared with $9.0 million or 23.2% of net sales
in 1998. This increase was primarily associated with higher sales levels.
General and administrative expenses increased 14.0% to $9.8 million or
21.4% of net sales in 1999, compared to $8.6 million or 22.0% of net sales in
1998. The increase in expenses 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 $3.5 million or
7.6% of net sales in 1999, compared with $3.3 million or 8.5% of net sales in
1998.
9
<PAGE> 11
Interest expense decreased to $1.3 million in 1999 compared with $1.5
million in 1998. The decrease was a result of lower average indebtedness in
1999. Other income in 1999 also includes a favorable insurance settlement of
$300,000, before considering income taxes, for a claim filed during 1998.
The Company recorded a net expense for income taxes during 1999 of
approximately $692,000 which included a $180,000 benefit for a reduction in the
valuation allowance against deferred tax assets. During 1998, the Company
recorded a net benefit from income taxes of approximately $369,000 primarily as
a result of a $785,000 reduction in the valuation allowance against deferred
tax assets. The reductions in the valuation allowance were the result of
management's revised expectations relative to the ability to generate future
taxable income. In fact, during 1999, the Company utilized substantially all of
the deferred tax assets associated with net operating loss carry-forwards, tax
credits and other carry-forward attributes. There is no valuation allowance
remaining at December 31, 1999.
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 indebtedness in
1998.
The Company recorded a net benefit from income taxes during 1998 of
approximately $369,000 primarily as a result of a $785,000 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.
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
10
<PAGE> 12
facility will be sufficient to fund its operating and capital requirements for
the fiscal year ended December 31, 2000.
Cash generated from operations totaled $8.2 million, $7.3 million and
$6.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase from 1998 to 1999 resulted primarily from improved
operating results. The increase from 1997 to 1998 resulted primarily from
increased earnings before depreciation and amortization.
Investing activities used $3.1 million, $4.7 million and $3.6 million
of cash in 1999, 1998 and 1997, respectively. Capital expenditures totaled $0.7
million, $0.5 million and $0.3 million for the years ended December 31, 1999,
1998 and 1997, respectively. During 1999, 1998 and 1997, capital expenditures
were primarily for computer equipment and general improvements on the Company's
corporate headquarters. The Company also invested $3.4 million, $4.2 million
and $3.3 million in new product masters during 1999, 1998 and 1997,
respectively. The decrease in the investment in product masters in 1999 was the
result of the production timing of certain releases, with $750,000 spent in
1998 for 1999 product releases. The Company expects its investments in capital
expenditures and product masters during 2000 to remain relatively consistent
with 1999 levels.
During the fourth quarter of 1999, the Company sold its Animation
Video masters at book value for $2 million. Payment of $1 million was received
by the Company during fourth quarter 1999, with the remaining $1 million to be
received during 2000 in four equal installments of $250,000. The proceeds have
been used to reduce the Company's debt position.
The Company's $19 million financing 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%. The lender holds approximately 818,000 warrants with an exercise price
of $1.875 that are exercisable into the Company's common stock and expire in
2006. During the years ended December 31, 1999, 1998 and 1997, the Company made
payments of $3.5 million, $2.3 million and $1.7 million, respectively, under
such agreements. At December 31, 1999, the Company had available borrowings of
$2.9 million under such agreements. The Company's minimum payments due in 2000
related to its borrowings are $1.9 million, however, the Company may elect to
make additional payments. Also during 1999, the Company paid $510,000 as a
distribution to the Hymnal joint venture partner.
SEASONALITY
Retail sales are typically higher in the third and fourth quarters
because of holiday promotions. Direct to consumer sales are typically higher in
the first quarter as a result of significant marketing promotions in late
December. Direct to consumer promotions require a build up in inventory in the
fourth quarter and as a result, sales and accounts receivable increase in the
first quarter. It is important to note that sales from quarter to quarter
depend heavily on marketing promotions and new product releases. Accordingly,
results of operations in any one quarter may not be indicative of results of
operations for the entire year.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost of sales. In prior years,
the Company has been able to adjust its selling prices to substantially recover
increased costs. While inflation has not had, and the Company does not expect
that it will have, a material impact upon operating results, inflation may
affect the Company's business in the future.
YEAR 2000 COMPLIANCE
Due to its remediation efforts, the Company has not yet experienced
any disruptions in its business because of Year 2000 related computer issues,
including leap year related failures. Further, the Company has not experienced
any disruptions in its business because of disruptions related to these issues
experienced by its suppliers, distributors, contractors or other service
providers.
The total cost of the Company's Year 2000 remediation effort was less
than $40,000 and was not material to the Company's financial condition or
results of operations. These costs were primarily in the form of compensation
and benefits of internal employees working on the Company's
11
<PAGE> 13
Year 2000 remediation effort and were expensed as incurred. The actual cost of
the remediation was materially consistent with its projected costs.
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
January 2004.
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,
12
<PAGE> 14
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 COMPANY IS CONTROLLED BY THE COLEMAN FAMILY
Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 35,100 shares of Class A Common Stock
and all 3,435,000 shares of Class B Common Stock outstanding. This represents
approximately 94.1% 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, further
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 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.
13
<PAGE> 15
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 2000 than they did in 1999, the Company's
interest expense would increase and income before income taxes would decrease
by $93,000. 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.
14
<PAGE> 16
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 2000 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 2000 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 2000 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 2000 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>
<S> <C>
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants 16
Consolidated Balance Sheets at December 31, 1999 and 1998 17
Consolidated Statement of Operations for the three years ended December 31, 1999 18
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December
31, 1999 19
Consolidated Statement of Cash Flows for the three years ended December 31, 1999 20
Notes to Consolidated Financial Statements 21
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and Qualifying Accounts for the three years ended December 31,
1999
15
<PAGE> 17
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) on page 15 present fairly, in all
material respects, the financial position of Integrity Incorporated and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index under item 14(a)(2) on page 15 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 18, 2000
16
<PAGE> 18
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Current Assets
Cash $ 1,067 $ 989
Trade receivables, less allowance for returns and doubtful accounts of $1,108 and $696 6,329 4,913
Other receivables 1,681 1,637
Inventories 4,754 4,528
Other current assets 2,456 3,831
-------- --------
Total current assets 16,287 15,898
Property and equipment, net of accumulated depreciation of $3,956 and $3,575 3,664 3,473
Product masters, net of accumulated amortization of $11,649 and $11,325 6,941 9,050
Other assets 3,156 3,196
-------- --------
Total assets $ 30,048 $ 31,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,937 $ 1,847
Accounts payable and accrued expenses 3,108 2,732
Royalties payable 774 569
Other current liabilities 1,493 923
-------- --------
Total current liabilities 7,312 6,071
Long-term debt 6,768 11,121
Other long-term liabilities 52 60
-------- --------
Total liabilities 14,132 17,252
-------- --------
Commitments and contingencies 0 0
Minority interest 1,166 1,384
-------- --------
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 shares and 2,079,000 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 13,847 13,428
Unearned compensation (327) 0
Retained earnings (accumulated deficit) 1,215 (449)
Equity adjustments from foreign translation (41) (53)
-------- --------
Total stockholders' equity 14,750 12,981
-------- --------
Total liabilities and stockholders' equity $ 30,048 $ 31,617
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
17
<PAGE> 19
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 45,571 $ 38,847 $ 34,954
Cost of sales 21,936 17,985 15,236
-------- -------- --------
Gross profit 23,635 20,862 19,718
Marketing and fulfillment expenses 10,404 9,023 9,450
General and administrative expenses 9,751 8,557 7,796
-------- -------- --------
Income from operations 3,480 3,282 2,472
Other expenses (income)
Interest expense, net 1,292 1,529 1,790
Other expenses (income) (352) 0 3
-------- -------- --------
Income before minority interest and taxes 2,540 1,753 679
Provision for (benefit from) income taxes 692 (369) 0
Minority interest, less applicable taxes (184) (268) (37)
-------- -------- --------
Net income $ 1,664 $ 1,854 $ 642
======== ======== ========
Adjustments to determine comprehensive income
Foreign currency translation adjustments 12 (69) 67
-------- -------- --------
Comprehensive income $ 1,676 $ 1,785 $ 709
======== ======== ========
Net income per share - Basic $ 0.30 $ 0.34 $ 0.12
======== ======== ========
Net income per share - Diluted $ 0.28 $ 0.32 $ 0.12
======== ======== ========
Weighted average number of shares outstanding (note 1)
Basic 5,579 5,514 5,514
Diluted 6,032 5,805 5,514
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
18
<PAGE> 20
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(Accum.
Class A Class B Additional Deficit) Equity Adj.
Common Stock Common Stock Unearned Paid-in Retained From
Shares Amount Shares Amount Compensation Capital Earnings Translations Total
------ ------ ------ ------ ------------ ---------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,079,000 $21 3,435,000 $ 34 $ 0 $ 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
Net income 1,664 1,664
Issuance of restricted stock 100,000 1 (375) 374 0
Issuance of warrants 45 45
Amortization of restricted 48 48
stock award
Translation adjustments 12 12
------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,179,000 $22 3,435,000 $ 34 $ (327) $ 13,847 $ 1,215 $(41) $14,750
================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial Statements.
19
<PAGE> 21
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,664 $ 1,854 $ 642
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 1,019 1,202 1,331
Amortization of product masters 3,526 3,787 3,250
Minority interest 184 268 37
Stock compensation 48 0 0
Deferred income tax (benefit) provision 420 (527) 0
Changes in operating assets and liabilities
Trade receivables (1,415) (655) (63)
Other receivables 956 396 (1,090)
Inventories (226) 996 (382)
Other assets 838 (691) 1,337
Accounts payable, royalties payable and
accrued expenses 580 200 1,109
Other current and non current liabilities 563 468 206
Other 12 0 0
-------- -------- --------
Net cash provided by operating activities 8,169 7,298 6,377
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (716) (463) (299)
Payments for product masters (3,417) (4,220) (3,267)
Proceeds from sale of product masters 1,000 0 0
-------- -------- --------
Net cash used in investing activities (3,133) (4,683) (3,566)
-------- -------- --------
Cash flows from financing activities
Net (repayments) borrowings under line of credit (975) 169 (2,040)
Distributions to joint venture partner (510) 0 0
Proceeds from issuance of long-term debt 0 0 300
Principal payments of long-term debt (3,473) (2,318) (1,679)
-------- -------- --------
Net cash used by financing activities (4,958) (2,149) (3,419)
-------- -------- --------
Net (decrease) increase in cash 78 466 (608)
Cash, beginning of year 989 523 1,131
-------- -------- --------
Cash, end of year $ 1,067 $ 989 $ 523
======== ======== ========
Supplemental disclosures of cash flow information
Interest paid $ 1,173 $ 1,355 $ 1,790
Income taxes paid $ 15 $ 0 $ 37
Noncash investing activities
Sale of product masters for note receivable $ 1,000 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
20
<PAGE> 22
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. Due to the Company's ability to control the venture, 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 $525,000 and $1,326,000 at December 31,
1999 and 1998, respectively. Marketing costs expensed for the three years ended
December 31, 1999, 1998 and 1997 approximated $4,609,000, $4,455,000 and
$4,626,000, 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, which is the life of the related lease; data processing equipment, 5
years; studio equipment, 5 years; and furniture and fixtures, 5 to 7 years.
Repairs
21
<PAGE> 23
and maintenance costs which do not increase the useful lives of the assets are
charged to expense as incurred. Additions, improvements and expenditures that
significantly add to the productivity or extend the life of an asset are
capitalized. When assets are replaced or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is reflected in income.
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
$562,000 and $1,256,000 at December 31, 1999 and 1998, 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.
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 of long-term debt approximates fair
value based on current rates of interest available to the Company for loans of
similar maturities.
22
<PAGE> 24
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.
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31
(in thousands)
1999 1998
------ ------
<S> <C> <C>
Prepaid supplies $1,571 $1,780
Prepaid marketing costs 525 1,326
Deferred tax assets 124 642
Other 236 83
------ ------
$2,456 $3,831
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31
(in thousands)
1999 1998
------- -------
<S> <C> <C>
Land $ 625 $ 625
Buildings and leasehold improvements 2,684 2,633
Data processing and other equipment 1,846 1,354
Studio equipment 1,037 1,062
Furniture and fixtures 1,428 1,374
------- -------
7,620 7,048
Less - accumulated depreciation (3,956) (3,575)
------- -------
$ 3,664 $ 3,473
======= =======
</TABLE>
Depreciation expense approximated $525,000, $499,000 and $509,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
23
<PAGE> 25
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31
(in thousands)
1999 1998
------- -------
<S> <C> <C>
Music copyrights, net of accumulated
amortization $1,840 $2,014
Deferred tax assets 592 494
Other 724 688
------ ------
$3,156 $3,196
====== ======
</TABLE>
The music copyrights are being amortized over their future estimated
useful lives, which is approximately fifteen years. Accumulated amortization at
December 31, 1999 and December 31, 1998 was approximately $794,000 and $588,000,
respectively.
5. DEBT
The Company's $19 million 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, 1999, the interest rate on the $3.1 million outstanding under
the Revolver was 9.12% and on the $6.25 million outstanding under the Term Loan
was 8.76%. At December 31, 1998, the interest rate on the $4.1 million
outstanding under the Revolver was 9.25%; and on the $9.5 million outstanding
Term Loan was 8.22%.
At December 31, 1999, the Company had approximately $2.9 million of
available funds under the Revolver.
The Company, in conjunction with the 1996 financing, issued warrants 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. These warrants became exercisable on August 6, 1998. The
warrants are subject to adjustment upon the issuance of additional shares of
common stock by the Company. On the date of issuance, the warrants had an
estimated fair value of $1.73 per share or $1,393,000, which is recorded as a
discount to the Revolver and Term Loan. As a result of the issuance of shares of
Class A Common Stock associated with certain restricted stock grants, the
Company issued 13,609 additional warrants in 1999, which are immediately
exercisable. The fair value of these warrants, approximately $45,000, was
recorded as additional debt discount. The discount is being amortized to
interest expense over the term of the facility. At December 31, 1999, the book
value of the discount is $649,000 net of accumulated amortization of $789,000.
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 incurrance 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, 1999.
Aggregate principal maturities of long-term debt at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Total
Fiscal Year (in thousands)
----------- --------------
<S> <C>
2000 $1,937
2001 2,873
2002 4,544
------
$9,354
Discount 649
------
$8,705
======
</TABLE>
24
<PAGE> 26
At December 31, 1999, approximately $299,000, net of accumulated
amortization of $396,000, 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, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands)
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current provision (benefit)
Federal $246 $ 138 $0
State 26 20 0
---- ----- --
272 158 0
---- ----- --
Deferred provision (benefit)
Federal 344 (464) 0
State 76 (63) 0
---- ----- --
420 (527) 0
---- ----- --
Total provision (benefit) $692 $(369) $0
==== ===== ==
</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)
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income tax provision at statutory $ 870 $ 596 $ 231
State tax provision, net of federal taxes 71 70 27
Nondeductible expenses 15 15 (2)
Other, net (84) (265) (58)
Change in valuation allowance (180) (785) (198)
----- ----- -----
Provision of (benefit) for income taxes
before extraordinary item $ 692 $ (369) $ 0
===== ===== =====
</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.
25
<PAGE> 27
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1999 1998
-------- --------
<S> <C> <C>
Deferred Assets
Net operating loss carryforwards $ 0 $ 413
Reserves for returns and allowances 211 258
Impairment of building and depreciation 460 494
Write down of product masters 137 295
Tax credits 0 618
Non compete agreement 246 206
Other 0 100
------ ------
1,054 2,384
------ ------
Deferred tax liabilities
Prepaid marketing expenses (217) (380)
Other (121) (368)
------ ------
(338) (748)
------ ------
Deferred tax asset before valuation allowance 716 1,636
Valuation allowance for deferred tax assets 0 (500)
------ ------
Net deferred tax asset $ 716 $1,136
Current portion (124) (642)
------ ------
Long term portion $ 592 $ 494
====== ======
</TABLE>
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, 1999. For the year ended December 31, 1999, the Company
reduced its valuation allowance by $320,000 related to the utilization of
previously established foreign tax credits as deductions rather than tax
credits. As a result this portion of the prior year tax credits has been written
off against the valuation allowance, which did not result in any impact to the
results of operations. The Company reduced the remaining $180,000 valuation
allowance to zero. Such reduction in the valuation allowance was the result of
three 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 did not make contributions to the Plan during the year
ended December 31, 1998 as contributions are at the discretion of the Board of
Directors. The Company contributed $91,000 and $99,670 to the Plan during the
years ended December 31, 1999 and 1997, respectively.
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
$110,000; $102,000; and $175,000 during the years ended December 31, 1999, 1998
and 1997, 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"), is a not-for-profit charitable organization, of which the principal
stockholder of the Company is a member of the board of directors. The Company
donated $9,280, $7,895 and $12,642 of inventory to Integrity Worship Ministries
during 1999, 1998 and 1997, respectively.
One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $276,000, $208,149
and $197,831 for the three
26
<PAGE> 28
years ended December 31, 1999, 1998 and 1997. Amounts due to the officer at
December 31, 1999 and 1998 approximate $82,690 and $57,957, respectively. Due
from this officer at December 31, 1999 is $10,500 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 operating profits, general corporate
expenses, to the extent related to a segment, are charged to that segment.
Marketing and fulfillment costs are also attributed to the specific segment
benefited. Other expenses (income) are also included in the general corporate
expenses total.
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 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.
27
<PAGE> 29
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NET SALES
Direct to consumer $14,188 $13,430 $11,602
Retail 20,924 14,702 14,214
International 7,234 6,392 6,346
Other 6,154 6,534 4,700
Eliminations (2,929) (2,211) (1,908)
------- ------- -------
Consolidated $45,571 $38,847 $34,954
======= ======= =======
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Direct to consumer $2,047 $ 2,954 $ 3,158
Retail 4,082 3,018 3,121
International 1,836 1,436 1,452
Other 1,669 1,798 278
------- ------- -------
Consolidated 9,634 9,206 8,009
General corporate expense 5,802 5,924 5,540
Interest expense, net 1,292 1,529 1,790
------- ------- -------
Income before income taxes and
minority interest $ 2,540 $ 1,753 $ 679
======= ======= =======
IDENTIFIABLE ASSETS
Direct to consumer $ 2,447 $ 2,870 $ 2,581
Retail 0 0 0
International 3,230 2,596 2,218
Other 1,840 2,014 2,191
General corporate assets 22,531 24,137 22,785
------- ------- -------
Total assets $30,048 $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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NET SALES
United States $38,337 $32,464 $29,875
Europe 2,401 1,956 1,638
Australia 1,174 1,011 1,267
Asia 1,142 938 0
Other 2,517 2,478 2,174
------- ------- -------
$45,571 $38,847 $34,954
======= ======= =======
IDENTIFIABLE ASSETS
United States $26,818 $29,021 $28,557
Europe 1,688 1,368 1,104
Australia 629 494 565
Asia 913 734 0
Other 0 0 549
------- ------- -------
$30,048 $31,617 $30,775
======= ======= =======
</TABLE>
28
<PAGE> 30
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, 1999 and 1998.
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 400,000 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, 1999.
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, 1999,
127,500 awards have been granted. During 1999, the Company paid $62,000 related
to this plan and retains an accrual in the amount of $40,000 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, 1999, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C> <C>
Net income As reported $1,664,000 $1,854,000 $642,000
Pro forma 1,474,000 1,785,000 543,000
Basic EPS As reported 0.30 0.34 0.12
Pro forma 0.26 0.32 0.10
Diluted EPS As reported 0.28 0.32 0.12
Pro forma 0.24 0.31 0.10
</TABLE>
These pro forma amounts represent the estimated fair value of stock
options issued during 1999, 1998 and 1997 and are being amortized to expense
over the applicable vesting period. Additional options may be granted in future
years.
29
<PAGE> 31
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 1999, 1998 and 1997, respectively: Dividend yields of 0%, expected
volatility of 50% 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
EXERCISE PRICE RANGES shares average
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 12/31/96 120,000 123,000 125,000 368,000 3.60
Granted 141,027 0 0 141,027 1.74
Exercised 0 0 0 0 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 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
Granted 0 272,000 0 272,000 3.60
Exercised 0 0 0 0 0
Forfeited (1,000) (2,000) (3,000) (6,000) 5.35
-------- ------- --------- ---------
Outstanding at 12/31/99 185,027 406,000 9,000 600,027 2.99
======== ======= ========= =========
Exercisable at 12/31/99 91,211 89,000 7,600 187,811
======== ======= ========= =========
Plan shares available for
future grants 145,000
=========
</TABLE>
The Company also has 818,897 warrants outstanding at December 31, 1999
at an exercise price of $1.875. These warrants were issued primarily in 1996
with an estimated fair value at time of issuance of $1,438,000 and expire in
2006.
The weighted-average fair value of options granted is $1.82, $1.32 and
$1.01 for the years ended December 31, 1999, 1998 and 1997, respectively. The
weighted average remaining contractual life for all options outstanding is 5.6
years. During 1999, the Company issued 100,000 shares of restricted common stock
to an officer of the Company. These shares had a fair value at the time of
issuance of $375,000 and vest on the seventh anniversary of the date of grant.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings 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. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1999 Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales $11,045 $10,513 $11,547 $12,466
Gross Profit 5,822 5,849 5,740 6,224
Net Income 223 156 632 653
Basic earnings per share $.04 $.03 $.11 $.12
Diluted earnings per share $.04 $.03 $.10 $.11
<CAPTION>
1998 Three Months Ended
(in thousands, except per share data)
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
</TABLE>
30
<PAGE> 32
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 end
Description Of Period expenses Deductions (1) of Period
----------- --------------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
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
1999
Allowance for returns and
doubtful accounts 696 5,108 (4,696) 1,108
</TABLE>
(1) Represents write-offs during the respective period for product returns and
uncollectible accounts.
<TABLE>
<CAPTION>
Charged to
Balance at costs and Balance at end
Description Beg. Of Period expenses Adjustments (2) of Period
----------- --------------- --------- --------------- --------------
<S> <C> <C> <C> <C>
1997
Valuation on deferred tax
assets 1,483 (198) 1,285
1998
Valuation on deferred tax
assets 1,285 (785) 500
1999
Valuation on deferred tax
assets 500 (180) (320) 0
</TABLE>
(2) During 1999, the Company reduced its valuation allowance by $320,000
related to the utilization of previously established foreign tax credits as
deductions rather than tax credits. As a result, this portion of the prior year
tax credits has been written off against the valuation allowance.
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.
31
<PAGE> 33
3. EXHIBITS
The exhibits indicated below are either incorporated by reference
herein or are bound separately and accompany the copies of this report filed
with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Copies of such exhibits will be furnished to any
requesting stockholder of the Company upon payment of the costs of copying and
transmitting the same.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
<S> <C>
3(i) Certificate of Incorporation of the Registrant, as
amended (incorporated by reference from Exhibit 4(a) to
the Registrant's Registration Statement on Form S-8 (File
No. 33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of
Incorporation of the Registrant, dated July 21, 1995
(incorporated by reference from Exhibit 3(I).1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference from Exhibit 3(ii) to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582),
and amendments thereto, originally filed on May 6, 1994).
4.1 See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the
Certificate of Incorporation, as amended, and Bylaws, as
amended, of the Registrant defining rights of holders of
Class A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the
Registrant (incorporated by reference from Exhibit 4.2 to
the Registrant's Registration Statement on Form S-1 (File
No. 33-78582), and amendments thereto, originally filed
on May 6, 1994).
10.1 Agreement dated as of June 1, 1994, by and between
Integrity Music, Inc. and LCS Industries, Inc. (Portions
of the foregoing have been granted confidential
treatment.) (incorporated by reference from Exhibit 10.13
to the Registrant's Registration Statement on Form S-2
(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 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).
10.4 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).
10.5 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).
10.6 Collateral Assignment and Agreement, dated as of August
2, 1996, by and between Integrity Incorporated and
Creditanstalt Corporate Finance, Inc., (incorporated by
reference from Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.7 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).
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C>
10.8 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).
10.9 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).
10.10 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).
10.11 Second Amendment to Loan and Security Agreement, dated as
of March 31, 1999, by and among Integrity Incorporated
and Bank Austria 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 March 31, 1999).
10.12 Warrant Certificate, dated January 26, 2000, issued by
Integrity Incorporated to Creditanstalt Corporate
Finance, Inc. (filed herewith)
10.13 Product Distribution Agreement by and between Integrity
Incorporated and Word, Inc., dated as of January 1, 2000
(The foregoing is the subject of a request for
confidential treatment)
10.14 Asset Purchase Agreement by and between Integrity
Incorporated and Idea Entertainment, Inc. dated as of
November 19, 1999. (filed herewith)
10.15 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
10.16 Integrity Music, Inc. Profit Sharing Plan (incorporated
by reference from Exhibit 10.42 to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582),
and amendments thereto, originally filed on May 6, 1994).
10.17 1994 Management Incentive Plan (incorporated by reference
from Exhibit 10.43 to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
10.18 Integrity Music, Inc. Long-Term Incentive Plan
(incorporated by reference) from Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8 (File No.
33-86126) filed on November 7, 1994).
10.19 Form of Stock Option Agreement under the Integrity Music,
Inc. Long-Term Incentive Plan (incorporated by reference
from Exhibit 10.45 to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
10.20 Integrity Music, Inc. 1994 Stock Option Plan for Outside
Directors (incorporated by reference from Exhibit 4(c) to
the Registrant's Registration Statement on Form S-8 (File
No. 33-86128) filed on November 7, 1994).
10.21 Form of Indemnification Agreement (incorporated by
reference from Exhibit 10.47 to the Registrant's
Registration Statement on Form S-1 (File No. 33-78582),
and amendments thereto, originally filed on May 6, 1994).
10.22 Integrity Music, Inc. Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
10.23 Integrity Music, Inc. 401(k) Employee Savings Plan
(incorporated by reference from Exhibit 10.50 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
</TABLE>
33
<PAGE> 35
<TABLE>
<S> <C>
10.24 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).
10.25 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).
10.26 Form of Key Employee Change in Control Agreement
(incorporated by reference from Exhibit 10.33 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.27 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).
10.28 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).
10.29 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).
10.30 Employment Agreement by and among Integrity Incorporated
and Don Moen dated as of October 1, 1998 (incorporated by
reference from Exhibit 10.27 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1998).
10.31 Employment Agreement by and among Integrity Incorporated
and Daniel McGuffey dated as of January 1, 1998
(incorporated by reference from Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.32 Amendment to the Integrity Music, Inc. 1994 Employee
Stock Purchase Plan as approved on August 6, 1999
(incorporated by reference from Exhibit 10.0 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.33 Integrity Incorporated 1999 Long-Term Incentive Plan, as
approved by the Stockholders of the Corporation on May 7,
1999 (incorporated by reference from Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
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, 1999.
34
<PAGE> 36
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 27, 2000.
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 27, 2000.
<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/ Jimmy M. Woodward
- ---------------------------------------------------------
Jimmy M. Woodward Director
/s/ Charles V. Simpson
- ---------------------------------------------------------
Charles V. Simpson Director
/s/ Heeth Varnedoe III
- ---------------------------------------------------------
Heeth Varnedoe III Director
</TABLE>
35
<PAGE> 1
EXHIBIT 10.12
WARRANT CERTIFICATE
THE WARRANTS AND SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR LAW. SUCH WARRANTS AND
SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN
AND ARE SUBJECT TO OTHER PROVISIONS OF THE WARRANT AGREEMENT, DATED AS OF
AUGUST 2, 1996, BETWEEN THE ISSUER AND CREDITANSTALT CORPORATE FINANCE, INC., A
COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL
OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN
REQUEST AND WITHOUT CHARGE.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN EXCHANGE
RIGHTS MORE FULLY SET FORTH IN THE WARRANT AGREEMENT.
January 26, 2000 Certificate No. R-1
EXERCISABLE ONLY ON OR BEFORE
August 2, 2006
Warrant Certificate
This Warrant Certificate certifies that BANK AUSTRIA AG, GRAND CAYMAN
BRANCH, or registered assigns, is the registered holder of 13,609 Warrants (the
"Warrants") to purchase Class A Common Stock or Convertible Preferred Stock of
INTEGRITY INCORPORATED, a Delaware corporation (the "Issuer"). Each Warrant
entitles the holder, but only subject to the conditions set forth herein and in
the Warrant Agreement referred to below, to purchase from the Issuer during the
period beginning on the earlier of (i) the date on which a Change of Control
(as defined in the Warrant Agreement) of the Issuer occurs or (ii) twenty-four
months after the Closing Date (as defined in the Warrant Agreement), and ending
at 5:00 P.M., New York time, on August 2, 2006 (the "Expiration Date"), one (1)
fully paid and nonassessable share of the Class A Common Stock of the Issuer or
one-fourth (1/4) fully paid and non-assessable share of the Convertible
Preferred Stock of the Issuer (the "Warrant Shares") in the percentages and to
the extent set forth in the Warrant Agreement, at a price (the "Exercise
Price") of $1.875 per Warrant payable in lawful money of the United States of
America, upon surrender of this Warrant Certificate, execution of the annexed
Form of Election to Purchase and payment of the Exercise Price at the office of
the Issuer at One Thousand Cody Road, Mobile Alabama 36695-3425, or such other
address as the Issuer may specify in writing to the registered holder of the
Warrants evidenced hereby (the "Warrant Office"). In lieu of exercising
Warrants pursuant to the immediately preceding
<PAGE> 2
sentence, the Warrant holder shall have the right to require the Issuer to
convert the Warrants, in whole or in part and at any time or times, into
Warrant Shares, by surrendering to the Issuer the Warrant Certificate
evidencing the Warrants to be converted, accompanied by the annexed Form of
Notice of Conversion which has been duly completed and signed. The exercise
Price and number of Warrant Shares purchasable upon exercise of the Warrants
are subject to adjustment prior to the Expiration Date as set forth in the
Warrant Agreement. In no event shall this Warrant be exercisable for shares of
Class A Common Stock or Convertible Preferred Stock which, when aggregated with
all other Warrant Shares (as defined in the Warrant Agreement) previously
issued (other than Non-Attributable Stock (as defined in the Warrant
Agreement)) would, upon issuance, represent in excess of 24.99% of the Equity
of the Issuer (defined in the Warrant Agreement) unless such shares, when
issued, would constitute Non-Attributable Stock (as defined in the Warrant
Agreement).
No Warrant may be exercised after 5:00 P.M., New York time, on the
Expiration Date and (except as otherwise provided in the Warrant Agreement) all
rights of the registered holders of the Warrants shall cease after 5:00 P.M.,
New York time, on the Expiration Date.
The Issuer may deem and treat the registered holders of the Warrants
evidenced hereby as the absolute owners thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holders hereof and for all other
purposes, and the Issuer shall not be affected by any notice to the contrary.
Warrant Certificates, when surrendered at the office of the Issuer at
the above-mentioned address by the registered holder hereof in person or by a
legal representative duly authorized in writing, may be exchanged, in the
manner and subject to the limitations provided in the Warrant Agreement, but
without payment of any service charge, for another Warrant Certificate or
Warrant Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the office of the Issuer at the above-mentioned address, a new
Warrant Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued in exchange for this
Warrant Certificate to the transferee(s) and, if less than all the Warrants
evidenced hereby are to be transferred, to the registered holder hereof,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection
therewith.
This Warrant Certificate is one of the Warrant Certificates referred
to in the Warrant Agreement, dated as of August 2, 1996, between the Issuer and
Creditanstalt Corporate Finance, Inc. Said Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Issuer and the holders.
-2-
<PAGE> 3
IN WITNESS WHEREOF the Issuer has caused this Warrant Certificate to
be signed by its duly authorized officers and has caused its corporate seal to
be affixed hereunto.
INTEGRITY INCORPORATED
By:
--------------------------------
Name:
-----------------------
Title:
----------------------
(CORPORATE SEAL)
ATTEST:
- ----------------------
Secretary
-3-
<PAGE> 4
ANNEX to Form
of Warrant
Certificate
FORM OF ELECTION TO PURCHASE
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase 13,609 Warrant Shares* and
herewith tenders payment for such Warrant Shares to the order of the Issuer in
the amount of $___________ in accordance with the terms hereof. The undersigned
requests that a certificate for such Warrant Shares be registered in the name
of Bank Austria AG, Grand Cayman Branch, whose address is Two Greenwich Plaza,
Greenwich, Connecticut 06830 and that such certificate be delivered to Bank
Austria, c/o Creditanstalt, Attention: Claudia Foster, whose address is Two
Greenwich Plaza, Greenwich, Connecticut 06830. If said number of Warrant Shares
is less than all of the Warrant Shares purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
the Warrant Shares be registered in the name of Bank Austria AG, Grand Cayman
Branch, whose address is Two Greenwich Plaza, Greenwich, Connecticut 06830 and
that such Warrant Certificate be delivered to Bank Austria, c/o Creditanstalt,
Attention: Claudia Foster, whose address is Two Greenwich Plaza, Greenwich,
Connecticut 06830.
Signature:
- ---------------------------------------
(Signature must conform in all respects to name and holder as specified on the
face of the Warrant Certificate.)
Date:
---------------------------
* Consisting of:
____ shares of Class A Common Stock
____ shares of Convertible Preferred Stock
-4-
<PAGE> 5
ANNEX to Form
of Warrant
Certificate
FORM OF NOTICE OF CONVERSION
(To be executed upon conversion of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to convert Warrants represented hereby
into 13,609 Warrant Shares* in accordance with the terms hereof. The
undersigned requests that a certificate for such Warrant Shares be registered
in the name of Bank Austria AG, Grand Cayman Branch, whose address is Two
Greenwich Plaza, Greenwich, Connecticut 06830 and that such certificate be
delivered to Bank Austria, c/o Creditanstalt, Attention: Claudia Foster, whose
address is Two Greenwich Plaza, Greenwich, Connecticut 06830. If said number of
Warrant Shares is less than all of the Warrant Shares purchasable hereunder,
the undersigned requests that a new Warrant Certificate representing the
remaining balance of the Warrant Shares be registered in the name of Bank
Austria AG, Grand Cayman Branch, whose address is Two Greenwich Plaza,
Greenwich, Connecticut 06830 and that such Warrant Certificate be delivered to
Bank Austria, c/o Creditanstalt, Attention: Claudia Foster, whose address is
Two Greenwich Plaza, Greenwich, Connecticut 06830.
Signature:
- --------------------------------------
(Signature must conform in all respects to name and holder as specified on the
face of the Warrant Certificate.)
Date:
--------------------------
* Consisting of:
____ shares of Class A Common Stock
____ shares of Convertible Preferred Stock
-5-
<PAGE> 1
EXHIBIT 10.13
PRODUCT DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made as of January 1,
2000 by and between Integrity Incorporated, 1000 Cody Road, Mobile, Alabama
36695 a Delaware Corporation ("INTEGRITY") and Word Entertainment (a division
of Word Music Group, Inc.), 25 Music Square West, Nashville, Tennessee 37203
("WORD").
RECITALS
WHEREAS, INTEGRITY is engaged in the business of acquiring and
producing audio and video masters and manufacturing phonograph records, tapes,
and printed musical products (including but not limited to audio cassettes,
compact discs, accompaniment tracks, video cassettes, and other recorded and
printed music products derived therefrom); and
WHEREAS, INTEGRITY desires WORD to distribute throughout the United
States, Guam, Puerto Rico and A.F.E.S. and other military purchasing groups
which serve military bases across the world, ("the Territory") through normal
retail channels and wholesale outlets in the Christian bookstore market ("CBA
Marketplace") and general/secular markets (e.g., record stores and mass
merchandisers) ("General Marketplace") recorded product and musical print
products related thereto manufactured by or for INTEGRITY.
NOW, THEREFORE, the parties hereto agree as follows;
1. GRANT OF RIGHTS. INTEGRITY hereby authorizes and appoints WORD to be
INTEGRITY's exclusive distributor to normal retail outlets in the CBA
Marketplace and General Marketplace (exclusive of those markets
retained by INTEGRITY pursuant to Paragraph 2 hereunder) during the
term hereof in the Territory of all audio and video recordings derived
from audio and video masters now or hereafter owned or controlled by
INTEGRITY (such masters hereinafter the "Masters," and the recordings
derived therefrom hereinafter "Records") and all choral and consumer
printed products (hereinafter "Print Products") whether or not on the
"Integrity Music" label (such Records and Print Products collectively
hereinafter referred to as the "Products.") A listing of all current
INTEGRITY labels is attached hereto as "Exhibit A". Such distribution
rights shall include the right to distribute to wholesalers which
distribute records and print products to such normal retail outlets in
the CBA Marketplace and General Marketplace. INTEGRITY may not sell,
license, or otherwise distribute Records or manufacturing overruns of
Records derived from the Products to any person, firm, association,
corporation, or entity other than WORD for sale through normal retail
channels in the CBA Marketplace and General Marketplace in the
Territory during the term of this Agreement.
1 of 19
<PAGE> 2
2. RIGHTS RESERVED BY INTEGRITY. Notwithstanding anything contained
herein to the contrary, WORD hereby acknowledges that INTEGRITY has
specifically reserved its right to distribute Products for sale in
remaining markets of any kind or nature not specifically granted to
WORD hereunder as well as all rights whatsoever outside the Territory,
including, but not limited to:
a. All mail order, television and radio promotion, record clubs,
budget and mid-price sales, "K-Tel"-type sales, and
non-phonograph record exploitation, such as films or
television;
b. Special markets, including but not limited to Christian Book
Distributors, Avon, Publisher's Clearing House, Books R Fun,
and any other direct to consumer catalog account;
c. All so-called international rights without limitation;
d. The right to sell Products directly to churches and
individuals, whether in the Territory or elsewhere throughout
the world;
e. All Internet, E-commerce, digital transmissions of any
nature, or by any technological means not specifically
granted to WORD hereunder;
f. General Market place sales for print products. If INTEGRITY
shall not have previously assigned such rights to any third
party, and INTEGRITY and WORD shall mutually desire for
INTEGRITY's Print Products to be distributed by WORD's
General Marketplace print distributor, WORD shall assume such
rights at a rate to be mutually negotiated in good faith.
g. All Choral Clubs rights. Each party shall maintain its own
Choral Clubs, and there shall be no right or responsibility
of either party to participate in the other's Choral Club,
except where the parties mutually agree. The parties
acknowledge that pursuant to WORD's current agreement with
PraiseGathering Publications, WORD currently handles the
subscription and fulfillment services for INTEGRITY's Choral
Club, however Word's right or obligation to deliver such
services is not a condition or term of this Agreement.
h. The right to sell Products directly to bookstore accounts
which primarily serve the Catholic Church market.
3. TERM. The term ("Term") of this Agreement shall commence on January 1,
2000 and shall continue for an initial period of four (4) years,
ending December 31, 2003. The initial twelve (12) months of the Term
and each consecutive twelve (12) month period thereafter
2 of 19
<PAGE> 3
is referred to herein as a "contract year." Execution of this
Agreement shall result in the early termination of the existing
agreement between the parties related to the subject matter hereof,
and dated April 1, 1996; provided that fees with respect to sales
occurring through December 31, 1999 shall be paid according to the
terms of the prior agreement.
4. INTEGRITY'S RESPONSIBILITIES. INTEGRITY shall be solely responsible
for, and shall pay all costs in connection with:
a. All activities and costs in connection with the Masters or
the Products, including without limitation all costs arising
out of the creation of, and/or the acquisition of INTEGRITY's
rights in, the Masters or the Products.
b. All activities and costs in connection with the manufacture
of finished Products, including without limitation, all
jackets, sleeves, inserts, engravings and other components of
the finished Records and Print Products, and delivery of
finished product to WORD's designated warehouse(s).
c. Obtaining all necessary mechanical, synchronization and print
licenses and paying all license fees; filing copyright
registration on all Masters or Products subject to copyright;
obtaining all consents, authorizations and clearance with
respect to the reproduction, use and commercial exploitation
of the Masters or the Products; and obtaining all consents,
authorizations and clearances with respect to the services,
names, and likenesses of any person whose performances and/or
services are embodied in any Products distributed hereunder.
INTEGRITY shall hold WORD harmless from its failure to take
such actions.
d. INTEGRITY will be solely responsible for and shall pay any
and all artists' royalties, producers' royalties, musicians,
copyright, publishers' and/or writers' mechanical and
synchronization royalties, and any and all other royalties or
similar payments as may be or become payable in connection
with the Masters, the Products, the Compositions, the
Materials, and/or earnings of WORD, which may be payable by
reason of the manufacture, sale, and distribution of the
Products in the Territory. INTEGRITY shall hold WORD harmless
from the obligation to pay such royalties.
e. Subject to the rights reserved by INTEGRITY hereunder,
INTEGRITY agrees that neither INTEGRITY nor any person, firm
or corporation acting for INTEGRITY or with INTEGRITY's
authorization or acquiescence (other than WORD) will
distribute the Products for sale through normal retail
channels in the CBA Marketplace and General Marketplace
throughout the Territory except as otherwise provided herein.
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5. INTEGRITY'S WARRANTIES. INTEGRITY represents and warrants to WORD as
follows:
a. INTEGRITY is the sole owner, or the exclusive licensee of the
sole owner, for the Territory of the Masters and Products, of
all performances embodied therein, all records, compact
discs, tapes, videos and reproductions derived therefrom, and
all sound recording copyrights therein. Subject to any rights
reserved by INTEGRITY hereunder, no other person, firm or
corporation has any rights in or to the Masters, the
Products, the performances embodied therein or any copy
thereof in the Territory.
b. INTEGRITY is duly qualified to do business in the State of
Alabama and has the full right, power and authority to enter
into this Agreement; and INTEGRITY has not done or permitted
to be done anything which may curtail or impair any of the
rights given or granted herein.
c. INTEGRITY has and will have the right to record and reproduce
all musical compositions (the "Compositions") embodied in the
Products.
d. None of the Masters, the Records, the Compositions, the Print
Products, or any other materials or services supplied by
INTEGRITY hereunder including, without limitation, album
jackets or other packaging, artwork liner notes, advertising,
promotion and merchandising materials and advertising
marketing services (the "Materials"), violate or infringe, or
will violate or infringe, any statute or law, or any common
law or statutory rights of any person or entity whatsoever,
including, without limitation, contractual rights,
copyrights, trademarks, rights of privacy and publicity, and
obscenity laws.
e. There is not any claim, demand, or any form of litigation or
other judicial or regulatory proceeding whatsoever pending or
threatened with respect to any of the Masters, the Records,
the Print Products, the Compositions, or the Materials.
f. All other costs and expenses in connection with the recording
and printing of the Products have been and will be paid, and
all necessary licenses, consents or clearances have been
and/or will be obtained.
6. PROPRIETARY MATERIALS; BIOGRAPHIES; TRADEMARKS.
a. Subject to any restrictions in INTEGRITY's agreements with
any individual artist or producer of which INTEGRITY shall
notify WORD in writing no later than the date INTEGRITY
delivers the Records containing such artists' performance,
WORD shall have the right to use and publish INTEGRITY's and
each artist's and producer's likeness, name, voice,
trademark, trade name, logo, sound effects and biographical
materials provided by INTEGRITY in connection with WORD's
sale, advertisement
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and distribution of Products hereunder, or to refrain
therefrom. It is understood that INTEGRITY's designated logo
will be used wherever INTEGRITY's Products and/or its artists
or producers are used in advertisement. Further, INTEGRITY
shall have the right to approve all consumer advertising not
supplied by Integrity and containing INTEGRITY's artists,
logos, trademarks or trade names prior to publication.
b. Subject to the foregoing provisions, WORD may use INTEGRITY's
applicable trademark or logo during the Term hereunder at no
additional cost to WORD. WORD will honor the notice
requirement relating to INTEGRITY's trademarks; provided that
any inadvertent failure by WORD to use INTEGRITY's logo shall
not constitute a breach of this Agreement. INTEGRITY warrants
that INTEGRITY has all rights to grant WORD the right to use
such trademarks and logo and shall indemnify and hold WORD
harmless with respect thereto. INTEGRITY's submission of any
material which includes INTEGRITY's and/or any artists'
trademarks and/or logos shall be deemed to be instructions to
WORD to use such trademarks and/or logos, as submitted.
7. WORD'S RESPONSIBILITIES. At WORD's expense, WORD will furnish all
"normal distribution services" as that term is generally understood in
the phonograph record industry subject to the specific business
practices and policies of WORD. Such services shall include, but not
necessarily be limited to:
a. Warehousing of finished Products and, if applicable, finished
jackets, sleeves, inserts and other components ("Inventory")
at its designated Distribution Centers.
b. Selling and shipment of finished goods and merchandising
materials supplied by INTEGRITY to WORD's customers within
the Territory (WORD's salesmen are to receive the same
compensation or commission on sales of Products hereunder as
they are paid for sales of WORD's products).
c. Billing for Products delivered to customers and collection
thereof, with weekly reports (including but not limited to
movement reports and weekly sales summaries) to be promptly
provided to INTEGRITY, including the administration of any
sales and/or discount programs requested by INTEGRITY
pursuant to Paragraph 13(b) herein below, and the absorption
of any "bad debts" and cash discounts (both of which are
WORD's sole responsibility) relating to Products sales
hereunder to such customers in the same manner as WORD deals
with customers of WORD's products.
d. Upon INTEGRITY's request to WORD, WORD will compile, collate,
pack and ship all packets required of INTEGRITY for use at
choral workshops, festivals, and clinics. INTEGRITY will pay
WORD's direct and out-of-pocket costs (including the wages of
hourly employees, but not an allocation of operating
overhead) for
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providing such services within thirty (30) days from receipt
of WORD's invoice for the same. In the event WORD and
INTEGRITY desire to join marketing efforts, the parties shall
jointly determine the extent of the efforts, and shall each
bear the cost incurred proportionate to their participation.
e. Notwithstanding anything to the contrary contained herein,
WORD shall have the right, without liability to INTEGRITY, to
decline to distribute or withdraw from distribution any
Products hereunder if such Products(s) or the materials
contained thereon or therein are deemed, in the opinion of
WORD's counsel, libelous, slanderous or defamatory or
violative of the laws of any jurisdiction or infringe upon
copyrights or trademarks or otherwise violate or infringe
upon the rights of any party or person.
f. WORD warrants and agrees that regular orders shall be
fulfilled out of Inventory on hand within an average of two
business (2) days [such average to be measured during any
continuous 30-day period] after WORD's receipt of an order
from its customer.
g. WORD shall issue a clear and direct clarification to its
General Market distributor of such distributor's rights with
regard to the Products. INTEGRITY shall either prepare or
approve such letter of clarification prior to its issuance.
h. WORD shall cause the WORD logo to be removed from all
Products manufactured for sale by its General Market
distributor, after the execution hereof. Such product shall
bear only the INTEGRITY logo and the logo of the General
Market distributor.
i. WORD shall furnish non-dedicated office space with telephone
privileges in WORD's Nashville building for the use by
INTEGRITY's senior staff when in Nashville.
8. WORD'S WARRANTIES; PERFORMANCE GOAL.
a. WORD warrants and agrees that it shall represent INTEGRITY's
Products in a manner consistent with INTEGRITY's mission and
the nature of the product, and further that WORD will promote
and sell INTEGRITY's product with the same level of energy,
commitment and professionalism as it devotes to sales of
WORD's own product lines. WORD agrees to exercise all of its
rights under this Agreement in good faith, in accordance with
its business practices and policies. In this regard, WORD
currently maintains a field sales force of fourteen (14)
persons, four (4) key account representatives, and a
telemarketing sales force of ten (10) persons. Word shall not
reduce the foregoing groups by more than twenty percent (20%)
throughout the Term, unless INTEGRITY agrees to such
reductions in writing.
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<PAGE> 7
b. Provided INTEGRITY shall continue to deliver similar quantity
and quality of Products to WORD for distribution as it has
produced over the last 24 months, if and only if, WORD's
total sales of INTEGRITY Products in any contract year falls
below net sales of ten million dollars ($10,000,000), in that
event, INTEGRITY shall have the right to terminate this
Agreement, upon three (3) months' written notice to WORD
delivered anytime within the first two (2) months of the next
contract year. In such event, all other provisions of the
Agreement relative to termination shall apply.
c. WORD shall have the right during the term hereof to sell
Products directly to U.S. bookstore accounts which deal
primarily with Spanish and Portuguese titles (and WORD shall
account for sales through its Miami-based office serving such
accounts separately, by product title); provided that if
aggregate net sales of Products to all such accounts reported
and paid to INTEGRITY shall not in the calendar year 2000
equal at least Five Hundred Thousand dollars ($500,000.00),
or in any subsequent calendar year shall not exceed by at
least ten percent (10%) such sales in the immediately
preceding calendar year, INTEGRITY shall have the right, at
any time during the first two (2) months of the subsequent
calendar year, to deliver written notice to WORD to the
effect that such right with regard to such Spanish/Portuguese
bookstore accounts will terminate on June 30 of the year in
which notice is given.
d. WORD shall during the term hereof sell selected Products
through its General Market distributor, such Products to be
selected at the General Market distributor's discretion;
provided that INTEGRITY shall have the right, at any time
during the first 30 days of any calendar year after 2000, to
deliver written notice to WORD to the effect that such right
will terminate on July 31 of the year in which notice is
given. INTEGRITY agrees that it will not enter into an
agreement with WORD's General Market distributor for the sale
of Products in the General Market within one (1) year after
the effectiveness of any termination of WORD's right as
described in this Section 8(d). The foregoing
notwithstanding, if during the term WORD shall terminate its
distribution agreement with its General Market Distributor
Sony, Inc., INTEGRITY shall have the option to negotiate an
agreement directly with Sony to continue distribution of
INTEGRITY's Products through Sony, Inc. independent of WORD.
9. FREIGHT CHARGES. INTEGRITY shall pay the insurance and freight charges
(including charges for air and/or surface shipment) for shipment from
the plants where the Products and merchandising materials are pressed
or fabricated to WORD's designated Distribution Centers (and
merchandising warehouses, if any).
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<PAGE> 8
10. SALES AND DISTRIBUTION FEES.
a. With respect to net sales of the Products in the Territory
(i.e., gross sales of the Products less returns, credits and
rebates) by WORD, and except as otherwise provided for
herein, WORD will pay INTEGRITY [ ]* percent ([ ]*) of WORD's
actual net selling price to its customers.
b. With respect to sales of INTEGRITY's Records by WORD through
WORD's General Market distributor, Sony Music, a Group of
Sony Music Entertainment, Inc. ("Distributor"), WORD shall
pay INTEGRITY [ ]* percent ([ ]*) of its net receipts from
Distributor, with full account and payment to be remitted to
INTEGRITY within thirty (30) days after WORD's receipt of
payment from Distributor. In the event of any material
modification to or termination of WORD's agreement with
Distributor, the parties agree to renegotiate in good faith
the terms of this provision, or a replacement provision as to
General Market sales.
c. With respect to net sales (i.e., gross sales of the Products
less returns, credits and rebates) by WORD of one (1)
released album of Masters and one (1) potentially forthcoming
album of Masters featuring Bishop T.D. Jakes (including his
ministries, associates, or successors), for which Integrity
has obtained distribution rights for the CBA marketplace
through Island Records, WORD will pay INTEGRITY [ ]* percent
([ ]*) of WORD's actual net selling price to its customers.
d. With respect to net sales of "WOW Worship" Products in the
Territory (i.e., gross sales of the Products less returns,
credits and rebates) by WORD, WORD will pay INTEGRITY
[ ]* percent ([ ]*) of WORD's actual net selling price
to its customers.
e. All amounts hereunder collected by WORD and due to INTEGRITY
shall be paid thirty (30) days following the end of each
month. Subject at all times to the provisions of Paragraph 22
hereof, amounts owing to INTEGRITY shall be paid as
aforesaid. WORD acknowledges that prompt and timely payment
by it is a material condition of this Agreement, and that if
any such payment is not made within five (5) days of its due
date INTEGRITY, in addition to any other remedies which it
might have, INTEGRITY shall be entitled to immediately
terminate this Agreement upon notice to WORD, and WORD shall
forthwith return to INTEGRITY all Inventory in its
possession. Amounts due INTEGRITY which are not paid within
five (5) days of the due date therefor shall bear interest at
the prime rate plus two percent (2%) per annum. For the
purposes of this Agreement, prime shall be the "prime rate"
set by SunTrust Bank in Nashville on the day which the
payment was due.
f. Upon either party's dissolution or the liquidation of
substantially all its assets, or the
* Indicates information that has been redacted pursuant to a request for
confidential treatment.
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filing of a petition in bankruptcy or insolvency or for an
arrangement or reorganization, by, or for either party (or
against such party and not disposed of successfully within
sixty (60) days thereafter), or in the event of the
appointment of a receiver or a trustee for all or a portion
of such party's property, or if either party shall make an
assignment for the benefit of creditors, commit any act for,
or in, bankruptcy or become insolvent, or in the event any
payment to either party by the other party under this
Agreement becomes subject, in any manner, to anticipation,
alienation, sale, transfer, assignment (except as permitted
pursuant to this agreement), levy, pledge, encumbrance or
charge, or to attachment, garnishment or other legal process,
then at any time after the occurrence of any such event, in
addition to any other remedies which may be available, then
the other party shall have the right to retain any funds then
in its possession but only as and to the extent such party is
entitled to such funds under the terms of this Agreement.
11. ACCOUNTING.
a. WORD shall render accounting statements setting forth in
detail the sales and returns of Products distributed
hereunder on a monthly basis. Said reports shall be rendered
no later than ten (10) business days following the last
business day of each month of this Agreement. Further, WORD
shall forward to INTEGRITY copies of such pages of
Distributor's monthly sales report to WORD which set forth
sales data of INTEGRITY's General Market sales and royalty
reporting as received by WORD within ten (10) business days
following WORD's receipt.
b. In addition to the foregoing accounting statements, WORD
agrees to electronically render to INTEGRITY on a monthly
basis no later than two (2) business days following the last
business day of each month of this Agreement all of WORD's
standard reports, which shall include a report listing gross
sales volume, Inventory movement (i.e. units sold, units
given away, units returned) and Inventory balances. No later
than December 1, 1999, WORD shall supply INTEGRITY with fully
functional on-line sales reporting and access to Inventory
data pertaining to the Products, including all reports
requested by INTEGRITY, a current list of which shall be
attached hereto as Exhibit B. Any such on-line reports shall
be made available by WORD on-line in text format for
transmission directly to INTEGRITY's database. The format of
such reports are subject to reasonable change in accordance
with WORD's then current practices and policies in effect
from time to time, provided INTEGRITY is notified in advance,
and WORD shall make every reasonable effort to accommodate
INTEGRITY's request for additional detail or format
adjustments.
c. Provided that INTEGRITY shall have theretofore notified WORD
in writing of its objection to any statement rendered
pursuant to this Agreement, specifying with
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particularity each element of such statement to which
objection is made, INTEGRITY may, at any time within two (2)
years after any statement is rendered to INTEGRITY hereunder,
examine the books and records of WORD described below with
respect to such objections. Such examination shall be
conducted at INTEGRITY's sole cost and expense by a certified
public accountant selected by INTEGRITY, provided that such
accountant shall be an accredited accounting firm and not
then engaged in an outstanding examination of WORD's books
and records on behalf of a person other than INTEGRITY and
who certifies that: (i) he will conduct such examination in
accordance with the then-current rules and regulations of the
applicable society of Certified Public Accountants; and (ii)
such examination shall be made in accordance with generally
accepted accounting principles. Such examination shall be
made during WORD's usual business hours at the place where
WORD maintains the books and records described below, and
INTEGRITY's examination shall be limited to the same.
INTEGRITY's sole right to inspect WORD's books and records
shall be as set forth in this Paragraph, and WORD shall have
no obligation to produce such books and records more than
once with respect to each statement rendered to INTEGRITY nor
more than once in any calendar year. Without limiting the
generality of the foregoing, INTEGRITY acknowledges and
agrees that WORD's statements of account and Inventory
summaries will be based on documents generated in the
ordinary course of WORD's business by WORD's computer system
and that said computer-generated documents shall constitute
the major source documents in, and be a substantial factor
in, any dispute between the parties as to the accuracy or
completeness of statements and inventories furnished by WORD
hereunder and that such documents shall show sales and gratis
distribution of Products hereunder. Except with respect to
objections made by INTEGRITY in accordance with this
Paragraph, each statement rendered to INTEGRITY shall be
final, conclusive and binding on INTEGRITY and shall
constitute an account stated. INTEGRITY shall be foreclosed
from maintaining any action, claim or proceeding against WORD
in any forum or tribunal with respect to any statement of
accounting due hereunder unless such action, claim or
proceeding is commenced against WORD in a court of competent
jurisdiction within one (1) year after the date any audit
conducted with respect thereto is completed.
12. MARKETING PROVISIONS.
a. WORD will provide four (4) to eight (8) hours for INTEGRITY
to present its Products at all WORD sales conferences, as
agreed upon with INTEGRITY for each conference.
b. WORD's executive sales, operations and distribution staff
shall meet with INTEGRITY's staff a minimum of three (3)
times per calendar year, with at least two (2) of those
meetings being held at INTEGRITY'S Mobile office, unless
agreed otherwise.
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c. Prior to March 31, 2000, WORD shall present for INTEGRITY's
approval a comprehensive plan for choral Print Products
reading events, specifically including WORD sponsored choral
reading sessions and other special events.
13. PROMOTIONAL AND FREE GOODS.
a. No payment shall be due from WORD nor shall a distribution
fee be charged on Products given away or on Records furnished
on a "no charge" basis for promotional purposes to disc
jockeys, radio and television stations or networks
("Promos"), or for sales inducement products (or discounts in
addition to or in lieu thereof) furnished to independent
distributors, subdistributors and dealers, or for displays,
or as sales inducement products to independent distributors,
subdistributors and dealers ("Free Goods"). Free Goods shall
be distributed only pursuant to sales programs of limited
duration. WORD agrees that Free Goods of INTEGRITY's Products
shall not be distributed to induce the sale of any products
other than INTEGRITY's. The foregoing notwithstanding, WORD
agrees that the sum of Promos and Free Goods of any Products
distributed hereunder shall not exceed ten percent (10%) of
the contract- to-date net trade sales (1 free with 10) of
that title reported and paid to INTEGRITY, unless INTEGRITY
and WORD shall have mutually agreed otherwise prior to such
distribution.
b. With respect to discount programs of Products hereunder
("Programs"), INTEGRITY shall instruct WORD in writing of the
particular Products and terms for such Programs that
INTEGRITY approves hereunder. WORD and INTEGRITY shall
develop and mutually agree on advertising programs with the
Family Bookstore Chain, Lemstone, Berean, Parable Group,
Covenant Group and Spring Arbor Distributors as well as
Central South, Riverside, Whitaker House, Appalachian and New
Day whereby advertising shall be paid for via INTEGRITY Free
Goods.
c. With WORD approval, INTEGRITY may furnish prizes or Aspiffs"
to WORD salesmen and district managers.
14. RETURNS. WORD shall be entitled to scrap shop-worn Products returned
to WORD upon prior written notice to INTEGRITY and WORD shall report
such scrapping to INTEGRITY. "Shop-worn" Products are those Products,
in any configuration, which by WORD's standards, are deemed to be so
damaged as a result of mishandling when not in WORD's control so as to
be unsalable and not economically salvageable.
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15. INVENTORY AND SHRINKAGE.
a. Simultaneously with WORD's receipt of a sales order from its
customers for finished goods and merchandising materials
supplied by INTEGRITY, title to such inventory passes to
WORD. Inventory shall at all other times by INTEGRITY's
property. Upon any authorized return by WORD's customer,
title to the returned goods and materials shall pass to
INTEGRITY when WORD credits its customer's account.
b. Inventory shall be subject to a two percent (2%) shrinkage
allowance calculated as of December 31st of each year based
on the average monthly Inventory ending balance for the
applicable calendar year. WORD will furnish to INTEGRITY the
results of its Inventory cycle counts regarding INTEGRITY
product kept at WORD's warehouse(s) for each year of the term
hereunder. INTEGRITY shall have the right, on an annual basis
and at its expense, to conduct a physical inventory of its
product upon reasonable notice. At such times as WORD in its
sole discretion, conducts a physical inventory of INTEGRITY's
product, the results of said physical inventory will also be
furnished to INTEGRITY.
c. All transfers and removals of Inventory shall be at
INTEGRITY's expense. WORD shall institute a new procedure, to
be approved by INTEGRITY, for reporting of such transferred
Inventory. Such transferred Inventory will not be reflected
as "gratis sales."
d. At the end of the Term, INTEGRITY shall remove its Inventory
from WORD's custody within thirty (30) days after WORD's
written request for such removal. The cost of such removal
and storage charges from and after the thirty-first (31st)
day following such written demand shall be paid by INTEGRITY.
At the end of the Term of this Agreement allowance for
shrinkage shall be calculated on the same basis as applied
throughout the Term as set forth above.
16. DELETION OF PRODUCTS.
a. INTEGRITY shall have the right, with WORD's consent as to the
precise timing thereof, to declare specified Products as
out-of-print or remainders and to delete such Products from
WORD's catalog ("Deleted Products") upon two (2) months'
written notice to WORD ("Deletion Notice"). Upon receipt of
such Deletion Notice, WORD shall advise all of its accounts
of such pending deletion to be effective at the time stated
in such notices to its accounts (the "Deletion Date"). If
INTEGRITY wishes to remainder such Inventory after such
Deletion Date, shipment and collection shall be INTEGRITY's
sole responsibility. At any time after INTEGRITY deletes one
(1) or more Products, WORD may, by written notice to
INTEGRITY, require INTEGRITY to remove its Inventory of such
Product or Products from WORD's
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warehouses and INTEGRITY shall do so within thirty (30) days
after such notice. The cost of such removal and any storage
charges from and after the thirty-first (31st) day following
such notice shall be paid by INTEGRITY.
b. Upon deletion of a Product or Products from WORD's catalog,
WORD shall continue to accept returns from WORD's customers
for a period not to exceed six (6) months or the expiration
of the Term (or other termination of this Agreement),
whichever is shorter. For purposes of this Paragraph, a
return shall be deemed to have been accepted on the date such
return is physically processed by WORD.
17. RETURNS UPON TERMINATION. Upon expiration of the Term of this
Agreement, WORD shall continue to accept returns (from other than
Deleted Products) for a period of six months (the "Extra Returns
Period"). Six (6) months prior to the expiration of the Term, WORD
shall establish a monthly returns reserve in an amount equal to the
monthly INTEGRITY sales times the "average actual returns percentage."
The "average actual returns percentage" shall be equal to the total
actual returns during the twelve (12) month period beginning eighteen
(18) months prior to the expiration of the Term and ending six (6)
months prior to the end of the Term divided by the actual gross
commissionable sales during the same period. This monthly returns
reserve percentage shall reduce the payments due to INTEGRITY each
month for the last six (6) months of the Term. This return reserve
shall be treated like any other return and therefore should be
subtracted from gross sales before any distribution fee is calculated.
The cumulative reserve built by this six (6) month period shall be
used during the Extra Returns Periods. WORD will reduce the returns
reserve during the Extra Returns Period by the gross amount of the
credits issued to WORD's customers (i.e., if WORD issues the customer
a credit for $5.80, the reserve balance will be reduced by the same
amount.) To the extent the reserve balance is insufficient to bear
such debits against the reserve (i.e., credits to WORD's customers),
INTEGRITY shall promptly pay to WORD the excess. Following the
expiration of the period during which WORD has agreed to accept
returns (i.e., the "Extra Returns Period"), WORD shall release the
remaining reserves, if any, within fourteen (14) days, and
subsequently, INTEGRITY, for the benefit of WORD's customers, shall
accept returns of Products distributed pursuant to this Agreement, and
give such customers full credit.
18. INSURANCE. The risk of loss of INTEGRITY's property in WORD's
possession (i.e., finished goods Inventory, finished jackets, inserts,
and other components) shall be borne by WORD, and WORD will procure
and pay for an insurance policy naming INTEGRITY as the primary
loss-payee, in an amount equal to the wholesale price of INTEGRITY's
Inventory on hand in warehouse. The proceeds of such policy shall be
payable to INTEGRITY in the event of the destruction or damage to the
Inventory. Evidence of such insurance shall be furnished to INTEGRITY
upon request.
19. SOUNDSCAN. During the term of this Agreement, WORD shall continue to
pay all charges
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in connection with INTEGRITY's access to SoundScan reporting.
20. NOTICES.
a. All notices, statements and payments which WORD may be
required or desire to serve upon INTEGRITY shall be served by
depositing same, postage prepaid, in any mail box, chute, or
other receptacle authorized by the United States Post Office
Department for mail, addressed to INTEGRITY at the address
below its signature, or at such other address as INTEGRITY
may from time to time designate by written notice to WORD
pursuant to Subparagraph 20(b). The date of service of any
notice, statement, or payment so deposited shall be five (5)
business days following the date of deposit.
b. All notices, statements, and payments which INTEGRITY may be
required or desire to service upon WORD shall be served by
depositing same, postage paid, in any mail box, chute or
other receptacle authorized by the United States Post Office
Department for mail, addressed to WORD at the address below
its signature, or at such other address as WORD may from time
to time designate by written notice to INTEGRITY pursuant to
Subparagraph 20(a). The date of service of any notice,
statement, or payment so deposited shall be five (5) business
days following the date of deposit.
21. WORD'S SERVICES NON-EXCLUSIVE. Nothing in this Agreement shall be
construed to prevent or restrict WORD from producing, distributing,
promoting and otherwise exploiting records of any kind, including
those produced by itself or other persons, whether or not competitive
with any of the Products distributed hereunder. Nothing in this
Agreement shall be construed to prevent or restrict INTEGRITY from
producing records of any kind, including those which may be deemed
competitive with product produced or distributed by WORD. Subject to
the provisions of Paragraph 7(e) herein, WORD agrees to distribute all
Products produced by INTEGRITY.
22. WAIVERS AND CURE OF BREACH. The waiver by either party or any term or
condition of this Agreement or any part hereof shall not be deemed a
waiver by such party of any other term or condition of this Agreement
or of any later breach of this Agreement or of any part thereof.
Except for a breach by WORD pursuant to Paragraph 10, neither WORD nor
INTEGRITY shall be deemed to be in breach of any of their respective
obligations hereunder unless and until the other shall have given
specific written notice by certified or registered mail, return
receipt requested, of the nature of such breach and the receiving
party shall have failed to cure such breach within twenty (20) days
after receipt of such written notice, provided such breach is
reasonably capable of being fully remedied within such twenty (20) day
period, or if it is not, the receiving party shall not be deemed to be
in breach if such party commences to remedy such breach within such
twenty (20) day period and proceeds with
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reasonable diligence to complete the remedying of such breach. The
foregoing notwithstanding, should WORD utilize more than two (2) cure
periods for any reason whatsoever during the term of this Agreement,
INTEGRITY may, at its sole option, terminate this Agreement
immediately upon written notice to WORD.
23. TERMINATION. This Agreement may be terminated only as follows:
a. Upon the mutual written agreement of the parties hereto; or
b. Upon either party's breach of performance and failure to cure
upon notice as set forth herein (which breach and failure to
cure shall be continuing.)
24. NO ASSIGNMENT. Neither party may assign this Agreement, or any part
hereof, or any rights hereunder to any person without the written
consent of the other, except that either party may, without such
consent, assign this Agreement to its controlling shareholder or
controlling shareholders, to a parent, subsidiary or affiliated
corporation. The foregoing notwithstanding, the parties mutually agree
that should the ownership or voting control of either company change
during the Term hereof, the other party may, upon four (4) months'
written notice to the other party, terminate this Agreement.
25. FORCE MAJEURE. If because of: act of God; inevitable accident; fire;
riot or civil commotion; act of public enemy; enactment rule, order or
act of any government or governmental instrumentality (whether
federal, state, local or foreign); either party is materially hampered
in the satisfaction of its obligations hereunder, then, such party
shall not be deemed to be in breach of this Agreement as a result
thereof and it shall continue in full force and effect unless such
party's inability to satisfy its obligations shall continue for a
period of greater than ninety (90) consecutive days and the other
party shall give written notice of its intent to terminate.
26. GOVERNING LAW. This Agreement shall be governed by laws of the State
of Tennessee, County of Davidson, applicable to contracts made and to
be performed within Tennessee.
27. INDEMNITIES.
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a. WORD and INTEGRITY agree to indemnify one another against,
and hold each other harmless from, any and all claims,
liabilities, causes of action, damages, expenses, costs of
defense (including reasonable attorneys' fees and court
costs) and other costs arising out of or in any way related
to any breach of any representation, warranty or agreement
contained in this Agreement; or though not a breach of this
Agreement, any act for which WORD has no responsibility
(including without limitation artist claims, producer claims,
union claims, copyright claims, trademark claims, and
disputes as to the ownership of or rights in the Masters or
the Products which may not arise out of or be related to a
breach) provided that such act shall result in a judgment in
WORD's or INTEGRITY's favor or a settlement executed with
INTEGRITY's consent, said consent not to be unreasonably
withheld.
b. WORD and INTEGRITY represent and warrant that each has the
right to enter into this Agreement and that each shall
perform all of its material obligations hereunder.
28. ACTIONS. If either party hereto commences a legal action or proceeding
against the other to enforce rights or obligations arising out of this
Agreement, the prevailing party in such action or proceeding shall, in
addition to all other sums, be entitled to recover its costs and
expenses, including reasonable attorneys' fees.
29. ENTIRE AGREEMENT. The terms set forth in this Agreement constitute the
entire agreement between WORD and INTEGRITY with respect to the
subject matter hereof, all prior negotiations and understandings being
merged herein. INTEGRITY acknowledges and agrees that no person acting
or purporting to act on behalf of WORD has made any promises or
representations upon which INTEGRITY has relied except those expressly
found herein. The bold headings contained in this Agreement are for
convenience and reference only, and shall have no effect upon the
purposes or intent of this Agreement. This Agreement may only be
altered by an instrument executed by both INTEGRITY and an authorized
officer of WORD.
[Remainder of page intentionally left blank]
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INTEGRITY INCORPORATED WORD ENTERTAINMENT
1000 Cody Road 25 Music Square West
Mobile, Alabama 36695 Nashville, Tennessee 37203
By: /s/ Jerry W. Weimer By: /s/ Roland Lundy
------------------------- -------------------------
Jerry W. Weimer Roland Lundy
Executive Vice President President Chief
Operating Officer
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EXHIBIT A
1. Hosanna! Music
2. Integrity Music
3. Vertical Music
4. Integrity Music Just For Kids
5. Renewal Music
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EXHIBIT B
ON DEMAND REPORTS TO BE MADE AVAILABLE ON-LINE/REAL-TIME ACCESS:
View Inventory Profile
Inventory Position
Inventory Movement
Confirmation of order and shipping status
DAILY REPORTS (TO BE MADE AVAILABLE ELECTRONICALLY [VIA ASCII OR EXCEL
SPREADSHEET] WITHIN 12 HOURS FOLLOWING THE CLOSE OF EACH BUSINESS DAY):
Sales report
Inventory report
Returns report
Reserved report
Receipts report
Sales Update summary
Adjustments report (Inventory adjustments and reason code)
WEEKLY REPORTS (TO BE DELIVERED NO LATER THAN 8:00 A.M. C.S.T. EACH TUESDAY
MORNING FOR THE PRECEDING WEEK):
Backorder report
Pre-publication report for Merchandising/Point of Purchase items
Pre-publication report for Recorded Product
MONTHLY REPORTS (TO BE DELIVERED AS SPECIFIED BELOW):
Final Month-end Sales report (two (2) days after the last business day of each
month)
Final Month-end Royalty report (preliminary report delivered electronically
within ten (10) days after the last business day of each month; final
report delivered with payment thirty (30) days following the last
business day of each month.)
QUARTERLY REPORT (TO BE DELIVERED WITHIN FIVE BUSINESS DAYS AFTER THE LAST
BUSINESS DAY OF THE CALENDAR QUARTER):
Customer Account Listing (Name, Address, YTD Sales of INTEGRITY Products)
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EXHIBIT 10.14
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of the ____
day of November, 1999, is by and among IDEA ENTERTAINMENT, INC., a Delaware
corporation, d/b/a EVERLAND ENTERTAINMENT (the "Purchaser"), and INTEGRITY
INCORPORATED d/b/a INTEGRITY FILMS and HOSANNA! MUSIC, a Delaware corporation
and INTEGRITY MUSIC, INC., a Delaware corporation (collectively, the "Seller").
WITNESSETH:
WHEREAS, Seller is the owner of and is engaged in the creation,
manufacture, and distribution of a series of children's video tapes entitled
"Adventures of The Royal Academy" (the "Property").
WHEREAS, Seller desires to sell, and Purchaser desires to acquire, an
undivided one hundred percent (100%) ownership interest in and to all of the
assets (including, but not limited to, any and all intellectual property rights)
associated with the Property, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and agreements contained herein, the parties hereto do hereby agree as
follows:
ARTICLE I
SALE AND PURCHASE OF ASSETS
Section 1.1 Definition of Assets. Effective as of the Closing Date (as
defined in Section 1.2), Seller shall sell, assign, transfer, convey and deliver
the following assets to Purchaser (collectively, the "Assets"):
(a) all worldwide right, title and interest in or to the following
property, whether known or unknown, now existing or hereafter arising, together
with all copyrights therein, the right to secure copyrights therein and the
right to renew, extend, continue and continue-in-part copyrights therein, in
each case throughout the world:
(i) the series title "Adventures of The Royal Academy"
and each of the titles of the Masters as such titles
are set forth on Schedule 1.1(a)(i);
(ii) each and every one of the video masters comprising or
relating to or created in connection with the
Property, a complete list of which is set forth on
Schedule 1.1(a)(ii) (the "Masters");
(iii) the literary works, scripts, storyboards, treatments
and concepts embodied in, relating to or created in
connection with the Masters or any future productions
relating to the Property;
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(iv) the characters, plots, themes and storylines embodied
in, relating to or created in connection with the
Masters;
(v) all tapes embodying the Masters and any advertising
therefor, including those set forth on Schedule
1.1(a)(v), and all negatives, cuts, outtakes and
edits prepared in connection with the Property,
whether or not embodied in the Masters;
(vi) all artwork embodied in the Masters and any outtakes
or edits not embodied in the Masters;
(vii) all adaptations, versions or derivative works of any
of the foregoing;
(viii) all future productions of video masters based on the
Property, the title thereto and the characters,
plots, themes or storylines embodied therein;
(ix) all other intangible property rights relating to the
Masters or the Property; and
(b) all worldwide right, title and interest in or to the trade names
and trademarks, whether registered or unregistered, used by Seller from time to
time in connection with the Property, together with the right to secure the same
therein and the right to renew and extend the same, in each case throughout the
world, including those listed on Schedule 1.1(b) (the "Trademarks"); and
(c) all worldwide right, title and interest in or to any artwork
created in connection with the marketing, distribution or packaging of products
consisting of the Property;
(d) all worldwide right, title and interest in or to each musical
composition embodied in the any of the Masters, all of which are listed on
Schedule 1.1(d) (the "Compositions"), including, without limitation,
the following:
(i) all right, title and interest in or to copyrights
(including registrations and applications for
registration therefor), the right to secure
copyrights and the right to renew, extend and
continue-in-part copyrights, in each case throughout
the world in connection with each Composition;
(ii) all right, title and interest in or to the lyrics,
music and title of each Composition, together with
all right, title and interest in or to all other
versions and derivative works;
(iii) all right, title and interest in or to any proceeds
from any Composition, from whatever source;
(iv) all rights to mechanically reproduce for use with any
device (alone or in synchronization with visual
images), publish in printed form, broadcast or
publicly perform each Composition;
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(v) all right, title and interest in or to any licenses
regarding any Composition (including mechanical
licenses);
(vi) all rights to administer, promote, exploit or
license, for any use whatsoever (including, without
limitation, the uses described in subsection (iv)
above), each Composition or any copyright associated
therewith or to sub-license the administration,
promotion or licensing thereof, all in Purchaser's
name;
(e) all worldwide right, title and interest in or to each Sound
Recording (whether sound only or audiovisual) embodying any Composition, all of
which are listed on Schedule 1.1(e) (the "Sound Recordings"), including, without
limitation, the following:
(i) all right, title and interest in or to copyrights
(including registrations and applications for
registration therefor), the right to secure
copyrights and the right to renew, extend and
continue-in-part copyrights, in each case throughout
the world in connection with each such Sound
Recording;
(ii) all right, title and interest in or to any proceeds
from each Sound Recording, from whatever source;
(iii) all rights to mechanically reproduce for use with any
device (alone or in synchronization with visual
images), distribute, market, broadcast or publicly
perform each such Sound Recording;
(iv) all right, title and interest in or to any licenses
regarding any Sound Recording;
(v) all rights to administer, promote, exploit or
license, for any use whatsoever (including, without
limitation, the uses described in subsection (iv)
above), each such Sound Recording or any copyright
associated therewith or to sub-license the
administration, promotion or licensing thereof, all
in Purchaser's name;
(vi) all original multi-track tapes, two-track masters and
any derivatives or copies thereof of any Sound
Recording;
(f) all worldwide right, title and interest in or to the following
property, whether known or unknown, now existing or hereafter arising, together
with all copyrights therein, the right to secure copyrights therein and the
right to renew, extend, continue and continue-in-part copyrights therein, in
each case throughout the world:
(i) each of the activity books, and the titles and the
content thereof, as set forth on Schedule 1.1(f) (the
"Activity Books");
(ii) the literary works embodied in, relating to or
created in connection with the Activity Books;
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(iii) the characters, plots, themes and storylines embodied
in, relating to or created in connection with the
Activity Books;
(iv) all artwork embodied in the Activity Books;
(v) all adaptations, versions or derivative works of any
of the foregoing;
(vi) all future productions of any such activity books
based on the Property, the title thereto and the
characters, plots, themes or storylines embodied
therein;
(vii) all other intangible property rights relating to the
Activity Books; and
(g) all agreements, understandings or contracts, whether verbal or
written, pursuant to which Seller owns or has acquired rights in any of the
Property, all of which are set forth on Schedule 1.1(g) (the "Ownership
Contracts");
(h) all rights to sue for past, present or future infringement of any
right in connection with any of the Assets (and all rights corresponding
thereto);
(i) all of Seller's books and records relating to any of the Assets,
including correspondence, records and book of account (the "Books and Records");
(j) all right to receive income or revenue associated with or derived
from the Assets at any time after the Closing Date (as hereafter defined).
Section 1.2 Closing. The closing of the transactions contemplated
hereby (the "Closing") shall take place at the offices of Sherrard & Roe, PLC in
Nashville, Tennessee, on the date the initial installment of the Purchase Price
(as described in Section 1.3 below) shall be paid by Purchaser (the "Closing
Date"), or at such other location and/or date as may be mutually agreed upon by
the parties. Notwithstanding the Closing Date, the transactions contemplated
hereby shall be effective as of 12:01 AM on the Closing Date.
Section 1.3 Purchase Price. In consideration of the transfer of the
Assets to Purchaser, Purchaser shall pay Seller $2,000,000 (the "Purchase
Price"), which amount shall be payable as follows: $1,000,000 at the Closing and
$250,000 on each of March 31, 2000, June 30, 2000, September 30, 2000 and
December 31, 2000, in each case by means of wire transfer of immediately
available funds in accordance with the instructions set forth on Schedule 1.3
hereto.
Section 1.4 Transfer of Assets. (a) The transfer and sale of Assets
will be effected by the delivery by the Seller to the Purchaser of a Bill of
Sale in the form attached as Exhibit A (the "Bill of Sale"), an Assignment and
Assumption Agreement in the form attached as Exhibit B (the "Assignment"),
Short-Form Assignments with respect to the Masters, the Compositions and the
Activity Books in the form attached as Exhibit C (the "Short-Form Assignments"),
all consents of third parties necessary to effectively vest in Purchaser title
to the Assets, free and clear of all liens, claims or encumbrances, except to
the extent disclosed herein or otherwise waived in writing by Purchaser, and the
Assets consisting of tangible property. This Agreement, the Bill of Sale, the
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Assignment and the Short-Form Assignment, together with the schedules and
attachments hereto and thereto, are collectively referred to herein as the
"Operative Documents."
(b) Additionally, Seller is herewith delivering copies of all federal
registrations of copyright on Form PA with regard to the Compositions, the
Masters and the Activity Books, copies of such registrations collectively
attached hereto as Exhibit D.
Section 1.5 Assumption of Liabilities. Purchaser assumes no liabilities
incurred by Seller or any other person in connection with the Assets at any time
prior to the Closing Date, except as and to the extent specifically set forth on
Schedule 3.12(a).
ARTICLE II
REPRESENTATIONS AND WARRANTIES
REGARDING SELLER
Seller hereby represents and warrants as follows:
Section 2.1 Status. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation
and has the power to own and operate its properties, to carry on its business as
now conducted and to enter into and to perform its obligations under each of the
Operative Documents. Seller is qualified to do business and is in good standing
in each state or other jurisdiction in which such qualification is necessary
under applicable provisions of law, except where the failure to so qualify would
not have a materially adverse effect on Seller.
Section 2.2 Authorization; Absence of Conflicts. Seller has full legal
right, power and authority to enter into and perform each of its obligations
under all of the Operative Documents to which it is a party. The execution and
delivery of this Agreement by Seller and the performance by Seller of its
obligations hereunder and/or thereunder, do not and will not (i) contravene or
conflict with the articles or certificate of incorporation, as amended, of
Seller, the Bylaws, as amended, of Seller, or any other organizational document
of Seller, (ii) contravene or conflict with any material agreement to which
Seller is a party or by which any of its properties is bound, or constitute a
default thereunder, or result in the creation or imposition of any lien, charge,
security interest, or encumbrance of any nature upon any of the property or
assets of Seller pursuant to the terms of any such agreement or instrument, or
(iii) violate any provision of law or any applicable judgment, ordinance,
regulation or order of any court or governmental agency material to Seller.
Section 2.3 No Required Consents. No consent, approval, qualification,
order or authorization of or filing with any governmental authority, and no
consent of any other person, is required on the part of Seller in connection
with Seller's execution, delivery or performance of any of the Operative
Documents, which consent has not been obtained in writing.
Section 2.4 Validity and Binding Effect. Each of the Operative
Documents is the legal, valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms.
Section 2.5 No Defaults. No default or event of default by Seller
exists under (i) any of the Operative Documents or (ii) any other instrument or
agreement to which Seller is a party or by which
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Seller or its properties may be bound, except (in the case of defaults or events
of defaults other than under the Operative Documents) for defaults or events of
default which are, individually or in the aggregate, immaterial. To the
knowledge of Seller, no event has occurred and is continuing that with notice or
the passage of time or both would constitute a default or event of default by
Seller or any other party under any of the Operative Documents or any other
instrument or agreement to which Seller is a party or by which Seller or its
respective properties may be bound.
Section 2.6 Compliance With Law. Seller is in compliance with all
federal, state or local laws, regulations, decrees and orders applicable to any
of them, except to the extent that noncompliance cannot reasonably be expected
to have a materially adverse effect on Seller.
Section 2.7 Taxes. Seller has filed, or caused to be filed, all
federal, state and local income, excise and franchise tax returns required to be
filed (except for returns that have been appropriately extended), and has paid,
or provided for the payment of, all taxes shown to be due and payable on said
returns and all other taxes, impositions, assessments, fees or other charges
imposed on it by any governmental authority, agency or instrumentality, prior to
any delinquency with respect thereto (other than taxes, impositions,
assessments, fees and charges which are, individually or in the aggregate,
immaterial, or are currently being contested in good faith by appropriate
proceedings, and for which appropriate amounts have been reserved). No tax liens
have been filed against Seller or any of its properties.
Section 2.8 Fees/Commissions. Seller has not agreed to pay any finder's
fee, commission, origination fee or other fee or charge to any person or entity
with respect to or as a result of the consummation of the transactions
contemplated hereunder.
Section 2.9 Bulk Sales Law. There is no bulk sales law applicable to
the transactions contemplated hereby.
Section 2.10 Disclosure. No representation or warranty given as of the
date hereof by Seller in this Article II contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or omits or will (as
of the time so furnished) omit to state any material fact which is necessary in
order to make the statements contained herein or therein untrue in any material
respect.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
REGARDING THE CONDITION OF THE ASSETS
Seller hereby represents and warrants as follows:
Section 3.1 Title to the Assets. Seller owns all worldwide right, title
and interest in and to, and has good and marketable title in and to, all of the
Assets, including specifically all copyrights therein, free and clear of all
liens, claims, mortgages, pledges, security interests, encumbrances or charges
of every kind, nature, and description whatsoever. Without limiting the
foregoing, Seller has not transferred its ownership in or to any copyright
pertaining to the Assets to any person or in any place throughout the world.
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Section 3.2 Adverse Claims. No adverse claims exist with respect to any
of the Assets, including, without limitation, any claims asserting the
invalidity, abuse, misuse or unenforceability of any of Seller's rights in any
of the Assets, and there are no grounds for the same.
Section 3.3 Infringement. Neither the Assets nor the conduct of
Seller's business with respect to the Assets infringes upon or violates the
rights of any person, including, without limitation, the copyright, other
proprietary or privacy rights of any person, and Seller has not received any
notice of the same.
Section 3.4 Original Works; Original Publication. All Assets consisting
of intellectual property, including, without limitation, the Masters and the
Compositions, are wholly original with Seller, whether pursuant to valid and
enforceable "work-made-for-hire" agreements included in the Ownership Contracts
or otherwise, and as such are susceptible of exclusive copyright and other
protection by Purchaser throughout the world. All Assets consisting of works
subject to publication were originally published by Seller.
Section 3.5 Options to Purchase. No person has any written or oral
agreement, option, understanding or commitment, or any right or privilege
capable of becoming an agreement, for the purchase of all or any part of any of
the Assets.
Section 3.6 Registration of Copyrights; Notice of Copyrights. (a)
Schedule 3.6 contains a complete list of all copyright registrations with
respect to the Assets consisting of intellectual property, including, without
limitation, the Compositions. Except as set forth on Schedule 3.6, no filings or
registrations with any governmental authorities have been made with respect to
perfection or protection of interests in any of the Assets consisting of
intellectual property, and no such filings or registrations are required.
(b) The Masters contain a copyright notice complying with the laws of
the United States and any foreign territory in which the Masters are distributed
as of the Closing Date, such notice appearing in the main or end title of each
of the Masters.
Section 3.7 Existing Licenses; Administration. There are no existing
licenses to third persons with regard to any of the Assets, including, without
limitation, any of the Masters, Compositions or Sound Recordings. Except as set
forth on Schedule 3.7, no person other than Seller has any right to administer,
promote, exploit or license, for any use whatsoever, any copyright or other
right in or to any of the Assets consisting of intellectual property, including,
without limitation, the Masters, Compositions or Sound Recordings.
Section 3.8 Outstanding Advances. There are no outstanding advances to
Seller from any performing rights society, subpublisher, printer or other
person.
Section 3.9 Licenses and Permits. Seller possesses all clearances,
licenses and other required approvals, permits, or authorizations applicable to
the Assets. Schedule 3.9 sets forth a complete list of all such clearances,
licenses, approvals, permits, and authorizations. All such clearances, licenses,
approvals, permits, and authorizations are in full force and effect, and Seller
is in material compliance with the requirements thereof. None of such
clearances, licenses, approvals,
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permits, and authorizations is or will be impaired or in any way affected by the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
Section 3.10 No Defaults Under Certain Contracts. No default or event
of default exists under any, and Seller has made all payments required to be
made by it in connection with, (i) any Ownership Contract or (ii) any contract
with illustrators, animators or personnel, for studio hire, purchases or
licenses, in each case with the production of the Masters and the Sound
Recordings, and there exists no state of facts which after notice or lapse of
time or both would constitute such a default or breach and such contracts are
now in full force and effect. All considerations required to be paid under each
of the agreements, licenses, assignments or other documents relating to the
production of the Masters have been paid in full, or otherwise discharged in
full, and, except as set forth on Schedule 3.12(a), there is no outstanding
obligation whatsoever, either present or future, under any of said agreements,
licenses, assignments or other documents.
Section 3.11 Guild and Union Payments. Seller has made all guild, union
or similar payments required to be made by it in connection with the production,
distribution or sale of the Masters or the Sound Recordings (including any
so-called "special fund" payments) through the Closing Date. Without limiting
the foregoing, all musicians rendering services in connection with the Sound
Recordings were paid the sums required to be paid to them under the applicable
American Federation of Musicians (the "AFM") Phonograph Record Labor Agreement.
The foregoing representations are included for the benefit of the AFM, all other
appropriate unions, their respective members whose performances are embodied in
the Masters or the Sound Recordings, and they may be enforced by the unions,
their respective designees or Purchaser. Seller has not been and is not
currently obligated to make any guild or union payments in connection with the
Assets.
Section 3.12 Royalty Obligations; Advances. (a) A summary of all
continuing royalty obligations with respect to the manufacture, sale or
distribution of the Masters or the Sound Recordings, or the use of the
Compositions embodied therein, is set forth on Schedule 3.12(a) hereto. Except
as set forth on Schedule 3.12(a), no other such royalty obligations exist.
Seller represents and warrants that the royalties payable to Classic
Entertainment, Inc. f/b/o Tony Salerno and Jodi Benson as described in items 1
and 6 appearing on Schedule 3.12(a) are only required to be paid by Purchaser
prospectively following recoupment of all production costs of the Masters
(determined on a Master by Master basis), which recoupment shall be determined
from Purchaser's "net receipts" as such term is defined in Section 9(b) of the
Production Services Agreement (as such term is defined in Section 3.23 hereof).
(b) The balance as of the Closing Date of each recoupable advance made
by Seller to any person in connection with the Assets is set forth on Schedule
3.12(b), and each such balance is subject to recoupment by Purchaser prior to
the payment by Purchaser of any royalties whatsoever in respect of the Assets to
the person for the account of whom such balance is maintained.
Section 3.13 Credits; Quality; Content. (a) All credits required to
appear in the Masters appear in the Masters in appropriate form and location;
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(b) The Masters are completely finished, fully edited and titled and
fully synchronized with language dialogue, sound and music and in all respects
of a quality, both artistic and technical, adequate for commercial public
exhibition.
(c) The Masters consist of a continuous and connected series of scenes,
telling or presenting a story, free from any obscene, vulgar, salacious,
controversial or partisan political matters.
Section 3.14 Other Musical Compositions. No musical compositions other
than the Compositions are embodied in any of the Masters.
Section 3.15 No Advertising Matter. The Masters do not contain any
advertising matter for which compensation, direct or indirect, has been or will
be received by Seller or any other person.
Section 3.16 Insurance. A list of all insurance policies of Seller with
regard to any of the Assets, including, without limitation, any policy of errors
and omissions insurance, is set described on Schedule 3.16 hereto.
Section 3.17 Power of Attorney. Seller has not given or granted any
power of attorney in regard to the Assets, whether limited or general, to any
person, firm, corporation, or otherwise that is in effect as of the date hereof
or is continuing in effect.
Section 3.18 Restrictions on Competition. Seller is not a party to any
contract, agreement or understanding expressly restricting or purporting to
restrict competition by the Seller in regard to the Assets.
Section 3.19 Books and Records. The Books and Records are complete and
correct in all material respects, have been maintained in accordance with sound
business practices and accurately and fairly reflect, in all material respects,
Seller's transactions with regard to the Assets.
Section 3.20 Letters of Direction. The Letters of Direction are
sufficient to enable Purchaser to register and claim its rights in and to the
Assets and income or revenue associated with or derived from the Assets at any
time after the Closing Date.
Section 3.21 Sufficiency of Assets. The Assets constitute all of the
property necessary for the conduct of Seller's business as it relates to the
Property.
Section 3.22 Inventory. Schedule 3.22 sets forth a brief description of
all of the existing inventory consisting in whole or in part of any of the
Property (the "Inventory").
Section 3.23 No Production in Process. No production of any video
masters based in whole or in part on the Property is currently in process, and
Purchaser shall not be obligated to engage in any additional video production or
expend any sums pursuant to the provisions of that certain Productions Services
Agreement, dated as of December 1, 1994, by and among Seller, Classic
Entertainment, Inc. and Tony Salerno, prior to its expiration on December 1,
1999 (the "Production Services Agreement").
9
<PAGE> 10
Section 3.24 Litigation; Judgments. There is no pending or threatened
litigation, arbitration, claim, proceeding or investigation which would
adversely affect or prejudice Purchaser's rights in any of the Assets. There are
no outstanding judgments, orders or decrees issued by any governmental authority
with respect to any of the Assets.
Section 3.25 Disclosure. No representation or warranty given as of the
date hereof by Seller in this Article III contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or omits or will (as
of the time so furnished) omit to state any material fact which is necessary in
order to make the statements contained herein or therein untrue in any material
respect.
ARTICLE IV
ADDITIONAL AGREEMENTS OF SELLER AND PURCHASER
Section 4.1 Name and Likeness. Seller hereby grants Purchaser, for no
additional consideration, the perpetual right to use the name, image, likeness
and voice of any person rendering services in connection with the production of
any Master, Composition or Sound Recording for the purpose of advertising,
publicizing or exploiting the same, including commercial tie-ins.
Section 4.2 Post-Closing Payments. Seller shall be responsible for the
payment of all songwriters' or composers' royalties due to the Composers in
respect of monies received by Seller prior to the Closing Date, and Purchaser
shall be responsible for the payment of such royalties in respect to monies
received by Purchaser after the date of execution of this Agreement. If Seller
shall receive any monies relating to the Compositions after execution of this
Agreement, Seller shall promptly pay over to Purchaser all such monies.
Section 4.3 Inventory. The parties agree that they will negotiate terms
and conditions regarding the disposition by Seller of the Inventory following
the Closing Date.
Section 4.4 Allocation of Purchase Price. The parties agree that the
Purchase Price shall be allocated among the assets as follows: $1,200,000 in
respect of goodwill and $800,000 in respect of general intangibles other than
goodwill. It is the intention of the parties that all of the Assets, including
goodwill and general intangibles other than goodwill, shall be treated as
"Section 197 intangibles" pursuant to Section 197 of the Internal Revenue Code,
as amended. Each of the parties agrees to prepare and timely submit a Form 8594
consistent with the provisions of this Section 4.4.
Section 4.5 Seller's Further Assurances. From time to time after the
date hereof, the Seller shall, at the request of Purchaser, execute and deliver
such additional conveyances, transfers, copyright assignments and other
documents or assurances (including letters of direction to the extent necessary
to claim income or revenue associated with or derived from the Assets at any
time after the Closing Date) as may, in the opinion of Purchaser, be reasonably
required to effectively carry out the intent of this Agreement and to transfer
the Assets to Purchaser, including, without limitation, any Assets consisting in
whole or in part of intellectual property.
10
<PAGE> 11
ARTICLE V
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER
The obligation of Purchaser to purchase and pay Purchase Price on the
Closing Date shall be subject to the fulfillment on or before the Closing Date
of each of the following conditions:
Section 5.1 Representations and Warranties. The representations and
warranties of Seller, or any of them, contained in this Agreement and the other
Operative Documents shall have been true and correct when made and shall be true
and correct as of the Closing Date, except to the extent such representations
and warranties expressly relate to a specific date. Seller shall have duly
performed all of the covenants and agreements to be performed by it hereunder on
or prior to the Closing Date.
Section 5.2 Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement and the other
Operative Documents necessary to the consummation thereof shall be satisfactory
in form and substance to Purchaser's counsel, and Seller shall have delivered to
Purchaser a certificate, dated the Closing Date, signed by the Secretary of
Seller to such effect in form and substance satisfactory to Purchaser's counsel.
Section 5.3 Operative Documents. Seller and each of the other
signatories thereto shall have executed and delivered to Purchaser each of the
Operative Documents.
Section 5.4 Existence and Authority. Seller shall have delivered to
Purchaser a certificate as to the legal existence and good standing of the
Company issued by the Secretary of State or other appropriate official in the
jurisdiction each such entity is organized.
Section 5.5 Required Consents. Any consents or approvals required to be
obtained by Seller from any other person, and any amendments of agreements which
shall be necessary to permit the consummation of the transactions contemplated
hereby on the Closing Date, shall have been obtained and all such consents or
amendments shall be satisfactory in form and substance to Purchaser's counsel.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Survival. The representations and warranties of Seller
contained herein or any of the other Operative Documents shall survive the
Closing and, notwithstanding such Closing, and regardless of any investigation
by or on behalf of Purchaser with respect thereto, shall continue in full force
and effect for the benefit of Purchaser.
11
<PAGE> 12
Section 6.2 Obligation of Seller to Indemnify. Seller agrees to
indemnify, defend, and hold harmless Purchaser and its affiliates, controlling
persons, directors, officers, employees, representatives, agents, partners,
joint venturers and assigns from and against any Losses (as defined below)
relating to, based upon, arising out of, or otherwise in respect of any breach
of any representation of any of Seller's warranties, representations or
agreements contained herein or in any of the other Operative Documents or any
actual or threatened claim, demand or action by any third party which is
inconsistent with any of Seller's warranties, representations or agreements
contained herein or in any of the Operative Documents. With respect to third
party claims, Purchaser shall give notice to Seller of any asserted liability
and shall thereafter have the right to pay, compromise or contest any asserted
liability on behalf of and for the account and risk of Seller; provided that (i)
Purchaser will not compromise any asserted liability without obtaining either an
unconditional release of liability of Seller with respect to such matter or
Seller's prior written consent and (ii) Seller may participate, at its own
expense, in any contest by Purchaser of any asserted liability. In any event,
Purchaser shall give Seller prompt written notice of, and Seller shall reimburse
Purchaser on demand for, any Losses to Purchaser.
Section 6.3 Definition of "Losses". As used in this Agreement, the term
"Loss" or "Losses" means any and all claims, actions, suits, proceedings,
demands, assessments, judgments, losses, remedial action requirements, costs,
expenses, deficiencies, damages, fines, penalties, liabilities, or expenses
(including, but not limited to, court costs and reasonable attorneys' fees).
Section 6.4 Right to Set-Off. Seller agrees that Purchaser may set off
any amount of Losses to which it is entitled pursuant to Section 6.2 by reducing
the amounts otherwise payable to Seller under any contract, agreement,
arrangement or otherwise, including, without limitation, this Agreement or any
of the Operative Documents. Neither the exercise of nor the failure to exercise
such right of set-off will constitute an election of remedies or limit Purchaser
in any manner in the enforcement of any other remedies that may be available to
it under this Agreement.
Section 6.5 Remedies Cumulative. The remedies provided herein shall be
cumulative and shall not preclude the assertion by Purchaser of any other rights
or the seeking of any other remedies against Seller.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Successors and Assigns. This Agreement shall inure to the
benefit of, and be binding upon, the parties hereto and their respective
successors and assigns.
Section 7.2 Powers and Rights Not Waived; Remedies Cumulative. No delay
or failure on the part of Purchaser in the exercise of any power or right shall
operate as a waiver thereof; nor shall any single or partial exercise of the
same preclude any other of further exercise thereof, or the exercise of any
other power or right, and the rights and remedies Purchaser are cumulative to
and are not exclusive of any rights or remedies any such holder would otherwise
have, and no waiver or consent shall extend to or affect any obligation or right
not expressly waived or consented to.
12
<PAGE> 13
Section 7.3 Persons Directly or Indirectly. Where any provision in this
Agreement refers to action or a prohibition on action by any person, such
provision shall be applicable whether the action in question is taken directly
or indirectly by such person.
Section 7.4 Severability. Should any part of this Agreement for any
reason be declared invalid or unenforceable, such decision shall not affect the
validity of any remaining portion, which remaining portion shall remain in force
and effect as if this Agreement had been executed with the invalid or
unenforceable portion thereof eliminated and it is hereby declared the intention
of the parties hereto that they would have executed the remaining portion of
this Agreement without including therein any such part, parts or portion which
may for any reason, be hereafter declared invalid or unenforceable.
Section 7.5 Governing Law; Venue. This Agreement shall be governed by
and construed in accordance with Tennessee law, without regard to its conflict
of law rules. This Agreement and its subject matter have substantial contacts
with Tennessee, and all actions, suits, or other proceedings with respect to
this Agreement shall be brought only in a court of competent jurisdiction
sitting in Davidson County, Tennessee, or in the Federal District Court having
jurisdiction over that County. In any such action, suit, or proceeding, such
court shall have personal jurisdiction of all of the parties hereto, and service
of process upon them under any applicable statutes, laws, and rules shall be
deemed valid and good.
Section 7.6 Captions; Counterparts. The descriptive headings of the
various sections or parts of this Agreement are for convenience only and shall
not affect the meaning or construction of any of the provisions hereof. This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
Section 7.7 Notices. All communications provided for hereunder shall be
in writing and shall be delivered personally, or mailed by registered mail, or
by prepaid overnight air courier, or by facsimile communication, in each case
addressed:
If to Purchaser: Idea Entertainment, Inc.
25 Music Square West
Nashville, TN 37203
Fax: (615) 457-2005
Attention: Roland Lundy
with a copy to: Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, Tennessee 37219
Fax: (615) 742-4539
Attention: Steven A. King
If to Seller: Integrity Incorporated
1000 Cody Road
Mobile, AL 36695
Fax: (334) 633-7438
Attention: Don Mayes
13
<PAGE> 14
or such other address as Purchaser, the Company or the Shareholders may
designate to the others in writing; provided, however, that a notice sent by
overnight air courier shall only be effective if delivered at a street address
designated for such purpose by such person and a notice sent by facsimile
communication shall only be effective if made by confirmed transmission at a
telephone number designated for such purpose by such person.
Section 7.8 Entire Agreement. This Agreement constitutes the entire
agreement of the parties with regard to the subject matter hereof.
[Remainder of page intentionally left blank.]
14
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase
Agreement to be executed and delivered by their duly authorized officers as of
the date first written above.
INTEGRITY INCORPORATED
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
INTEGRITY MUSIC, INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
IDEA ENTERTAINMENT, INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
15
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of issued
shares each period 5,579,000 5,514,000 5,514,000
Common stock equivalents, computed
using treasury stock method 453,000 291,000 0
--------- --------- ---------
6,032,000 5,805,000 5,514,000
========== ========== ==========
Shares used in
Basic EPS 5,579,000 5,514,000 5,514,000
Diluted EPS 6,032,000 5,805,000 5,514,000
</TABLE>
36
<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
37
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-30244, 33-86126, 33-86128 and 33-84584) of
Integrity Incorporated of our report dated February 18, 2000 relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 27, 2000
38
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,067
<SECURITIES> 0
<RECEIVABLES> 7,437
<ALLOWANCES> 1,108
<INVENTORY> 4,754
<CURRENT-ASSETS> 16,287
<PP&E> 7,620
<DEPRECIATION> 3,956
<TOTAL-ASSETS> 30,048
<CURRENT-LIABILITIES> 7,312
<BONDS> 0
0
0
<COMMON> 5,614
<OTHER-SE> 13,847
<TOTAL-LIABILITY-AND-EQUITY> 30,048
<SALES> 41,373
<TOTAL-REVENUES> 45,571
<CGS> 21,936
<TOTAL-COSTS> 10,404
<OTHER-EXPENSES> 9,751
<LOSS-PROVISION> 5,108
<INTEREST-EXPENSE> 1,292
<INCOME-PRETAX> 2,540
<INCOME-TAX> 692
<INCOME-CONTINUING> 1,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,664
<EPS-BASIC> .30
<EPS-DILUTED> .28
</TABLE>
