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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NO. 000-24134
INTEGRITY INCORPORATED
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 63-0952549
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1000 CODY ROAD
MOBILE, ALABAMA 36695
-------------------------------------------------------------
(Address of principal executive offices, zip code)
(251) 633-9000
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(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, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant, based upon the closing price of the Class A
Common Stock on the Nasdaq National Market on March 15, 2002, was $10,244,508.
Solely for the purpose of the foregoing calculation, all executive officers and
directors of the Registrant have been deemed to be "affiliates" of the
Registrant.
The number of shares of the Registrant's Class A Common Stock, $0.01
par value per share, outstanding at March 15, 2002 was 2,301,000.
The number of shares of the Registrant's Class B Common Stock, $0.01
par value per share, outstanding at March 15, 2002 was 3,435,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2002 are incorporated by reference into Part
III hereof.
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
"Item 7. 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. For any forward-looking statements contained,
or incorporated by reference, herein, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. The Company's actual results may differ materially from the
results anticipated in these forward-looking statements due to a variety of
factors, including without limitation those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors." All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by this cautionary notice. Any
forward-looking statements represent management's estimates only as of the date
of this report and should not be relied upon as representing estimates as of any
subsequent date. While Integrity may elect to update forward-looking statements
at some point in the future, Integrity specifically disclaims any obligation to
do so, even if its estimates change.
PART I.
ITEM 1. BUSINESS
INTRODUCTION
Integrity is a media/communications company that produces, publishes
and distributes Christian music, books and related products. Integrity's music
product formats include cassettes, compact discs, videos, DVD's and printed
music. The Company produces Praise and Worship music in different musical styles
for specific audiences such as children's music, gospel music for the
African-American audience, youth music and live worship music for adult
audiences. According to Soundscan's Top 50 Praise and Worship Titles chart of
December 30, 2001, the Company is the leading Praise and Worship music company,
with a 64% share of the Christian Bookstore Association ("CBA") market. The
Company was also the No. 2 Christian music label in the CBA market for 4 years
running according to Soundscan. Integrity's products are sold primarily through
retail stores and direct-to-consumers throughout the United States and in 176
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 of
the 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 as an Alabama corporation on May 1, 1987, and
was reincorporated in Delaware on October 1, 1993.
In June 2001, Integrity announced the formation of a new subsidiary,
Integrity Publishers, Inc., that will develop and publish Christian books. The
first product offerings are scheduled for release in the third quarter of 2002,
and will be sold through Christian retail (CBA stores), general retail and
direct-to-consumer channels.
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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, Hosanna! Music(R), consists of live recordings
of Praise and Worship music 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 released its 108th recording in March 2002.
The Company's concept product line now includes: Hosanna! Music(R),
Urban Praise(R), FairHope Records(R), classic Praise and Worship music grouped
according to themes and designed for budget-conscious customers;
Songs4Worship(R), World's Best Praise and Worship(R); 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 in which the artist is the main focal point. These products have
recently included "Shake The Foundation" with Joe Pace, "Get Ready - The Best of
T.D. Jakes" with T.D. Jakes, "I Will Sing" with Don Moen, "Lion of Judah" with
Paul Wilbur, "We Offer Praises" with Ron Kenoly, "Never Gonna Stop" with Tommy
Walker, "More Than Enough" with Gary Oliver, and "Open The Eyes of My Heart"
with Paul Baloche.
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" and "Welcome Home,"
and the Gold-certified videos "Lift Him Up," "God is Able" and "Sing Out," the
first Hosanna! title to appear on Billboard's Top 40 Music Video Chart. The
popular children's music series, Just-For-Kids(R), featuring the Donut Man(R),
includes nine Gold-certified and three 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. The
Company, in partnership with two other Praise and Worship music companies, has
also produced the Double-Platinum certified "WoW Worship (Blue)" and the
Platinum certified "WoW Worship (Orange)". The Company has also developed the
Songs4Worship series in conjunction with Time Life Music, which includes the
Double-Platinum certified "Songs4Worship - Shout To The Lord", the first release
in the series.
Integrity's Christian music products also include printed music such as
songbooks and sheet music designed primarily for distribution to churches and
choral groups. The Company produces "God With Us," winner of the 1994 Gospel
Music Association Dove Award for best musical, which has remained on the best
sellers list on the non-seasonal musical charts for seven years running. "God
For Us," "Let Your Glory Fall," "God In Us" and "Hillsongs Choral Collection"
ranked among the top 10 in the non-seasonal musical and adult collection charts.
"We Believe" and "Redeemer, Savior, Friend" ranked among the top 10 in the youth
musical non-seasonal charts in recent years. The musicals were ranked by The
Church Music Report ("TCMR"). Other printed music products include
orchestrations and "The Celebration Hymnal", a joint venture with Word
Entertainment ("Word"), featuring over 700 songs and hymns. Sales of this hymnal
had exceeded one million units by year-end 2001.
Integrity's new subsidiary, Integrity Publishers, Inc., is scheduled to
release its first Christian books into the market in the fall of 2002. These
Christian books will be sold through Christian retail, general retail and
direct-to-consumer channels.
PRODUCT CREATION
The Company's music product development process is based upon the
creation of new concept or artist products that 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.
2
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, the concept is reviewed and discussed by representatives of
Integrity's creative, marketing and finance divisions. If the product concept is
approved by that group, then Integrity assembles a creative team, which includes
one or more artists and producers, generally employed on a freelance or contract
basis, and members of Integrity's creative division.
Following the development of the product concept, the product is
recorded in live settings at churches or civic auditoriums, in independent
studios in cities such as Los Angeles, California or Nashville, Tennessee, or at
Integrity's studio in Mobile, Alabama. 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 176 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, through which the member receives a new selection every six to
eight weeks and is billed for each product. Shipments continue until the Company
is instructed to cancel the membership. This differs from certain other music
clubs in which members have a "negative option" allowing them to decline monthly
selections before they are mailed and in which their only obligation is to
purchase a certain number of products over a stated period of time.
The Company rents mailing lists that include 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 in 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
released its 108th recording in March 2002. Currently the Company operates
several continuity clubs, including the Songs4Worship and 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.
The Company operates its Internet activity through integritymusic.com and
songs4worship.com. We have also expanded our marketing through direct response
television including the Songs4Worship series advertising with Time Life Music.
The direct-to-consumer segment also includes direct sales to churches of printed
products, including "The Celebration Hymnal," which features over 700 songs and
hymns and was introduced in 1997 in a joint venture with Word.
Retail Markets
Integrity's retail sales activities are targeted at two markets, the
Christian retail market ("CBA"), which includes sales of choral music products,
and the general retail market. The Company currently utilizes Word to serve the
CBA market.
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All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products. Products 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 2001, SoundScan ranked Word as the number two distribution
company in the CBA market.
The Company has recently concluded a global marketing and distribution
agreement with Sony Music Entertainment and its subsidiary Epic Records for the
distribution of our products in the general retail market. During 2001,
SoundScan ranked Integrity as the number three Christian label 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), 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 to approximately 18
importers to whom the Company provides products. The Company's international
distribution network reaches markets in 176 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, Hindi, Portuguese and Indonesian languages. Integrity artists are also
involved in live performance tours to various countries.
SONG PUBLISHING
The Company's song catalog has accumulated ownership rights for over
2,800 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 from 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 through Christian
Copyright Licensing, Inc. ("CCLI"). Through CCLI, churches in the United States
are able to pay one licensing fee for the use of numerous Christian song
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.
WAREHOUSING AND FULFILLMENT
Integrity currently contracts with Word for its CBA retail market
warehousing, physical inventory and distribution functions. Word is one of
several companies that provide this service in the CBA market. All CBA 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 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 for 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
4
direct-to-consumer and international warehousing, physical inventory and
distribution functions. Most of our products are sold on a returnable basis,
which is standard music and book publishing industry practice.
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 2,800 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 recordings, 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. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors.
Integrity pays royalties in two different categories. The Integrity
songwriters are paid by Integrity's song publishing division when their songs
are used on an Integrity product and 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.
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. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors.
COMPETITION
The Company faces intense competition for discretionary consumer
spending from numerous other music companies, book publishers and entertainment
companies that utilize various formats, including audio recordings, film, video
and other media. Integrity competes directly with the products of other record
companies, book publishers and music publishers that distribute Christian music
and books to Christian bookstores, as well as with a number of secular
companies. Many of the Company's competitors have substantially greater
financial resources than Integrity. The Company competes on the basis of its
ability to produce new products that are attractive to consumers, sign
established and new artists, songwriters and authors and gain access to
distribution channels.
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
books, as well as other communication products. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors.
EMPLOYEES
As of December 31, 2001, the Company employed 176 individuals, 141 of
whom were located at the Company's Mobile, Alabama, headquarters and 3 were
located at the Brentwood, Tennessee offices of Integrity Publishers, Inc.
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
5
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. The
Company leases 5,400 square feet of office space in Brentwood, Tennessee, to
house its recently-created book publishing subsidiary, Integrity Publishers,
Inc.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any 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, 2001.
6
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Integrity's Class A Common Stock is traded on The Nasdaq National
Market under the symbol "ITGR". Integrity's Class B Common is not traded on any
public market. 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, 2000 through March 15, 2002. The last sale
price of the Class A Common Stock on March 15, 2002 was $5.26.
High Low
----- -----
Fiscal Year 2000
First Quarter 4.000 2.813
Second Quarter 3.750 3.000
Third Quarter 3.750 3.313
Fourth Quarter 3.688 2.375
Fiscal Year 2001
First Quarter 4.063 2.938
Second Quarter 5.91 3.313
Third Quarter 7.77 4.81
Fourth Quarter 8.80 5.76
Fiscal Year 2002
First Quarter (through March 15, 2002) 6.45 4.77
As of March 15, 2002, there were approximately 101 holders of record
and approximately 1,500 beneficial owners of Integrity's Class A Common Stock,
and three holders of record of Integrity's Class B Common Stock.
Integrity has never declared or paid any cash dividends on its shares
of Class A or Class B Common Stock or any other of its securities. 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 of the Notes to
Consolidated Financial Statements.
The Company's Class A Common Stock was listed on The Nasdaq SmallCap
Market effective October 2, 1998 and on The Nasdaq National Market effective
November 20, 2001.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical balance sheet and statement of operations data
presented below for each of the five years in the period ended December 31, 2001
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 the Notes thereto and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
Year Ended December 31
(in thousands, except per share data)
STATEMENT OF OPERATIONS 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net sales $ 70,958 $ 51,819 $ 45,326 $ 38,847 $ 34,954
Cost of sales 38,089 27,072 22,268 18,254 15,427
-------- -------- -------- -------- --------
Gross profit 32,869 24,747 23,058 20,593 19,527
Marketing and fulfillment expenses 12,815 10,496 10,404 9,023 9,450
General and administrative
Expenses 14,729 10,698 9,751 8,557 7,796
-------- -------- -------- -------- --------
Income from operations 5,325 3,553 2,903 3,013 2,281
Interest expense (net) 281 932 1,292 1,529 1,790
Other (income) expense 184 137 (352) 0 3
-------- -------- -------- -------- --------
Income before extraordinary
item, minority interest and taxes 4,860 2,484 1,963 1,484 488
Income tax (expense) benefit (1,632) (600) (481) 467 70
Minority interest, net of tax (105) (188) (55) (200) (37)
-------- -------- -------- -------- --------
Net income before extraordinary item $ 3,123 $ 1,696 $ 1,427 $ 1,751 $ 521
Extraordinary item from early
extinguishment of debt less taxes of $154 (312) 0 0 0 0
Net income $ 2,811 $ 1,696 $ 1,427 $ 1,751 $ 521
======== ======== ======== ======== ========
Basic EPS
Income (loss) before extraordinary
Item $ 0.56 $ 0.30 $ 0.26 $ 0.32 $ 0.09
Extraordinary item (0.06) 0 0 0 0
-------- -------- -------- -------- --------
Net income (loss) $ 0.50 $ 0.30 $ 0.26 $ 0.32 $ 0.09
======== ======== ======== ======== ========
Diluted EPS
Income (loss) before extraordinary
Item $ 0.50 $ 0.28 $ 0.24 $ 0.30 $ 0.09
Extraordinary item (0.05) 0 0 0 0
-------- -------- -------- -------- --------
Net income $ 0.45 $ 0.28 $ 0.24 $ 0.30 $ 0.09
======== ======== ======== ======== ========
Weighted average number of
Shares outstanding
Basic 5,638 5,615 5,579 5,514 5,514
Diluted 6,238 6,058 6,032 5,805 5,514
As of December 31
(in thousands)
BALANCE SHEET DATA 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net working capital $ 8,150 $ 5,787 $ 8,179 $ 9,536 $ 8,831
Total assets 31,367 27,232 29,341 31,377 30,775
Total bank debt (1) 4,878 4,034 8,705 12,968 15,117
Stockholders' equity 15,418 15,956 14,289 12,758 11,076
(1) Includes discount of $0 at December 31, 2001, $403 at December 31,
2000, $649 at December 31, 1999, $832 at December 31, 1998 and $1,064
at December 31, 1997.
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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 the Notes
thereto included elsewhere herein.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note 1
in the Notes to the Consolidated Financial Statements. Note that our preparation
of this Annual Report on Form 10-K requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our financial statements, and
the reported amounts of revenues and expenses during the reporting period. There
can be no assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as
amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. We derive our
revenue from two primary sources: (1) product sales from CD's, cassettes, or
books; and (2) copyright revenue from third-party use of our product masters and
song catalog.
Revenue from product sales is generally recognized when delivery has
occurred and at the time title passes to the customer. For product sales
direct-to-consumers that allow a trial or acceptance period, title is not deemed
to have passed nor revenue recognized until the acceptance periods have expired.
Generally, these acceptance periods are fifteen days after receipt of product.
Provisions for sales returns and allowances are made in the period in which the
related products are shipped or title passes based on estimates derived from
historical data. The allowance represents the gross sales price and is recorded
in the period in which the related products are shipped. The returns allowance
is presented, along with the allowance for doubtful accounts, as a reduction of
accounts receivable in the accompanying financial statements.
Revenue earned from licensing the use of songs or product masters in
the Company's song catalogs is generally recognized as payments are received
from licensees. If the Company has information related to the licensed use of
songs that would result in the revenue being fixed and determinable, and
collection reasonably assured, then revenue is recognized in the periods in
which the license revenue is earned.
ALLOWANCES FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period.
Specifically, our management must make estimates of potential future
product returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand and
acceptance of our products when evaluating the adequacy of the sales returns and
other allowances. Significant management judgments and estimates must be made
and used in connection with establishing the sales returns and other allowances
in any accounting period. Material differences could result in the amount and
timing of our revenue for any period if management made different judgments or
utilized different estimates.
Similarly, our management must make estimates of the uncollectability
of our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad
9
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the
amount and timing of expense recorded if management made different judgments or
utilized different estimates.
Our accounts receivable balance at December 31, 2001 was $5.4 million,
net of allowances for returns of $1.2 million and net of allowances for doubtful
accounts of $600,000.
PRODUCT MASTERS
Product masters, which include sound and video 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,
not to exceed a three year period. Management periodically reviews the product
masters amortization rates and adjusts the rate based on management's estimates
for future sales. In conjunction with such analysis, any amounts that do not
appear to be fully recoverable are charged to expense during the period the loss
becomes estimable. 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. A significant portion of these product master costs
are capitalized costs of the Company's resources, both personnel and equipment
related, that can be primarily associated with the creation of the product
master. Because consumer tastes, which are unpredictable and constantly
changing, primarily determine the commercial success of any work, estimates must
be made regarding future sales. Changes in management's judgment or estimates
could result in different amortization rates.
Our product masters balance at December 31, 2001 was $3.5 million, net
of accumulated amortization of $15.9 million.
ADVANCE ROYALTIES AND ROYALTIES PAYABLE
Royalties earned by publishers, authors, producers, songwriters and
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/author to whom the advance is made demonstrates
such amounts will be recoverable from future royalties to be earned by the
artist/author. Such capitalized amounts are included as a component of Other
Current Assets 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 advance
royalties totaled $1.2 million at December 31, 2001. The Company expects that
any royalty advances will be recouped over future sales.
Royalties payable to publishers, authors, producers, songwriters and
artists from the related product sale or from the related copyright revenues are
recorded in the period in which the revenue is recognized. Royalties payable are
reduced for the estimated royalties that will not be paid due to product returns
and bad debts based on historical experience. Royalty payments are generally
made on a quarterly basis, 45 days after the end of a quarter. The amount of
royalties payable totaled $4.3 million at December 31, 2001.
OVERVIEW
The Company is a media/communications company that produces, publishes
and distributes Christian music, books and related products. Integrity's music
product formats include cassettes, compact discs, videos, DVD's and printed
music. The Company produces Praise and Worship music in different musical styles
for specific audiences such as children's music, gospel music for the
African-American audience, youth music and live worship music for adult
audiences. 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 are those in
which the artist is the focal point. Some of the Company's concept product lines
are Hosanna! Music(R), Urban Praise(R), FairHope Records(R), Songs4Worship(R)
and Just-For-Kids(R). The Company has several artists under contract, including
leaders in Christian music such as Don Moen, Ron Kenoly, Paul Wilbur, Tommy
Walker, Gary Oliver, Darrell Evans and Paul Baloche. In addition to audio
recordings, Integrity produces Christian music video and DVD products, printed
music such as songbooks and sheet music, books and software. The Company has
determined that its reportable segments are those that are based on the
Company's
10
distribution channels. These distribution channels are Retail, Direct to
Consumers, International and Other channels. The Retail channel primarily
represents sales to Christian retailers through Word, special event sales, sales
of choral products and sales to the general market through Sony Music
Entertainment and its subsidiary Epic Records. Direct-to-Consumers primarily
represents sales from direct mail programs but also includes Internet sales,
television sales and sales of 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 176 countries. All transactions with foreign
entities, whether they are shipped from the United States or from one of the
Company's three subsidiaries in Singapore, the United Kingdom and Australia, are
reported in this segment. Christian retailers 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:
2001 2000 1999
------ ------ ------
Direct-to-Consumer 41.7% 30.9% 27.8%
Retail Markets 47.1% 50.1% 49.2%
International 11.2% 14.5% 16.0%
Other 12.7% 14.2% 14.9%
Eliminations (12.7%) (9.7%) (7.9%)
The Direct-to-Consumer segment, as a percent of total sales, increased
largely due to the sales to Time Life for the Songs4Worship continuity program.
As a result, the Retail, International and Other segments decreased as a percent
of total sales, although net sales in these segments increased for the year as
compared to 2000.
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 consolidated operating results expressed
as a percentage of net sales for the periods indicated and the percentage change
in such operating results between periods.
Percentage of Net Sales
Year Ended December 31
2001 2000 1999
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 53.7% 52.2% 49.1%
Gross Profit 46.3% 47.8% 50.9%
Marketing and Fulfillment
Expenses 18.1% 20.3% 23.0%
General and Administrative
Expenses 20.8% 20.6% 21.5%
Income from operations before
taxes and minority interest 6.8% 4.8% 4.3%
THE YEAR ENDED DECEMBER 31, 2001 ("2001") COMPARED TO THE YEAR ENDED DECEMBER
31, 2000 ("2000")
Net sales increased 36.9% to $71.0 million in 2001 from $51.8 million
in 2000. The increases were mainly attributable to increases in the
Direct-to-Consumer and Retail Market segments. Major new releases in 2001
included WoW Worship Green and various releases of the Songs4Worship series. In
2001, new products accounted for 3.9 million units, or 29.1% of the total units
sold. The new products released in 2001 featured several of Integrity's
best-selling artists such as Paul Wilbur, Paul Baloche, Ron Kenoly and Don Moen.
Three of the best selling albums of the year were Songs4Worship "Shout To The
Lord," Songs4Worship "Be Glorified" and WoW Worship (Green). All three of the
albums are compilations of the "best" Praise and Worship songs. The WoW albums
were created in partnership with two other Christian Praise and Worship song
providers. Songs4Worship is a continuity series of Praise and Worship
compilations developed in partnership with Time Life Music. According to Time
Life Music, the Songs4Worship continuity
11
series, released in the fourth quarter of 2000, "generated the strongest initial
response for a music product launch in Time Life Music's history." Over 1
million consumers joined Time Life Music's continuity series that was advertised
on mainstream television in the United States. Time Life Music spent the
equivalent of $30 million in television advertising for this series. Due to the
success of the Songs4Worship series and the WoW albums, substantial progress was
made in 2001 in broadening the overall market for Praise and Worship music. As
the leader in this genre, Integrity should benefit from this increased exposure.
Due primarily to the success of Time Life Music's Songs4Worship continuity
program, sales in the Direct-to-Consumer segment increased 84.8% to $29.6
million in 2001 from $16.0 million in 2000. Due to the retail release of the
Songs4Worship albums, sales in the Retail segment increased 28.7% to $33.4
million in 2001, from $26.0 million in 2000. Total WoW sales were $6.5 million
in 2001 as compared to $7.5 million in 2000. Revenues in the International
segment increased 5.8% to $7.9 million in 2001 from $7.5 million in 2000, due
primarily to the release of the Songs4Worship series in Australia and New
Zealand. Other International divisions and subsidiaries were impacted negatively
due to local competitive pressures and declining economic conditions in their
areas, especially Singapore and Latin America. Management expects these
conditions to continue in 2002. Revenues in the Other segment increased 23.3% to
$9.0 million in 2001, from $7.3 million in 2000, due primarily to additional
song copyright royalties generated from the increase in product sales and third
party use. Due primarily to the increase in sales, bad debts and returns were
$6.7 million in 2001, compared to $4.8 million in 2000.
Management does not expect the level of success of the Songs4Worship
series to be as substantial in 2002 as it was in 2001. Revenue in 2002 from this
series is projected to be approximately 50% of the 2001 numbers. However, the
Company and Time Life have been in discussions concerning new project ideas and
various line extensions, and several new products are scheduled for release in
2002. In addition, the partnership agreement that resulted in the development
and release of the three WoW Worship albums is still in place, and the Company
will continue to sell these albums. However, the Company does not expect to
produce any new WoW Worship albums beyond the original three.
Gross profit increased 32.8% to $32.8 million in 2001 from $24.7
million in 2000, due primarily to the increases in revenue discussed previously.
Gross profit as a percentage of sales was 46.3% and 47.8% for the years ended
December 31, 2001 and 2000, respectively. The decrease in gross profit as a
percentage of sales was primarily due to the Songs4Worship sales to Time Life
and due to an increase in the reserves for excess and obsolete inventory. The
gross margin percentage on sales to Time Life is lower because the Company sells
the product to Time Life at a wholesale price. Additionally, Time Life has no
right of return on products sold to them. The gross profit percentage in the
Direct-to-Consumer segment declined to 42.6% in 2001 from 47.5% in 2000. The
decline is attributable to Songs4Worship sales whose gross margins are lower as
the Company sells the product to Time Life at a wholesale price. The gross
profit percentage in the Retail segment increased to 45.8% in 2001 from 45.2% in
2000, due primarily to the retail releases of the Songs4Worship products. The
gross profit percentage in the International segment increased slightly to 58.2%
in 2001 from 58.0% in 2000. Additionally, reductions in the carrying value of
product masters as a result of management's periodic estimates of the eventual
recoupment of production costs increased to $1,356,000 for the year ended
December 31, 2001, as compared to $992,000 for the year ended December 31, 2000.
These amounts are included in cost of sales but are not specifically allocated
to the segments.
The Company's gross margins are generally higher in the
Direct-to-Consumer segment, where sales are generally at retail value. However,
the Songs4Worship release is sold to Time Life at a wholesale value and
significantly lowers the gross margin for this segment. The Retail segment's
gross margin is also affected by the sales mix of products that we distribute
for third parties and artists products, which generally have lower gross margins
than concept products. Management expects consolidated gross margin percentages
to be higher in 2002 compared to 2001 due to lower sales of the Songs4Worship
series to Time Life.
The following table shows the gross margin by operating segment:
Year Ended December 31
Gross margin 2001 2000
------------ ----- -----
Retail 45.8% 45.2%
Direct-to-Consumer 42.6% 47.5%
International 58.2% 58.0%
Other 7.3% 18.4%
Eliminations (3.4%) (6.2%)
Consolidated 46.3% 47.8%
12
Operating profit in the Direct-to-Consumer segment increased 94.3% to
$5.8 million in 2001 from $3.0 million in 2000 due to the Songs4Worship sales
mentioned earlier. Total gross margins increased 30%, though the mix of
Songs4Worship sales resulted in a decline of the gross margin percentage from
47.6% in 2000 to 42.6% in 2001. Marketing and fulfillment expenses increased 57%
compared to 2000 due to additional direct mail and marketing expenses for the
Company's own Songs4Worship continuity club. As a percentage of sales, marketing
and fulfillment expenses decreased from 20.0% in 2000 to 17.0% in 2001.
Operating profit in the Retail segment increased 61.4% to $7.0 million
in 2001 from $4.4 million in 2000. This increase was due to the success of the
Songs4Worship series in CBA stores and in the general market. Operating profits
from CBA and general market revenues were up 54% and 227% in 2001, respectively,
compared to 2000. Marketing and fulfillment expenses increased 9.0% in 2001
compared to 2000, due to increased revenues. As a percentage of sales, marketing
and fulfillment expenses in the retail segment declined from 24.5% in 2000 to
20.7% in 2001.
Operating profit in the International segment decreased slightly to
$1.6 million in 2001 from $1.7 million in 2000. The success of the Songs4Worship
series in Australia resulted in a 5.7% increase in revenues and a 6% increase in
gross margins for the overall International segment in 2001 compared to 2000.
However, an 8.7% increase in marketing expenses and additional bad debt reserves
for the Latin American market resulted in an overall decline in operating income
in 2001 compared to 2000.
Operating profit in the Other segment decreased $284,000, or 65.7%, in
2001 compared to 2000, due to a combination of factors. Due to increased sales
for the year, copyright revenue and margins increased 22.4% and 20.5%,
respectively, in 2001 compared to 2000. However, additional reserves for excess
and obsolete inventory absorbed by this segment in 2001 resulted in an overall
decline in operating profit compared to 2000.
Marketing and fulfillment expenses increased 22.1% from $10.5 million
in 2000 to $12.8 million in 2001, due primarily to additional direct mail and
marketing expenses incurred in the Company's Songs4Worship continuity club and
the additional fulfillment expenses resulting from increased sales. As a
percentage of sales, the Company's marketing and fulfillment expenses declined
from 20.2% in 2000 to 18.1% in 2001. This decline is because the Company bears
no marketing and fulfillment expenses on Songs4Worship sales to Time Life and
Songs4Worship sales into the general market.
General and administrative expenses increased 37.7% from $10.7 million
in 2000 to $14.7 million in 2001. This increase was primarily the result of
additional personnel costs, increased professional fees, and the start-up
expenses for Integrity Publishers. The increase in personnel costs is due to
strategic additions in headcount for our Vertical and Urban product channels as
well as added resources in the areas of marketing and radio promotion. In
addition, increases in commissions and incentive compensation substantially
increased personnel expenses compared to 2000. Professional fees increased
primarily due to additional focus on investor relations and additional legal
fees for trademark protection matters.
As a result of the above, income from operations increased 48.5% to
$5.3 million in 2001 from $3.6 million in 2000. As a percentage of sales,
operating income increased to 7.4% in 2001 from 6.9% in 2000.
Interest expense decreased to $281,000 in 2001 from $932,000 in 2000.
The decrease was a result of lower average indebtedness in 2001.
In the quarter ended December 31, 2001, the Company and its outside tax
advisors undertook an extensive review of all deferred and current tax accounts.
As a result of this evaluation, an additional tax expense of $280,000 was
recorded in the fourth quarter of 2001. The Company recorded a net expense for
income taxes during 2001 of approximately $1.6 million compared to $600,000 in
2000. During 2001, the Company's effective tax rate was 33.6% (24.1% in 2000),
which reflected the benefit of certain foreign and AMT (alternative minimum tax)
tax credits. On a going-forward basis, the Company expects an effective tax rate
in 2002 of approximately 36%.
THE YEAR ENDED DECEMBER 31, 2000 ("2000") COMPARED TO THE YEAR ENDED DECEMBER
31, 1999 ("1999")
Net sales increased 14.3% to $51.8 million in 2000 from $45.3 million
in 1999. The increases were mainly attributable to increases in the
Direct-to-Consumer and Retail Market segments. Major new releases in 2000
included WoW Worship Orange and Songs4Worship
13
"Shout To the Lord," In 2000, new products accounted for 2.7 million units, or
42.3% of the total units sold. The new products released in 2000 featured
several of Integrity's best-selling artists such as Don Moen, Paul Wilbur,
Lincoln Brewster and Gary Oliver, as well as new Integrity artist Tommy Walker.
Three of the best selling albums of the year were WoW Worship (Blue), WoW
Worship (Orange) and Songs4Worship "Shout To The Lord". All three of the albums
are compilations of the "best" Praise and Worship songs. The WoW albums were
created in partnership with two other Christian Praise and Worship song
providers. WoW Orange (released in 2000) and WoW Blue (released in 1999)
continued to have a very strong market presence. Songs4Worship is a continuity
series of Praise and Worship compilations developed in partnership with Time
Life Music. According to Time Life Music, the Songs4Worship continuity series,
released in the fourth quarter of 2000, "generated the strongest initial
response for a music product launch in Time Life Music's history." In the first
90 days of release, over 500,000 consumers joined Time Life's continuity series.
Due to the success of the Songs4Worship series and the WoW albums, substantial
progress was made in 2000 in broadening the overall market for Praise and
Worship Music. Due primarily to the success of Time Life's Songs4Worship
continuity program, sales in the Direct-to-Consumer segment increased 27.2% to
$16.0 million in 2000 from $12.6 million in 1999. Due to the success of the WoW
Worship albums, sales in the Retail segment increased 16.5% to $26.0 million in
2000 from $22.3 million in 1999. Total WoW sales were $7.5 million in 2000 as
compared to $3.8 million in 1999. Revenues in the International segment
increased 3.8% to $7.5 million in 2000 from $7.2 million in 1999, due primarily
to increases in the Latin American division. Other international divisions and
subsidiaries were impacted negatively by changes in foreign exchange rates and
increased local competitive pressures. Revenues in the Other segment increased
8.9% to $7.3 million in 2000 from $6.7 million in 1999, due primarily to
additional copyright royalties generated from the increase in product sales and
third party use. Bad debts and returns were $4.8 million in 2000 and $5.1
million in 1999.
Gross profit increased 7.3% to $24.7 million in 2000 from $23.1 million
in 1999 due primarily to the increases in revenue discussed previously. Gross
profit as a percentage of sales was 47.8% and 50.9% for the years ended December
31, 2000 and 1999, respectively. The decrease in gross profit as a percentage of
sales was primarily due to increased sales of the WoW albums and the
Songs4Worship sales to Time Life, which have lower margins. The gross profit
percentage in the Direct-to-Consumer segment declined to 47.5% in 2000 from
53.3% in 1999. The decline is attributable to Songs4Worship sales whose gross
margins are lower as the Company sells the product to Time Life at a wholesale
price. The gross profit percentage in the Retail segment declined to 45.2% in
2000 from 48.6% in 1999, due primarily to the increased sales of the WoW albums.
Because the WoW albums were created in partnership with two other record
companies, the Company's margin is lower due to higher royalties. The gross
profit percentage in the International segment declined slightly to 58.0% in
2000 from 58.6% in 1999. Additionally, reductions in the carrying value of
product masters as a result of management's periodic estimates of the eventual
recoupment of production costs increased to $894,000 for the year ended December
31, 2000 as compared to $640,000 for the year ended December 31, 1999. These
amounts are included in cost of sales, but are not specifically allocated to the
segments.
The Company's gross margins are generally higher in the
Direct-to-Consumer segment where sales are generally at retail value. However,
the Songs4Worship release is sold to Time Life at a wholesale value and
significantly lowers the gross margin for this segment. The Retail segment's
gross margin is affected by the sales mix of products that we distribute for
third parties and artists products, which generally have lower gross margins
than concept products.
The following table shows the gross margin by operating segment:
Year Ended December 31
Gross margin 2000 1999
- ------------ ---- ----
Retail 45.2% 48.6%
Direct-to-Consumer 47.5% 53.3%
International 58.0% 58.6%
Other 18.4% 20.5%
Eliminations (6.2%) (2.7%)
Consolidated 47.8% 50.9%
Operating profit in the Direct-to-Consumer segment increased 106% to
$3.0 million in 2000 from $1.5 million in 1999, due to Songs4Worship sales
mentioned earlier and due to lower marketing and fulfillment costs in 2000
versus 1999 in this segment. Though the Songs4Worship sales to Time Life had a
negative impact on Direct-to-Consumer's gross margin as a percentage of sales,
the Company bears no marketing and fulfillment expenses related to this revenue.
Operating profit in the Retail segment increased 2.2% to $4.4 million in 2000
from $4.3 million in 1999. Though retail gross margins rose $0.9 million in 2000
compared to 1999, most of this benefit
14
was offset by increases in retail marketing and fulfillment expenses resulting
from the higher level of sales. As a percentage of sales, marketing and
fulfillment expenses in the retail segment declined to 24.5% in 2000 from 25.5%
in1999. Operating profit in the International segment decreased 9.8% to $1.7
million in 2000 from $1.8 million in 1999. The net decrease is a result of a
slight increase in International's gross margin, offset by larger increases in
applicable general and administrative expenses in 2000 compared to 1999. The
increase in the International segment's general and administrative expenses for
2000 is due to additional expenditures for market development and personnel
additions. The Operating profit in the Other segment decreased $638,000, or
59.6%, due to increases in marketing and fulfillment expenses not charged to
specific segments and due to amounts charged to expense for record masters that
do not appear to be fully recoverable.
Marketing and fulfillment expenses increased 0.9% to $10.5 million in
2000 from $10.4 million in 1999. As a percentage of sales, however, marketing
and fulfillment expenses decreased to 20.3% in 2000 from 23.0% in 1999. The
Company negotiated a reduction in its fulfillment services rate that was
effective for 2000. The aggregate dollar amount of marketing and fulfillment
expenses increased as a result of higher volumes in the Retail segment. These
higher volumes were partially offset by the benefit of a reduction in the
fulfillment services rate being charged. Also offsetting the increase were lower
marketing costs due to fewer direct mail campaigns in the Direct-to-Consumer
segment. The primary reason for the decline as a percent of sales is that
Songs4Worship sales in the Direct-to-Consumer segment bear no marketing or
fulfillment expenses when the Company sells directly to Time Life.
General and administrative expenses increased 9.7% to $10.7 million in
2000 from $9.8 million in 1999. The increase was due to several new positions,
company wide cost of living increases and certain professional fees. Also
included in these amounts is approximately $0.3 million from the International
segment. The additional personnel were needed to support the anticipated growth
of the Company.
As a result of the above, income from operations increased 22.4% to
$3.6 million in 2000 from $2.9 million in 1999. As a percentage of sales,
operating income increased to 6.9% in 2000 from 6.4% in 1999.
Interest expense decreased to $0.9 million in 2000 from $1.3 million in
1999. The decrease was a result of lower average indebtedness in 2000. Other
income in 1999 included a favorable insurance settlement of $300,000.
The Company recorded a net expense for income taxes during 2000 of
approximately $600,000 compared to $481,000 in 1999. During 2000, the Company's
effective tax rate was 24.1%, which reflected the benefit of certain foreign and
AMT (alternative minimum tax) tax credits. The effective rate in 1999 was 24.5%,
which reflected the benefit of a $180,000 reduction in the valuation allowance
against deferred taxes.
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 of product masters
to build the Company's product master library and debt service. It is from these
product masters that the Company's products are duplicated and distributed to
customers. The Company believes that its working capital and funds available
under its credit facility will be sufficient to fund its operating and capital
requirements for the fiscal year ending December 31, 2002 and beyond.
Cash generated from operations totaled $13.5 million, $8.9 million and
$8.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The increases from 2000 to 2001 and 1999 to 2000 resulted primarily from
improved operating results.
Investing activities used $4.2 million, $3.9 million and $3.1 million
of cash in 2001, 2000 and 1999, respectively. Capital expenditures totaled $0.9
million, $0.8 million and $0.7 million for the years ended December 31, 2001,
2000 and 1999, respectively. During 2001, 2000 and 1999, capital expenditures
were primarily for computer equipment and general improvements on the Company's
corporate headquarters. The Company also invested $3.3 million, $4.1 million and
$3.4 million in new product masters during 2001, 2000 and 1999, respectively.
The Company expects its investments in product masters during 2002 to remain
relatively consistent with 2001 levels. However, the Company has plans to
complete its corporate campus in Mobile, Alabama in 2002 at a capital cost of
approximately $5.5 million. These plans include the completion of a new building
15
and the expansion of parking facilities. Construction is expected to begin in
early summer 2002, with occupancy in late 2002 or early 2003.
During the fourth quarter of 1999, the Company sold its Animation Video
masters at book value for $2 million. The Company received payment of $1 million
during fourth quarter 1999, with the remaining $1 million 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 financing agreement with Bank Austria in effect through
April 25, 2001 included a revolving credit facility and a term loan that were
payable through August 2002. As part of this agreement, Bank Austria held
818,897 warrants with an exercise price of $1.875 that were exercisable into the
Company's Class A common stock and would expire in 2006. On April 25, 2001, the
Company entered into a new $20 million, five-year secured credit facility with
LaSalle Bank N.A. The related credit agreement includes a $6 million line of
credit and a $14 million term loan. Through this new credit facility, the
Company has repaid in full all debt under its previous credit facility with Bank
Austria. In connection with the early extinguishment of the previous facility,
the Company has recorded a $312,000 charge related to the write-off of
unamortized financing costs. In addition, on September 26, 2001, the Company
repurchased the 818,897 warrants from Bank Austria for approximately $3.4
million in cash.
At December 31, 2001, there was no balance outstanding under the new
line of credit and $4.9 million outstanding under the term loan with LaSalle
Bank N.A. At December 31, 2000, there was $874,000 outstanding under the
revolving credit facility and $3.6 million outstanding under the term loan with
Bank Austria. At the Company's option, the LaSalle loan carries an interest rate
of the bank's base rate plus a margin ranging from 0%-.5% or LIBOR plus a margin
ranging from 2.25%-3.0%. The actual margin is a function of the Company's
leverage ratio as calculated quarterly. At December 31, 2001 the balance due on
the LaSalle loan carried an interest rate of 4.75%. During the years ended
December 31, 2001, 2000, and 1999, the Company made net payments of $2.1
million, $4.9 million, and $4.4 million, respectively, under such agreements.
At December 31, 2001, the Company had available borrowings from the
LaSalle facility of $6.0 million under the line of credit and $4.5 million under
the term loan. Of the $14.0 million initial term facility, $3.0 million was used
for the pay-off to Bank Austria, $3.4 million was used for the warrant
repurchase, and $3.1 million expired, leaving $4.5 million available at December
31, 2001. The $3.1 million portion expired unused on December 19, 2001, after
extension of the original expiration date of October 22, 2001, due to time and
use restrictions as detailed in the original credit agreement. The Company is
currently in negotiations with LaSalle to reinstate a portion of this expired
facility. The Company's minimum payments due in 2002 related to its borrowings
are $2.0 million, however, the Company may elect to make additional payments.
The loan with LaSalle Bank N.A. carries an interest rate of 4.75%, and
the Company is in compliance with all debt covenants.
During 2001, the Company paid $250,000 as a distribution to "The
Celebration Hymnal" joint venture partner.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 141 (SFAS 141), Business
Combinations, and Statement No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. SFAS 141 supercedes APB 16, Business Combinations, and requires the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS 142 supercedes APB 17, Intangible Assets and primarily requires
that goodwill and indefinite lived intangible assets will no longer be amortized
and will be tested for impairment at least annually at a reporting unit level.
SFAS 142 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 141 had no effect, and the adoption of SFAS 142 is not expected
to have a material affect, on the Company's reported results of operations,
financial position or cash flows because the Company has not entered into such a
transaction. However, should the Company do so in the future, the Company will
comply with the provisions of FAS 141 and FAS 142.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires that obligations associated with the
retirement of a tangible long-
16
lived asset be recorded as a liability when those obligations are incurred, with
the amount of the liability initially measured at fair value. SFAS 143 will be
effective for financial statements for fiscal years beginning after June 15,
2002. Adoption of this statement is not expected to have a material impact on
the Company's reported results of operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30 (APB 30),
Reporting Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business. SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value less cost to
sell. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and, generally, its provisions are to be
applied prospectively. Adoption of this statement is not expected to have a
material impact on the Company's reported results of operations, financial
position or cash flows.
In November 2001, the FASB's Emerging Issues Task Force reached a
consensus on EITF Issue 01-09, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products," which is a codification
of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a
vendor to a customer or reseller of the vendor's products is a reduction in the
selling prices of the vendor's product and, therefore, should be characterized
as a reduction of revenue when recognized in the vendor's income statement which
could lead to negative revenue under certain circumstances. Revenue reduction is
required unless the consideration related to a separate identifiable benefit and
the benefit's fair value can be established. This issue is to be applied
retroactively in the first fiscal quarter beginning after December 15, 2001.
Adoption of this statement is not expected to have a material impact on the
Company's reported results of operations, financial position or cash flow.
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. 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.
RISK FACTORS
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for Christian music, books and related products are highly
competitive. We face competition from other record companies, music publishers,
book publishers, entertainment companies and multimedia companies that seek to
offer recorded music, video products, software, printed music and books to the
public. Many of these competitors, as well as a number of potential new
competitors, have significantly longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we. This provides them with the ability
to launch more new products, spend more on marketing those products, and pay
more to artists, authors and songwriters for new music, book manuscripts and
songs. Our ability to compete in this market depends largely on:
- The skill and creativity of our employees and their
relationships with artists,
- Our ability to recruit and retain new and established artists,
songwriters, authors and distributive relationships, - The
expansion and utilization of our catalog,
- The acquisition of licenses to enable us to create compilation
packages,
- The effective and efficient distribution of our products, and
- Our ability to build upon and maintain our reputation for
producing, licensing, acquiring, marketing and distributing
high quality Christian media products.
In addition, the future success of our sales and marketing efforts
through the Internet will be affected by existing competition and by additional
entrants to the electronic commerce market.
17
OUR BUSINESS IS SUBJECT TO CONSTANTLY CHANGING CONSUMER TASTES.
Our products consist of recorded music, video productions, books and
printed music. Each music or video recording, book or printed product is an
individual artistic work. The commercial success of a music or video recording,
book or printed product depends on consumer taste, the quality and acceptance of
competing offerings released into the marketplace at or near the same time, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions and other tangible and intangible factors, all of
which can change quickly. Accordingly, there can be no assurance as to the
financial success of any particular product, the timing of such success, or the
popularity of any particular artist.
Our future success depends on our ability to continue to develop
recorded music, videos, printed music and other content that is interesting and
engaging to our target audience. If our audience determines that our content
does not reflect its tastes, then our audience size could decrease, which would
adversely affect our results of operations. Our ability to develop compelling
content depends on several factors, including the following:
- quality of our editorial staff;
- technical expertise of our production staff;
- access to worship leaders; and
- access to songwriters
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. 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 a multi-channel distribution system
comprised of:
- direct-to-consumer sales;
- retail sales;
- international, and
- license arrangements.
The direct-to-consumer channel primarily represents sales from direct
mail programs such as our continuity clubs, direct response television to Time
Life Music, Internet sales and sales directly to churches, including through the
Company's hymnal joint venture. Members of a continuity club receive monthly
mailings containing a feature recording, which they may then accept and pay for
or return within a specified time. 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.
In addition, our results could also be affected if Time Life Music were
to reduce its marketing efforts for the Songs4Worship continuity series on
television, or if the consumer popularity of the Songs4Worship products were to
decline.
We also sell our products through the Internet through our websites
www.integritymusic.com and www.songs4worship.com. Revenues from these sites are
not currently a significant part of our business. The future success of on-line
sales and marketing efforts cannot be adequately determined at this time,
particularly due to the short history of the
18
electronic commerce market. Results will also be affected by existing
competition and by additional entrants to the market, many of whom may have
substantially greater resources than we.
Currently, we rely on Word's sales force to perform Christian retail
market sales functions for us pursuant to a contract with them that extends
through January 2004. In addition, we recently concluded an important global
marketing and distribution agreement with Sony Music Entertainment and its
subsidiary Epic Records for the distribution of our releases in the general
retail markets.
Our International area is dependent on our subsidiaries and a network
of independent distributors and exporters reaching markets in 176 countries.
Our retail and international distribution channels rely 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, the failure by any of these parties to fulfill their
duties effectively and efficiently will immediately and adversely affect our
results of operations.
Should we encounter difficulty with our existing distribution methods,
or be unable to further develop our distribution systems successfully in the
future, our business, results of operation and financial condition may be
materially adversely affected.
BECAUSE SPENDING ON OUR PRODUCTS IS DEPENDENT ON DISCRETIONARY CONSUMER
SPENDING, WE ARE SUSCEPTIBLE TO FLUCTUATIONS IN GENERAL ECONOMIC CONDITIONS.
We believe that revenue from sales of recorded music, video products,
software, printed music and books are dependent on discretionary consumer
spending. Our revenue will therefore be subject to fluctuations based upon
general economic conditions in the United States and the foreign countries in
which we do business. If there is a general economic downturn or recession in
the United States or in such foreign countries, general consumer spending in
these markets likely would decline, and our revenues may decrease as a result.
WE DEPEND ON THE CONTINUED POPULARITY OF CHRISTIAN MUSIC.
We produce records, video productions and printed music in the
Christian music segment of the industry. Our artists are all in this segment of
the market. Although we believe that this sector will continue to grow, consumer
taste is unpredictable and constantly changing. If tastes move away from this
type of music and we do not develop any alternatives, we may not be able to sell
enough recordings to be profitable.
WE MAY HAVE DIFFICULTY ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS.
We consider our copyrights, trademarks and other similar intellectual
property to be a valuable part of our business. To protect our intellectual
property rights, we rely upon copyright and trademark laws, as well as
confidentiality agreements with our employees and consultants. The decreasing
cost of electronic equipment and related technology, however, has made it easier
to create unauthorized versions of audio and audiovisual products such as
compact discs, videotapes and DVDs. A substantial portion of our revenue comes
from the sale of audio and audiovisual products potentially subject to
unauthorized copying. Similarly, advances in Internet technology, such as
peer-to-peer and MP3 technology, as well as the emergence of file-sharing
services, have increasingly made it possible for computer users to share audio
and audiovisual information without the permission of the copyright owners and
without paying royalties to holders of applicable intellectual property or other
rights. These developments may hinder our ability to sell our products through
traditional retail outlets, and there can be no assurance that the application
of existing law will provide sufficient protection from misappropriation or
infringement of our intellectual property rights. There can also be no assurance
that third parties will not claim infringement by us with respect to others'
current or future intellectual property rights. If we were to fail to develop
effective means of protecting our intellectual property or entertainment-related
products and services, or to obtain appropriate relief through the judicial
process or the complete enforcement of judicial decisions issued in our favor in
the event our rights were to be violated by third parties, our results of
operations and financial position would likely suffer.
19
PORTIONS OF OUR BUSINESS ARE DEPENDENT ON CROSS-LICENSING ARRANGEMENTS.
We license the rights to certain recordings and compositions from third
parties for recording and re-recording of music to produce compilations and to
expand our catalog. We also seek to license the rights to our recordings and
compositions to third parties for a royalty or a flat fee. These cross-licensing
arrangements are generally made possible by existing industry practices based on
reciprocity. If these practices change, we cannot assure that we will be able to
obtain licenses from third parties on satisfactory terms, or at all, and our
business, financial condition and operating results, particularly with respect
to compilation products, could be materially and adversely affected.
WE MAY NOT BE ABLE TO PREVENT THIRD PARTIES FROM USING OUR DOMAIN NAMES, WHICH
COULD DECREASE THE VALUE OF THESE DOMAIN NAMES.
Our trademark rights may not be sufficient to prevent third parties
from acquiring or using domain names that infringe or otherwise decrease the
value of our trademarks and domain names. We currently hold the Internet domain
name "integritymusic.com," "songs4worship.com,"as well as various other related
domain names. We do not hold the domain names "integrity.com", "integrity.org"
or "integrity.net." Domain names generally have been regulated by the Commerce
Department through a contract with Network Solutions, Inc., a company that has
exclusively administered the so-called top-level domain names ending in ".com,"
".net" and ".org." We expect that the regulation of domain names in the United
States and in foreign countries will continue to evolve and change. For example,
the Commerce Department appointed the nonprofit Internet Corporation for
Assigned Names and Numbers (ICANN) to further privatize the administration of
domain names and to address regulatory issues, including the appointment of
additional domain name registrars and the adoption of new domain name dispute
policies. The ICANN recently has appointed several new domain name registrars
who will sell and administer new domain names, such as the ".biz" and ".info"
domains, and the effect this will have on the regulation of domain names is
uncertain. Internet regulatory bodies also could establish additional top-level
domains or modify the rights of current holders of domain names. As a result,
the value of the "integritymusic.com" domain could be diluted and decrease the
number of visitors to our websites, and we may not acquire or maintain the
"integritymusic.com" domain name in all of the countries in which we intend to
conduct business.
OUR RESERVES FOR PRODUCT RETURNS MAY PROVE INADEQUATE.
Most of our products are sold on a returnable basis, which is standard
music and book publishing industry practice. We set reserves for future returns
of products estimated based on return policies and experience. We expect that
our actual return experience will be within standard industry parameters and our
historical experience. However, we may in the future experience an increase in
returns over our established reserves. If this occurs our business, results of
operations and financial condition could be materially adversely affected.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE MARKET PRICE FOR
OUR CLASS A COMMON STOCK TO BE VOLATILE.
Our results of operations are subject to quarterly fluctuations and
seasonal variations. In particular, our revenues are affected by end-of-the-year
holiday sales. In accordance with industry practice, we record revenues for
music products when the products are shipped to retailers. In anticipation of
holiday sales, retailers purchase products from us prior to December. In
addition, changes in the timing of new product 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. For example, if releases planned for the
peak holiday season are delayed, our operating results could be adversely
affected, which could in turn cause the price of the Class A Common Stock to
fluctuate.
INCREASES IN THE COSTS OF CD'S OR CASSETTES COULD HARM OUR PROFITABILITY
Increases in the costs of producing a CD or cassette due to increases
in petroleum prices or other costs associated with the manufacture and
duplication of CD's or cassettes could adversely affect our profitability.
Although we do not manufacture these products internally, any
20
significant price increase to our suppliers could result in higher CD or
cassette prices to Integrity. We may not be able to pass on these price
increases to our customers.
INCREASES IN MAILING, PAPER, PRINTING AND DELIVERY COSTS COULD HARM OUR
PROFITABILITY.
Increases in postal rates, as well as in the costs of paper, printing
and delivery, could adversely affect our direct response programs. We generally
ship orders by third class mail with the United States Postal Service, and we
rely heavily on discounts from the basic postal rate structure, such as special
rates for bulk mailings, sorting by zip code and carrier routes. Any increase in
postal rates, paper, printing or delivery costs could adversely affect our
profitability.
WE DEPEND ON CERTAIN 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. Although we have employment agreements with
some of our senior executives, they could still choose to leave Integrity at any
time. If they did, we would have difficulty replacing them with individuals who
had an equal level of experience in the Christian music and related products
industries. This could adversely affect our daily operations, creative
development and financial performance.
OUR NEW BOOK PUBLISHING BUSINESS HAS A LIMITED OPERATING HISTORY.
Our book publishing subsidiary, Integrity Publishers, Inc., has a
limited operating history on which to base an evaluation of its business and
prospects, having only commenced its initial operations in August, 2001. The
prospects for our book publishing operation must be considered in light of the
risks, difficulties and uncertainties frequently encountered by businesses in an
early stage of development, particularly operations in industries involving many
larger and more established competitors. These risks include our ability to:
- publish compelling and unique Christian book content;
- successfully market and sell our books; and
- effectively develop new and maintain existing relationships
with book distributors and other persons with which we do
business.
The ability to attract successful and highly qualified authors and
illustrators is critical to our future success. Competition for this type of
resource is intense, and authors and illustrators have many options in terms of
publisher affiliation. There can be no assurance that we will be able to develop
relationships with or retain superior-quality authors and illustrators, and any
failure to do so could adversely affect our operating results.
WE MAY BE SUBJECT TO LIABILITY FOR MISUSE OF USERS' PRIVATE INFORMATION.
It is our policy that we will not willfully disclose any individually
identifiable information about any customer to a third party without the
customer's consent unless required by law. This policy is available to customers
when they initially register on integritymusic.com website and is also easily
accessible on our websites. Despite this policy, if third persons were able to
penetrate our network security or otherwise misappropriate, or if we
inadvertently disclose, our customers' personal information or credit card
information, we could be subject to liability. These liabilities could include
claims for unauthorized purchases with credit card information, impersonation or
other similar fraud claims. They could also include claims for other misuses of
personal information, such as for unauthorized marketing purposes. These claims
could result in litigation which may cause us to incur substantial costs. We
could incur additional expenses if new laws or regulations regarding the use of
personal information are introduced or if these authorities choose to
investigate our privacy practices. While we have implemented and intend to
implement additional programs designed to enhance the protection of the privacy
of our customers, these programs may not conform with laws or regulations that
are adopted.
INTEGRITY IS CONTROLLED BY THE COLEMAN FAMILY.
Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 5,100 shares of Class A Common Stock
and all 3,435,000 shares of Class B
21
Common Stock outstanding. This represents approximately 94.0% 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.
LIMITED PUBLIC TRADING OF OUR CLASS A COMMON STOCK MAY RESULT IN INCREASED PRICE
VOLATILITY.
Although our Class A Common Stock is traded on the Nasdaq National
Market, the volume of shares traded during any particular period has
historically been low. Any sale or purchase of our Class A Common Stock in the
public markets that is large in relation to recent trading volumes for the Class
A Common Stock may therefore disproportionately affect the market price of our
shares. We cannot assure you that a more active and liquid market for the shares
of Class A Common Stock will develop.
OUR 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 of our Class B Common Stock could
adversely affect the market price of our Class A Common Stock. These
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
might therefore be deprived of an opportunity to sell their shares at a premium
over the then prevailing market price.
THE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW 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 Section 203 of the
Delaware General Corporation Law, which may render more difficult a change in
control of Integrity.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to fluctuations in interest rates
as they pertain to the Company's borrowings under its credit facility. As of
April 25, 2001, the Company paid interest on borrowings at either LaSalle's base
rate or an Adjusted LIBOR, plus an Interest Rate Margin. The Interest Rate
Margin is based upon the Leverage Ratio as of the last day of a fiscal quarter.
Prior to April 25, 2001, under the Bank Austria credit facility, the Company
paid interest on borrowings at either the lender's base rate plus 0.75%, or
LIBOR plus 2%. Prior to September 2000, the interest rate was the bank's base
rate plus 1 1/2% or LIBOR plus 3%. In the event that interest rates were to
increase 100 basis points, the Company's interest expense would increase and
income before income tax would decrease by $48,000, assuming current debt levels
are maintained. (This amount is determined solely by considering the impact of
the hypothetical change in the interest rate on the Company's borrowing cost
without consideration of other factors such as actions management might take to
mitigate its exposure to interest rate changes.)
The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging
transactions in order to modify the risk from these foreign currency exchange
rate and commodity price fluctuations. The Company also does not use financial
instruments for trading purposes and is not a party to any leveraged
derivatives.
ITEM 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.
23
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 Integrity" and "Other Matters - Section 16(a) Beneficial
Ownership Reporting Compliance" in Integrity's 2002 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Proposal I - Election of Directors -
Executive Compensation" in Integrity's 2002 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 Integrity's Common Stock; Shares
Held by Directors and Executive Officers" in the Company's 2002 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 2002 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
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants 25
Consolidated Balance Sheets at December 31, 2001 and 2000 26
Consolidated Statement of Operations for the three years ended December 31, 2001 27
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December
31, 2001 28
Consolidated Statement of Cash Flows for the three years ended December 31, 2001 29
Notes to Consolidated Financial Statements 30
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and Qualifying Accounts and Reserves for the three years ended
December 31, 2001
24
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of Integrity Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 24 present fairly, in all material
respects, the financial position of Integrity Incorporated and its subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under item 14(a)(2) on page 24 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 auditing standards generally
accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Atlanta, GA
March 15, 2002
25
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
ASSETS 2001 2000
-------- --------
Current Assets
Cash $ 6,854 $ 801
Trade receivables, less allowance for returns and doubtful accounts of $1,788
and $1,241 5,389 5,929
Other receivables 451 191
Inventories 4,342 5,033
Other current assets 3,512 2,510
-------- --------
Total current assets 20,548 14,464
Property and equipment, net of accumulated depreciation of $5,228 and $4,519 4,243 3,950
Product masters, net of accumulated amortization of $15,946 and $16,604 3,520 5,626
Other assets 3,056 3,192
-------- --------
Total assets $ 31,367 $ 27,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,000 $ 2,188
Accounts payable and accrued expenses 3,683 3,090
Royalties payable 4,340 2,920
Other current liabilities 2,375 479
-------- --------
Total current liabilities 12,398 8,677
Long-term debt 2,878 1,846
Other long-term liabilities 70 7
-------- --------
Total liabilities 15,346 10,530
-------- --------
Commitments and contingencies (Note 12)
Minority interest 603 746
-------- --------
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;
2,301,000 and 2,184,000 shares issued and outstanding 23 22
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 12,930 13,857
Unearned compensation (587) (272)
Retained earnings 3,236 2,450
Equity adjustments from foreign translation (218) (135)
-------- --------
Total stockholders' equity 15,418 15,956
-------- --------
Total liabilities and stockholders' equity $ 31,367 $ 27,232
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
26
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Net sales $ 70,958 $ 51,819 $ 45,326
Cost of sales 38,089 27,072 22,268
-------- -------- --------
Gross profit 32,869 24,747 23,058
Marketing and fulfillment expenses 12,815 10,496 10,404
General and administrative expenses 14,729 10,698 9,751
-------- -------- --------
Income from operations 5,325 3,553 2,903
Other expenses (income)
Interest expense, net 281 932 1,292
Other expenses (income) 184 137 (352)
-------- -------- --------
Income before minority interest, taxes and
extraordinary item 4,860 2,484 1,963
Provision for income taxes (1,632) (600) (481)
Minority interest, net of applicable taxes (105) (188) (55)
-------- -------- --------
Net income before extraordinary item $ 3,123 $ 1,696 $ 1,427
Extraordinary item from early extinguishment of debt
less taxes of $154 (312) 0 0
-------- -------- --------
Net income $ 2,811 $ 1,696 $ 1,427
======== ======== ========
Adjustments to determine comprehensive income
Foreign currency translation adjustments (83) (94) 12
--------
-------- -------- --------
Comprehensive income $ 2,728 $ 1,602 $ 1,439
======== ======== ========
Net income per share - Basic - before extraordinary
item $ 0.56 $ 0.30 $ 0.26
Extraordinary item per share - Basic (0.06) 0 0
-------- -------- --------
Net income per share - Basic $ 0.50 $ 0.30 $ 0.26
======== ======== ========
Net income per share - Diluted - before
extraordinary item $ 0.50 $ 0.28 $ 0.24
Extraordinary item per share - Diluted (0.05) 0 0
-------- -------- --------
Net income per share - Diluted $ 0.45 $ 0.28 $ 0.24
======== ======== ========
Weighted average number of shares outstanding (note 1)
Basic 5,638 5,615 5,579
Diluted 6,238 6,058 6,032
The accompanying notes are an integral part of these
consolidated financial statements.
27
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(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
--------- ------ --------- ------- ------------ ---------- -------- ------------ -------
Balance, December 31, 1998 2,079,000 $ 21 3,435,000 $ 34 $ 0 $13,428 $ (673) $ (53) $12,757
Net income 1,427 1,427
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) 13,847 754 (41) 14,289
Net income 1,696 1,696
Issuance of common stock
upon exercise of options 5,000 0 10 10
Amortization of restricted
stock award 55 55
Translation adjustments (94) (94)
--------------------------------------------------------------------------------------------------
Balance, December 31, 2000 2,184,000 22 3,435,000 34 (272) 13,857 2,450 (135) 15,956
Net income 2,811 2,811
Repurchase of stock
warrants (1,438) (2,025) (3,463)
Issuance of restricted stock 50,000 0 (377) 377 0
Issuance of common stock
upon exercise of options 67,000 1 134 135
Amortization of restricted
stock award 62 62
Translation adjustments (83) (83)
--------------------------------------------------------------------------------------------------
Balance, December 31, 2001 2,301,000 $ 23 3,435,000 $ 34 $(587) $12,930 $3,236 $(218) $15,418
==================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
28
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flows from operating activities
Net income $ 2,811 $ 1,696 $ 1,427
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 799 1,034 1,019
Amortization of product masters 5,394 5,397 3,500
Minority interest 105 188 55
Stock compensation 62 55 48
Extraordinary loss on debt extinguishment 466 0 0
Deferred income tax (benefit) provision 385 (390) 420
Changes in operating assets and liabilities
Trade receivables (net) 540 317 (1,170)
Other receivables (260) 120 956
Inventories 691 143 22
Other assets (1,493) (528) 838
Accounts payable, royalties payable and
accrued expenses 2,013 1,799 690
Other current and non current liabilities 1,961 (792) 352
-------- -------- --------
Net cash provided by operating activities 13,474 9,039 8,157
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (912) (849) (716)
Payments for product masters (3,288) (4,056) (3,417)
Proceeds from sale of product masters 0 1,000 1,000
-------- -------- --------
Net cash used in investing activities (4,200) (3,905) (3,133)
-------- -------- --------
Cash flows from financing activities
Net (repayments) borrowings under line of credit 287 (2,290) (975)
Borrowings under term facility 6,378 0 0
Payments under line of credit (1,161) 0 0
Distributions to joint venture partner (250) (400) (510)
Stock warrant repurchase (3,463) 0 0
Proceeds from issuance of stock 135 10 0
Principal payments of long-term debt (5,064) (2,626) (3,473)
-------- -------- --------
Net cash used in financing activities (3,138) (5,306) (4,958)
-------- -------- --------
Effect of exchange rate changes on cash (83) (94) 12
-------- -------- --------
Net increase (decrease) in cash 6,053 (266) 78
Cash, beginning of year 801 1,067 989
-------- -------- --------
Cash, end of year $ 6,854 $ 801 $ 1,067
======== ======== ========
Supplemental disclosures of cash flow information
Interest paid $ 348 $ 913 $ 1,173
Income taxes paid $ 401 $ 1,188 $ 15
Noncash investing activities
Sale of product masters for note receivable $ 0 $ 0 $ 1,000
Issuance of warrants in connection with debt $ 0 $ 0 $ 45
The accompanying notes are an integral part of these
consolidated financial statements.
29
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is a media/communications
company that produces, publishes and distributes Christian music, books and
related products. Integrity's music product formats include cassettes, compact
discs, videos, DVD's and printed music. The Company produces Praise and Worship
music in different musical styles for specific audiences such as children's
music, gospel music for the African-American audience, youth music and live
worship music for adult audiences. Products are sold through two divisions.
Integrity Music sells all music-related products and Integrity Publishers sells
all Christian book products. Products are sold mainly by direct-to-consumer
marketing and wholesale trade methods. A principal direct-to-consumer marketing
method of distribution is continuity programs whereby subscribers receive
products at regular intervals.
Integrity Music Europe Limited was formed in 1988, Integrity 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, the
Company consolidates the venture and Word Entertainment's interest in the joint
venture is presented as minority interest in these financial statements.
Integrity Publishers, Inc. was formed in August 2001 for the purpose of
publishing and distributing Christian books. This division is expected to
publish its first books in the Fall of 2002.
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 generally recognized when delivery has occurred and at the
time title passes to the customer. For product sales direct-to-consumers that
allow a trial or acceptance period, title is not deemed to have passed nor
revenue recognized until the acceptance periods have expired. Generally, these
acceptance periods are fifteen days after receipt of product. Provisions for
sales returns and allowances are made in the period in which the related
products are shipped or title passes based on estimates derived from historical
data. The allowance represents the gross sales price and is recorded in the
period in which the related products are shipped. The returns allowance is
presented, along with the allowance for doubtful accounts, as a reduction of
accounts receivable in the accompanying financial statements.
Revenue earned from licensing the use of songs or product masters in
the Company's song catalogs is generally recognized as payments are received
from licensees. If the Company has information related to the licensed use of
songs that would result in the revenue being fixed and determinable, and
collection reasonably assured, then revenue is recognized in the periods in
which the license revenue is earned.
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.
30
MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct-to-consumer sales. Marketing expenditures that benefit future periods are
capitalized and charged to operations over a period of six months, which
approximates the period during which the related sales are expected to be
realized. Other marketing costs are expensed the first time advertising takes
place. Prepaid marketing costs, including artwork, printing and direct mail
packages, are included in assets in the accompanying financial statements and
approximated $1,271,000 and $814,000 at December 31, 2001 and 2000,
respectively. Marketing costs expensed for the three years ended December 31,
2001, 2000 and 1999 approximated $6,183,000, $4,628,000 and $4,609,000,
respectively.
FULFILLMENT COSTS
Fulfillment expenses are primarily comprised of distribution fees paid
to third party distributors based on a percentage of sales. The services
provided by the third party distributor include sales, fulfillment and storage
of the Company's product for the retail segment. Distribution fees represented
approximately 74.7% of total fulfillment expense for the year ended December 31,
2001. Also included in fulfillment expenses are fees paid to a third party
service provider on a transaction basis for data entry, generation of invoices
and cash processing.
Additionally, in the Direct-to-Consumer segment, the Company completes
the distribution and shipping function internally and includes a separate
surcharge to customers related to this service. These costs, which approximated
$1.0 million for the year ended December 31, 2001, are recorded as a component
of Cost of Sales and the related customer fee is recorded as a component of Net
Sales.
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 and maintenance costs that 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 and video 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 estimable.
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. A significant portion of these product master costs are
capitalized costs of the Company's resources, both personnel and equipment
related, that can be primarily associated with the creation of the product
master.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, an impairment loss would be
recognized. Measurement of an impairment loss for long-lived assets would be
based on the fair value of the asset.
ADVANCE ROYALTIES AND ROYALTIES PAYABLE
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.
31
Such capitalized amounts are included as a component of product masters in the
consolidated balance sheet. Any portion of advances that subsequently appear not
to be recoverable from future royalties are charged to expense during the period
the loss becomes evident. The amount of capitalized advance royalties aggregated
$1,247,000 and $370,000 at December 31, 2001 and 2000, respectively. Royalties
payable are reduced for the estimated royalties that will not be paid due to
product returns and bad debts.
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
that 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 COMMON 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.
FOREIGN CURRENCIES
Assets and liabilities at foreign subsidiaries are recorded based on
their functional currencies, which are their respective local currencies.
Amounts in foreign currencies are translated at the applicable exchange rate at
the balance sheet date using the rate in effect as of the period end. Revenues
and expenses of foreign subsidiaries are translated using the average rates
applicable during the reporting period. The effects of foreign currency
translation adjustments are included as a component of stockholders' equity and
Comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value. The carrying amount of long-term debt approximates fair
value based on current rates of interest available to the Company for loans of
similar maturities.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music, video and
publishing-related products in order to evaluate the ultimate recoverability of
product masters and artist advances. Management periodically reviews such
estimates and it is possible that management's assessment of recoverability of
product masters and artist advances may change based on actual results and other
factors.
32
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires entities to report comprehensive income which
represents the change in equity during a period from non-owner sources and
requires financial statement presentation with the same prominence as net
income. The Company's components of comprehensive income relate solely to
foreign currency translation adjustments and are presented in the accompanying
consolidated statement of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. OTHER CURRENT ASSETS
Other current assets consist of the following:
December 31
(in thousands)
2001 2000
------ ------
Prepaid expenses $ 868 $ 692
Prepaid marketing costs 1,271 814
Royalty advances 1,247 370
Income tax receivable 0 512
Deferred tax assets 79 102
Other 47 20
------ ------
$3,512 $2,510
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31
(in thousands)
2001 2000
------ ------
Land $ 625 $ 625
Buildings and leasehold improvements
2,911 2,837
Data processing and other equipment
3,029 2,284
Studio equipment 1,119 1,083
Furniture and fixtures 1,787 1,640
------ ------
9,471 8,469
Less - accumulated depreciation (5,228) (4,519)
------ ------
$4,243 $3,950
====== ======
Depreciation expense approximated $619,000, $563,000 and $525,000 for
the years ended December 31, 2001, 2000 and 1999, respectively.
33
4. OTHER ASSETS
Other assets consist of the following:
December 31
(in thousands)
2001 2000
------ ------
Music copyrights, net of accumulated
amortization $1,490 $1,665
Deferred tax assets 642 1,004
Loan financing cost 615 236
Cash surrender value of life insurance
225 184
Other 84 103
------ ------
$3,056 $3,192
====== ======
The music copyrights are being amortized over their future estimated
useful lives, which is approximately fifteen years. Accumulated amortization at
December 31, 2001 and December 31, 2000 was approximately $1,143,000 and
$969,000, respectively.
5. DEBT
The Company's financing agreement in effect through April 25, 2001
included a revolving credit facility and a term loan that were payable through
August 2002. On April 25, 2001, the Company entered into a new $20 million,
five-year secured credit facility with LaSalle Bank N. A. The credit agreement
includes a $6 million line of credit and a $14 million term loan. Through this
new credit facility, the Company refinanced its previous credit facility with
Bank Austria Creditanstalt. In connection with the early extinguishment of the
previous facility, the Company recorded a $312,000 charge related to the
write-off of unamortized financing costs. At December 31, 2001, there was $0
outstanding under the line of credit and $4.9 million outstanding under the term
loan with LaSalle Bank N. A. At December 31, 2000, there was $874,000
outstanding under the revolver and $3.6 million outstanding under the term loan
with Bank Austria Creditanstalt. The loan with LaSalle carries an interest rate
of 4.75%.
At December 31, 2001, the Company had approximately $6.0 million of
available funds under the line of credit and $4.5 million available under the
term loan with LaSalle. Of the $14 million initial term facility, $3.0 million
was used for the pay-off to Bank Austria, $3.4 million was used for the warrant
repurchase described below, and $3.1 million expired, leaving $4.5 million
available at December 31, 2001. The $3.1 million portion expired on December 19,
2001, after extension of the original expiration date of October 22, 2001, due
to time and use restrictions as detailed in the original credit agreement.
The Company, in conjunction with the 1996 financing with Bank Austria
Creditanstalt, issued warrants to purchase 805,288 shares of Class A Common
Stock. Each warrant entitled 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 were 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 was 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 were immediately exercisable. The fair value of these warrants,
approximately $45,000, was recorded as additional debt discount. The fair value
of the warrants was determined using the Black-Scholes option-pricing model with
the following assumptions: Dividend yield of 0%, expected volatility of 95%,
risk-free interest rate of 5.5%, and an expected term of 6.5 years. The discount
was amortized to interest expense over the term of the facility. On September
26, 2001, the Company repurchased the 818,897 common stock purchase warrants
from Bank Austria for approximately $3.4 million in cash.
The line of credit and term loan with LaSalle contain restrictive
covenants with respect to the Company, including, among other things,
maintenance of working capital, limitations on the payments of dividends, the
incurrence of additional indebtedness, certain liens and require the maintenance
of certain financial ratios. Substantially all of the Company's assets are
pledged as collateral for these loans.
34
Aggregate principal maturities of long-term debt at December 31, 2001 are as
follows:
Total
Fiscal Year (in thousands)
----------- -------------
2002 $2,000
2003 2,000
2004 878
-------
$4,878
=======
At December 31, 2001, approximately $615,000, net of accumulated
amortization of $87,000, of loan issuance costs are being amortized over the
term of the debt agreements.
6. INCOME TAXES
The components of the provision for income taxes for the three years
ended December 31, 2001 are as follows:
Year Ended December 31,
(in thousands)
2001 2000 1999
------- ------ ------
Current provision
Federal $ 973 $ 861 $ 55
State 274 129 6
------- ------ ------
1,247 990 61
------- ------ ------
Deferred provision (benefit)
Federal 374 (345) 344
State 11 (45) 76
------- ------ ------
385 (390) 420
------- ------ ------
Total provision (benefit) $ 1,632 $ 600 $ 481
======= ====== ======
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:
December 31,
2001 2000 1999
------- ------ ------
Income tax provision at statutory rates $ 1,653 $ 845 $ 667
State tax provision, net of federal taxes 140 59 34
Nondeductible expenses 67 56 15
Foreign tax impacts (144) (260) 0
Other, net 26 (100) (55)
Foreign tax credit (390) 0 0
Change in valuation allowance 0 0 (180)
Deferred tax adjustment 280 0 0
------- ------ ------
Provision of (benefit) for income taxes before
extraordinary item $ 1,632 $ 600 $ 481
======= ====== ======
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.
35
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows (in thousands):
December 31
2001 2000
------- -------
Deferred assets
Net operating loss carryforwards $ 25 $ 16
Reserves for returns and
allowances, net 982 194
Impairment of building and
depreciation 450 349
Stock based compensation 205 0
Write down of product masters 0 265
Hymnal income 0 373
Non compete agreement 211 171
Other 18 86
------- -------
1,891 1,454
------- -------
Deferred tax liabilities
Prepaid marketing expenses (477) (263)
Returns (548) 0
Other (145) (85)
------- -------
(1,170) (348)
------- -------
Net deferred tax asset $ 721 $ 1,106
Current portion (79) (102)
------- -------
Long term portion $ 642 $ 1,004
======= =======
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, 2001 or 2000 as contributions are at the discretion of the
Board of Directors. The Company contributed $91,000 to the Plan during the year
ended December 31, 1999.
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
$144,000, $125,000 and $110,000 during the years ended December 31, 2001, 2000
and 1999, 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
One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $420,000, $385,000
and $276,000 for the three years ended December 31, 2001, 2000 and 1999. Amounts
due to the officer at December 31, 2001 and 2000 approximate $84,500 and
$45,000, respectively. Due from this officer at December 31, 2001 and 2000 was
$26,500 and $10,500, respectively, 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.
In computing operating profits, certain 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 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
36
bookstores, special event sales and sales of choral products through third party
distributors, and sales to the general retail market. The Direct-to-Consumer
channel primarily represents sales from direct mail programs and direct response
television to Time Life, and also includes Internet 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.
Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:
2001 2000 1999
-------- -------- --------
NET SALES
Direct-to-consumer $ 29,594 $ 16,012 $ 12,587
Retail 33,401 25,960 22,280
International 7,942 7,510 7,234
Book publishing 0 0 0
Other 9,045 7,334 6,735
Eliminations (9,024) (4,997) (3,510)
-------- -------- --------
Consolidated $ 70,958 $ 51,819 $ 45,326
======== ======== ========
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Direct-to-consumer $ 5,811 $ 2,990 $ 1,454
Retail 7,041 4,362 4,270
International 1,613 1,656 1,836
Book publishing (554) 0 0
Other 148 432 1,070
Consolidated 14,059 9,440 8,630
General corporate expense 8,918 6,024 5,375
Interest expense, net 281 932 1,292
-------- -------- --------
Income before income taxes and minority interest $ 4,860 $ 2,484 $ 1,963
======== ======== ========
IDENTIFIABLE ASSETS
Direct-to-Consumer $ 1,619 $ 1,712 $ 1,980
Retail 0 0 0
International 3,541 3,126 3,230
Other 1,490 1,665 1,840
General corporate assets 24,717 20,729 22,291
-------- -------- --------
Total assets $ 31,367 $ 27,232 $ 29,341
======== ======== ========
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 that are shared among all segments. The Company does not track
property and equipment usage by segments.
37
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):
2001 2000 1999
-------- -------- --------
NET SALES
United States $ 63,016 $ 44,309 $ 38,092
Europe 2,247 2,136 2,401
Australia 1,209 737 1,174
Asia 944 1,179 1,142
Latin America 1,288 1,478 652
Other 2,254 1,980 1,865
-------- -------- --------
$ 70,958 $ 51,819 $ 45,326
======== ======== ========
IDENTIFIABLE ASSETS
United States $ 27,826 $ 24,106 $ 26,111
Europe 1,967 1,617 1,688
Australia 692 499 629
Asia 882 1,010 913
-------- -------- --------
$ 31,367 $ 27,232 $ 29,341
======== ======== ========
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, 2001 and 2000.
11. STOCK COMPENSATION PLANS
The Company has several stock option plans that provide for the
granting of stock options to officers, employees and non-employee directors.
The 1999 Long-term Incentive Plan (the "1999 LTIP") 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 1999 LTIP is authorized to issue up to 400,000 shares of Class A
Common Stock in connection with such awards. Under the 1999 LTIP, awards may not
be granted at less than the market value at the date of the grant, and vesting
terms are generally five years. At December 31, 2001, there were 397,722 options
outstanding under the 1999 LTIP and there were 2,278 shares available for
issuance.
On November 2, 2001, Integrity's Board of Directors adopted the
Integrity Incorporated 2001 Long-Term Incentive Plan (the "2001 LTIP"). The 2001
LTIP became effective as of its approval by the Board of Directors. The 2001
LTIP permits grants of incentive stock options, non-qualified stock options,
stock appreciation rights, performance shares, restricted stock and other stock
based awards. The Company has reserved for issuance upon the grant or exercise
of awards pursuant to this plan 400,000 shares of authorized but unissued shares
of Class A Common Stock. At December 31, 2001, there were 50,000 shares of Class
A restricted stock outstanding under the 2001 LTIP. If the stockholders approve
the 2001 LTIP at the Company's Annual Meeting of Stockholders in May 2002,
Integrity will make no further awards under the 1999 LTIP.
Prior to the approval of the 1999 LTIP, the Company had the 1994 Stock
Option Plan (the "1994 Plan") for employees and officers. Under the 1994 Plan,
257,027 options were outstanding at December 31, 2001. No further options will
be granted under the 1994 Plan.
The 1994 Stock Option Plan for Outside Directors (the "1994 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. At December 31, 2001, there were 5,000 options outstanding under
the 1994 Directors Plan and there were 11,000 shares available for issuance.
On February 15, 2002, Integrity's Board of Directors adopted the
Integrity Incorporated 2002 Stock Option Plan for Outside Directors (the "2002
Directors' Plan"), subject to approval by the stockholders at the Company's
Annual Meeting of Stockholders in May 2002. Integrity has
38
reserved 60,000 shares of Class A Common Stock for issuance in connection with
options and awards under this plan. This plan would grant 5,000 options to
purchase Class A Common Stock annually to Directors following the annual
meeting. If approved by the stockholders, the 2002 Directors' Plan will become
effective and no further grants will be made under the 1994 Directors' Plan.
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, 2001.
Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan. Awards were granted by the Company's Compensation
Committee and were expressed in a number of units payable only in cash. Vesting
was one-fifth of the units of an award on each anniversary of the date of grant
until vested in full. Participants would have been 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 was 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 were to exceed the fair market value
at the date of grant, compensation expense would be charged to the Company's
statement of operations. As of December 31, 2000, 127,500 awards had been
granted. The Company paid $11,000 and $62,000 related to this plan in 2000 and
1999, respectively. An accrual of $30,000 was recorded as of December 31, 2000
for the difference in the fair market value of the stock between the grant date
and the end of the year. Final distributions under this plan were made in 2001.
No further grants will be made under this Plan.
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 and per share results would have been reduced to the pro forma amounts
indicated below for the years ended December 31, 2001, 2000 and 1999,
respectively.
2001 2000 1999
---------- ---------- ----------
Net income As reported $2,811,000 $1,696,000 $1,427,000
Pro forma $2,598,000 $1,495,000 $1,237,000
Basic EPS As reported 0.50 0.30 0.26
Pro forma 0.46 0.27 0.22
Diluted EPS As reported 0.45 0.28 0.24
Pro forma 0.42 0.25 0.21
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 2001, 2000 and 1999, 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 weighted-average fair value of options granted is $1.94, $1.96 and $1.82 for
the years ended December 31, 2001, 2000 and 1999, respectively. The
weighted-average remaining contractual life for all options outstanding is 5.1
years.
39
The following table summarizes the changes in the number of shares
under option:
EXERCISE PRICE RANGES
Weighted
Total average
shares option
$0.50 $2.01 $5.01 under price per
to$2.00 to $5.00 to $10.00 option share
-------------- ----------- -------------- ----------- ------------
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
Granted 0 131,722 0 131,722 2.87
Exercised (5,000) 0 0 (5,000) 1.75
Forfeited 0 0 (2,000) (2,000) 6.50
-------------- ----------- -------------- -----------
Outstanding at 12/31/00 180,027 537,722 7,000 724,749 2.95
Granted 0 4,000 50,000 54,000 7.30
Exercised (59,000) (7,000) (1,000) (67,000) 2.02
Forfeited 0 (2,000) 0 (2,000) 2.88
-------------- ----------- -------------- -----------
Outstanding at 12/31/01 121,027 532,722 56,000 709,749 3.39
============== =========== ============== ===========
Exercisable at 12/31/01 100,421 218,345 6,000 324,766 2.88
============== =========== ============== ===========
Plan shares available for future grants 363,278
===========
The Company also had 818,897 warrants outstanding at December 31, 2000
at an exercise price of $1.875. These warrants were issued in 1996 and 1999 with
an estimated fair value at time of issuance of $1,438,000. On September 26,
2001, the Company repurchased these warrants from Bank Austria for approximately
$3.4 million in cash.
During 2001 and 1999, the Company issued 50,000 and 100,000 shares of
restricted common stock, respectively, to two officers of the Company. These
shares had a fair value of $377,000 and $375,000, respectively, at time of
issuance. The shares vest on the seventh anniversary of the dates of grant.
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and other claims that 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 are
not significant.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001
Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Net sales $20,894 $16,883 $17,926 $15,255
Gross profit 8,274 7,818 8,560 8,217
Net income 1,309 505 668 329
Basic earnings per share $ 0.23 $ 0.09 $ 0.12 $ 0.06
Diluted earnings per share $ 0.21 $ 0.08 $ 0.10 $ 0.05
2000
Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Net sales $13,897 $12,204 $12,224 $13,494
Gross profit 6,548 5,506 6,263 6,430
Net income 167 156 705 668
Basic earnings per share $ .03 $ .03 $ .13 $ .12
Diluted earnings per share $ .03 $ .03 $ .12 $ .11
40
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)
Additions
Charged to
Balance at Beg. costs and Balance at end
Description Of Period expenses Deductions (1) of Period
----------- --------- -------- -------------- ---------
1999
Allowance for returns and
doubtful accounts 696 5,108 (4,696) 1,108
2000
Allowance for returns and
doubtful accounts 1,108 4,826 (4,693) 1,241
2001
Allowance for returns and
doubtful accounts 1,241 6,707 (6,160) 1,788
(1) Represents write-offs during the respective period for product returns
and uncollectible accounts.
Charged to
Balance at Beg. costs and Balance at end
Description Of Period expenses Adjustments (2) of Period
----------- --------- ---------- --------------- ---------------
1999
Valuation of deferred tax
assets 500 (180) (320) 0
2000
Valuation on deferred tax
assets 0 0 0 0
2001
Valuation on deferred tax
assets 0 0 0 0
(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.
41
3. EXHIBITS
The exhibits indicated below are either incorporated by reference
herein or are bound separately and accompany the copies of this report filed
with the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Copies of such exhibits will be furnished to any
requesting stockholder of the Company upon payment of the costs of copying and
transmitting the same.
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation
of the Registrant, dated July 21, 1995 (incorporated by
reference from Exhibit 3(I).1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference from Exhibit 3(ii) to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
4.1 See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the
Certificate of Incorporation, as amended, and Bylaws, as
amended, of the Registrant defining rights of holders of Class
A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001)
10.1 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 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) (incorporated by reference from Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.4 Amendment to Product Distribution Agreement dated as of
January 1, 2000, by and between Integrity Incorporated and
Word, Inc., a division of Warner Music Group Inc., amendment
effective as of January 1, 2002 (The foregoing is the subject
of a request for confidential treatment)
10.5 Asset Purchase Agreement by and between Integrity Incorporated
and Idea Entertainment, Inc. dated as of November 19, 1999.
(incorporated by reference from Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.6 Product Development and Co-Branding Agreement dated January
10, 2000 by and between Integrity Incorporated and Time Life,
Inc. (the foregoing is the subject of a request for
confidential treatment) (incorporated by reference from
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K
for he year ended December 31, 2000).
42
10.7 Credit Agreement dated April 25, 2001 by and between Integrity
Incorporated and LaSalle Bank National Association (The
foregoing is the subject of a request for confidential
treatment) (incorporated by reference from Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)
10.8 Intellectual Property Security Agreement dated April 25, 2001
by Integrity Incorporated in favor of LaSalle Bank National
Association (incorporated by reference from Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)
10.9 Security and Pledge Agreement dated April 25, 2001 by
Integrity Incorporated in favor of LaSalle Bank National
Association (incorporated by reference from Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)
10.10 First Amendment to Credit Agreement dated June 15, 2001 by and
between Integrity Incorporated and LaSalle Bank National
Association (incorporated by reference from Exhibit 10.6 to
the Registrant's Amended Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 2001)
10.11 Warrant Repurchase Agreement dated September 26, 2001, by and
between Integrity Incorporated and Bank Austria AG, Grand
Cayman Branch (incorporated by reference from Exhibit 10.9 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001)
10.12 Lease dated August 24, 2001 by and between Park Center
Partnership II and Integrity Incorporated (incorporated by
reference from Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001)
10.13 Product Distribution Agreement between Integrity Incorporated
and Sony Music Entertainment, dated March 4, 2002, effective
January 1, 2002. (The foregoing is the subject of a request
for confidential treatment).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.14 1994 Management Incentive Plan (incorporated by reference from
Exhibit 10.43 to the Registrant's Registration Statement on
Form S-1 (File No. 33-78582), and amendments thereto,
originally filed on May 6, 1994).
10.15 Integrity Music, Inc. Long-Term Incentive Plan (incorporated
by reference) from Exhibit 4(c) to the Registrant's
Registration Statement on Form S-8 (File No. 33-86126) filed
on November 7, 1994).
10.16 Form of Stock Option Agreement under the Integrity Music, Inc.
Long-Term Incentive Plan (incorporated by reference from
Exhibit 10.45 to the Registrant's Registration Statement on
Form S-1 (File No. 33-78582), and amendments thereto,
originally filed on May 6, 1994).
10.17 Integrity Music, Inc. 1994 Stock Option Plan for Outside
Directors (incorporated by reference from Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8 (File No.
33-86128) filed on November 7, 1994).
10.18 Integrity Incorporated 2002 Stock Option Plan for Outside
Directors
10.19 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).
10.20 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).
10.21 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).
43
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 Integrity Incorporated 2001 Long-Term Incentive Plan,
adopted by the Board of Directors of Integrity
Incorporated on November 2, 2001 (incorporated by
reference from Exhibit 10.11 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001)
10.30 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).
10.31 Employment Agreement by and among Integrity Incorporated
and Donald Moen effective as of October 1, 2001
(incorporated by reference from Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).
10.32 Employment Agreement dated June 1, 2001 by and between
Integrity Incorporated and Byron Williamson (incorporated
by reference from Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2001)
10.33 Key Employee Change In Control Agreement dated June 1,
2001 by and between Integrity Incorporated and Byron
Williamson (incorporated by reference from Exhibit 10.5
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001)
10.34 Employment Agreement dated October 29, 2001 by and
between Integrity Incorporated and Danny McGuffey
(incorporated by reference from Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
10.35 Key Employee Change in Control Agreement dated October
29, 2001 by and between Integrity Incorporated and Danny
McGuffey (incorporated by reference from Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
11 Statement of Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountant
(a) Reports on Form 8-K
During the three months ended September 30, 2001, Integrity filed the following
report on Form 8-K:
Form 8-K dated September 26, 2001 relating to Integrity's repurchase of warrants
to purchase 818,897 shares of Integrity's common stock from Bank Austria AG,
Grand Cayman Branch.
44
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 15, 2002.
INTEGRITY INCORPORATED
By: /s/ P. Michael Coleman
---------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 15, 2002.
Signature Title
/s/ P. Michael Coleman
- ---------------------------------------------------------
P. Michael Coleman Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Donald S. Ellington
- ---------------------------------------------------------
Donald S. Ellington Senior Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
/s/ Jean C. Coleman
- ---------------------------------------------------------
Jean C. Coleman Director
/s/ William A. Jolly
- ---------------------------------------------------------
William A. Jolly Director
/s/ Charles V. Simpson
- ---------------------------------------------------------
Charles V. Simpson Director
/s/ Heeth Varnedoe III
- ---------------------------------------------------------
Heeth Varnedoe III Director
/s/ Jimmy M. Woodward
- ---------------------------------------------------------
Jimmy M. Woodward Director
45