Filed On 3/29/01 9:37am ET · SEC File 0-24134 · Accession Number 950144-1-4196
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/29/01 Integrity Media Inc 10-K405 12/31/00 7:76 Bowne of Atlanta Inc/FA
Annual Report -- [X] Reg. S-K Item 405 · Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Integrity Incorporated 40 265K
2: EX-10.16 Waiver to Loan and Security Agreement 7 28K
3: EX-10.17 Product Development and Co-Branding Agreement 11 41K
4: EX-10.36 Employment Agreement 15 46K
5: EX-11 Statement of Computation of Per Share Earnings 1 5K
6: EX-21 Subsidiaries of the Registrant 1 4K
7: EX-23 Consent of Independent Accountant 1 5K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----- -----
COMMISSION FILE NUMBER 0-24134
INTEGRITY INCORPORATED
(Exact name of registrant as specified in its charter)
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION NUMBER 63-0952549
1000 CODY ROAD
MOBILE, ALABAMA 36695
(Address of principal executive offices)
334-633-9000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (assuming, for purposes of this calculation,
without conceding, that only Integrity's executive officers and directors are
"affiliates"), was $6,473,744 at March 23, 2001, as reported by the Nasdaq
SmallCap Market.
The number of shares of Registrant's Class A Common Stock, $.01 par
value per share, outstanding at March 23, 2001 was 2,184,000.
The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 23, 2001 was 3,435,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 17, 2001 are incorporated by reference into Part
III.
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. 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 these
cautionary statements. 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 chiefly produces,
publishes and distributes Christian music. It is a producer and publisher of
Christian lifestyle products developed to facilitate worship, entertainment and
education. 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,
urban music, youth music and live worship for adult audiences. According to
Soundscan tracking, the Company is the leading praise and worship music company,
with 56% of the Christian Bookseller's Association ("CBA") market at end of year
2000. The Company was also the No. 2 Christian music label in the CBA market for
3 years running according to Soundscan. Integrity's products are sold primarily
through retail stores and direct to consumers throughout the United States and
internationally in 161 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 10 to Notes to Consolidated Financial Statements.
Integrity's recorded music products fall into two broad categories (i)
concept products which are centered on a specific theme, such as praise and
worship music and (ii) artist products, in which the artist is the focal point.
In addition to recorded music, Integrity produces Christian music video products
for certain praise and worship artists. Integrity's products also include
software and printed music, such as songbooks and sheet music, designed
primarily for distribution to churches and choral groups.
Integrity was organized in Alabama as a corporation on May 1, 1987 and
was reincorporated in Delaware on October 1, 1993.
PRODUCTS
Concept Products
Praise and worship concept products are centered around a specific
theme or event rather than being focused on a specific artist. The Company's
original concept product series, Hosanna! Music(R), consists of recorded praise
and worship music composed of live recordings sung by an audience and worship
leader rather than a performing artist. The Company's Hosanna! Music(R) series
has proven to be a successful product line having just produced its 105th
recording.
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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, designed for budget-conscious customers; World's Best
Praise and Worship(R) series; and Integrity Notes(R), a series of greeting cards
for general occasions and specialty cards related to seasonal events, featuring
verses from our praise and worship songs.
Artist Products
In addition to concept products, the Company also produces artist
recordings in which the artist is the main focal point. These products have
recently included "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, "Freedom" with Darrell Evans 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 ten 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 Platinum certified "WoW Worship (Blue)" and the Gold certified
"WoW Worship (Orange)", as well as the Songs 4 Worship series produced in
conjunction with Time Life Music, which includes the Gold certified "Songs 4
Worship - 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 Gospel Music
Association Dove Award in April 1994 for best musical and still on the best
sellers list on the non-seasonal musical charts for seven years running. "God
For Us", "Let Your Glory Fall" 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. 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, featuring over 700
songs and hymns. Sales of this hymn book have exceeded one million units in less
than four years.
PRODUCT CREATION
The Company's 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.
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, along with 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.
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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 161 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 selection every six to
eight weeks and is billed for each selection. Shipments continue until the
Company is instructed to cancel the membership. This differs from certain other
music clubs in which members have a "negative option" allowing them to decline
monthly selections before they are mailed and in which their only obligation is
to purchase a certain number of products over a stated period of time.
The Company rents mailing lists of potential direct-to-consumer
customers that includes subscribers to Christian magazines, purchasers of
Christian mail order products and donors to Christian ministries. When
available, the Company obtains new mailing lists to conduct a one-time
solicitation of an approved direct mailing. Once a response is received by
Integrity, the customer's name is added to the Company's own mailing list.
Integrity also builds its direct-to-consumer database through space
advertisements in Christian magazines, television advertising and Internet
marketing.
The Company's first continuity club, Hosanna! Music(R) has just
produced its 105th recording. Currently the Company operates several continuity
clubs, including the Integrity Notes(R) series. The clubs are launched with a
mailing of a new product announcement and solicitation to as many as 500,000
people. After the initial mailing, the Company postpones further direct mail
solicitation campaigns for up to six months, utilizing the time to study the
response and evaluate the sustainability of the initial members. If the initial
membership proves to be sustainable based on product shipments, the Company will
roll out the club in an extensive direct mail effort to an average of 900,000
people.
In addition to continuity clubs, the Company's direct-to-consumer
program includes mail order catalog sales, telemarketing, one-time offers to
active customers, television offers and sales through the Internet. The mail
order catalog and telemarketing programs are designed to increase sales to the
Company's current customers by increasing their awareness of Integrity's full
line of products, as well as to develop new customers for Integrity products.
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, introduced in 1997 in a joint venture with Word Entertainment.
Retail Markets
Integrity's retail sales activities are targeted at two markets, the
Christian bookstore ("CBA") market which includes sales of choral music
products, and the general retail market. The Company currently utilizes Word
Entertainment ("Word") to serve these markets.
All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products, which are shipped and invoiced based on orders
received directly from Word's sales force through a computerized order entry
system. Word services the Company's customers from one warehouse located in
Tennessee. During 2000, SoundScan ranked Word as the number two distribution
company in the CBA market. SoundScan also ranked Integrity as the number two
record label in CBA for three consecutive years. The distribution agreement with
Word also offers the Company access to the Sony/Epic distribution system for
sales in the general market.
Retail sales efforts are supported by Integrity's own in-house staff
for marketing, covering such things as point-of-purchase advertising, radio
promotion, and product publicity. The Company also utilizes the marketing
expertise of several outside marketing firms.
International
The Company's international sales are made through a subsidiary located
in the United Kingdom, responsible for Europe; a subsidiary located in
Australia, responsible for Australia, New Zealand and the Solomon Islands; a
subsidiary located in Singapore, responsible for Singapore and Myanmar; 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
3
distribute them in a country or region and approximately 18 importers to whom
the Company provides products. The Company's international distribution network
reaches markets in 161 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 10 to Notes to Consolidated Financial
Statements.
The Company also develops products specifically for certain markets.
This effort includes recording songs in indigenous languages as well as
utilizing local artists and local songs to produce the recordings. Integrity
currently produces products in the Russian, Spanish, Mandarin Chinese, French,
German, Portuguese and Indonesian languages. Integrity artists are also involved
in live performance tours to various countries.
MUSIC PUBLISHING
The Company's song catalog has accumulated ownership rights for over
2,700 songs and has generated a significant amount of royalty income from use by
third parties. A majority of the songs appearing on Integrity recordings are
published out of the Company's song catalog.
Integrity emphasizes the development and maintenance of its song
catalog. Songs are selectively added to the song catalog based on the concept or
theme of a specific product design or because the Company believes that the
songs have the potential to be a part of a future Integrity product. The Company
believes that its efforts have produced a distinctive Christian song catalog
whose titles are used not only on recorded media and radio and television
programming, but also in church services.
The Company licenses the use of its songs to churches and other choral
groups through Christian Copyright Licensing, Inc. ("CCLI"). Through CCLI,
churches and choral groups in the United States are able to pay one licensing
fee for the use of numerous Christian music copyrights. The Company is paid a
percentage of the licensing fees collected by CCLI based on CCLI's estimates of
the percentage of Integrity songs utilized by the churches and choral groups.
WAREHOUSING AND FULFILLMENT
Integrity currently contracts with Word for its retail market
warehousing, physical inventory and distribution functions. Word is one of
several companies that provide this service in the CBA market. All retail market
sales functions are currently performed by Word's sales force. Many
direct-to-consumer fulfillment services, excluding warehousing and physical
inventory functions, for Integrity's direct to consumer programs are provided by
Client Logic located in Clifton, New Jersey. Some of the order entry and data
fulfillment services for direct to consumer are handled by Integrity's own staff
in Mobile. In addition to managing most of the Company's database of customer
names, Client Logic also provides most of the fulfillment activities of the
direct-to-consumer operation, including order receipt and processing, data
entry, invoicing and payment processing. Integrity's own distribution center
located in Mobile is responsible for its direct-to-consumer and international
warehousing, physical inventory and distribution functions.
COPYRIGHTS AND ROYALTY AGREEMENTS
The Company's music products are protected under applicable domestic
and international copyright laws. In addition, Integrity currently has ownership
rights to approximately 2,700 songs, which are also protected under copyright
law.
In general, works that are protected under copyright laws are
proprietary, which means that for a fixed period of time the copyright owner has
the exclusive right to control the publication (or other reproduction) of the
copyrighted work. Subject to the compulsory licensing provisions of the United
States Copyright Act covering audio records, a copyright owner may license
others to publish, reproduce, or otherwise use its copyrighted work, on an
exclusive or nonexclusive basis, subject to limitations (such as duration and
territory) and upon such other terms and conditions, including royalty payments,
as the copyright owner may require. Despite these protections, the Company's
revenues may be adversely affected by the unauthorized reproduction of
recordings for commercial sale, commonly referred to as "piracy" and by home
taping for personal use.
Integrity pays royalties in two different categories. The Integrity
songwriters are paid by Integrity's publishing division when their songs are
used on an Integrity product or by other companies when used on third party
products. Artists, producers and other song publishers are paid based on
Integrity's sales of products containing their works. Integrity owns the
majority of the songs it produces, and does not have to pay publisher royalties
to third parties for those songs.
4
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.
COMPETITION
The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others. Integrity competes
directly with other record companies and music publishers that distribute
Christian music to Christian bookstores, as well as a number of secular record
companies. Many of the Company's competitors have substantially greater
financial resources than the Company. The Company competes on the basis of the
Company's ability to produce new products that are attractive to consumers, sign
established and new artists and songwriters and gain access to distribution
channels.
Many of the Company's competitors have significantly longer operating
histories and greater revenues from their music product lines. The Company's
ability to continue to compete successfully will be largely dependent upon its
ability to build and maintain its reputation for quality Christian music and
other communication products.
EMPLOYEES
As of December 31, 2000, the Company employed 168 individuals, 134 of
whom are located at the Company's Mobile, Alabama, headquarters.
The Company has no collective bargaining agreements covering any of its
employees, has never experienced any material labor disruption and is unaware of
any efforts or plans to organize its employees. The Company considers relations
with its employees to be good.
GOVERNMENT REGULATION
The Company's direct to consumer program is subject to federal
regulations governing unfair methods of competition and unfair or deceptive acts
and practices in or affecting commerce. These regulations generally prohibit the
solicitation of any order for sale of merchandise through the mail unless at the
time of solicitation the seller has a reasonable basis to expect that he will be
able to ship the merchandise within the time period indicated or within thirty
days if no time period is indicated. If there is any delay in the applicable
time period, the regulations require the seller to give the buyer the option to
cancel the order and receive a prompt refund or consent to a delay in shipment.
Management believes that the Company is in full compliance with the applicable
federal regulations governing its direct to consumer programs.
ITEM 2. PROPERTIES.
The Company owns a 25,000 square foot headquarters and studio facility
in Mobile, Alabama, which houses its executive offices, management and sales
staff. This facility was constructed in 1983 and is pledged as security for the
Company's indebtedness. The Company leases a 30,000 square foot building located
in Mobile, Alabama, which houses its distribution and warehousing center.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings that
management believes will have a material effect on Integrity's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 2000.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Integrity's common stock is traded on The Nasdaq SmallCap Market under
the symbol ITGR. The table below sets forth the quarterly high and low sales
price as reported on The Nasdaq National Market and The Nasdaq SmallCap Market
for the Class A Common Stock from January 1, 1999 through March 23, 2001. The
last sale price of the Class A Common Stock on March 23, 2001 was $3.50.
[Download Table]
High Low
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Fiscal Year 1999
First Quarter $7.250 $3.375
Second Quarter 4.500 2.096
Third Quarter 4.125 2.750
Fourth Quarter 3.688 2.781
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 (through
March 23, 2001) 4.063 2.938
As of March 23, 2001, there were approximately 104 stockholders of
record and approximately 1,500 beneficial stockholders of Integrity's Class A
Common Stock and three stockholders 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 6 to the financial
statements.
The Company's Class A Common Stock was listed on The Nasdaq SmallCap
Market effective October 2, 1998. Prior to that time, the Company's Class A
Common Stock was listed on The Nasdaq National Market.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical balance sheet and statement of operations
presented below for each of the five years in the period ended December 31, 2000
have been derived from the Company's audited consolidated financial statements.
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
[Enlarge/Download Table]
Year Ended December 31
(in thousands, except per share data)
STATEMENT OF OPERATIONS 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net sales $ 51,819 $ 45,326 $ 38,847 $ 34,954 $ 31,975
Cost of sales 27,072 22,268 18,254 15,427 14,981
-------- -------- -------- -------- --------
Gross profit 24,747 23,058 20,593 19,527 16,994
Marketing and fulfillment expenses 10,496 10,404 9,023 9,450 10,711
General and administrative
Expenses 10,698 9,751 8,557 7,796 7,545
Loss on impairment of long-lived assets
0 0 0 0 1,200
-------- -------- -------- -------- --------
Income (loss) from operations 3,553 2,903 3,013 2,281 (2,462)
Interest expense (net) 932 1,292 1,529 1,790 1,804
Other (income) expense 137 (352) 0 3 (153)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item, minority interest and taxes 2,484 1,963 1,484 488 (4,113)
Income tax (expense) benefit (600) (481) 467 70 654
Minority interest, net of tax (188) (55) (200) (37) 0
-------- -------- -------- -------- --------
Income (loss) before extraordinary
Item 1,696 1,427 1,751 521 (3,459)
Extraordinary item from early
extinguishment of debt less
applicable taxes of $47 0 0 0 0 (248)
-------- -------- -------- -------- --------
Net income (loss) $ 1,696 $ 1,427 $ 1,751 $ 521 $ (3,707)
======== ======== ======== ======== ========
Basic EPS
Income (loss) before extraordinary
Item $ 0.30 $ 0.26 $ 0.32 $ 0.09 $ (0.63)
Extraordinary item 0 0 0 0 (0.04)
-------- -------- -------- -------- --------
Net income (loss) $ 0.30 $ 0.26 $ 0.32 $ 0.09 $ (0.67)
======== ======== ======== ======== ========
Diluted EPS
Income (loss) before extraordinary
Item $ 0.28 $ 0.24 $ 0.30 $ 0.09 $ (0.63)
Extraordinary item 0 0 0 0 (0.04)
-------- -------- -------- -------- --------
Net income $ 0.28 $ 0.24 $ 0.30 $ 0.09 $ (0.67)
======== ======== ======== ======== ========
Weighted average number of
shares outstanding
Basic 5,615 5,579 5,514 5,514 5,514
Diluted 6,058 6,032 5,805 5,514 5,514
[Download Table]
As of December 31
(in thousands)
BALANCE SHEET DATA 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net working capital $ 5,787 $ 8,179 $ 9,536 $ 8,831 $ 10,467
Total assets 27,232 29,341 31,377 30,775 31,058
Total bank debt(1) 4,034 8,705 12,968 15,117 18,304
Stockholders' equity 15,956 14,289 12,758 11,076 10,487
(1) Includes discount of $403 at December 31, 2000, $649 at December 31, 1999,
$832 at December 31, 1998, $1,064 at December 31, 1997 and $1,296 at December
31, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Selected Financial Data and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
During February 2001, management determined that certain adjustments
were necessary to the prior year's financial statements. See Footnote 2 of the
Notes to the Consolidated Financial Statements for a detailed explanation and
discussion of the impact of these adjustments. As a result of these adjustments,
the Company has revised the financial statements for the years ended December
31, 1997, 1998, 1999, and interim periods of 2000 and 1999.
OVERVIEW
The Company is a media-communications company that chiefly produces,
publishes and distributes Christian music. It is a producer and publisher of
Christian lifestyle products developed to facilitate worship, entertainment and
education. 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) 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 and software. The Company has determined
that its reportable segments are those that are based on the Company's
distribution channels. These distribution channels are Retail, Direct to
Consumers, International and Other channels. The Retail channel primarily
represents sales to Christian bookstores through Word Distribution, special
event sales, sales of choral products and to the general market through Sony.
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 161 countries. All
transactions with foreign entities, whether they are shipped from the United
States or one of the Company's three subsidiaries in Singapore, the United
Kingdom and Australia are reported in the segment. Christian bookstores are the
primary distribution channel for this segment, but there are also direct mail
and other techniques used for these markets. The Other segment includes
copyright revenue and other distribution sales.
The following historical analysis shows the percentage of sales by
segment:
[Download Table]
2000 1999 1998
------ ------ ------
Direct to Consumer 30.9% 27.8% 30.6%
Retail Markets 50.1% 49.2% 41.8%
International 14.5% 16.0% 16.5%
Other 4.5% 7.0% 11.1%
The Direct to Consumer segment, as a percent of total sales, increased
largely due to the sales to Time Life for the Songs 4 Worship continuity
program. As a result, the International and Other segments decreased as a
percent of total sales, although International net sales increased slightly for
the year as compared to 1999.
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.
8
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.
[Download Table]
Percentage of Net Sales
Year Ended December 31
2000 1999 1998
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 52.2% 49.1% 47.0%
Gross Profit 47.8% 50.9% 53.0%
Marketing and Fulfillment
Expenses 20.3% 23.0% 23.2%
General and Administrative
Expenses 20.6% 21.5% 22.0%
Income from operations before
taxes and minority interest 4.8% 4.3% 3.8%
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 Songs 4 Worship "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 Songs 4 Worship "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) continue to have a very strong market presence. Songs 4 Worship is a
continuity series of praise and worship compilations developed in partnership
with Time Life Music. The Songs 4 Worship continuity series, released in the
fourth quarter of 2000, according to Time Life "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 Songs 4 Worship series and the WoW albums, substantial
progress was made in 2000 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's Songs 4 Worship
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 America division. Other international divisions and
subsidiaries were impacted negatively by changes in foreign exchange rates and
increased local competitive pressures. Management expects these competitive
pressures to continue in many of its foreign markets in 2001. 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 Songs 4
Worship continuity 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 Songs 4 Worship 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
9
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 Songs 4
Worship 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
impacted by the sales mix of distributed and artists products, which generally
have lower gross margins than concept products. Sales of concept products made
up 62% and 78% of the retail segment's sales in 2000 and 1999, respectively.
Management expects the trend towards more artists products to continue in 2001.
Management expects consolidated gross margins in 2001 to be consistent with 2000
results.
The following table shows the gross margin by operating segment:
[Download Table]
Year Ended December 31
2000 1999
Gross margin
Retail 45.2% 48.6%
Direct to Consumer 47.5% 53.3%
International 58.0% 58.6%
Other 18.4% 20.5%
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 Songs 4 Worship sales
mentioned earlier and due to lower marketing and fulfillment costs in 2000
versus 1999 in this segment. Though the Songs 4 Worship sales to Time Life had a
negative impact to 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 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% in 1999. 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 amount 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 rate that was effective for
2000. The aggregate dollar amount of marketing and fulfillment expenses
increased as a result of higher fulfillment expenses due to higher volumes in
the Retail segment. These higher volumes were offset partially 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 Songs 4 Worship 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.
10
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.
THE YEAR ENDED DECEMBER 31, 1999 ("1999") COMPARED TO THE YEAR ENDED DECEMBER
31, 1998 ("1998")
Net sales increased 16.7% to $45.3 million in 1999 from $38.8 million
in 1998, mainly attributable to a 37.2% increase in the retail segment to $22.3
million in 1999 from $16.2 million in 1998. Unit sales increased by 6% to 7.1
million in 1999 from 6.7 million in 1998 due to 63 major releases, including WoW
Worship and Shout To The Lord 2000, and strong product catalog sales from prior
releases such as Shout To The Lord and Jerusalem Arise. In 1999, new products
accounted for 2.4 million units, or 33.8% of the total units sold. The new
products offered were from existing product lines as well as new product lines
featuring several of Integrity's best-selling artists, such as Don Moen, Ron
Kenoly and Paul Wilbur. One of our best selling albums for the year was WoW
Worship, a collection of the best selling praise and worship songs, created in
partnership with Maranatha! and Vineyard. Total WoW sales were $3.8 million in
1999 as compared to $0 million in 1998. Sales in the direct to consumer segment
increased 5.8% to $12.6 million, compared to $11.9 million in 1998 due to
increased sales of Integrity Notes, a greeting card continuity club. Direct to
consumer sales were negatively impacted by approximately $0.2 million during the
year due to adjustments to correct an inadvertent overstatement of shipping and
handling revenue related to system modifications carried out in 1998. This
situation, which affected only one portion of the Company's direct to consumer
segment, had no impact on customers, has been rectified, and had an immaterial
impact on all prior periods. Revenues from the international segment increased
13.2% to $7.2 million from $6.4 million in 1998, mainly due to strong increases
in Australia and the U.K. However, because of the 37.2% increase in the retail
segment, international sales as a percent of total sales decreased to 16.0% from
16.5% in 1998. Sales from the Other segment increased from $6.5 million to $6.7
million due largely to increases in copyright revenues, which increased from
$6.0 million in 1998 to $6.6 million in 1999. Bad debts and returns were $5.1
million in 1999 as compared to $4.9 million in 1998.
Gross profit increased 12.0% to $23.1 million in 1999 from $20.6
million in 1998 due primarily to revenue increases discussed above. Gross profit
as a percentage of sales was 50.9% and 53.0% for the years ended December 31,
1999 and 1998, respectively. The decrease in gross profit as a percentage of
sales was primarily the result of the sales mix including a higher portion of
distributed and artist products, which have lower gross margin percentages, than
the comparable period in 1998. The gross margin percentages in the retail
segment were negatively impacted with the sales of WoW Worship. Although the
album has generated significant revenues, it was created in partnership with two
other record companies, and, as a result, the Company's margin percentage is
significantly lower due to higher royalties. Gross profit in the direct to
consumer segment was negatively impacted by approximately $200,000 as a result
of the billing adjustments discussed above. Management expects that the sales
mix is likely to continue to focus in the retail segment, which may keep gross
margin percentages lower than in previous years. Reductions in the carrying
value of product masters as a result of management's periodic estimates of the
eventual recoupment of production costs aggregated $640,000 and $700,000 for the
years ended December 31, 1999 and 1998, respectively. Such amounts are included
in cost of sales, but are not specifically allocated to the segments.
Operating profit in the retail segment grew 27.0% to $4.3 million
during 1999 from $3.4 million due to the revenue increases discussed above,
resulting from several major product releases during the year, including the WoW
Worship and Shout To The Lord 2000. Operating costs related to the retail
segment, principally fulfillment expenses, were consistent with the increase in
sales. The lower gross margin in the retail segment discussed above also
contributed to the results for the segment. Operating profit from the direct to
consumer segment decreased 44.3% to $1.5 million during 1999 from $2.6 million
as a result of the $200,000 billing adjustment discussed above and increased
direct marketing costs associated with new continuity products. Operating profit
in the international segment grew 27.9% to $1.8 million during 1999 from $1.4
million due to continued steady growth in sales (13%). Operating profit in the
Other segment decreased $459,000 due to higher royalties and additional masters
amortization.
11
Marketing and fulfillment expenses increased 15.3% to $10.4 million or
23.0% of net sales in 1999 as compared with $9.0 million or 23.2% of net sales
in 1998. This increase was primarily associated with higher sales levels.
General and administrative expenses increased 14.0% to $9.8 million or
21.5% of net sales in 1999, compared to $8.6 million or 22.0% of net sales in
1998. The increase in expenses was mainly attributable to increases in personnel
costs required to support the growth in the business including the addition of
new positions arising from the Company's expansion both internationally and in
new distribution channels.
As a result of the above, income from operations was $2.9 million or
6.4% of net sales in 1999, compared with $3.0 million or 7.8% of net sales in
1998.
Interest expense decreased to $1.3 million in 1999 compared with $1.5
million in 1998. The decrease was a result of lower average indebtedness in
1999. Other income in 1999 also includes a favorable insurance settlement of
$300,000.
The Company recorded a net expense for income taxes during 1999 of
approximately $481,000 which included a $180,000 benefit for a reduction in the
valuation allowance against deferred tax assets. During 1998, the Company
recorded a net benefit from income taxes of approximately $467,000 primarily as
a result of a $785,000 reduction in the valuation allowance against deferred tax
assets. The reductions in the valuation allowance were the result of
management's revised expectations relative to the ability to generate future
taxable income. In fact, during 1999, the Company utilized substantially all of
the deferred tax assets associated with net operating loss carry-forwards, tax
credits and other carry-forward attributes. There was no valuation allowance
remaining at December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations through cash
generated from operations and from borrowings under a line of credit and term
notes as needed. The Company's need for cash varies from quarter to quarter
based on product releases and scheduled marketing promotions. The Company's
principal uses of cash historically have been the production and recording of
product masters to build the Company's product master library and debt service.
It is from these product masters that the Company's products are duplicated and
distributed to customers. The Company believes that its working capital and
funds available under its credit facility will be sufficient to fund its
operating and capital requirements for the fiscal year ended December 31, 2001
and beyond.
Cash generated from operations totaled $8.9 million, $8.2 million and
$7.3 million for the years ended December 31, 2000, 1999 and 1998, respectively.
The increases from 1999 to 2000 and 1998 to 1999 resulted primarily from
improved operating results.
Investing activities used $3.9 million, $3.1 million and $4.7 million
of cash in 2000, 1999 and 1998, respectively. Capital expenditures totaled $0.8
million, $0.7 million and $0.5 million for the years ended December 31, 2000,
1999 and 1998, respectively. During 2000, 1999 and 1998, capital expenditures
were primarily for computer equipment and general improvements on the Company's
corporate headquarters. The Company also invested $4.1 million, $3.4 million and
$4.2 million in new product masters during 2000, 1999 and 1998, respectively.
The Company expects its investments in capital expenditures and product masters
during 2001 to remain relatively consistent with 2000 levels.
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 $19 million financing agreement includes a $6 million
revolving credit facility and $13 million term loan. At the Company's option,
and as of September 1, 2000, the loan carries an interest rate of the bank'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%. The lender holds
818,897 warrants with an exercise price of $1.875 that are exercisable into the
Company's Class A common stock and expire in 2006. During the years ended
December 31, 2000, 1999 and 1998, the Company made net payments of $4.9 million,
$4.4 million and $2.1 million, respectively, under such agreements. At December
31, 2000, the Company had available borrowings of $4.1 million under such
agreements. The Company's minimum payments due in 2001 related to its borrowings
are $2.2 million, however, the Company may elect to make additional payments.
Also during 2000, the Company paid $400,000 as a distribution to the Hymnal
joint venture partner. As discussed in
12
Note 2, during the fourth quarter of 2000, adjustments were made to prior
periods and prior year financial statements. In light of these adjustments, all
loan covenants for prior periods were reviewed and the Company found that
certain covenants were violated. The Company has received waivers for those
violations and is currently in compliance with all debt covenants at December
31, 2000. Management has been in discussions with several banking institutions
interested in refinancing its credit facilities and providing expanded credit
facilities during 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
Accordingly, guidance is provided with respect to the recognition, presentation,
and disclosure of revenue in the financial statements. Adoption of SAB No. 101,
as amended by SAB No. 101A, "Amendment: Revenue Recognition in Financial
Statements" and SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements," was effective for the fourth quarter of 2000. The
Company's adoption of this SAB did not materially affect the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000,requires that all derivatives be recognized as either assets or liabilities
at estimated fair value. In June 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
SFAS No. 133. This accounting standard amended the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and hedging
activities. The January 1, 2001 adoption of SFAS No. 133, as amended, is not
expected to have a material effect on the Company's financial position or
results of operations. The Company does not enter into any derivative or related
instruments, and the Company does not engage in any hedging activities related
to foreign currency transactions.
In September 2000, the EITF reached a final consensus on Issue No.
00-10, "Accounting for Shipping and Handling Revenues and Costs," which requires
amounts charged to customers for shipping and handling to be classified as
revenue. In addition, the Issue established that the classification of shipping
and handling costs is an accounting policy decision that should be disclosed
pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies." If shipping
and handling costs are significant and are not included in cost of sales, a
company should disclose both the amount of such costs and which line item on the
income statement includes that amount. This Issue is applicable no later than
the fourth quarter of fiscal years beginning after December 15,1999. The
Company's current accounting policies conform with this new guidance.
In November 2000, the Emerging Issues Task Force ("EITF") reached a
final consensus on Issue No. 00-14, "Accounting for Coupons, Rebates and
Discounts" that addresses the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a customer
as a result of, a single exchange transaction. This Issue is applicable no later
than in annual financial statements for fiscal years beginning after December
15, 1999, or financial statements for the first quarter beginning after March
15, 2001,whichever is later. The Company believes that adoption of this Issue
will not have a material impact on the Company's results of operations,
financial position, or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," an Interpretation of Accounting Principles Board ("APB") Opinion
No. 25. This interpretation was intended to clarify certain problems that have
arisen in practice since the issuance of APB Opinion No. 25 in October 1972. It
specifically answers certain questions and provides guidance on the
implementation of APB Opinion No. 25. The adoption of this interpretation did
not have any impact on the Company's financial position or results of
operations.
13
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.
YEAR 2000 COMPLIANCE
Due to its remediation efforts, the Company has not experienced any
disruptions in its business because of Year 2000 related computer issues,
including leap year related failures. Further, the Company has not experienced
any disruptions in its business because of disruptions related to these issues
experienced by its suppliers, distributors, contractors or other service
providers.
The total cost of the Company's Year 2000 remediation effort was less
than $40,000 and was not material to the Company's financial condition or
results of operations. These costs were primarily in the form of compensation
and benefits of internal employees working on the Company's Year 2000
remediation effort and were expensed as incurred. The actual cost of the
remediation was materially consistent with its projected costs.
RISK FACTORS
OUR COMPETITION INCLUDES OTHER MUSIC COMPANIES AND GENERAL ENTERTAINMENT
COMPANIES
We face intense competition for discretionary consumer spending from
numerous other music companies and entertainment companies that utilize various
formats, including audio recordings, film, video, and other media.
Our products compete directly with the products of other record
companies and music publishers that distribute Christian music to Christian
bookstores, as well as a number of secular music companies. Many of these
competitors have substantially greater financial resources than we have. This
provides them with the ability to launch more new products, spend more on
marketing those products, and pay more to artists and songwriters for new music
and songs. Our ability to continue to compete successfully will be largely
dependent upon our ability to successfully develop and launch new products that
build upon and maintain our reputation for quality Christian music and other
communication products.
OUR INDUSTRY IS SUBJECT TO CONSUMER TASTES AND DEMANDS
We operate in the recorded music, video productions and printed music
industries. These industries involve a substantial degree of risk. Each music or
video recording or printed product is an individual artistic work. Consumer
taste, which is unpredictable and constantly changing, primarily determines the
commercial success of any such work. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of such success,
or the popularity of any particular artist.
Furthermore, we must invest significant amounts for product development
prior to the release of any product. These costs may not be recovered if the
release is unsuccessful. Changes in the timing of new releases can also cause
significant fluctuations in our quarterly operating results because of the
marketing costs involved in launching a new product and the delay in receiving
any sales revenue from the new product. There can be no assurance that our
products will be successful releases or that any product will generate revenues
sufficient to cover the cost of product development. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
14
COMPETITION FROM INTERNET RETAILERS AND "NAPSTER-STYLE COMPANIES" MAY IMPAIR OUR
ABILITY TO SELL OUR PRODUCTS
The emergence of Internet, peer-to-peer, and MP3 technology, as well as
file-sharing services like Napster, has facilitated the free distribution of
music over the Internet and may hinder our ability to sell our products through
traditional retail outlets. File-sharing technology permits the sharing of high
quality music without payment to performers, songwriters and music producers.
The impact this technology will have on the music industry in general and on
Integrity in particular is not certain.
OUR BUSINESS IS DEPENDENT ON ACCESS TO DISTRIBUTION CHANNELS
We distribute our products through three primary channels:
- Direct to Consumer
- Retail Sales; and
- License Arrangements.
If our access to any of these channels is interrupted, our sales could be
significantly affected.
The direct to consumer channel is based on a variety of methods, but
primarily is composed of our continuity clubs. The performance of these clubs
could be affected by a number of factors including:
- the maturity of our mailing lists such that consumers no longer
desire our products and cancel their participation;
- our failure to expand and revise our mailing lists to include new
potential customers, or the inability to secure new mailing lists from
which to build ours;
- our failure to offer new and appealing products to these customers;
and
- increases in the cost of mailing and shipping, or increased
regulation of mail order sales.
Currently, we rely on Word's sales force to perform all retail market
sales functions for us, pursuant to a contract with them that extends through
January 2004.
In addition to our retail distribution channel, our international
distribution channel also relies heavily on third parties to sell and deliver
our products. We cannot quickly replace these third parties should they fail to
perform, nor can we assume their duties in a timely manner. As a result, the
failure by any of these parties to fulfill their duties effectively and
efficiently will immediately and adversely affect our sales.
INCREASES IN COSTS OF MAILING, PAPER, PRINTING AND DELIVERY WILL SIGNIFICANTLY
INCREASE OUR COSTS OF GOODS SOLD
Increases in postal rates, as well as in paper, printing and delivery
costs would affect our direct response programs. We generally ship orders by
third class mail with the United States Postal Service. We rely heavily on
discounts from the basic postal rate structure, such as discounts for bulk
mailings, sorting by zip code, and carrier routes.
Any increase in postal rates, papers and printing or delivery costs
could adversely affect our earnings.
WE DEPEND ON OUR SENIOR EXECUTIVES WHO HAVE EXPERIENCE UNIQUE TO OUR INDUSTRY
Our success has been largely dependent on the skills, experience and
efforts of our senior management. Although we have employment agreements with
some of our senior executives, they could still choose to leave the Company at
any time. If they did we would have significant difficulty replacing them with
individuals who had an equal level of experience in the Christian products
market. This could affect our daily operations, creative development and
ultimately our financial performance.
15
OUR COMPANY IS CONTROLLED BY THE COLEMAN FAMILY
Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 35,100 shares of Class A Common Stock
and all 3,435,000 shares of Class B Common Stock outstanding. This represents
approximately 94.1% of the total voting power of all classes of our voting
stock. As a result, Mr. Coleman is able to elect all of our directors, further
amend our Amended Certificate of Incorporation (the "Amended Certificate"),
effect or prevent a merger, sale of assets or other business acquisition or
disposition, and otherwise control the outcome of actions requiring stockholder
approval.
THE CLASS A COMMON STOCK HAS LIMITED VOTING RIGHTS
Our Amended Certificate limits the voting rights of our Class A Common
Stock. Each share of our Class A Common Stock is entitled to one vote, while
each share of our Class B Common Stock is entitled to ten votes on all matters
with respect to which our stockholders have a right to vote. Both classes of our
stock generally vote together as a single class. The shares of Class B Common
Stock are convertible into shares of Class A Common Stock on a share-for-share
basis at the election of the holder. Also, our Class B Common Stock must be
converted to shares of Class A Common Stock automatically if it is transferred,
except for transfers to or for the benefit of certain of Mr. Coleman's
relatives. We do not have the authority to issue additional Class B Common Stock
except as dividends or distributions on outstanding Class B Common Stock
proportional to dividends or distributions on Class A Common Stock.
The disproportionate voting rights between our classes of stock could
adversely affect the market price of our Class A Common Stock. The
disproportionate voting rights may also make us a less attractive target for a
takeover than we otherwise might be, and render more difficult or discourage a
merger proposal, a tender offer, or a proxy contest even if such actions were
favored by holders of our Class A Common Stock.
Holders of Class A Common Stock may be deprived of an opportunity to
sell their shares at a premium over the then prevailing market price due to the
disproportionate voting rights between the two classes of stock.
CERTAIN PROVISIONS OF OUR AMENDED CERTIFICATE COULD DISCOURAGE A TAKE-OVER OF
INTEGRITY
Our Board of Directors is authorized to issue shares of preferred
stock. Our Board of Directors, without approval of the stockholders, is also
authorized to establish the following provisions of any preferred stock: voting,
dividend, redemption, conversion, liquidation, and other provisions.
The issuance of preferred stock could adversely affect the voting power
or other rights of the holders of our common stock. Further, the issuance of
preferred stock could make more difficult, or discourage, a third party's
attempt to acquire control of us. Finally, we are also subject to the Delaware
Business Combination Statute, which may render more difficult a change in our
control.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE
From time to time there may be significant volatility in the market
price of the Class A Common Stock. Our quarterly operating results or those of
other similar companies, changes in the conditions in the economy or the
financial markets, projections and statements by industry analysts or other
third parties could cause the price of the Class A Common Stock to fluctuate
substantially.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to fluctuations in interest rates
as it pertains to the Company's borrowings under its credit facility. As of
September 1, 2000, the Company pays 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%. If the
interest rates on the Company's borrowings average 100 basis points more in 2001
than they did in 2000, the Company's interest expense would increase and income
before income taxes would decrease by $68,000. This amount is determined solely
by considering the impact of the hypothetical change in the interest rate on the
Company's borrowing cost without consideration for other factors such as actions
management might take to mitigate its exposure to interest rate changes.
The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging
transactions in order to modify the risk from these foreign currency exchange
rate and commodity price fluctuations. The Company also does not use financial
instruments for trading purposes and is not a party to any leveraged
derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in Part IV, Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
17
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 2001 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 2001 Proxy Statement is incorporated
herein by reference. In no event shall the information contained in the proxy
statement under the sections "Stockholder Return Comparison" or "Compensation
Committee Report on Executive Compensation" be incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Proposal I - Election of Directors
- Beneficial Owners of More Than Five Percent of the Company's Common Stock;
Shares Held by Directors and Executive Officers" in the Company's 2001 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 2001 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
[Enlarge/Download Table]
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants 19
Consolidated Balance Sheets at December 31, 2000 and 1999 20
Consolidated Statement of Operations for the three years ended December 31, 2000 21
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December
31, 2000 22
Consolidated Statement of Cash Flows for the three years ended December 31, 2000 23
Notes to Consolidated Financial Statements 24
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and Qualifying Accounts for the three years ended December 31,
2000
18
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 18, after the restatement described in
Note 2, present fairly, in all material respects, the financial position of
Integrity Incorporated and its subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, 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 18 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
February 28, 2001
19
INTEGRITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
December 31,
2000 1999
-------- --------
ASSETS
Current Assets
Cash $ 801 $ 1,067
Trade receivables, less allowance for returns and doubtful accounts of $1,241 and $1,108 5,929 6,246
Other receivables 561 1,681
Inventories 3,961 4,104
Other current assets 3,212 2,456
-------- --------
Total current assets 14,464 15,554
Property and equipment, net of accumulated depreciation of $4,519 and $3,956 3,950 3,664
Product masters, net of accumulated amortization of $16,604 and $11,649 5,626 6,967
Other assets 3,192 3,156
-------- --------
Total assets $ 27,232 $ 29,341
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,188 $ 1,937
Accounts payable and accrued expenses 3,090 3,108
Royalties payable 2,920 1,104
Other current liabilities 479 1,226
-------- --------
Total current liabilities 8,677 7,375
Long-term debt 1,846 6,768
Other long-term liabilities 7 52
-------- --------
Total liabilities 10,530 14,195
-------- --------
Commitments and contingencies 0 0
Minority interest 746 857
-------- --------
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;
2,184,000 and 2,179,000 shares issued and outstanding 22 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 13,857 13,847
Unearned compensation (272) (327)
Retained earnings 2,450 754
Equity adjustments from foreign translation (135) (41)
-------- --------
Total stockholders' equity 15,956 14,289
-------- --------
Total liabilities and stockholders' equity $ 27,232 $ 29,341
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
20
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Net sales $ 51,819 $ 45,326 $ 38,847
Cost of sales 27,072 22,268 18,254
-------- -------- --------
Gross profit 24,747 23,058 20,593
Marketing and fulfillment expenses 10,496 10,404 9,023
General and administrative expenses 10,698 9,751 8,557
-------- -------- --------
Income from operations 3,553 2,903 3,013
Other expenses (income)
Interest expense, net 932 1,292 1,529
Other expenses (income) 137 (352) 0
-------- -------- --------
Income before minority interest and taxes 2,484 1,963 1,484
(Provision for) benefit from income taxes (600) (481) 467
Minority interest, net of applicable taxes (188) (55) (200)
-------- -------- --------
Net income $ 1,696 $ 1,427 $ 1,751
======== ======== ========
Adjustments to determine comprehensive income
Foreign currency translation adjustments (94) 12 (69)
-------- -------- --------
Comprehensive income $ 1,602 $ 1,439 $ 1,682
======== ======== ========
Net income per share - Basic $ 0.30 $ 0.26 $ 0.32
======== ======== ========
Net income per share - Diluted $ 0.28 $ 0.24 $ 0.30
======== ======== ========
Weighted average number of shares outstanding (note 1)
Basic 5,615 5,579 5,514
Diluted 6,058 6,032 5,805
The accompanying notes are an integral part of these
consolidated financial statements.
21
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
(Accum. Equity Adj.
Class A Class B Unearned Additional Deficit) From
Common Stock Common Stock Compen- Paid-in Retained Trans-
Shares Amount Shares Amount sation Capital Earnings lations Total
--------- ------- --------- ------ -------- ---------- -------- ---------- -------
Balance, December 31, 1997 2,079,000 $ 21 3,435,000 $34 $13,428 $(2,424) $ 16 $11,075
Net income 1,751 1,751
Translation adjustments (69) (69)
--------- ------- --------- --- ----- ------- ------- ----- -------
Balance, December 31, 1998 2,079,000 21 3,435,000 34 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 stock 48 48
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
========= ======= ========= === ===== ======= ======= ===== =======
The accompanying notes are an integral part of these
consolidated financial statements.
22
INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
Year Ended December 31,
2000 1999 1998
------- ------- -------
Cash flows from operating activities
Net income $ 1,696 $ 1,427 $ 1,751
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 1,034 1,019 1,202
Amortization of product masters 5,397 3,500 3,787
Minority interest 188 55 200
Stock compensation 55 48 0
Deferred income tax (benefit) provision (390) 420 (527)
Changes in operating assets and liabilities
Trade receivables 317 (1,170) (817)
Other receivables 120 956 396
Inventories 143 22 1,177
Other assets (528) 838 (510)
Accounts payable, royalties payable and
accrued expenses 1,799 690 265
Other current and non current liabilities (886) 352 377
Other 0 12 0
------- ------- -------
Net cash provided by operating activities 8,945 8,169 7,298
------- ------- -------
Cash flows from investing activities
Purchases of property and equipment (849) (716) (463)
Payments for product masters (4,056) (3,417) (4,220)
Proceeds from sale of product masters 1,000 1,000 0
------- ------- -------
Net cash used in investing activities (3,905) (3,133) (4,683)
------- ------- -------
Cash flows from financing activities
Net (repayments) borrowings under line of credit (2,290) (975) 169
Distributions to joint venture partner (400) (510) 0
Proceeds from exercise of common stock options 10 0 0
Principal payments of long-term debt (2,626) (3,473) (2,318)
------- ------- -------
Net cash used in financing activities (5,306) (4,958) (2,149)
------- ------- -------
Net (decrease) increase in cash (266) 78 466
Cash, beginning of year $ 1,067 989 523
------- ------- -------
Cash, end of year $ 801 $ 1,067 $ 989
======= ======= =======
Supplemental disclosures of cash flow information
Interest paid $ 913 $ 1,173 $ 1,355
Income taxes paid $ 1,188 $ 15 $ 0
Noncash investing activities
Sale of product masters for note receivable $ 0 $ 1,000 $ 0
Issuance of warrants in connection with debt $ 45
The accompanying notes are an integral part of these
consolidated financial statements
23
INTEGRITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes and compact discs, print
music and related products, primarily by direct to consumer marketing and
wholesale trade methods. A principal direct to consumer marketing method of
distribution is continuity programs whereby subscribers receive products at
regular intervals.
Integrity Music Europe Limited was formed in 1988, Integrity Music PTY
Limited was formed in 1991 and Integrity Media Asia Pte Ltd was formed in 1995.
These subsidiaries serve to expand the Company's presence in Western Europe;
Australia and New Zealand; and Singapore, respectively, and all are
wholly-owned by the Company. Celebration Hymnal LLC was formed in 1997 as a
50/50 joint venture with Word Entertainment, for the purpose of producing and
promoting The Celebration Hymnal. Due to the Company's ability to control the
venture, Word Entertainment's interest in the joint venture is presented as
minority interest in these financial statements.
The Company's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company controls
the operations of the joint venture through its majority position on the Board
of Directors of The Celebration Hymnal LLC.
REVENUE RECOGNITION
Revenue is recognized at the time title passes to the customer.
Provision for sales returns and allowances are made in the period in which the
related products are shipped 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. Generally, revenue earned
from licensing the use of songs in the Company's song catalogs is recognized as
payments are received from licensees.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use and which have
original maturities of three months or less.
INVENTORIES
Inventories, which consist principally of finished goods such as
compact discs, cassette tapes, videos and print products, are stated at the
lower of average cost or market using the first-in, first-out method.
MARKETING COSTS
The Company incurs marketing costs utilizing various media to generate
direct sales to customers. Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized. Other marketing costs are expensed the first
time advertising takes place. Prepaid marketing costs, including artwork,
printing and direct mail packages, are included in assets in the accompanying
financial statements and approximated $814,000 and $525,000 at December 31,
2000 and 1999, respectively. Marketing costs expensed for the three years ended
December 31, 2000, 1999 and 1998 approximated $4,628,000, $4,609,000 and
$4,455,000, 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 58.3% of total fulfillment expense for the year ended December
31,
24
2000. 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
$1.3 million for the year ended December 31, 2000, 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.
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.
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 $370,000 and $562,000 at December 31, 2000 and 1999, 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
25
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. 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.
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. REVISIONS TO THE CONSOLIDATED FINANCIAL STATEMENTS
During February 2001, management determined that certain adjustments
were necessary to the prior year financial statements. At Celebration Hymnal,
the Company's joint venture in which the Company holds a controlling interest,
management determined that an inventory adjustment was required due to the
incorrect costing of certain inventory items during 1998 and 1999. As a result
of this matter, cost of sales had been understated while the ending inventory
balances had been overstated during 1998 and 1999. An accounts receivable and
sales adjustment was also
26
necessary at this joint venture to correct a clerical oversight that was
originally recorded in the fourth quarter of 1999, which had increased sales and
accounts receivable.
In accordance with its contracts, and consistent with industry
practice, the Company withholds a percentage of royalties due to artists,
producers, and songwriters in anticipation of future product returns.
Management has also determined that its previous reporting did not
appropriately reflect a liability for the future payment of these royalty
"hold-backs". Accordingly, the revisions to the previously reported amounts
include adjustments to correct the timing of the recognition of these
liabilities.
None of these adjustments have impacted the Company's reported cash
flows from operations. The Company has also amended all its Form 10-Q's in 2000
to reflect the matters discussed above.
The impact of the revisions to the annual periods is presented below:
[Enlarge/Download Table]
As of and for the year ended As of and for the year ended
December 31 December 31
1999 1999 1998 1998
------- ------- ------- -------
As previously As revised As previously As revised
reported reported
Statement of Operations Data:
Net Sales $45,571 $45,326 $38,847 $38,847
Gross Profit $23,635 $23,058 $20,862 $20,593
Income From Operations $ 3,480 $ 2,903 $ 3,282 $ 3,013
Net Income $ 1,664 $ 1,427 $ 1,854 $ 1,751
Net Income Per Share
Basic $ 0.30 $ 0.26 $ 0.34 $ 0.32
Fully Diluted $ 0.28 $ 0.24 $ 0.32 $ 0.30
Balance Sheet Data:
Accounts Receivable $ 6,329 $ 6,246 $ 4,913 $ 5,075
Inventory $ 4,754 $ 4,104 $ 4,528 $ 4,126
Current Assets $16,287 $15,554 $15,898 $15,658
Royalties Payable $ 774 $ 1,104 $ 569 $ 789
Current Liabilities $ 7,312 $ 7,375 $ 6,071 $ 6,122
Minority Interest $ 1,166 $ 857 $ 1,384 $ 1,316
Total Stockholders' Equity $14,750 $14,289 $12,981 $12,758
In connection with the items outlined above, the Company has also
recorded a reduction of $121,000 to its retained earnings balance at January 1,
1998. This adjustment gives effect to the cumulative impact of the above noted
matters on the 1997 financial statements.
3. OTHER CURRENT ASSETS
Other current assets consist of the following:
[Download Table]
December 31
(in thousands)
2000 1999
---- ----
Prepaid supplies $1,241 $1,571
Prepaid marketing costs 814 525
Income tax receivable 512 0
Deferred tax assets 102 124
Other 543 236
------ ------
$3,212 $2,456
====== ======
27
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
[Download Table]
December 31
(in thousands)
2000 1999
---- ----
Land $ 625 $ 625
Buildings and leasehold improvements 2,837 2,684
Data processing and other equipment 2,284 1,846
Studio equipment 1,083 1,037
Furniture and fixtures 1,640 1,428
------- -------
8,469 7,620
Less - accumulated depreciation (4,519) (3,956)
------- -------
$ 3,950 $ 3,664
======= =======
Depreciation expense approximated $563,000, $525,000 and $499,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
5. OTHER ASSETS
Other assets consist of the following:
[Download Table]
December 31
(in thousands)
2000 1999
---- ----
Music copyrights, net of accumulated
amortization $1,665 $1,840
Deferred tax assets 1,004 592
Other 523 724
------ ------
$3,192 $3,156
====== ======
The music copyrights are being amortized over their future estimated
useful lives, which is approximately fifteen years. Accumulated amortization at
December 31, 2000 and December 31, 1999 was approximately $969,000 and
$794,000, respectively.
6. DEBT
The Company's $19 million credit agreement includes a $6 million
revolving credit facility (the Revolver) and $13 million term loan (the Term
Loan) maturing on August 6, 2002. At the Company's option, and as of September
1, 2000, the credit agreement carries an interest rate of the bank'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%. At December 31, 2000, the
interest rate on the $874,000 outstanding under the Revolver was 8.78% and on
the $3.6 million outstanding under the Term Loan was 8.62%. At December 31,
1999, the interest rate on the $3.1 million outstanding under the Revolver was
9.12% and on the $6.25 million outstanding under the Term Loan was 8.76%.
At December 31, 2000, the Company had approximately $4.1 million of
available funds under the Revolver.
The Company, in conjunction with the 1996 financing, issued warrants
to purchase 805,288 shares of Class A Common Stock. Each warrant entitles the
record holder thereof to purchase one fully paid share of Class A Common Stock
(for an aggregate of 805,288 shares) or one-fourth fully paid share of
convertible preferred stock (for an aggregate of 201,322 shares) at the
exercise price of $1.875. These warrants became exercisable on August 6, 1998.
The warrants are subject to adjustment upon the issuance of additional shares
of common stock by the Company. On the date of issuance, the warrants had an
estimated fair value of $1.73 per share or $1,393,000, which is recorded as a
discount to the Revolver and Term Loan. As a result of the issuance of shares
of Class A Common Stock associated with certain restricted stock grants, the
Company issued 13,609 additional warrants in 1999, which are immediately
exercisable. The fair value of these warrants, approximately $45,000, was
recorded as additional debt discount. The fair value of the warrants was
determined using the Black-Scholes option-pricing model with the following
assumptions:
28
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 is being amortized to
interest expense over the term of the facility. At December 31, 2000, the book
value of the discount is $403,000 net of accumulated amortization of $1.0
million.
The Revolver and Term Loan contain certain restrictive covenants with
respect to the Company, including, among other things, maintenance of working
capital, limitations on the payments of dividends, the incurrance of additional
indebtedness, certain liens and require the maintenance of certain financial
ratios. Substantially all of the Company's assets are pledged as collateral for
these loans. Due to the restatement described in Note 2, all loan covenants for
prior periods were reviewed and the Company found that certain covenants were
violated. The Company has received waivers for these violations and is
currently in compliance with these debt covenants at December 31, 2000.
Aggregate principal maturities of long-term debt at December 31, 2000 are as
follows:
[Download Table]
Total
Fiscal Year (in thousands)
----------- --------------
2001 $2,188
2002 2,249
------
$4,437
Discount 403
------
$4,034
======
At December 31, 2000, approximately $403,000, net of accumulated
amortization of $1,033,000, of loan issuance costs are being amortized over the
term of the debt agreements.
7. INCOME TAXES
The components of the provision for income taxes for the three years
ended December 31, 2000 are as follows:
[Download Table]
Year Ended December 31
(in thousands)
2000 1999 1998
----- ----- -----
Current provision
Federal $ 861 $ 55 $ 54
State 129 6 6
----- ----- -----
990 61 60
----- ----- -----
Deferred provision (benefit)
Federal (345) 344 (464)
State (45) 76 (63)
----- ----- -----
(390) 420 (527)
----- ----- -----
Total provision (benefit) $ 600 $ 481 $(467)
===== ===== =====
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:
[Download Table]
December 31
(in thousands)
2000 1999 1998
----- ----- -----
Income tax provision at statutory rates $ 845 $ 667 $ 504
State tax provision, net of federal taxes 59 34 26
Nondeductible expenses 56 15 15
Foreign tax impacts (260) 0 (40)
Other, net (100) (55) (187)
Change in valuation allowance 0 (180) (785)
----- ----- -----
Provision of (benefit) for income taxes
before extraordinary item $ 600 $ 481 $(467)
===== ===== =====
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.
29
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows (in thousands):
[Download Table]
December 31
2000 1999
-------- --------
Deferred Assets
Net operating loss carryforwards $ 16 $ 0
Reserves for returns and allowances, net 194 30
Impairment of building and depreciation 349 460
Write down of product masters 265 137
Hymnal income 373 246
Non compete agreement 171 246
Other 86 0
-------- --------
1,454 1,119
-------- --------
Deferred tax liabilities
Prepaid marketing expenses (263) (217)
Other (85) (186)
-------- --------
(348) (403)
-------- --------
Net deferred tax asset $ 1,106 $ 716
Current portion (102) (124)
-------- --------
Long term portion $ 1,004 $ 592
======== ========
Management believes that it is more likely than not that it will
generate taxable income sufficient to realize the net deferred tax asset
recorded at December 31, 2000. For the year ended December 31, 1999, the
Company reduced its valuation allowance by $320,000 related to the utilization
of previously established foreign tax credits as deductions rather than tax
credits. As a result this portion of the prior year tax credits has been
written off against the valuation allowance, which did not result in any impact
to the results of operations. The Company reduced the remaining $180,000
valuation allowance to zero. Such reduction in the valuation allowance was the
result of three consecutive years of profitability coupled with management's
current projections that sufficient taxable income will realize the remaining
deferred tax assets.
8. 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, 2000 or 1998 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
$124,000, $110,000 and $102,000 during the years ended December 31, 2000, 1999
and 1998, respectively. The Board of Directors amended the 401(k) Plan in 1997
to include qualified non-elective contributions to satisfy minimum
contributions.
9. RELATED PARTY TRANSACTIONS
Integrity Worship Ministries, formerly known as Worship International
("Worship"), is a not-for-profit charitable organization, of which the
principal stockholder of the Company is a member of the board of directors. The
Company donated $6,470, $9,280 and $7,895 of inventory to Integrity Worship
Ministries during 2000, 1999 and 1998, respectively.
One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $385,000, $276,000
and $208,149 for the three years ended December 31, 2000, 1999 and 1998.
Amounts due to the officer at December 31, 2000 and 1999 approximate $45,000
and $83,000, respectively. Due from this officer at December 31, 2000 and 1999
is $10,500 advanced against future royalties.
30
10. SEGMENT REPORTING
The Company is a multinational corporation with wholly-owned
subsidiaries in the United States, Australia, the United Kingdom and Singapore.
Transfers between companies primarily represent inter-company export sales of
U.S. produced goods and are accounted for based on established sales prices
between the related companies. Intercompany sales and profits are eliminated
during consolidation. In computing 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 also included in the general corporate
expenses total.
The Company has determined that its reportable segments are those that
are based on the Company's distribution channels. These distribution channels
are Retail, Direct to consumers, International and Other channels. The Retail
channel primarily represents sales to Christian bookstores, special event sales
and sales of choral products through third party distributors, and sales to the
general retail market. Direct to consumers primarily represents sales from
direct mail programs but 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:
[Download Table]
2000 1999 1998
------- ------- -------
NET SALES
Direct to consumer $16,012 $12,587 $11,898
Retail 25,960 22,280 16,234
International 7,510 7,234 6,392
Other 7,334 6,735 6,534
Eliminations (4,997) (3,510) (2,211)
------- ------- -------
Consolidated $51,819 $45,326 $38,847
======= ======= =======
OPERATING PROFIT (BEFORE MINORITY INTEREST)
Direct to consumer $2,990 $1,454 $2,609
Retail 4,362 4,270 3,363
International 1,656 1,836 1,436
Other 432 1,070 1,529
------- ------- -------
Consolidated 9,440 8,630 8,937
General corporate expense
6,024 5,375 5,924
Interest expense, net 932 1,292 1,529
------- ------- -------
Income before income taxes and
minority interest $2,484 $1,963 $1,484
====== ====== ======
IDENTIFIABLE ASSETS
Direct to consumer $1,712 $1,980 $2,630
Retail 0 0 0
International 3,126 3,230 2,596
Other 1,665 1,840 2,014
General corporate assets 20,729 22,291 24,137
------- ------- -------
Total assets $27,232 $29,341 $31,377
======= ======= =======
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
31
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.
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):
[Download Table]
2000 1999 1998
------- ------- -------
NET SALES
United States $44,309 $38,092 $32,464
Europe 2,136 2,401 1,956
Australia 737 1,174 1,011
Asia 1,179 1,142 938
Latin America 1,478 652 12
Other 1,980 1,865 2,466
------- ------- -------
$51,819 $45,326 $38,847
======= ======= =======
IDENTIFIABLE ASSETS
United States $24,106 $26,111 $28,781
Europe 1,617 1,688 1,368
Australia 499 629 494
Asia 1,010 913 734
Other 0 0 0
------- ------- -------
$27,232 $29,341 $31,377
======= ======= =======
11. 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, 2000 and 1999.
12. STOCK COMPENSATION PLANS
The Company has two stock option plans, which provide for the granting
of stock options to officers, employees and non-employee directors. The 1999
Long-term Incentive Plan (the "Incentive Plan") permits grants of not only
incentive stock options, but also non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and other stock based
awards. The Incentive Plan is authorized to issue up to 400,000 shares of Class
A Common Stock in connection with such awards. Under the Incentive Plan, awards
may not be granted at less than the market value at the date of the grant, and
vesting terms are generally five years. The 1994 Stock Option Plan for Outside
Directors (the "Directors' Plan"), grants 1,000 options to purchase Class A
Common stock annually to Directors following the annual meeting. Such options
have an exercise price equal to the fair market value at grant date and are
exercisable six months from date of grant. Prior to approval of the 1999
Long-term Incentive Plan, the Company had the 1994 Stock Option Plan for
employees and officers. Under that plan, 315,207 options had been granted and
are outstanding at December 31, 2000. No further options will be granted under
the 1994 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, 2000.
Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan. Awards may be granted by the Company's
Compensation Committee and any award made is expressed in a number of units
payable only in cash. Vesting is one-fifth of the units of an award on each
anniversary of the date of grant until vested in full. Participants become
vested in full six months after the occurrence of a change in control (as
defined by the agreement) of the Company. The value of all units is measured as
the difference between the fair market value of the Company's stock on the
grant date and the fair market value of the Company's stock on any given date
subsequent to the grant date. To the extent the fair market value of the stock
exceeds the fair market value at the date of grant, compensation expense will
be charged to the Company's statement of operations. As of December 31, 2000,
127,500 awards have been granted. The Company paid $11,000 and $62,000 related
to this plan in 2000 and 1999, respectively. An accrual of $30,000 is 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.
32
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, 2000, 1999 and 1998,
respectively.
[Download Table]
2000 1999 1998
---------- ---------- ----------
Net income As reported $1,696,000 $1,427,000 $1,751,000
Pro forma $1,536,645 $1,237,000 $1,682,000
Basic EPS As reported 0.30 0.26 0.32
Pro forma 0.27 0.22 0.31
Diluted EPS As reported 0.28 0.24 0.30
Pro forma 0.25 0.21 0.29
These pro forma amounts represent the estimated fair value of stock
options issued during 2000, 1999 and 1998 and are being amortized to expense
over the applicable vesting period. Additional options may be granted in future
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 2000, 1999 and 1998, 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 $1.96, $1.82 and $1.32 for
the years ended December 31, 2000, 1999 and 1998, respectively. The
weighted-average remaining contractual life for all options outstanding is 5.6
years.
The following table summarizes the changes in the number of shares
under option:
[Enlarge/Download Table]
Total Weighted
shares average
EXERCISE PRICE RANGES under option price
$0.50 - $2.00 $2.01 - $5.00 $5.01- $10.00 option per share
------------- ------------- ------------- ------- ------------
Outstanding at 12/31/97 226,027 123,000 12,000 361,027 1.39
Granted 20,000 13,000 0 33,000 1.64
Exercised 0 0 0 0 0
Forfeited (60,000) 0 0 (60,000) 1.58
------- ------- ------- -------
Outstanding at 12/31/98 186,027 136,000 12,000 334,027 1.38
Granted 0 272,000 0 272,000 3.60
Exercised 0 0 0 0 0
Forfeited (1,000) (2,000) (3,000) (6,000) 5.35
------- ------- ------- -------
Outstanding at 12/31/99 185,027 406,000 9,000 600,027 2.99
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
======= ======= ======= =======
Exercisable at 12/31/00 122,815 150,800 7,000 280,615
======= ======= ======= =======
Plan shares available for
future grants 15,278
=======
The Company also has 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 and expire in 2006.
33
During 1999, the Company issued 100,000 shares of restricted common
stock to an officer of the Company. These shares had a fair value at the time of
issuance of $375,000 and vest on the seventh anniversary of the date of grant.
13. 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
for equipment are not significant.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
[Download Table]
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
[Download Table]
1999
Three Months Ended
(in thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31
------- ------- ------- -------
Net Sales $11,045 $10,513 $11,547 $12,221
Gross Profit 5,683 5,776 5,613 5,986
Net Income 147 119 570 591
Basic earnings per share $ .03 $ .02 $ .10 $ .11
Diluted earnings per share $ .02 $ .02 $ .09 $ .10
34
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)
[Download Table]
Additions
Charged to
Balance at costs and Balance at
Description Beg. Of Period expenses Deductions(1) end of Period
----------- -------------- ---------- ------------- -------------
1998
Allowance for returns and
doubtful accounts 812 4,852 (4,968) 696
1999
Allowance for returns and
doubtful accounts 696 5,108 (4,696) 1,108
2000
Allowance for returns and
doubtful accounts 1,108 4,826 (4,693) 1,241
(1) Represents write-offs during the respective period for product returns
and uncollectible accounts.
[Enlarge/Download Table]
Charged to
Balance at costs and Balance at
Description Beg. Of Period expenses Adjustments(2) end of Period
----------- -------------- ---------- -------------- -------------
1998
Valuation on deferred tax
assets 1,285 (785) 0 500
1999
Valuation of deferred tax
assets 500 (180) (320) 0
2000
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.
35
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
[Download Table]
Exhibit Exhibit Description
Number
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8 (File No.
33-84584) filed on September 29, 1994).
3(i).1 Certificate of Amendment to the Certificate of Incorporation
of the Registrant, dated July 21, 1995 (incorporated by
reference from Exhibit 3(I).1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995).
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference from Exhibit 3(ii) to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
4.1 See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the
Certificate of Incorporation, as amended, and Bylaws, as
amended, of the Registrant defining rights of holders of Class
A and Class B Common Stock of the Registrant.
4.2 Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 (File No.
33-78582), and amendments thereto, originally filed on May 6,
1994).
10.1 Agreement dated as of June 1, 1994, by and between Integrity
Music, Inc. and LCS Industries, Inc. (Portions of the
foregoing have been granted confidential treatment.)
(incorporated by reference from Exhibit 10.13 to the
Registrant's Registration Statement on Form S-2 (File No.
33-78582), and amendments thereto, originally filed on May 6,
1994).
10.2 Form of Continuity Club Membership Agreement (incorporated by
reference from Exhibit 10.25 to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
10.3 Loan and Security Agreement, dated as of August 2, 1996, by
and among Integrity Incorporated and Creditanstalt Corporate
Finance, Inc., (incorporated by reference from Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
10.4 Stock Pledge Agreement, dated as of August 2, 1996, by
Integrity Incorporated in favor of Creditanstalt Corporate
Finance, Inc., (incorporated by reference from Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
10.5 Conditional Assignment and Trademark Security Agreement, dated
August 2, 1996, between Integrity Incorporated and
Creditanstalt Corporate Finance, Inc. (incorporated by
reference from Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.6 Collateral Assignment and Agreement, dated as of August 2,
1996, by and between Integrity Incorporated and Creditanstalt
Corporate Finance, Inc., (incorporated by reference from
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.7 Copyright Security Agreement, dated as of August 2, 1996, made
by Integrity Incorporated in favor of Creditanstalt Corporate
Finance, Inc., (incorporated by reference from Exhibit 10.5 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
36
[Download Table]
10.8 Warrant Agreement, dated August 2, 1996, made by Integrity
Incorporated in favor of Creditanstalt Corporate Finance,
Inc., (incorporated by reference from Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
10.9 Product Distribution Agreement by and between Integrity
Incorporated and Word, Inc., dated as of April 1, 1996. (The
foregoing is the subject of a request for confidential
treatment.) (incorporated by reference from Exhibit 10.7 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
10.10 First Amendment to Loan and Security Agreement, dated as of
February 14, 1997, by and among Integrity Incorporated and
Creditanstalt Corporate Finance, Inc. (incorporated by
reference from Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.11 Second Amendment to Loan and Security Agreement, dated as of
March 31, 1999, by and among Integrity Incorporated and Bank
Austria Creditanstalt Corporate Finance, Inc. (incorporated by
reference from Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999).
10.12 Warrant Certificate, dated January 26, 2000, issued by
Integrity Incorporated to Creditanstalt Corporate Finance,
Inc. (incorporated by reference from Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.13 Product Distribution Agreement by and between Integrity
Incorporated and Word, Inc., dated as of January 1, 2000 (The
foregoing is the subject of a request for confidential
treatment) (incorporated by reference from Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.14 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).
10.15 Amended and Restated Stock Pledge Agreement, dated as of
January 22, 1997, by Integrity Incorporated in favor of
Creditanstalt Corporate Finance, Inc. (incorporated by
reference from Exhibit 10.15 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.16 Waiver to Loan and Security Agreement dated February 28, 2001
by and between Integrity Incorporated and Bank Austria
Creditanstalt Corporate Finance.
10.17 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).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.18 Integrity Music, Inc. Profit Sharing Plan (incorporated by
reference from Exhibit 10.42 to the Registrant's Registration
Statement on Form S-1 (File No. 33-78582), and amendments
thereto, originally filed on May 6, 1994).
10.19 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).
10.20 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).
10.21 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).
37
[Download Table]
10.22 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).
10.23 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).
10.24 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).
10.25 Integrity Music, Inc. 401(k) Employee Savings Plan
(incorporated by reference from Exhibit 10.50 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 Employment Agreement by and among Integrity Incorporated and
Don Moen dated as of October 1, 1998 (incorporated by
reference from Exhibit 10.27 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998).
10.33 Employment Agreement by and among Integrity Incorporated and
Daniel McGuffey dated as of January 1, 1998 (incorporated by
reference from Exhibit 10.28 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998).
10.34 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).
10.35 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).
10.36 Employment Agreement by and among Integrity Incorporated and
Donald Moen effective as of October 1, 2001.
11 Statement of Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountant
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 2000.
38
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 23, 2001.
INTEGRITY INCORPORATED
By: /s/ P. Michael Coleman
--------------------------------
P. Michael Coleman
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities indicated on March 23, 2001.
[Enlarge/Download Table]
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/ Jimmy M. Woodward
---------------------------------------------------------
Jimmy M. Woodward Director
/s/ Charles V. Simpson
---------------------------------------------------------
Charles V. Simpson Director
/s/ Heeth Varnedoe III
---------------------------------------------------------
Heeth Varnedoe III Director
39
Dates Referenced Herein and Documents Incorporated By Reference
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