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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
 Commission File No. 000-24134 Integrity Media, Inc. 
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-0952549(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 1000 Cody Road
Mobile, Alabama 36695 
 (Address of principal
executive offices, zip code)   (251) 633-9000
 
 (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 Par Value(Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this form 10-K. [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes  [   ] No [X] The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Class A
Common Stock on the Nasdaq National Market on June 30, 2003, the last business
day of the registrants most recently completed second fiscal quarter, was
$11,511,361.14. Solely for the purpose of the foregoing calculation, all
executive officers and directors of the registrant have been deemed to be
affiliates of the registrant. The number of shares of the registrants Class A Common Stock, $0.01 par
value per share, outstanding at March 12, 2004 was 2,384,783. The number of shares of the registrants Class B Common Stock, $0.01 par value
per share, outstanding at March 12, 2004 was 3,385,000.




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TABLE OF CONTENTS  PART I.ITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.REPORT OF INDEPENDENT AUDITORSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSINDEX TO EXHIBITSSIGNATURESEX-10.28 EIGHTH AMENDMENT TO CREDIT AGREEMENTEX-10.29 AGREEMENT AND PLAN OF MERGEREX-11 STATEMENT OF COMPUTATION-PER SHARE EARNINGSEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF INDEPENDENT ACCOUNTANTEX-31.1 302 CERTIFICATION OF CEOEX-31.2 302 CERTIFICATION OF CFOEX-32.1 906 CERTIFICATION OF CEOEX-32.2 906 CERTIFICATION OF CFO    Table of Contents  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 Media, Inc. and Subsidiaries (the Company or
Integrity) to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The
words expect, anticipate, intend, plan, believe, seek, estimate,
and similar expressions are intended to identify such forward-looking
statements. For any forward-looking statements contained, or incorporated by
reference, herein, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. The Companys actual results may differ materially from
the results anticipated in these forward-looking statements due to a variety of
factors, including without limitation those discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations  Risk
Factors. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by this cautionary notice.
Any forward-looking statements represent managements estimates only as of the
date of this report and should not be relied upon as representing estimates as
of any subsequent date. While Integrity may elect to update forward-looking
statements at some point in the future, Integrity specifically disclaims any
obligation to do so, even if its estimates change. 1




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PART I. 
 ITEM 1. BUSINESS Introduction Integrity Media, Inc. and Subsidiaries is a media/communications company
that produces, publishes and distributes Christian music, books and related
products. Integritys music product formats include cassettes, compact discs,
videos, DVDs and printed music. The Company produces Praise and Worship music
in different musical styles for specific audiences such as childrens music,
gospel music for the African-American audience, youth music and live worship
music for adult audiences. In July 2002, Integrity announced the purchase of
INO Records, LLC (formerly M2 Communications, L.L.C.), an artist-based
independent Christian music company headquartered in Nashville, Tennessee. The
purchase of INO Records, LLC allowed the Company to enter the Adult
Contemporary/Rock segment of Christian music. The Companys Integrity
Publishers division, created in 2001, produces and publishes Christian books.
The first product offerings were released in the third quarter of 2002. The
Company first recorded sales from the INO Records and Integrity Publishers
divisions in the third quarter of 2002. 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s book
products are categorized in one of four categories: Inspirational, Christian
Living, Youth or Fiction. Integritys products are sold primarily through retail stores and
direct-to-consumer channels throughout the United States and in 168 other
countries worldwide. The Company has determined that its business is operated
in segments based on distribution channels. For specific information regarding
the financial performance of each segment, see Note 10 of the Notes to
Consolidated Financial Statements. Integrity was organized as an Alabama 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®,consists of live recordings
of Praise and Worship music sung by an audience and worship leader rather than
a performing artist. The Companys Hosanna! Music®series has proven to be a
successful product line having just released its 121st recording in March 2004. The Companys concept product line now includes: Hosanna! Music®, FairHope
Records®, Songs4Worship®, iWorship®, Worlds Best Praise and Worship®;and
Integrity Notes®,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 Satisfy with Kathryn Scott, Bigger Than My Imagination
with Michael Gungor and Worship With Natalie Grant and Friends by Natalie
Grant. Some of the recent artist products released by the INO Records, LLC are
Kiss of Heaven with Darlene Zschech, The Throne Room with CeCe Winans and
A Beautiful Glow with Rock & Roll Worship Circus. 2




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Other Products The Company has also produced a variety of other types of products, such
as musical video products featuring recordings of live performances by the
Companys artists, such as the Gold certified Shalom Jerusalemwith Paul
Wilbur, and the childrens music series, Just-For-Kids®,featuring the Donut
Man®,which includes multiple Gold and Platinum certified videos. Other videos
include the Gold certified Praise! Aerobics®,Praise and Worship music recorded
specifically for aerobic exercises. Other products include Integrity Music
Worship Software®,designed to assist music ministers in the selection of songs
(over 5,000 featured), planning rehearsals and services, and reviewing song
usage tracking. The Company, in partnership with two other Praise and Worship
music companies, has also produced the Double-Platinum certified WoW Worship
(Blue),the Platinum certified WoW Worship (Orange)and the Gold certified
WoW Worship (Green).The Company has also developed the Songs4Worshipseries
in conjunction with Time Life Music, which includes the Double-Platinum
certified Songs4Worship  Shout To The Lordand the Gold certified
Songs4Worship  Holy Ground.In late 2002, the Company released the iWorship
series, featuring popular contemporary and emerging modern worship songs on CD,
along with DVDs that provide breathtaking visuals, sing-along lyrics and
click-tracks for musicians and worship leaders. The first release in the
series was certified Gold by the Recording Industry Association of America
(RIAA) in January 2003 and certified Platinum in October 2003. 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 produced God With Us, winner of the 1994 Gospel
Music Association Dove Award for best musical, which has remained on the best
sellers list on the non-seasonal musical charts for eight years running. Other
musicals include God For Us, Let Your Glory Fall, God In Us, We Believe
and Redeemer, Savior, Friend. Other printed music products include
orchestrations, octavos and The Celebration Hymnal, a joint venture with Word
Entertainment (Word), featuring over 700 songs and hymns. Sales of this
hymnal had exceeded one million units by year-end 2003. Integrity Publishers, Inc., the Companys book publishing division,
released its first Christian books into the market in the third quarter of
2002. Product Creation The Companys music product development process is based upon the creation
of new concept or artist products that are designed, scripted and marketed to
respond to a specific demand. Integrity Music and INO Records, LLC each
conduct planning processes 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 for Integrity Music are based on responses to surveys
of the Companys current customer base as well as other market and product
research conducted by the Company and by independent consultants. Once a new
product concept has been identified, the concept is reviewed and discussed by
representatives of Integritys creative, marketing and finance divisions. If
the product concept is approved by that group, then Integrity assembles a
creative team, which includes one or more artists and producers, generally
employed on a freelance or contract basis, and members of Integritys creative
division. Following the development of the Integrity Music 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. The Companys book product development process begins with the signing of
a contract with the author. The author and the Company negotiate on the
concept for the book. Once 3




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agreement has been reached on a concept, the author will create a
manuscript for submission to the Company for editorial changes. Design for the
interior and exterior of the book and marketing plans are formulated
accordingly. The Companys own editorial staff provides final approval before
the book is manufactured. 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 168 countries. Direct-To-Consumer The Companys direct-to-consumer activities are based on a variety of
methods designed to reach the consumer directly. Among the methods are
continuity clubs, through which the member receives a new selection every six
to eight weeks and is billed for each product. Shipments continue until the
Company is instructed to cancel the membership. This differs from certain
other music clubs in which members have a negative option allowing them to
decline monthly selections before they are mailed and in which their only
obligation is to purchase a certain number of products over a stated period of
time. The Company rents mailing lists that include subscribers to Christian
magazines, purchasers of Christian mail order products and donors to Christian
ministries. When available, the Company obtains new mailing lists to conduct a
one-time solicitation in an approved direct mailing. Once a response is
received by Integrity, the customers name is added to the Companys own
mailing list. Integrity also builds its direct-to-consumer database through
space advertisements in Christian magazines, television advertising and
Internet marketing. The Companys first continuity club, Hosanna! Music®,released its 121st
recording in March 2004. Currently the Company operates several continuity
clubs, including the Songs4Worshipand Integrity Notes®series. The clubs are
launched with a mailing of a new product announcement and solicitation to as
many as 500,000 people. After the initial mailing, the Company postpones
further direct mail solicitation campaigns for up to six months, utilizing the
time to study the response and evaluate the sustainability of the initial
members. If the initial membership proves to be sustainable based on product
shipments, the Company will roll out the club in an extensive direct mail
effort to an average of 900,000 people. In addition to continuity clubs, the Companys direct-to-consumer program
includes mail order catalog sales, telemarketing, one-time offers to active
customers, television offers and sales through the Internet. The mail order
catalog and telemarketing programs are designed to increase sales to the
Companys current customers by increasing their awareness of Integritys full
line of products, as well as to develop new customers for Integrity products.
The Company operates its Internet activity through integritymusic.com and
songs4worship.com. We have also expanded our marketing through direct response
television including the Songs4Worshipseries advertising with Time Life Music.
The Direct-to-Consumer segment also includes direct sales to churches of
printed products, including The Celebration Hymnal, which features over 700
songs and hymns and was introduced in 1997 in a joint venture with Word
Entertainment. Retail Markets Integritys music retail sales activities target two markets: the
Christian retail market (CBA), which includes sales of choral music products,
and the general retail market. The Company currently utilizes Word Entertainment, a division of Warner
Music Group, to serve the CBA market. All CBA orders are fulfilled through
Word, which is responsible for warehousing Integrity Music and INO Records, LLC
products. Products are shipped and invoiced based on orders received directly
from Words sales force through a computerized order entry system. Word
services the Companys customers from one warehouse located in Tennessee. Word
is the number two distributor in the CBA market according to SoundScans Top
2003 CBA Distribution Group Share chart. 4




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Distribution of our products to the general retail market (i.e., Walmart,
Target, etc.) is done through the Companys global marketing and distribution
agreement with Sony Music Entertainment and its subsidiary Epic Records.
Products released by INO Records, LLC prior to its acquisition by Integrity are
distributed by Warner Music Group for distribution to the general retail
market. The Companys Integrity Publishers subsidiary utilizes G. L. Services for
distribution of its products to CBA stores, the general market, and ABA stores
(i.e. Barnes & Noble, Books-a-Million, etc.). G.L. Services warehouses the
Companys book products in one warehouse located in Cincinnati, Ohio. Retail sales efforts are overseen by an in-house sales staff and 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), a subsidiary
located in South Africa (responsible for South Africa) and an office located at
the Companys headquarters in Mobile, Alabama (responsible for Latin America).
Products are sold to more than 60 independent distributors who are licensed to
manufacture Integritys music products from master recordings and distribute
them in a country or region and to approximately 18 importers to whom the
Company provides products. The Companys international distribution network
reaches markets in 168 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 music 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 music products in the Russian, Spanish, Mandarin Chinese,
French, German, Hindi, Portuguese and Indonesian languages. Some of
Integritys artists are also involved in live performance tours to various
countries. Song Publishing The Companys song catalog has accumulated ownership rights for over 2,800
songs and has generated a significant amount of royalty income from use by
third parties. A majority of the songs appearing on Integrity recordings are
published from the Companys song catalog. Integrity emphasizes the development and maintenance of its song catalog.
Songs are selectively added to the song catalog based on the concept or theme
of a specific product design, or because the Company believes that the songs
have the potential to be a part of a future Integrity product. The Company
believes that its efforts have produced a distinctive Christian song catalog
whose titles are used not only on recorded media and radio and television
programming, but also in church services. The Company licenses the use of its songs to churches through Christian
Copyright Licensing, Inc. (CCLI). Through CCLI, churches in the United
States are able to pay one licensing fee for the use of numerous Christian song
copyrights. The Company is paid a percentage of the licensing fees collected
by CCLI based on CCLIs estimates of the percentage of Integrity songs utilized
by the churches. Warehousing and Fulfillment The Company currently contracts with Word Entertainment, a division of
Warner Music Group, for its CBA retail market warehousing, physical inventory
and distribution functions of its 5




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music products. Word is one of several companies that provide this
service in the CBA market. All of the Companys music products are sold in the
CBA retail market by Words sales force. Direct-to-consumer fulfillment
services, including order receipt and processing, data fulfillment services,
database management and payment processing, are handled by Integritys own
staff in Mobile. Integritys own distribution center located in Mobile is
responsible for its direct-to-consumer and international warehousing, physical
inventory and distribution functions. The Companys Integrity Publishers
subsidiary utilizes G.L. Services for warehousing and fulfillment of its
products for the CBA, ABA and general markets. Most of our products are sold
on a returnable basis, which is standard music and book publishing industry
practice. Copyrights and Royalty Agreements The Companys music and book products are protected under applicable
domestic and international copyright laws. In addition, Integrity currently
has ownership rights to approximately 2,800 songs, which are also protected
under copyright law. In general, works that are protected under copyright laws are proprietary,
which means that for a fixed period of time the copyright owner has the
exclusive right to control the publication (or other reproduction) of the
copyrighted work. Subject to the compulsory licensing provisions of the United
States Copyright Act covering audio recordings, a copyright owner may license
others to publish, reproduce, or otherwise use its copyrighted work, on an
exclusive or nonexclusive basis, subject to limitations (such as duration and
territory) and upon such other terms and conditions, including royalty
payments, as the copyright owner may require. Despite these protections, the
Companys revenues may be adversely affected by the unauthorized reproduction
of recordings for commercial sale, commonly referred to as piracy, and by
home taping for personal use. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Risk Factors. Integrity pays music royalties in two different categories. The Integrity
songwriters are paid by Integritys song publishing division when their songs
are used on an Integrity product, when used in public performances such as CCLI
use in churches and 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.
Integritys book publishing division pays royalties to authors and literary
agents based on the number of units sold. Seasonality Retail sales for music and books are typically higher in the third and
fourth quarters because of holiday promotions. Direct-to-Consumer sales are
typically higher in the first quarter as a result of significant marketing
promotions in late December. Direct-to-Consumer promotions require a build up
in inventory in the fourth quarter and as a result, sales and accounts
receivable increase in the first quarter. It is important to note that sales
from quarter to quarter depend heavily on marketing promotions and new product
releases. Accordingly, results of operations in any one quarter may not be
indicative of results of operations for the entire year. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Risk
Factors. Competition The Company faces intense competition for discretionary consumer spending
from numerous other music companies, book publishers and entertainment
companies that utilize various formats, including audio recordings, film, video
and other media. Integrity competes directly with the products of other record
companies, book publishers and music publishers that distribute Christian music
and books to Christian bookstores, as well as with a number of secular
companies. Many of the Companys competitors have substantially greater
financial resources than Integrity. The Company competes on the basis of its
ability to produce new products that are attractive to consumers, sign
established and new artists, songwriters and authors and gain access to
distribution channels. Many of the Companys competitors have significantly longer operating
histories and greater revenues from their music and book product lines. The
Companys ability to continue to 6




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compete successfully will be largely dependent upon its ability to build
and maintain its reputation for quality Christian music and books, as well as
other communication products. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Risk Factors. Employees As of December 31, 2003, the Company employed 218 individuals, 146 of whom
were located at the Companys Mobile, Alabama, headquarters and 21 were located
at the Tennessee offices of Integrity Publishers, Inc. and INO Records, LLC. 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. Privatization On March 2, 2004, the Company issued a press release announcing the
execution of a merger agreement with Kona Acquisition Corp. that would have the
effect of taking the Company private. Kona Acquisition Corp. is wholly owned
by P. Michael Coleman, Integritys principal stockholder, President and Chief
Executive Officer. The closing of this merger is contingent upon Konas
financing and approval by a majority of Integritys stockholders who are
unaffiliated with management. 
 ITEM 2. PROPERTIES. The Company owns a 65,000 square-foot headquarters and studio facility in
Mobile, Alabama, which houses its executive offices, management and sales
staff. Part of this facility (approximately 25,000 square feet) was
constructed in 1983. The main building in the campus, a 40,000 square foot
facility, was completed in mid-2003. These facilities are pledged as security
for the Companys indebtedness. The Company leases a 30,000 square foot
building located in Mobile, Alabama, which houses its distribution and
warehousing center. The Company leases approximately 10,700 square feet of
office space in Brentwood, Tennessee, to house its book publishing subsidiary,
Integrity Publishers, Inc., its INO Records, LLC subsidiary, and offices to
house a Christian film division. The Company leases office space for
International operations in Eastbourne, UK, Singapore, Singapore, Toowoomba,
Australia, and Durban, South Africa. 
 ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings that management
believes will have a material effect on Integritys business, financial
condition or results of operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matters were submitted to a vote of the Companys stockholders during
the fourth quarter of the year ended December 31, 2003. 7




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PART II. 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Integritys Class A Common Stock is traded on The Nasdaq National Market
under the symbol ITGR. There is no established public trading market for
Integritys Class B Common Stock. 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, 2002
through March 12, 2004. The last sale price of the Class A Common Stock on
March 12, 2004 was $6.40. High
    
    LowFiscal Year 2002First Quarter
    
    $
    6.45
    
    
    $
    4.77Second Quarter
    
    $
    7.48
    
    
    $
    5.15Third Quarter
    
    $
    7.15
    
    
    $
    4.65Fourth Quarter
    
    $
    5.56
    
    
    $
    3.75Fiscal Year 2003First Quarter
    
    $
    5.66
    
    
    $
    4.25Second Quarter
    
    $
    5.17
    
    
    $
    4.28Third Quarter
    
    $
    5.34
    
    
    $
    3.50Fourth Quarter
    
    $
    6.10
    
    
    $
    3.30Fiscal Year 2004First Quarter through March 12, 2004
    
    $
    6.50
    
    
    $
    5.85
 As of March 12, 2004, there were approximately 191 holders of record and
approximately 1,500 beneficial owners of Integritys Class A Common Stock, and
three holders of record of Integritys Class B Common Stock. Integrity has never declared or paid any cash dividends on its shares of
Class A or Class B Common Stock or any other of its securities. The current
policy of Integritys Board of Directors is to retain any future earnings to
provide funds for the operation and expansion of Integritys business, and,
therefore, the Board of Directors does not anticipate paying any cash dividends
in the foreseeable future. In addition, Integritys ability to pay dividends
is limited by its existing credit agreement and may be limited in the future by
the terms of then-existing credit facilities. See Note 6 of the Notes to
Consolidated Financial Statements. The Companys Class A Common Stock was listed on The Nasdaq SmallCap
Market effective October 2, 1998 and on The Nasdaq National Market effective
November 20, 2001. 8




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Equity Compensation Plan Information The following table provides information about the equity securities of
the Company that may be issued under all of the Companys existing equity
compensation plans as of December 31, 2003. Number of SecuritiesNumber of Securities
    
    
    
    
    
    Remaining Available forto be Issued Upon
    
    
    
    
    
    Future Issuance UnderExercise of
    
    Weighted Average
    
    Equity CompensationOutstanding
    
    Exercise Price of
    
    Plans (ExcludingOptions, Warrants
    
    Outstanding Options,
    
    Securities Reflected inPlan Category
    
    and Rights
    
    Warrants and Rights
    
    Column (a))(a)
    
    (b)
    
    (c)Equity
Compensation Plans Approved by
Stockholders
    
    
    0
    (1)
    
    $
    7.54
    
    
    
    350,000287,722
    (2)
    
    $
    3.3970
    
    
    
    040,000
    (3)
    
    $
    5.9750
    
    
    
    20,000Equity Compensation
Plans Not Approved by Stockholders
    
    
    233,244
    (4)
    
    $
    2.6842
    
    
    
    05,000
    (5)
    
    $
    3.8850
    
    
    
    0Total
    
    
    565,966
    
    
    
    
    
    
    
    370,000
   (1)
    
    Integrity Incorporated 2001 Long-Term Incentive Plan(2)
    
    Integrity Incorporated 1999 Long-Term Incentive Plan(3)
    
    Integrity Incorporated 2002 Stock Option Plan for Outside Directors(4)
    
    1994 Stock Option Plan(5)
    
    1994 Stock Option Plan for Outside Directors The 1994 Stock Option Plan (the 1994 Plan) permitted grants of incentive
stock options, non-qualified stock options, stock appreciation rights,
performance shares, restricted stock and other stock based awards to employees
and officers. Under the 1994 Plan, 233,244 options were outstanding at
December 31, 2003. No further options will be granted under the 1994 Plan. The 1994 Stock Option Plan for Outside Directors (the 1994 Directors
Plan), granted 1,000 options to purchase Class A Common stock annually to
Directors following each annual meeting. Such options have an exercise price
equal to the fair market value at grant date and are exercisable six months
from date of grant. At December 31, 2003, there were 5,000 options outstanding
under the 1994 Directors Plan. No further options will be granted under the
1994 Directors Plan. 9




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The selected historical balance sheet and statement of operations data
presented below for each of the five years in the period ended December 31,
2003 have been derived from the Companys audited consolidated financial
statements. As discussed in Note 2 of the notes to our consolidated financial
statements in Item 15. Financial Statements and Supplemental Schedule, we
have restated our financial statements as of and for the fiscal years ended
December 31, 2002 and 2001. The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere herein. Year Ended December 31(in thousands, except per share data)2001(Restated)STATEMENT OF OPERATIONS
    
    2003
    
    2002
    
    (2)
    
    2000
    
    1999Net sales
    
    $
    74,264
    
    
    $
    66,345
    
    
    $
    70,958
    
    
    $
    51,819
    
    
    $
    45,326Cost of sales
    
    
    37,233
    
    
    
    32,178
    
    
    
    38,089
    
    
    
    27,072
    
    
    
    22,268Gross profit
    
    
    37,031
    
    
    
    34,167
    
    
    
    32,869
    
    
    
    24,747
    
    
    
    23,058Marketing and fulfillment expenses
    
    
    13,690
    
    
    
    13,897
    
    
    
    12,983
    
    
    
    10,496
    
    
    
    10,404General and administrative
Expenses
    
    
    19,586
    
    
    
    16,138
    
    
    
    15,246
    
    
    
    10,698
    
    
    
    9,751Income from operations
    
    
    3,755
    
    
    
    4,132
    
    
    
    4,640
    
    
    
    3,553
    
    
    
    2,903Interest expense (net)
    
    
    415
    
    
    
    273
    
    
    
    281
    
    
    
    932
    
    
    
    1,292Other (income) expense
    
    
    1
    
    
    
    126
    
    
    
    184
    
    
    
    137
    
    
    
    (352
    )Income before minority interest
And taxes
    
    
    3,339
    
    
    
    3,733
    
    
    
    4,175
    
    
    
    2,484
    
    
    
    1,963Income tax (expense) benefit
    
    
    (1,249
    )
    
    
    (1,263
    )
    
    
    (1,412
    )
    
    
    (600
    )
    
    
    (481
    )Minority interest, net of tax
    
    
    (208
    )
    
    
    (254
    )
    
    
    (105
    )
    
    
    (188
    )
    
    
    (55
    )Net income
    
    $
    1,882
    
    
    $
    2,216
    
    
    $
    2,658
    
    
    $
    1,696
    
    
    $
    1,427Net income per share  Basic
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.47
    
    
    $
    0.30
    
    
    $
    0.26Net income per share  Diluted
    
    $
    0.32
    
    
    $
    0.37
    
    
    $
    0.43
    
    
    $
    0.28
    
    
    $
    0.24Weighted average number of
shares outstandingBasic
    
    
    5,611
    
    
    
    5,599
    
    
    
    5,638
    
    
    
    5,615
    
    
    
    5,579Diluted
    
    
    5,958
    
    
    
    6,010
    
    
    
    6,238
    
    
    
    6,058
    
    
    
    6,032
 As of December 31(in thousands)2002
    
    
    2001(Restated)
    
    (Restated)BALANCE SHEET DATA
    
    2003
    
    (2)
    
    (2)
    
    2000
    
    1999Working capital
    
    $
    4,881
    
    
    $
    6,069
    
    
    $
    7,997
    
    
    $
    5,787
    
    
    $
    8,179Total assets
    
    
    51,505
    
    
    
    40,673
    
    
    
    31,199
    
    
    
    27,232
    
    
    
    29,341Total bank debt (1)
    
    
    14,309
    
    
    
    9,470
    
    
    
    4,878
    
    
    
    4,034
    
    
    
    8,705Stockholders equity
    
    
    19,718
    
    
    
    17,884
    
    
    
    15,265
    
    
    
    15,956
    
    
    
    14,289
  (1)
    
    Includes discount of $0 at December 31, 2003, $0 at December 31,
2002, $0 at December 31, 2001, $403 at December 31, 2000 and $649 at
December 31, 1999.  (2)
    
    We have restated financial statements for 2001 and 2002 as a result
of matters related to our U.K. subsidiary. See Note 2 of financial
statements. 10




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. OVERVIEW Integrity Media, Inc. and Subsidiaries is a media/communications company
that produces, publishes and distributes Christian music, books and related
products. Integritys music product formats include cassettes, compact discs,
videos, DVDs and printed music. The Company produces Praise and Worship music
in different musical styles for specific audiences such as childrens music,
gospel music for the African-American audience, youth music and live worship
music for adult audiences. In July 2002, Integrity announced the purchase of
INO Records, LLC, an artist-based independent Christian music company
headquartered in Nashville, Tennessee. The purchase of INO Records, LLC
allowed the Company to enter the Adult Contemporary/Rock segment of Christian
music, which represents over 30% of the Christian music market at year end
2003. The Companys Integrity Publishers division, created in 2001, produces
and publishes Christian books. The first product offerings were released in
the third quarter of 2002, with a total of 16 books published during the year.
The Company first recorded sales from the INO Records, LLC and Integrity
Publishers divisions in the third quarter of 2002. 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s book
products are categorized in one of four categories: Inspirational, Christian
Living, Youth or Fiction. Integritys products are sold primarily through retail stores and
direct-to-consumers throughout the United States and in 168 other countries
worldwide. The Company has determined that its business is operated in
segments based on distribution channels. For specific information regarding
the financial performance of each segment, see Note 11 of the Notes to
Consolidated Financial Statements. These distribution channels are Retail, Direct to Consumers,
International, Book Publishing and Other channels. The Retail channel primarily
represents sales to Christian retailers through Word, special event sales,
sales of choral products and sales to the general market through Sony Music
Entertainment and its subsidiary Epic Records. Direct-to-Consumers primarily
represents sales from direct mail programs but also includes Internet sales,
television sales and sales of print products directly to churches, including
sales of the Celebration Hymnal through a joint venture controlled by the
Company. The International channel represents an international distribution
network that reaches markets in 168 countries. All transactions with foreign
entities, whether they are shipped from the United States or from one of the
Companys four subsidiaries in Singapore, the United Kingdom, Australia and
South Africa, are reported in this segment. Christian retailers are the
primary distribution channel for this segment, but there are also direct mail
and other techniques used for these markets. The Book Publishing segment
represents sales by our Integrity Publishers, Inc. division and includes sales
to Christian retailers as well as sales to the general retail market. The
Other segment includes copyright revenue and other distribution sales. 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. On March 2, 2004, the Company issued a press release announcing the
execution of a merger agreement with Kona Acquisition Corp. that would have the
effect of taking the Company private. Kona Acquisition Corp. is wholly owned
by P. Michael Coleman, Integritys principal stockholder, President and Chief
Executive Officer. The closing of this merger is contingent upon Konas
financing and approval by a majority of Integritys stockholders who are
unaffiliated with management. Upon final execution of this merger, the
following changes will occur in the 11




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Companys debt structure: the LaSalle term loan will increase by $1.5
million; an additional $15 million in debt will be obtained through a mezzanine
lender; and the maximum line of credit with LaSalle will increase from $9
million to $12 million. The Company believes that should the merger occur, the
plan financing will be adequate to fund the Companys operations for at least
the next 12 months. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note
1 in the Notes to the Consolidated Financial Statements. Note that our
preparation of this Annual Report on Form 10-K requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenues and expenses during the
reporting period. There can be no assurance that actual results will not
differ from those estimates. Revenue Recognition The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition (SAB 104) which supercedes SAS 101,
Revenue Recognition in Financial Statements (SAB 101). SAB 104 requires that
four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4)
collectability is reasonably assured. We derive our revenue from two primary
sources: (1) product sales from CDs, cassettes, or books; and (2) copyright
revenue from third-party use of our product masters and song catalog. Revenue from product sales is generally recognized when delivery has
occurred and at the time title passes to the customer. For direct-to-consumers
product sales that allow a trial or acceptance period, title is not deemed to
have passed nor revenue recognized until the acceptance periods have expired.
Generally, these acceptance periods are fifteen days after receipt of product.
Provisions for sales returns and allowances are made against revenue in the
period in which the related products are shipped or title passes based on
estimates derived from historical data. The allowance is recorded in the
period in which the related products are shipped. The returns allowance is
presented, along with the allowance for doubtful accounts, as a reduction of
accounts receivable in the accompanying financial statements. Revenue earned from licensing the use of songs or product masters in the
Companys song catalogs is generally recognized as payments are received from
licensees. If the Company has information related to the licensed use of songs
that would result in the revenue being fixed and determinable, and collection
reasonably assured, then revenue is recognized in the periods in which the
license revenue is earned. Allowances for Sales Returns and Doubtful Accounts Specifically, our management must make estimates of potential future
product returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand and
acceptance of our products when evaluating the adequacy of the sales returns
and other allowances. Significant management judgments and estimates must be
made and used in connection with establishing the sales returns and other
allowances in any accounting period. Material differences could result in the
amount and timing of our revenue for any period if management made different
judgments or utilized different estimates. Similarly, our management must make estimates of the uncollectability of
our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Material differences could result in the amount and timing of expense recorded
if management made different judgments or utilized different estimates. 12




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Our accounts receivable balance at December 31, 2003 was $10.8 million,
net of allowances for returns of $1.6 million and net of allowances for
doubtful accounts of $721,000. Product Masters Product masters, which include sound and video recordings and print
masters, are amortized over their future estimated useful lives, using a method
that reasonably relates to the amount of net revenue expected to be realized,
not to exceed a three year period. Management periodically reviews the product
masters amortization rates and adjusts the rate based on managements estimates
for future sales. In conjunction with such analysis, any amounts that do not
appear to be fully recoverable are charged to expense during the period the
loss becomes estimable. The costs of producing a product master include the
cost of the musical talent, the cost of the technical talent for engineering,
directing and mixing, costs for the use of the equipment to record and produce
the master, and studio facility charges. A significant portion of these
product master costs are capitalized costs of the Companys resources, both
personnel and equipment related, that can be primarily associated with the
creation of the product master. Because consumer tastes, which are
unpredictable and constantly changing, primarily determine the commercial
success of any work, estimates must be made regarding future sales. Changes in
managements judgment or estimates could result in different amortization
rates, or an immediate write-off of the balance related to a product. Our product masters balance at December 31, 2003 was $4.7 million, net of
accumulated amortization of $22.3 million. Advance Royalties and Royalties Payable Royalties earned by publishers, authors, producers, songwriters and
artists are charged to expense in the period in which the related product sale
occurs. Advance royalties paid are capitalized based on past performance,
current popularity or judgments made by management of the future success of the
artist/author. These royalty advances are deemed to be recoverable from future
royalties to be earned by the artist/author. Such capitalized amounts are
included as a component of Other Current Assets in the consolidated balance
sheet. Any portion of advances that subsequently appear not to be recoverable
from future royalties are charged to expense during the period the loss becomes
evident. The amount of advance royalties and prepaid publishing totaled $3.9
million at December 31, 2003. The Company expects that any royalty advances
will be recouped over future sales, however, should circumstances prove
otherwise, such amounts would be expensed immediately. Royalties payable to publishers, authors, producers, songwriters and
artists from the related product sale or from the related copyright revenues
are recorded in the period in which the revenue is recognized. Royalties
payable are reduced for the estimated royalties that will not be paid due to
product returns and bad debts based on historical experience. Royalty payments
for music products are generally made on a quarterly basis, 45 days after the
end of a quarter. Royalty payments to publishers, authors and literary agents
for book products are generally made in six-month cycles, 60 to 90 days after
the close of a period. The amount of royalties payable totaled $6.6 million at
December 31, 2003. Intangible Assets In conjunction with the acquisition of INO Records, LLC, on June 28, 2002,
the Company recorded $5.3 million of artists contracts as an intangible asset.
This asset is amortized on a straight-line basis over seven years, which is the
period the underlying value is expected to be realized. On an annual basis the
Company assesses the carrying value of its intangible assets to determine
whether trends or events may have caused the carrying value of such intangible
assets to exceed their net realizable value. No such trends or events were
noted in the three year period ended December 31, 2003. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations. 13




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Results of Operations After
experiencing turnover of certain accounting personnel at our United
Kingdom subsidiary, while in the midst of testing internal controls,
evaluating the effectiveness of current procedures, and implementing
system changes, the Company identified certain account reconciliation
adjustments with respect to accounts receivable and accounts payable
and certain marketing costs incorrectly deferred, the aggregate of
which totaled $245,000 ($153,000, net of tax) and relate to fiscal
year 2001 and prior periods. The resultant restatement has been
recorded entirely in 2001 as the Company is unable to determine the
impact on periods prior thereto. The impact of
these errors also impacted the 2002 consolidated balance sheet, consolidated
statement of changes in stockholders equity, consolidated statement of cash
flows and the foreign currency translation adjustment and comprehensive income
lines in our 2002 statement of operations. The financial information
presented in Managements Discussion and Analysis of Financial
Condition and Results of Operations has been revised to reflect the
correction of the errors described in Note 2 of the consolidated financial statements. The following table sets forth consolidated operating results expressed as
a percentage of net sales for the periods indicated. Percentage of Net SalesYear Ended December 312001(Restated,2003
    
    2002
    
    see Note 2)Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    50.1
    %
    
    
    48.5
    %
    
    
    53.7
    %Gross Profit
    
    
    49.9
    %
    
    
    51.5
    %
    
    
    46.3
    %Marketing and Fulfillment Expenses
    
    
    18.4
    %
    
    
    20.9
    %
    
    
    18.3
    %General and Administrative Expenses
    
    
    26.4
    %
    
    
    24.3
    %
    
    
    21.5
    %Income from operations before
taxes and minority interest
    
    
    4.5
    %
    
    
    5.6
    %
    
    
    5.9
    %
 The year ended December 31, 2003 (2003) compared to the year ended December
31, 2002 (2002) Net sales increased $7.9 million, or 11.9%, from $66.3 million in 2002 to
$74.3 million in 2003. This variance was due to increases in three primary
areas  INO Records (formerly M2 Communications., name changed September 30,
2003); Integrity Publishers; and Sarepta (our subsidiary located in South
Africa). Combined, these three areas recorded an increase of $10.6 million, or
90.3%, in 2003 compared to 2002. Sales in the remainder of the Company declined
$2.7 million, or 4.9%, in 2003 compared to 2002 principally due to the decline
of Songs4Worship and WoW sales. INO Records (INO), acquired in June 2002, reported sales of $12.8 million,
an increase of $5.2 million, or 69% ahead of partial-year sales of $7.6
million in 2002. The best selling albums in 2003 were Almost There and
Spoken For by Mercy Me; Kiss of Heaven by Darlene Zschech; Throne Room
by CeCe Winans; Visit Us by Terry MacAlmon; and Live This Is Your House by
the Brooklyn Tabernacle Choir. Mercy Mes album, Almost There was again the
top-seller in 2003. I Can Only Imagine, the hit single from this album
crossed-over into mainstream radio during 2003 and climbed as high as number 4
in the Adult Contemporary charts in November 2003. INO is scheduled to release
their third album from Mercy Me in the second quarter, 2004. Integrity Publishers, the Companys Christian book publisher and
subsidiary, began as a start-up in August, 2001 and released its first catalog
of titles in the third quarter, 2002.
Revenues in 2003 were $8.2 million, an increase of $ 4.1 million, or 99.0%,
compared to the partial-year sales of $4.1 million in 2002. The major book
releases in 2003 included The Right Thing by Scott Waddle; The Yada Yada
Prayer Group by Neta Jackson; Memory Bible; and The Ten Offenses by Pat
Robertson. Its Not About Me, a book by Max Lucado, the number one
non-fiction Christian author, is scheduled for release by Integrity Publishers
in the first quarter, 2004. Sarepta, the Companys South African subsidiary, was acquired on March 31,
2003. Revenues for the partial year were $1.3 million compared to none in 2002. 14




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Songs4Worship sales declined from $13.4 million in 2002 to $9.0 million in
2003. Songs4Worship is a continuity series of Praise and Worship compilations
that was developed in partnership with Time Life Music. This series was
launched in late 2000 and according to Time Life Music, was the most successful
product launch in Time Life Musics history. After its record-breaking success
in 2001 with sales of $24.5 million, revenues have declined to $13.4 million in
2002 and $9.0 million in 2003. The Company continues to sell and market all
products in the Songs4Worship series and continues discussions and testing with
Time Life and other partners regarding new products ideas and line extensions. WoW Worship revenues declined from $1.6 million in 2002 to $368 thousand
in 2003. The WoW Worship albums, also a compilation of Praise and Worship
songs, were developed in partnership with two other Christian music companies.
The partnership agreement provided for the development, release, and marketing
of three albums, WoW Worship Blue in 1999; WoW Worship Orange in 2000; and WoW
Worship Green in 2001. Since the WoW agreement was not renewed, there was not a
WoW Worship product release for year 2002. Although the Company continues to
sell all three WoW albums, the demand for these albums continues to decline as
evidenced by the sales decline in 2003. In July, 2002, the Company announced the launch of a new product 
Integritys iWorship. Considered by the Company to be the WoW Worship series
replacement, Integritys iWorship was jointly developed by INO Records, and
another Christian music company. Helped by the second major release in this
series in the fall, 2003, sales of Integritys iWorship products were $3.5
million in 2003, an increase of $1.2 million, or 61% over 2002. The third
release in this series is scheduled for the Fall, 2004. The following historical analysis shows the percentage of sales by
segment: 2001(Restated,2003
    
    2002
    
    see Note 2)Retail Markets
    
    
    47.4
    %
    
    
    50.2
    %
    
    
    47.1
    %Direct-to-Consumer
    
    
    20.3
    %
    
    
    24.1
    %
    
    
    41.7
    %International
    
    
    14.0
    %
    
    
    14.5
    %
    
    
    11.2
    %Book Publishing
    
    
    11.1
    %
    
    
    6.2
    %
    
    
    0
    %Other
    
    
    12.6
    %
    
    
    13.7
    %
    
    
    12.7
    %Eliminations
    
    
    (5.4
    )%
    
    
    (8.7
    %)
    
    
    (12.7
    %)
 To summarize the segments of the Company, sales in the Retail segment were
$35.2 million in 2003 compared to $33.3 million in 2002, an increase of 5.8%.
Significant items
were the increase in INO sales of $5.2 million; increase in Integritys
iWorship sales of $1.5 million; decrease in WoW Worship sales of $1.2 million;
and a decrease in Songs4Worship sales of $1.7 million. Generally, retail sales
were negatively impacted in 2003 due to the poor economic conditions in the
second quarter due primarily to the impact of the Iraqi war. Sales in the
Direct-to-Consumer segment were $15.1 million in 2003 compared to $16.0 million
in 2002, a decrease of 5.9%. This decrease was due primarily to a reduction in
Songs4Worship sales of $2.1 million. Sales in the International division were
$10.4 million in 2003 compared to $9.6 million in 2002, an increase of 7.5%.
Significant items in this segment were the $1.3 million incremental sales for
Sarepta (acquired on March 31, 2003); increase in sales of $458 thousand due to
the weakening of the $US dollar versus currencies in the UK, Australia, and
Singapore; and a reduction in Songs4Worship sales of $1.0 million. Sales in the
Other segment were $9.4 million in 2003 compared to $9.1 million in 2002, an
increase of 3.9%. This increase was due primarily to an increase in copyright
income in 2003 compared to 2002. Gross profit increased $2.9 million, or 8.4% to $37.0 million in 2003
compared to $34.2 million in 2002. This increase in gross profit was due to the
increase in sales described earlier. Gross profit as a percentage of sales
decreased to 49.9% in 2003 from 51.5% in 2002. This decrease in percentage of
sales is primarily due to lower margins for the sales of INO and Sarepta, where
gross margins as a percentage of sales were 42.1% and 40.2%, respectively. The
gross margin percentages are lower for INO because of the nature of their
artist contracts. Because the majority of their artists assume the costs of
marketing and promoting their products, artist royalties are higher and margins
lower. Sareptas margins are lower because they are primarily a wholesale
distributor. The gross margin percentage in the Retail segment increased
slightly from 44.8% in 15




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2002 to 45.6% in 2003 due primarily to changes in sales mix. The gross
margin in the Direct-to-Consumer segment increased from 52.5% in 2002 to 59.5%
in 2003 due primarily to lower Songs4Worship sales to Time Life, increased
registrations for the Companys Seminars 4 Worship training seminars, and
changes in sales mix. Gross margins on sales to Time Life are lower because
sales are made to them at wholesale prices. The gross profit percentage in the
International segment decreased from 46.2% in 2002 to 45.7% in 2003. Factors
contributing to this percentage decline were higher royalty costs on
International Lease Revenues, increase in lower-margin Songs4Worship sales to
Time Life for sale in Latin America, and higher royalty costs and shipping
costs in the UK subsidiary. Helping partially offset this gross margin
percentage decline was a favorable increase in Singapore from 19.0% in 2002 to
41.0% in 2003. The 2002 margins were negatively impacted due to additional
reserves for excess and obsolete inventory booked in 2002. The gross profit
percentage in the Book Publishing segment declined from 57.4% in 2002 to 53.2%
in 2003 due primarily to additional reserves for returns booked in 2003.
Because actual returns in the first quarter, 2003 increased the rolling twelve
month return percentage above the established return reserve of 18%, the
Company increased the return reserve for the Book publishing segment from 18%
to 20%. The Company expects that gross margins for the Book Publishing segment
will be consistent with 2003 levels in the future. The gross margin percentage
in the Other segment decreased from 48.7% in 2002 to 38.9% due primarily to
increased adjustments to product masters amortization in 2003 compared to 2002.
This amortization adjustment is a result of managements periodic analysis of
the net book value of a product master in relation to the product sales
generated by the product master. These amortization expenses are included in
the Other segment and not allocated specifically to other segments. The Companys gross margins are historically higher in the
Direct-to-Consumer segment, where sales are generally at retail value. The
Retail segments gross margin is affected by the sales mix of products that we
distribute for third parties and artists products, which generally have lower
gross margins than concept products. Due to growth anticipated in the
Direct-to-Consumer segment in 2004, management anticipates that the overall
gross margin percentage for the Company will be higher in 2004 than in 2003. The following table shows the gross margin by operating segment: Year Ended December 31Gross margin
    
    2003
    
    2002Retail
    
    
    45.6
    %
    
    
    44.8
    %Direct-to-Consumer
    
    
    59.5
    %
    
    
    52.5
    %International
    
    
    45.7
    %
    
    
    46.2
    %Book publishing
    
    
    53.2
    %
    
    
    57.4
    %Other
    
    
    38.9
    %
    
    
    48.7
    %Eliminations
    
    
    (18.8
    )%
    
    
    (6.3
    )%Consolidated
    
    
    49.9
    %
    
    
    51.5
    %
 Operating profit in the Retail segment increased 13.0% from $5.3 million
in 2002 to $6.0 million in 2003 due primarily to the increase of $670 thousand
in operating profit for INO. Operating profit for the remaining retail channels
for the Company were relatively flat in 2003 compared to 2002 due to the
economic conditions in the second quarter, 2003, increased marketing expenses,
and the reduction in retail Songs4Worship sales. Operating profit in the Direct-to-Consumer segment increased 70.3% from
$1.8 million in 2002 to $3.0 million in 2003. This increase was due primarily
to improvements in operating profit for the Companys core continuity clubs 
Hosanna One, Hosanna Songsheet, Hosanna Two, Integrity Notes, and
Songs4Worship. Though total sales for these core clubs decreased approximately
$2.3 million in 2003 compared to 2002, the improvement was accomplished by
spending approximately $2.0 million less in marketing and fulfillment expenses
in 2003 compared to 2002. Operating profit in the International segment decreased 46.0% from $1.2
million in 2002 to $661 thousand in 2003 due primarily to operating losses in
our UK subsidiary. Operating income in the UK decreased from an operating
profit of $55 thousand in 2002 to an operating loss of $456 thousand in 2003.
The primary reasons behind the U.K. loss in 2003 were unfavorable changes in
foreign exchange rates, reduced sales, increases in marketing expenses, and
increases in general and administrative expenses. Approximately $34 thousand of
the loss in 2003 is attributable to unfavorable changes in foreign exchange
rates. Sales decreased 8.5% from $4.3 million in 2002 to 16




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$3.9 million in 2003 due primarily to the reduction in sales of
Songs4Worship products. Marketing expenses increased 43.6% from $241 thousand
in 2002 to $346 thousand in 2003. Included in 2003 marketing expenses were
approximately $80 thousand in adjustments to prepaid marketing expenses. After
a thorough review by management of all prepaid marketing accounts it was
determined that a change in estimates was required in order to more accurately
match the projected revenue stream and the expenses related to this revenue.
General and administrative expenses increased 16.7% from $1.1 million in 2002
to $1.3 million in 2003. Approximately half of this increase was from changes
in foreign exchange rates during 2003 (i.e. weakening of the US dollar versus
the British sterling). Specific accounts creating this variance were as
follows: salaries and wages  up $106 thousand, or 19.2%;employee benefits- up
$11 thousand, or 20.8%; recruiting costs- up $16 thousand, or 356%; travel
expenses-up $38 thousand, or 196%. Operating profit in the Book Publishing segment improved from an operating
loss of $560 thousand in 2002 to an operating profit of $118 thousand in 2003.
In 2002, this segment was still in start-up mode for the first half of the
year in preparation for its initial release of books in the third quarter,
2002. The year 2003 was the first year with 12 months of revenue for this
segment. Revenues and gross margins increased $4.1 million and $2.0 million,
respectively, in 2003 compared to 2002. Marketing and fulfillment expenses were
$2.0 million in 2003 compared to $1.1 million in 2002, an increase of 90.3%.
The increase is due to the full year of sales in 2003 compared to the partial
year sales in 2002. General and administrative expenses increased from $1.8
million in 2002 to $2.2 million in 2003, an increase of 18.9%, due primarily to
an increase in salaries and wages of $262 thousand and an increase in outside
sales commissions of $103 thousand. Operating profit in the Other segment decreased 25.7% from $3.8 million in
2002 to $2.8 million in 2003. This reduction was due primarily to an increase
of $524 thousand in product masters amortization booked to this segment in 2003
compared to 2002. For the Company, marketing and fulfillment expenses decreased 1.5% from
$13.9 million in 2002 to $13.7 million in 2003. Significant variances were in
the Direct-to-Consumer segment and the Book Publishing segment. Marketing and
fulfillment expenses in the Direct-to-Consumer segment decreased $947 thousand,
or 19%, in 2003 compared to 2002 due primarily to reduction in marketing
expenses. In the Book Publishing segment, marketing and fulfillment expenses
increased $972 thousand, or 90.3%, in 2003 compared to 2002 due to the
additional expenses incurred as a result of the increase in sales. Also of
note, are the lower-than-normal marketing and fulfillment expenses for INO in
2003. These expenses were projected to be approximately 18% of sales for the
year. However, the actual marketing and fulfillment expenses as a percentage of
sales were 12.1% due to the special sales promotion of the hit single, I Can
Only Imagine. Sales per unit under this special promotion were lower in
exchange for no fulfillment fee charged. In the future, marketing and
fulfillment expenses for INO are expected to be around the 18% range. For the
Company in total, marketing and fulfillment expenses as a percentage of sales
decreased from 21.0% in 2002 to 18.7% in 2003 due primarily to the INO
marketing promotion just described and the decrease in marketing expenses in
the Direct-to-Consumer segment. General and administrative expenses increased $3.4 million, or 21.4%, from
$16.1 million in 2002 to $19.6 million in 2003. Approximately 53% of this
increase was due to INO, Book Publishing, and Sarepta with a combined increase
of $1.8 million. INO incurred only partial year expenses in 2002 since they
were acquired on June 30, 2002. The Book Publishing division was still in
start-up mode in 2002. Sarepta was acquired on March 31, 2003 and therefore had
no general and administrative expenses in 2002. Of the remaining $1.7 million
increase, the majority of the variance comes from the Companys core businesses
 Integrity Music and Integrity Direct, which would include all corporate
services overhead. The most significant items are as follows:
Salaries and wages  up $629 thousand, or 8.7%; group medical/disability
insurance  up $52 thousand, or 12.7%; depreciation expense  up $245 thousand,
or 31.3%; travel/entertainment expenses  up $283 thousand, or 34.0%;
casualty/loss insurance  up $70 thousand, or 12.6%; charitable contributions 
up $149 thousand, or 456%. Charitable contributions increased due to a $150
thousand contribution by the Company to Integrity Worship Ministries during
2003. This contribution was initiated and authorized by the Board of Directors
of the Company. The increase in depreciation expense is the result of the
completion and occupation of new building in Mobile and the completion of our
SAP system conversion. As a percentage of sales, general and administrative
expenses increased from 24.3% in 2002 to 26.4% in 2003. 17




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Income from operations decreased 9.1% from $4.1 million in 2002 to $3.8
million in 2003 due primarily to the increase in general and administrative
expenses. Net interest expense increased 52% from $273 thousand in 2002 to $415
thousand in 2002 due primarily to higher average debt levels in 2003 compared
to 2002. Average debt levels in 2003 were $12.8 million in 2003 compared to
$7.4 million in 2002. The average interest rate declined from 4.6% in 2002 to
4.0% in 2003. The Company recorded a net expense of $1.2 million for income taxes during
2003, compared to $1.3 million in 2002. In 2003, the U.K. subsidiary incurred
a significant loss for the year and is entitled to carry this loss forward to
offset future taxable earnings. At December 31, 2003, the Company estimates
the amount of loss carry-forwards available for the U.K. subsidiary to be
approximately $580 thousand. Due to the size of these loss carry-forwards, the
Company has elected to record a valuation allowance of $175 thousand that is
included in income tax expense for 2003. With the addition of this valuation
allowance, the effective tax rate for the Company increased from 33.8% in 2002
to 37.4% in 2003. Going forward, the Company estimates the effective tax rate
for 2004 to be approximately 34% to 36%. Diluted earnings per share for the Company were $0.32/share compared to
$.37/share in 2002, a decrease of 13.5%. The year ended December 31, 2002 (2002) compared to the year ended December
31, 2001 (2001) (Restated, see Note 2) Net sales decreased 6.5% to $66.3 million in 2002 from $71.0 million in
2001. The overall decrease was due to the decline in sales of our
Songs4Worship series and WoW Worship products. Songs4Worship sales declined
$11.1 million, or 45.3%, from $24.5 million in 2001 to $13.4 million in 2002.
Songs4Worship is a continuity series of Praise and Worship compilations
developed in partnership with Time Life Music. The series was launched in late
2000 and generated the strongest initial response for a music product launch
in Time Life Musics history. The Songs4Worship series debut title, Shout To
The Lord, attained gold, platinum and multi-platinum certification with sales
of over 2.4 million double CD units. The success of this launch resulted in
record revenues for the Company in 2001. Since the majority of the
Songs4Worship sales were generated from Time Life and Company-managed
continuity clubs, this decline in revenues from Songs4Worship products was
predicted and anticipated. Sales of WoW Worship products declined $4.9
million, or 75.4%, from $6.5 million in 2001 to $1.6 million in 2002. The WoW
Worship albums, also a compilation of Praise and Worship songs, were developed
in partnership with two other Christian music companies. The partnership
agreement provided for the development, release, and marketing of three albums
 WoW Worship Blue in 1999, WoW Worship Orange in 2000, and WoW Worship Green
in 2001. Since this WoW agreement was not renewed, there was not a WoW Worship
product release in the year 2002, resulting in the revenue decline. The Company continues to sell and market all products in the Songs4Worship
and WoW Worship series. Management also continues discussion and testing with
Time Life and other partners regarding new product ideas and line extensions.
In July, 2002, the Company announced the launch of a new product  Integritys
iWorship. Positioned as a Total Worship Experience, this new product
features a series of double CDs offering the most popular contemporary and
emerging modern Christian songs in the world, as determined by Soundscan and
CCLI (Christian Copyright Licensing Inc.). In addition, the collection will
feature a line of DVDs especially designed to enhance the worshipers
experience through visuals combined with sing-along lyrics and click tracks for
musicians and worship leaders. Considered by the Company to be the WoW Worship
replacement, Integritys iWorship is jointly developed by M2 Communications,
L.L.C. (M2), a wholly-owned subsidiary of the Company, and another
independently-owned Christian music company. Partially offsetting the sales decline of the Songs4Worship and WoW
Worship products in 2002 were the sales of Integrity Publishers, Inc. and M2
Communications, L.L.C. Integrity Publishers, the Companys Christian book
publisher and subsidiary, began as a start-up in August, 2001 and released its
first catalog of titles in the third quarter, 2002. Revenues for the year
totaled $4.1 million and included titles such as God Will Make a Way by John
Townsend and Henry Cloud; My Hearts Desire by David Jeremiah; God at Ground
Zero by Ray Giunta; and All Is 18




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##### Table of Contents



Well by Frank Peretti. Integrity Publishers continues to be well
received by both consumers and authors. The Company is very optimistic about
the future success of this division. M2 Communications, L.L.C. (M2), a
Christian music label acquired in June 2002, recorded 2002 revenues of $7.6
million. The best sellers were Almost There and Spoken For by Mercy Me;
and All Right Here by Sarah Groves. To summarize the segments of the Company, sales in the Retail segment were
flat with revenues of $33.3 million in 2002 compared with revenues of $33.4
million in 2001. Significant items included in this segment in 2002 were the
M2 sales of $7.6 million, Integritys iWorship sales of $2.0 million, the
decline in WoW Worship sales of $4.9 million and a reduction in Songs4Worship
sales of $3.0 million. Sales in the Direct-to-Consumer segment decreased $13.6
million, or 45.9%, due primarily to a reduction in Songs 4 Worship sales of
$12.4 million. Sales in the International segment increased $1.7 million, or
20.8%, from $7.9 million in 2001 to $9.6 million in 2002 due to the increase in
Songs4Worship sales in the United Kingdom and Australia. Songs4Worship products
were introduced into the International markets after the success was proven in
the United States. As a result, the International success of Songs4Worship was
primarily in the year ended 2002. International sales in Latin America and
Singapore continued to be negatively impacted by the poor economic conditions
in those countries. Sales in the Book Publishing segment in 2002 were $4.1
million compared to none in 2001. Revenues in the Other segment were flat with
revenues of $9.1 million in 2002 compared with revenues of $9.0 million in
2001. Gross profit increased $1.3 million, or 3.9%, to $34.2 million in 2002
compared to $32.9 million in 2001. Although sales declined in 2002 compared to
2001, gross margins increased in 2002 due to a reduction of product
amortization of $2.0 million in 2002 compared to 2001 and from additional
inventory reserves booked in 2001. Gross profit as a percentage of sales
increased to 51.5% in 2002 compared to 46.3% in 2001 due to these two
adjustments and due to the reduction of the lower-margin Time Life
Songs4Worship sales and the declines in the low-margin WoW Worship albums.
Gross margins on sales to Time Life are lower because sales are made to them at
wholesale prices. The WoW Worship albums carry a lower gross profit percentage
due to the higher royalty payouts required by the partnership agreement. The
gross margin percentage in the Retail segment declined slightly from 45.8% in
2001 to 44.8% in 2002 due to the lower margin sales of M2. Because the
majority of the M2 artists assume the costs of marketing and promoting their
products, royalties are higher and margins lower in M2. The gross margin
percent in the Direct-to-Consumer segment increased from 42.6% in 2001 to 52.5%
in 2002 due to the decrease of Songs4Worship sales in 2002. The gross margin
percentage in the International segment declined from 58.2% in 2001 to 46.2% in
2002 due to the increase in the lower-margin Songs4Worship sales in 2002. The
gross margin percentage in the Book Publishing segment was 57.4% in 2002. This
percentage is higher than forecasted due to lower product and royalty costs.
The gross margin percentage in the Other segment increased from 7.3% in 2001 to
48.7% in 2002. The gross margin and gross margin percentage in the Other
segment were negatively impacted in 2001 due to additional product masters
amortization, additional reserves for inventory, and additional reserves for
returns. These expenses in the Other segment are included in cost of sales but
were not allocated to specific segments. The Companys gross margins are historically higher in the
Direct-to-Consumer segment, where sales are generally at retail value. The
Retail segments gross margin is affected by the sales mix of products that we
distribute for third parties and artists products, which generally have lower
gross margins than concept products. The following table shows the gross margin by operating segment: Year Ended December 312001 (As restated,Gross margin
    
    2002
    
    see Note 2)Retail
    
    
    44.8
    %
    
    
    45.8
    %Direct-to-Consumer
    
    
    52.5
    %
    
    
    42.6
    %International
    
    
    46.2
    %
    
    
    58.2
    %Book publishing
    
    
    57.4
    %
    
    
    0
    %Other
    
    
    48.7
    %
    
    
    7.3
    %Eliminations
    
    
    (6.3
    )%
    
    
    (3.4
    )%Consolidated
    
    
    51.5
    %
    
    
    46.3
    %
 19




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##### Table of Contents



Operating profit in the Retail segment decreased 25% from $7.0 million in
2001 to $5.3 million in 2002. This decrease was due primarily to increased
marketing expenses of $700,000 and increased general and administrative
expenses of $1.1 million. The increase in marketing expenses was primarily due
to the launch of iWorship and other marketing expenditures related to CBA
product releases. The increase in general and administrative expenses was due
to the addition of M2 Communications, L.L.C. in this segment. Approximately
$400,000 of the $1.1 million increase in general and administrative expenses
was amortization expense related to the acquisition of M2. Marketing and
fulfillment expenses increased 3.6% in 2002 compared to 2001. As a percentage
of sales, marketing and fulfillment expenses in the Retail segment increased
from to 20.7% in 2001 to 21.5% in 2002. As a percentage of sales, general and
administrative expenses increased from 4.0% in 2001 to 7.3% in 2002. Operating profit in the Direct-to-Consumer segment decreased 69% from $5.8
million in 2001 to $1.8 million in 2001 due to the reduction in Songs4Worship
sales. Marketing and fulfillment expenses overall declined 2% in 2002 compared
to 2001. As a percentage of sales, marketing and fulfillment expenses
increased from 17% in 2001 to 31% in 2002. This percentage in 2001 was lower
because Songs4Worship sales to Time Life did not require any marketing or
fulfillment expenses. Operating profit in the International segment decreased 12.3% from $1.4
million in 2001 to $1.2 million in 2002 due primarily to additional reserves
for inventory and bad debts required in Singapore. Included in the operating
profit for the International segment in 2001 are additional expenses of $219
thousand in the U.K. subsidiary related to the restatement of the 2001
financial statements. In the midst of making improvements to existing internal
controls, procedures and system changes during 2003, the Company identified
several prior year issues that resulted in this restatement. These adjustments
are as follows: 1) increase in fulfillment expenses of approximately $112
thousand due to errors in accounts receivable balances; 2) increase in
marketing expenses of approximately $56 thousand due to the write-off of
prepaid expenses for the Dutch continuity club; and 3) increase in general and
administrative expenses of approximately $51 thousand due to discrepancies in
the accounts payable control accounts. Operating losses in the Book Publishing segment were $560,000 in 2002
compared to an operating loss of $554,000 in 2001. Beginning as a start-up in
August 2001, this segment incurred an operating loss in 2001 due primarily to
general and administrative expenses incurred during its start-up year. For the
first half of 2002, general, administrative, and marketing expenses continued
to be incurred in preparation for its first release of books in the third
quarter, 2002. For the year, the Book Publishing segment recorded revenues of
$4.1 million, all in the third and fourth quarters. Marketing and fulfillment
expenses were $1.1 million for 2002 compared to $100,000 in 2001. General and
administrative expenses were $1.8 million for 2002 compared to $454,000 in
2001. Operating profit in the Other segment increased $3.6 million from $226,000
in 2001 to $3.8 million in 2002. This increase was primarily due to a
reduction of product masters amortization of $2.0 million in 2002 compared to
2001 and from additional inventory reserves booked in 2001. Marketing and fulfillment expenses increased $914 thousand or 7.0% from
$13.0 million in 2001 to $13.9 million in 2002 due to additional expenses
incurred for Integrity Publishers and M2 Communications, L.L.C. Included in
the 2001 amounts are additional marketing expenses of $56 thousand and $112
thousand in fulfillment expenses in the U.K. subsidiary related to the
restatement of the 2001 financial statements. Combined, Integrity Publishers
and M2 Communications, L.L.C. incurred additional marketing and fulfillment
expenses of $2.2 million in 2002 compared to 2001. As a percentage of sales,
the Companys marketing and fulfillment expenses increased from 18.3% in 2001
to 20.9% in 2002. General and administrative expenses increased $943,000, or 6.2%, from
$15.2 million in 2001 to $16.1 million in 2002. This increase was primarily
the result of additional expenses incurred by Integrity Publishers and M2
Communications, L.L.C. Combined, these two entities incurred additional
general and administrative expenses of $2.3 million in 2002 compared to 2001.
Included in the 2001 total was a charge of $466 thousand due to the early
extinguishment of debt related to the refinancing of the Companys credit
facility from Bank Austria to LaSalle Bank N.A. Also included in the 2001
total are additional general and administrative expenses of $56 thousand in the
U.K. subsidiary related to the restatement of the 2001 financial statements. 20




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##### Table of Contents



Income from operations decreased 10.9% to $4.1 million in 2002, from $4.6
million in 2001 due primarily to the decline in revenues, increases in
Marketing and Fulfillment expenses, and increases in General and Administrative
expenses. Included in the 2001 total for operating income are $219 thousand in
expenses in the U.K. related to the restatement of the 2001 financial
statements. As a percentage of sales, operating income decreased to 6.2% in
2002 from 6.5% in 2001. Net Interest expense decreased to $273,000 in 2002, from $281,000 in 2001.
The primary reason for the decrease in 2002 compared to 2001 is that the 2001
amount included a charge of $102,000 for amortization of debt discount related
to the credit facility with Bank Austria. This credit facility with Bank
Austria ended as of April 25, 2001 when the Company entered into a new facility
with LaSalle Bank N.A. This increase was due to a combination of higher debt
levels in 2002 partially offset by lower average interest rates in 2002.
Average debt levels increased from $3.9 million in 2001 to $7.4 million in
2002. Average interest rates declined from 6.7% in 2001 to 4.6% in 2002. The Company recorded a net expense for income taxes during 2002 of $1.3
million compared to $1.4 million in 2001. The income tax amount for 2001
includes a reduction of $66 thousand in the U.K. due to the restatement of the
2001 financial statements. The Companys effective tax rate for both 2002 and
2001 was 33.8%. Liquidity and Capital Resources The Company historically has financed its operations through cash
generated from operations and from borrowings under a line of credit and term
notes as needed. The Companys need for cash varies from quarter to quarter
based on product releases and scheduled marketing promotions. The Companys
principal uses of cash historically have been the production of product masters
to build the Companys product master library, building, and debt service. It
is from these product masters that the Companys products are duplicated and
distributed to customers. The Company believes that its working capital and
funds available under its credit facility will be sufficient to fund its
operating and capital requirements for the fiscal year ending December 31, 2004
and beyond. Cash generated from operations totaled $2.6 million, $5.7 million and
$13.5 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The decreases from 2002 to 2003 resulted primarily from
increases in accounts receivable, inventory, and royalty advances. The
decreases from 2001 to 2002 resulted primarily from reductions in net income,
decreases in amortization, and net increases in working capital accounts. Investing activities consumed $8.7 million, $12.3 million and $4.2 million
of cash in 2003, 2002 and 2001, respectively. The major categories of
investing activities are purchases of property and equipment and payments for
product masters. For 2002, the acquisition of INO Records, LLC in the amount
of $4.8 million (net of cash acquired) is also included as an investment
activity. Purchases of property and equipment totaled $4.6 million, $3.9
million and $0.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Capital purchases for 2003 included $3.2 million of costs
associated with the completion of the new building and the expansion of parking
facilities at the Companys corporate campus in Mobile, Alabama. Construction
began in early summer 2002 with occupancy in mid-2003. Total capital costs
associated with this expansion approximate $5.5 million. In addition, capital
costs of $761,000 were incurred during 2003 for the purchase and development of
a new software system for the Company, which became operational in July 2003.
Other capital expenditures were primarily for computer equipment and general
improvements on the Companys corporate headquarters. The Company also
invested $3.9 million, $3.7 million and $3.3 million in new product masters
during 2003, 2002 and 2001, respectively. The Company expects its investments
in product masters during 2004 to be approximately $4.7 million in order to
properly support the growth in projected revenue. The Companys financing agreement with Bank Austria in effect through
April 25, 2001 included a revolving credit facility and a term loan that were
payable through August 2002. As part of this agreement, Bank Austria held
818,897 warrants with an exercise price of $1.875 that were exercisable into
the Companys Class A common stock and would expire in 2006. On April 25, 21




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##### Table of Contents



2001, the Company entered into a new $20 million, five-year secured credit
facility with LaSalle Bank N.A. The original credit agreement included a $6
million line of credit, an $11 million secured term loan, and a $3.0 million
mortgage term loan. Through this new credit facility, the Company repaid in
full all debt under its previous credit facility with Bank Austria. In
connection with the early extinguishment of the previous facility, during 2001
the Company recorded a $312,000 charge (net of tax) related to the write-off of
unamortized financing costs. In addition, on September 26, 2001, the Company
repurchased the 818,897 warrants from Bank Austria for approximately $3.4
million in cash. At December 31, 2001, the Company had available borrowings from the
LaSalle facility of $6.0 million under the line of credit, $3.0 million under
the mortgage term loan, and $1.5 million under the secured term loan. Of the
original $11.0 million initial term facility, $3.0 million was used for the
pay-off to Bank Austria, $3.4 million was used for the warrant repurchase, and
$3.1 million expired, leaving $1.5 million available at December 31, 2001. The
$3.1 million portion expired unused on December 19, 2001, after extension of
the original expiration date of October 22, 2001, due to time and use
restrictions as detailed in the original credit agreement. On March 30, 2002,
the term facility was amended to decrease the allowed borrowings under this
secured term facility to $6.4 million and the mortgage term loan was amended to
increase the allowed borrowings for this facility to $4.6 million. On June 28,
2002, the term facility was again amended to increase the total allowed
borrowings to $9.4 million, an increase of $3.0 million. On June 28, 2002, the
Company then used this additional $3 million to partially fund the acquisition
of M2 Communications, L.L.C. On December 31, 2002, the mortgage term facility
was amended to increase the allowed borrowings to $5.1 million. At December 31,
2002, the Company had available borrowings from the LaSalle facility of $6
million under the line of credit, $3 million under the mortgage term loan, and
zero under the secured term loan. At December 31, 2003, the Company had
available borrowings from the LaSalle facility of $1.5 million under the line
of credit, zero under the mortgage term loan, and zero under the secured term
loan. Effective January 29, 2004, the LaSalle line of credit increased from
$6 million to $9 million. At December 31, 2001, there was no balance outstanding under the line of
credit and $4.9 million outstanding under the term loan with LaSalle Bank N.A.
At December 31, 2002, there was no balance outstanding under the line of
credit, $7.6 million outstanding under the term loan, and $1.8 million
outstanding under the building loan. At December 31, 2003, there was $4.5
million outstanding under the line of credit, $5.3 million outstanding under
the term loan, and $4.5 million outstanding under the building loan. During
the years ended December 31, 2003, 2002 and 2001, the Company made net payments
of $2.7 million, $2.4 million and $2.1 million, respectively, under such
agreements. The Companys minimum payments due in 2004 related to its
borrowings are $2.7 million, however, the Company may elect to make additional
payments. In the original credit agreement, the LaSalle loan carries an interest
rate of the banks base rate plus a margin ranging from 0% to 0.5% or LIBOR
plus a margin ranging from 2.25% to 3.0%. The actual margin is a function of
the Companys leverage ratio as calculated quarterly. At December 31, 2003 the
balance due on the LaSalle loan carried an interest rate of 4.0%. The Company
is in compliance with all debt covenants. The line of credit and term loan with LaSalle contain restrictive
covenants with respect to the Company, including, among other things,
limitations on the payments of dividends, the incurrence of additional
indebtedness, certain liens and require the maintenance of certain financial
ratios. Substantially all of the Companys assets are pledged as collateral
for these loans. Aggregate principal maturities of long-term debt at December 31, 2003 are
as follows: TotalFiscal Year
    
    (in thousands)2004
    
    $
    2,6902005
    
    
    2,6902006
    
    
    4,4292007
    
    
    0$
    9,809
 22




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##### Table of Contents



During 2003, the Company paid $250,000 as a distribution to The
Celebration Hymnal joint venture partner. On March 2, 2004, the Company issued a press release announcing the
execution of a merger agreement with Kona Acquisition Corp. that would have the
effect of taking the Company private. Kona Acquisition Corp. is wholly owned
by P. Michael Coleman, Integritys principal stockholder, President and Chief
Executive Officer. The closing of this merger is contingent upon Konas
financing and approval by a majority of Integritys stockholders who are
unaffiliated with management. Upon final execution of this merger, the
following changes will occur in the Companys debt structure: the LaSalle term
loan will increase by $1.5 million; an additional $15 million in debt will be
obtained through a mezzanine lender; and the maximum line of credit with
LaSalle will increase from $9 million to $12 million. The Company believes
that should the merger occur, the plan financing will be adequate to fund the
Companys operations for at least the next 12 months. Off-Balance Sheet Arrangements As of December 31, 2003, we did not engage in any off-balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the
Commission under Securities Exchange Act of 1934, as amended. Contractual Obligations The Company is a party to various lease agreements related to office space
and equipment. Future minimum payments under these commitments consist of the
following at December 31, 2003 (in thousands): Payment due by periodLess Than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 yearsLong-Term Debt Obligations
    
    $
    9,809
    
    
    $
    2,690
    
    
    $
    7,119
    
    
    
    0
    
    
    
    0Capital Lease Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Lease Obligations
    
    
    2,351
    
    
    
    585
    
    
    
    1,347
    
    
    
    419
    
    
    
    0Purchase Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term
Liabilities Reflected on
the Registrants Balance
Sheet under GAAP
    
    
    2,500
    
    
    
    0
    
    
    
    250
    
    
    
    1,500
    
    
    
    750Total
    
    $
    14,660
    
    
    $
    3,275
    
    
    $
    8,716
    
    
    $
    1,919
    
    
    $
    750
 Recent Accounting Pronouncements In August 2001, FASB issued SFAS No. 143, (SFAS 143), Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after
June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 requires, among other things,
that the retirement obligations be recognized when they are incurred and
displayed as liabilities on the balance sheet. In addition, the assets
retirement costs are to be capitalized as part of the assets carrying amount
and subsequently allocated to expense over the assets useful life. The
adoption of SFAS No. 143 had no effect on the Companys financial position,
results of operations or cash flows. In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which supersedes both Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (SFAS 121) and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental
provisions in SFAS 121 for recognizing and measuring impairment losses on
long-lived assets to be held and used. In addition, the statement 23




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provides more guidance on estimating cash flows when performing a
recoverability test, requires that a long-lived asset or group of assets to be
disposed of other than by sale be classified as held-and-used until they are
disposed of, and establishes more restrictive criteria to classify an asset or
group of assets as held for sale. SFAS 144 also retains the basic provisions
of Opinion 30 on how to present discontinued operations in the income
statement, but broadens that presentation to include a component of an entity
(rather than a segment of a business). We
adopted SFAS 144 at the beginning of fiscal 2003, which had no impact on our
consolidated results of operations, financial condition or cash flows. In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of Financial Accounting
Standards Board Statements No. 4, 44 and 64, Amendment of Financial Accounting
Standards Board Statement No. 13, and Technical Corrections (SFAS 145). In
addition to other technical provisions, this Statement rescinds Statement of
Financial Accounting Standards No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of tax. The Company as adopted SFAS 145 with the
appropriate reclassifications made to our consolidated results of operations,
financial condition and cash flows. In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities(SFAS No. 146). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities,
such as restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. The Companys adoption of SFAS
146 did not have a significant impact on its financial position, results of
operations or cash flows. In November 2002, the FASB Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others was issued. The interpretation provides
guidance of the guarantors accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The
Company has adopted the disclosure requirements of the interpretation as of
December 31, 2002. The accounting guidelines are applicable to guarantees
issued after December 31, 2002 and require that the Company record a liability
for the fair value of such guarantees in the balance sheet. The Companys
adoption of FIN No. 45 did not have a significant impact on its financial
position, results of operations or cash flow. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Companys adoption
of FIN No. 46 did not have a significant impact on its financial position,
results of operations or cash flow. The Company adopted the disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment
of FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, effective January 1, 2003. SFAS No.
148 amends SFAS No. 123 Accounting for Stock-Based Compensation to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
the Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The amendments pertaining to the
alternative methods of transition are effective for financial statements for
fiscal years ended after December 15, 2002. The amendments to the disclosure
requirements are effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. As permitted
by SFAS No. 148 and SFAS No. 123, we continue to apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, 24




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Accounting for Stock Issued to Employees and related Interpretations in
accounting for our stock option plans and our employee stock purchase plan and
the disclosure-only provisions of SFAS No. 123 as amended by SFAS 148. We did
not record stock-based compensation expense in the twelve months ended December
31, 2003 and December 31, 2002, as all options granted under our plans had an
exercise price equal to fair market value. The adoption of the additional
disclosure requirement did not have a significant impact on our reported
results of operations, financial position or cash flows. SFAS No. 148 requires
us to provide pro forma disclosure of the impact on our results of operations
had we adopted the expense measurement provisions of SFAS No. 123. In April 2003, the FASB issued Financial Accounting Standard No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
(FAS No.149). This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and other hedging activities entered into after
June 30, 2003. The Company does not expect the adoption of FAS No. 149, to have
a material effect on its financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a material effect on the Companys financial
statements. Reclassifications Upon the adoption of FAS 145, the Company reclassified $ 154,000, net of
tax from an extraordinary item to general and administrative expenses in the
2001 consolidated statement of operations. Inflation The impact of inflation on the Companys operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the Companys cost of sales. While inflation
has not had, and the Company does not expect that it will have, a material
impact upon operating results, inflation may affect the Companys business in
the future. RISK FACTORS Our markets are highly competitive. The markets for Christian music, books and related products are highly
competitive. We face competition from other record companies, music
publishers, book publishers, entertainment companies and multimedia companies
that seek to offer recorded music, video products, software, printed music and
books to the public. Many of these competitors, as well as a number of
potential new competitors, have significantly longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than us. This provides them with
the ability to launch more new products, spend more on marketing those
products, and pay more to artists, authors and songwriters for new music, book
manuscripts and songs. Our ability to compete in this market depends largely
on:  
    
    The skill and creativity of our employees and their relationships
with artists and authors,
    
    Our ability to recruit and retain new and established artists,
songwriters, authors and distributive relationships,
    
    Our continued ability to attract and retain highly capable management personnel
    
    The expansion and utilization of our song catalog,
    
    The acquisition of licenses to enable us to create compilation packages, 25




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
    
    The effective and efficient marketing and distribution of our products, and
    
    Our ability to build upon and maintain our reputation for
producing, licensing, acquiring, marketing and distributing high
quality Christian media products. In addition, the future success of our sales and marketing efforts through
the Internet will be affected by existing competition and by additional
entrants to the electronic commerce market. Our business is subject to constantly changing consumer tastes. Our products consist of recorded music, video productions, books and
printed music. Each music or video recording, book or printed product is an
individual artistic work. The commercial success of a music or video
recording, book or printed product depends on consumer taste, the quality and
acceptance of competing offerings released into the marketplace at or near the
same time, the availability of alternative forms of entertainment and leisure
time activities, general economic conditions and other tangible and intangible
factors, all of which can change quickly. Accordingly, there can be no
assurance as to the financial success of any particular product, the timing of
such success, or the popularity of any particular artist or author. Our future success depends on our ability to continue to develop recorded
music, videos, books, printed music and other content that is interesting and
engaging to our target audience. If our audience determines that our content
does not reflect its tastes, then our audience size could decrease, which would
adversely affect our results of operations. Our ability to develop compelling
content depends on several factors, including the following:  
    
    quality of our editorial staff;
    
    technical expertise of our production staff;
    
    access to worship leaders;
    
    access to songwriters;
    
    access to authors. Furthermore, we must invest significant amounts for product development
prior to the release of any product. These costs may not be recovered if the
release is unsuccessful. There can be no assurance that our products will be
successful releases or that any product will generate revenues sufficient to
cover the cost of product development. See Managements Discussion and
Analysis of Financial Condition and Results of Operations. Our business is dependent on access to distribution channels. We distribute our products through a multi-channel distribution system comprised of:  
    
    direct-to-consumer sales;
    
    retail sales;
    
    international sales, and
    
    license arrangements. The direct-to-consumer channel primarily represents sales from direct mail
programs such as our continuity clubs, direct response television to Time Life
Music, Internet sales and sales directly to churches, including through the
Companys hymnal joint venture. Members of a continuity club receive monthly
mailings containing a feature recording, which they may then accept and pay for
or return within a specified time. The performance of these clubs could be
affected by a number of factors including:  
    
    the maturity of our mailing lists, such that consumers no longer
desire our products and cancel their participation;
    
    our failure to expand and revise our mailing lists to include new
potential customers, or the inability to secure new mailing lists from
which to build ours;
    
    our failure to offer new and appealing products to these customers; and
    
    increases in the cost of mailing and shipping, or increased regulation of mail order sales. We also sell our products through the Internet through our websites
www.integritymusic.com and www.songs4worship.com. Revenues from these sites
are not 26




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currently a significant part of our business. The future success of
on-line sales and marketing efforts cannot be adequately determined at this
time, particularly due to the short history of the electronic commerce market.
Results will also be affected by existing competition and by additional
entrants to the market, many of whom may have substantially greater resources
than we. Currently, we rely on Word Entertainments sales force to perform
Christian retail market sales functions of our music products, pursuant to a
contract with them that extends through December 2004. Also, we depend on a
global marketing and distribution agreement with Sony Music Entertainment and
its subsidiary Epic Records for the distribution of our releases in the general
retail markets pursuant to a contract with them that extends through December
2004. In addition, our Christian book publishing division depends on the
retail and general market sales functions of G.L. Services. Our International area is dependent on our subsidiaries and a network of
independent distributors and exporters reaching markets in 168 countries. Our retail and international distribution channels rely heavily on third
parties to sell and deliver our products. We cannot quickly replace these
third parties should they fail to perform, nor can we assume their duties in a
timely manner. As a result, the failure by any of these parties to fulfill
their duties effectively and efficiently will immediately and adversely affect
our results of operations. Should we encounter difficulty with our existing distribution methods, or
be unable to further develop our distribution systems successfully in the
future, our business, results of operation and financial condition may be
materially adversely affected. Because spending on our products is dependent on discretionary consumer
spending, we are susceptible to fluctuations in general economic conditions. We believe that revenue from sales of recorded music, video products,
software, printed music and books are dependent on discretionary consumer
spending. Our revenue will therefore be subject to fluctuations based upon
general economic conditions in the United States and the foreign countries in
which we do business. If there is a general economic downturn or recession in
the United States or in such foreign countries, general consumer spending in
these markets likely would decline, and our revenues may decrease as a result. We depend on the continued popularity of Christian music and books. We produce records, video productions and printed music in the Christian
music segment of the industry. We produce books in the Christian book segment
of the industry. Our artists and authors are all in these segments of the
respective markets. Although we believe that these sectors will continue to
grow, consumer taste is unpredictable and constantly changing. If tastes move
away from this type of music and books, and we do not develop any alternatives,
we may not be able to sell enough recordings and books to be profitable. We may have difficulty enforcing our intellectual property rights. We consider our copyrights, trademarks and other similar intellectual
property to be a valuable part of our business. To protect our intellectual
property rights, we rely upon copyright and trademark laws, as well as
confidentiality agreements with our employees and consultants. The decreasing
cost of electronic equipment and related technology, however, has made it
easier to create unauthorized versions of audio and audiovisual products such
as compact discs, videotapes and DVDs. A substantial portion of our revenue
comes from the sale of audio and audiovisual products potentially subject to
unauthorized copying. Similarly, advances in Internet technology, such as
peer-to-peer and MP3 technology, as well as the emergence of file-sharing
services, have increasingly made it possible for computer users to share audio
and audiovisual information without the permission of the copyright owners and
without paying royalties to holders of applicable intellectual property or
other rights. These developments may hinder our ability to sell our products
through traditional retail outlets, and there can be no assurance that the
application of existing law will provide sufficient protection from
misappropriation or infringement of our intellectual property rights. There
can also be no assurance that third parties will not claim infringement by us
with 27




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respect to others current or future intellectual property rights. If we were
to fail to develop effective means of protecting our intellectual property or
entertainment-related products and services, or to obtain appropriate relief
through the judicial process or the complete enforcement of judicial decisions
issued in our favor in the event our rights were to be violated by third
parties, our results of operations and financial position would likely suffer. Portions of our business are dependent on cross-licensing arrangements. We license the rights to certain recordings and compositions from third
parties for recording and re-recording of music to produce compilations and to
expand our catalog. We also seek to license the rights to our recordings and
compositions to third parties for a royalty or a flat fee. These
cross-licensing arrangements are generally made possible by existing industry
practices based on reciprocity. If these practices change, we cannot assure
that we will be able to obtain licenses from third parties on satisfactory
terms, or at all, and our business, financial condition and operating results,
particularly with respect to compilation products, could be materially and
adversely affected. We may not be able to prevent third parties from using our domain names, which
could decrease the value of these domain names. Our trademark rights may not be sufficient to prevent third parties from
acquiring or using domain names that infringe or otherwise decrease the value
of our trademarks and domain names. We currently hold the Internet domain
names integritymusic.com, integritymedia.com, integrityinc.com,
integritypublishers.com, songs4worship.com, m2-0.com, as well as various
other domain names. We do not hold the domain names integrity.com,
integrity.org or integrity.net. Domain names are regulated by the U.S.
Commerce Department through a contract with the nonprofit U.S. corporation
Internet Corporation for Assigned Names and Numbers (ICANN). Numerous domain
name registrars throughout the world have been authorized by ICANN to register
domain names in the .com, .org, .net, .biz and .info generic
top-level domains (gTLDs). Additionally, every recognized country in the
world has been assigned a country code top-level domain (ccTLD) by the
Commerce Department, and each country is responsible for registration of domain
names within the ccTLD. ICANN is currently considering the addition of one or
more new gTLDs and can do so at any time in the future. Internet regulatory
bodies could further modify the rights of current holders of domain names. As
a result, the value of each of our domain names could be diluted and decrease
the number of visitors to our Web sites, and we may not acquire or maintain
integritymusic or other relevant names in all gTLDs or in the ccTLDs of all
countries in which we conduct business or intend to conduct business. Our reserves for product returns may prove inadequate. Our management must make estimates of potential future product returns
related to current period product revenue. Management analyzes historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns and other
allowances. Significant management judgments and estimates must be made and
used in connection with establishing the sales returns and other allowances in
any accounting period. Material differences could result in the amount and
timing of our revenue for any period if management made different judgments or
utilized different estimates. Similarly, our management must make estimates of the uncollectability of
our accounts receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Material differences could result in the amount and timing of expense recorded
if management made different judgments or utilized different estimates. Fluctuations in our quarterly operating results may cause the market price for
our Class A Common Stock to be volatile. Our results of operations are subject to quarterly fluctuations and
seasonal variations. In particular, our revenues are affected by
end-of-the-year holiday sales. In accordance with industry practice, we record
revenues for music and book products when the products are shipped to 28




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retailers. In anticipation of holiday sales, retailers purchase products from
us prior to December. In addition, changes in the timing of new product
releases can also cause significant fluctuations in our quarterly operating
results because of the marketing costs involved in launching a new product and
the delay in receiving any sales revenue from the new product. For example, if
releases planned for the peak holiday season are delayed, our operating results
could be adversely affected, which could in turn cause the price of the Class A
Common Stock to fluctuate. Increases in the costs of CDs, cassettes, DVDs, and paper could harm our
profitability Increases in the costs of producing a CD, cassette or DVD due to increases
in petroleum prices or other costs associated with the manufacture and
duplication of CDs, cassettes and DVDs could adversely affect our
profitability. Increases in the costs of producing books due to increases in
the prices of paper or other costs associated with the manufacture of books
could adversely affect our profitability. Although we do not manufacture these
products internally, any significant price increase to our suppliers could
result in higher CD, cassette, DVD, and book prices to Integrity. We may not
be able to pass on these price increases to our customers. Increases in mailing, paper, printing and delivery costs could harm our
profitability. Increases in postal rates, as well as in the costs of paper, printing and
delivery, could adversely affect our direct response programs. We generally
ship orders by third class mail with the United States Postal Service, and we
rely heavily on discounts from the basic postal rate structure, such as special
rates for bulk mailings, sorting by zip code and carrier routes. Any increase
in postal rates, paper, printing or delivery costs could adversely affect our
profitability. We depend on certain senior executives who have experience unique to our
industry. Our success has been largely dependent on the skills, experience and
efforts of our senior management. Although we have employment agreements with
some of our senior executives, they could still choose to leave Integrity at
any time. If they did, we would have difficulty replacing them with
individuals who had an equal level of experience in the Christian music and
related products and book publishing industries. This could adversely affect
our daily operations, creative development and financial performance. Our new book publishing business has a limited operating history. Our book publishing subsidiary, Integrity Publishers, Inc., has a limited
operating history on which to base an evaluation of its business and prospects,
having only commenced its initial operations in August, 2001. The prospects
for our book publishing operation must be considered in light of the risks,
difficulties and uncertainties frequently encountered by businesses in an early
stage of development, particularly operations in industries involving many
larger and more established competitors. These risks include our ability to:  
    
    publish compelling and unique Christian book content;
    
    successfully market and sell our books; and
    
    effectively develop new and maintain existing relationships with
book distributors and other persons with which we do business. The ability to attract successful and highly qualified authors and
illustrators is critical to our future success. Competition for this type of
resource is intense, and authors and illustrators have many options in terms of
publisher affiliation. There can be no assurance that we will be able to
develop relationships with or retain superior-quality authors and illustrators,
and any failure to do so could adversely affect our operating results. We may be subject to liability for misuse of users private information. It is our policy that we will not willfully disclose any individually
identifiable information about any customer to a third party without the
customers consent unless required by law. This policy is available to
customers when they initially register on integritymusic.com website and is
also easily accessible on our websites. Despite this policy, if third persons
were able to penetrate our network security or otherwise misappropriate, or if
we inadvertently disclose, our customers personal 29




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information or credit card information, we could be subject to liability.
These liabilities could include claims for unauthorized purchases with credit
card information, impersonation or other similar fraud claims. They could also
include claims for other misuses of personal information, such as for
unauthorized marketing purposes. These claims could result in litigation,
which may cause us to incur substantial costs. We could incur additional
expenses if new laws or regulations regarding the use of personal information
are introduced or if these authorities choose to investigate our privacy
practices. While we have implemented and intend to implement additional
programs designed to enhance the protection of the privacy of our customers,
these programs may not conform with laws or regulations that are adopted. Integrity is controlled by the Coleman family. Our Chairman, President and Chief Executive Officer, P. Michael Coleman,
and his family beneficially own 55,100 shares of Class A Common Stock and all
3,385,000 shares of Class B Common Stock outstanding. This represents
approximately 93.6% of the total voting power of all classes of our voting
stock. As a result, Mr. Coleman is able to elect all of our directors, further
amend our Amended Certificate of Incorporation (the Amended Certificate),
effect or prevent a merger, sale of assets or other business acquisition or
disposition, and otherwise control the outcome of actions requiring stockholder
approval. Limited public trading of our Class A Common Stock may result in increased
price volatility. Although our Class A Common Stock is traded on the Nasdaq National Market,
the volume of shares traded during any particular period has historically been
low. Any sale or purchase of our Class A Common Stock in the public markets
that is large in relation to recent trading volumes for the Class A Common
Stock may therefore disproportionately affect the market price of our shares.
We cannot assure you that a more active and liquid market for the shares of
Class A Common Stock will develop. Our Class A Common Stock has limited voting rights. Our Amended Certificate limits the voting rights of our Class A Common
Stock. Each share of our Class A Common Stock is entitled to one vote, while
each share of our Class B Common Stock is entitled to ten votes on all matters
with respect to which our stockholders have a right to vote. Both classes of
our stock generally vote together as a single class. The shares of Class B
Common Stock are convertible into shares of Class A Common Stock on a
share-for-share basis at the election of the holder. Also, our Class B Common
Stock must be converted to shares of Class A Common Stock automatically if it
is transferred, except for transfers to or for the benefit of certain of Mr.
Colemans relatives. We do not have the authority to issue additional Class B
Common Stock except as dividends or distributions on outstanding Class B Common
Stock proportional to dividends or distributions on Class A Common Stock. The disproportionate voting rights of our Class B Common Stock could
adversely affect the market price of our Class A Common Stock. These
disproportionate voting rights may also make us a less attractive target for a
takeover than we otherwise might be, and render more difficult or discourage a
merger proposal, a tender offer, or a proxy contest, even if such actions were
favored by holders of our Class A Common Stock. Holders of Class A Common
Stock might therefore be deprived of an opportunity to sell their shares at a
premium over the then prevailing market price. The provisions of our charter documents and Delaware law could discourage a
take-over of Integrity. Our Board of Directors is authorized to issue shares of preferred stock.
Our Board of Directors, without approval of the stockholders, is also
authorized to establish the following provisions of any preferred stock:
voting, dividend, redemption, conversion, liquidation, and other provisions.
The issuance of preferred stock could adversely affect the voting power or
other rights of the holders of our common stock. Further, the issuance of
preferred stock could make more difficult, or discourage, a third partys
attempt to acquire control of us. Finally, we are also subject to Section 203
of the Delaware General Corporation Law, which may render more difficult a
change in control of Integrity. 30




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Companys market risk is limited to fluctuations in interest rates as
they pertain to the Companys borrowings under its credit facility. As of
December 31, 2003, the Company paid interest on borrowings at either LaSalles
base rate or an Adjusted LIBOR, plus an Interest Rate Margin. In the event
that interest rates were to increase 100 basis points, the Companys interest
expense would increase and income before income tax would decrease by $128,772,
assuming current debt levels are maintained. (This amount is determined solely
by considering the impact of the hypothetical change in the interest rate on
the Companys borrowing cost without consideration of other factors such as
actions management might take to mitigate its exposure to interest rate
changes.) The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging
transactions in order to modify the risk from these foreign currency exchange
rate and commodity price fluctuations. The Company also does not use financial
instruments for trading purposes and is not a party to any leveraged
derivatives. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to this item is submitted in Part III, Item 15 of this
report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES. An evaluation was performed under the supervision and with the
participation of the Companys management, including the President and Chief
Executive Officer (CEO), and the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures. Based on that evaluation, the Companys management, including
the CEO and CFO, concluded that the Companys disclosure controls and
procedures as of the end of the period covered by this report, were effective
in timely bringing to their attention material information related to the
Company required to be included in the Companys periodic SEC filings. During 2003, the Company implemented a new fully-integrated software
system for the operations at its main facilities in Mobile, Alabama. This new
software system services all operations for Integrity Media, Inc. and
Subsidiaries, with the exception of its book publishing subsidiary, Integrity
Publishers, Inc., and its international subsidiaries in Europe, Asia, Australia
and South Africa. Management discovered during the implementation isolated
instances whereby new internal control procedures were not followed. All
instances were detected on a timely basis and new controls set in place.
Management does not believe any of these instances had any material impact on
financial reporting. After
experiencing turnover of certain accounting personnel at our United
Kingdom subsidiary, while in the midst of testing internal controls,
evaluating the effectiveness of current procedures, and implementing
system changes, the Company identified certain account reconciliation
adjustments with respect to accounts receivable and accounts payable
and certain marketing costs incorrectly deferred, the aggregate of
which totaled $245,000 ($153,000, net of tax) and relate to fiscal
year 2001 and prior periods. Our auditors have reported a material
weakness relative to the lack of monitoring controls at our U.K.
subsidiary. New controls and procedural changes over these areas were
implemented and are currently in place and operating in accordance
with managements expectations. 31




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PART III. 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. To be provided by amendment pursuant to General Instruction G(3) of Form
10-K. 
 ITEM 11. EXECUTIVE COMPENSATION. To be provided by amendment pursuant to General Instruction G(3) of Form
10-K. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. To be provided by amendment pursuant to General Instruction G(3) of Form
10-K. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. To be provided by amendment pursuant to General Instruction G(3) of Form
10-K. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. To be provided by amendment pursuant to General Instruction G(3) of Form
10-K. 32




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Consolidated Financial Statements The following is a list of our consolidated financial statements, restated
for 2002 and 2001. Financial Statements
    
    Page No.Report of Independent Auditors
    
    
    34Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    35Consolidated Statement of Operations for the three years ended December 31, 2003
    
    
    36Consolidated Statement of Changes in Stockholders Equity for the three years
ended December 31, 2003
    
    
    37Consolidated Statement of Cash Flows for the three years ended December 31, 2003
    
    
    38Notes to Consolidated Financial Statements
    
    
    392. Financial Statement Schedules:II  Valuation and Qualifying Accounts and Reserves for the three years ended
December 31, 2003
    
    
    58
 33




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REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Integrity Media, Inc. and
Subsidiaries: 
 In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Integrity Media, Inc. and Subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 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
accompanying index 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. 
 As indicated in Note 2, the Company has restated its December 31, 2002 and
2001 consolidated financial statements. 
 /s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
April 14, 2004 
 34




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INTEGRITY MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) December 31,2002(Restated,2003
    
    see Note 2)ASSETSCurrent AssetsCash
    
    $
    3,142
    
    
    $
    4,821Trade receivables, less allowance for returns and doubtful accounts of $2,300
and $2,415
    
    
    10,847
    
    
    
    6,718Other receivables
    
    
    143
    
    
    
    67Inventories
    
    
    7,389
    
    
    
    5,191Other current assets
    
    
    6,835
    
    
    
    4,496Total current assets
    
    
    28,356
    
    
    
    21,293Property and equipment, net of accumulated depreciation of $7,179 and $6,055
    
    
    10,909
    
    
    
    7,337Product
masters, net of accumulated amortization of $22,321 and $19,387
    
    
    4,737
    
    
    
    3,806Other assets
    
    
    7,503
    
    
    
    8,237Total assets
    
    $
    51,505
    
    
    $
    40,673LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesLine of credit
    
    $
    4,500
    
    
    $
    0Current portion of long-term debt
    
    
    2,690
    
    
    
    2,690Accounts payable and accrued expenses
    
    
    7,746
    
    
    
    5,354Royalties payable
    
    
    6,630
    
    
    
    6,256Other current liabilities
    
    
    1,909
    
    
    
    924Total current liabilities
    
    
    23,475
    
    
    
    15,224Long-term debt
    
    
    7,119
    
    
    
    6,780Other long-term liabilities
    
    
    630
    
    
    
    179Total liabilities
    
    
    31,224
    
    
    
    22,183Commitments and contingencies (Note 14)Minority interest
    
    
    563
    
    
    
    606Stockholders EquityPreferred stock, $.01 par value; 500,000 shares authorized, none issued and
outstanding
    
    
    0
    
    
    
    0Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,384,783 and 2,364,783 shares issued and outstanding
    
    
    24
    
    
    
    24Class B common stock, $.01 par value, 10,500,000 shares authorized;
3,385,000 and 3,385,000 shares issued and outstanding
    
    
    34
    
    
    
    34Additional paid-in capital
    
    
    13,001
    
    
    
    12,956Unearned compensation
    
    
    (371
    )
    
    
    (479
    )Retained earnings
    
    
    7,181
    
    
    
    5,299Accumulated other comprehensive income (loss)
    
    
    (151
    )
    
    
    50Total stockholders equity
    
    
    19,718
    
    
    
    17,884Total liabilities and stockholders equity
    
    $
    51,505
    
    
    $
    40,673
 The accompanying notes are an integral part of these consolidated financial statements. 35




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INTEGRITY MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Year Ended December 31,2002(Restated,
    
    (Restated,2003
    
    See Note 2)
    
    See Note 2)Net sales
    
    $
    74,264
    
    
    $
    66,345
    
    
    $
    70,958Cost of sales
    
    
    37,233
    
    
    
    32,178
    
    
    
    38,089Gross profit
    
    
    37,031
    
    
    
    34,167
    
    
    
    32,869Marketing and fulfillment expenses
    
    
    13,690
    
    
    
    13,897
    
    
    
    12,983General and administrative expenses
    
    
    19,586
    
    
    
    16,138
    
    
    
    15,246Income from operations
    
    
    3,755
    
    
    
    4,132
    
    
    
    4,640Other expenses (income)Interest expense, net
    
    
    415
    
    
    
    273
    
    
    
    281Other expenses (income)
    
    
    1
    
    
    
    126
    
    
    
    184Income before minority interest and taxes
    
    
    3,339
    
    
    
    3,733
    
    
    
    4,175Provision for income taxes
    
    
    (1,249
    )
    
    
    (1,263
    )
    
    
    (1,412
    )Minority interest, net of applicable taxes
    
    
    (208
    )
    
    
    (254
    )
    
    
    (105
    )Net income
    
    $
    1,882
    
    
    $
    2,216
    
    
    $
    2,658Adjustments to determine comprehensive
incomeForeign currency translation adjustments
    
    
    (201
    )
    
    
    268
    
    
    
    (83
    )Comprehensive income
    
    $
    1,681
    
    
    $
    2,484
    
    
    $
    2,575Net income per share  Basic
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.47Net income per share  Diluted
    
    $
    0.32
    
    
    $
    0.37
    
    
    $
    0.43Weighted average number of shares
outstandingBasic
    
    
    5,611
    
    
    
    5,599
    
    
    
    5,638Diluted
    
    
    5,958
    
    
    
    6,010
    
    
    
    6,238
 The accompanying notes are an integral part of these consolidated financial statements. 36




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INTEGRITY MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except per share data)
(Restated, see Note 2) Class A
    
    Class BCommon Stock
    
    Common StockShares
    
    Amount
    
    Shares
    
    AmountBalance, December 31, 2000
    
    
    2,184,000
    
    
    $
    22
    
    
    
    3,435,000
    
    
    $
    34Net incomeRepurchase of stock
WarrantsIssuance of restricted stock
    
    
    50,000
    
    
    
    0Issuance of common stock
upon exercise of options
    
    
    67,000
    
    
    
    1Amortization of restricted
stock awardTranslation adjustmentsBalance, December 31, 2001
    
    
    2,301,000
    
    
    
    23
    
    
    
    3,435,000
    
    
    
    34Net incomeTransfer of stock
    
    
    50,000
    
    
    
    1
    
    
    
    (50,000
    )
    
    
    0Issuance of common stock
upon exercise of options
    
    
    13,783
    
    
    
    0Amortization of restricted
stock awardTranslation adjustmentsBalance, December 31, 2002
    
    
    2,364,783
    
    
    
    24
    
    
    
    3,385,000
    
    
    
    34Net incomeIssuance of common stock
upon exercise of options
    
    
    20,000
    
    
    
    0Amortization of restricted
stock awardTranslation adjustmentsBalance, December 31, 2003
    
    
    2,384,783
    
    
    $
    24
    
    
    
    3,385,000
    
    
    $
    34
   [Continued from above table, first column(s) repeated] AccumulatedAdditional
    
    
    
    
    
    OtherUnearned
    
    Paid-in
    
    (Accum. Deficit)
    
    ComprehensiveCompensation
    
    Capital
    
    Retained Earnings
    
    Income (Loss)
    
    TotalBalance, December 31, 2000
    
    $
    (272
    )
    
    $
    13,857
    
    
    $
    2,450
    
    
    $
    (135
    )
    
    $
    15,956Net income
    
    
    
    
    
    
    
    
    
    
    2,658
    
    
    
    
    
    
    
    2,658Repurchase of stock
Warrants
    
    
    
    
    
    
    (1,438
    )
    
    
    (2,025
    )
    
    
    
    
    
    
    (3,463
    )Issuance of restricted stock
    
    
    (377
    )
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    0Issuance of common stock
upon exercise of options
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    135Amortization of restricted
stock award
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    (83
    )Balance, December 31, 2001
    
    
    (587
    )
    
    
    12,930
    
    
    
    3,083
    
    
    
    (218
    )
    
    
    15,265Net income
    
    
    
    
    
    
    
    
    
    
    2,216
    
    
    
    
    
    
    
    2,216Transfer of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of common stock
upon exercise of options
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Amortization of restricted
stock award
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    268Balance, December 31, 2002
    
    
    (479
    )
    
    
    12,956
    
    
    
    5,299
    
    
    
    50
    
    
    
    17,884Net income
    
    
    
    
    
    
    
    
    
    
    1,882
    
    
    
    
    
    
    
    1,882Issuance of common stock
upon exercise of options
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Amortization of restricted
stock award
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (201
    )
    
    
    (201
    )Balance, December 31, 2003
    
    $
    (371
    )
    
    $
    13,001
    
    
    $
    7,181
    
    
    $
    (151
    )
    
    $
    19,718
 The accompanying notes are an integral part of these consolidated financial statements. 37




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INTEGRITY MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,2002(Restated,
    
    (Restated,2003
    
    see Note 2)
    
    see Note 2)Cash flows from operating activitiesNet income
    
    $
    1,882
    
    
    $
    2,216
    
    
    $
    2,658Adjustments to reconcile net income to net cash provided
by operating activitiesDepreciation and amortization
    
    
    2,296
    
    
    
    1,628
    
    
    
    1,265Amortization of product masters
    
    
    2,937
    
    
    
    3,409
    
    
    
    5,394Minority interest
    
    
    207
    
    
    
    254
    
    
    
    105Stock compensation
    
    
    108
    
    
    
    108
    
    
    
    62Deferred income tax (benefit) provision
    
    
    362
    
    
    
    (255
    )
    
    
    385Changes in operating assets and liabilitiesTrade receivables (net)
    
    
    (4,012
    )
    
    
    (550
    )
    
    
    652Other receivables
    
    
    (76
    )
    
    
    22
    
    
    
    (260
    )Inventories
    
    
    (2,058
    )
    
    
    (787
    )
    
    
    691Other assets
    
    
    (3,485
    )
    
    
    (1,687
    )
    
    
    (1,437
    )Accounts payable, royalties payable and
Accrued expenses
    
    
    3,045
    
    
    
    2,597
    
    
    
    2,064Other current and non current liabilities
    
    
    1,354
    
    
    
    (1,260
    )
    
    
    1,895Net cash provided by operating activities
    
    
    2,560
    
    
    
    5,695
    
    
    
    13,474Cash flows from investing activitiesPurchases of property and equipment
    
    
    (4,633
    )
    
    
    (3,887
    )
    
    
    (912
    )Payments for product masters
    
    
    (3,867
    )
    
    
    (3,682
    )
    
    
    (3,288
    )Payment for purchase of INO Records, LLC
net of cash acquired
    
    
    0
    
    
    
    (4,779
    )
    
    
    0Payment for purchase of Sarepta (Pty) Ltd, net of cash
Acquired
    
    
    (191
    )
    
    
    0
    
    
    
    0Net cash used in investing activities
    
    
    (8,691
    )
    
    
    (12,348
    )
    
    
    (4,200
    )Cash flows from financing activitiesNet borrowings under line of credit
    
    
    9,000
    
    
    
    1,300
    
    
    
    287Borrowings under term facility
    
    
    3,048
    
    
    
    6,950
    
    
    
    6,378Payments under line of credit
    
    
    (4,500
    )
    
    
    (1,300
    )
    
    
    (1,161
    )Distributions to joint venture partner
    
    
    (250
    )
    
    
    (250
    )
    
    
    (250
    )Stock warrant repurchase
    
    
    0
    
    
    
    0
    
    
    
    (3,463
    )Proceeds from issuance of stock
    
    
    45
    
    
    
    28
    
    
    
    135Principal payments under term facility
    
    
    (2,690
    )
    
    
    (2,376
    )
    
    
    (5,064
    )Net cash provided (used) by financing activities
    
    
    4,653
    
    
    
    4,352
    
    
    
    (3,138
    )Effect of exchange rate changes on cash
    
    
    (201
    )
    
    
    268
    
    
    
    (83
    )Net (decrease) increase in cash
    
    
    (1,679
    )
    
    
    (2,033
    )
    
    
    6,053Cash, beginning of year
    
    
    4,821
    
    
    
    6,854
    
    
    
    801Cash, end of year
    
    $
    3,142
    
    
    $
    4,821
    
    
    $
    6,854Supplemental disclosures of cash flow informationInterest paid
    
    $
    531
    
    
    $
    283
    
    
    $
    249Income taxes paid
    
    $
    740
    
    
    $
    1,633
    
    
    $
    401
 The accompanying notes are an integral part of these consolidated financial statements. 38




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INTEGRITY MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Integrity Media, Inc. and Subsidiaries (the Company) is a
media/communications company that produces, publishes and distributes Christian
music, books and related products. Integritys music product formats include
cassettes, compact discs, videos, DVDs and printed music. The Company
produces Praise and Worship music in different musical styles for specific
audiences such as childrens music, gospel music for the African-American
audience, youth music and live worship music for adult audiences. In July
2002, Integrity announced the purchase of INO Records, LLC (formerly M2
Communications, L.L.C.), an artist-based independent Christian music company
headquartered in Nashville, Tennessee. The purchase of INO allowed the Company
to enter the Adult Contemporary/Rock segment of Christian music. The Companys
Integrity Publishers division, created in 2001, produces and publishes
Christian books. Products are sold through two divisions. Integrity Music
sells all music-related products and Integrity Publishers sells all Christian
book products. Products are sold mainly by direct-to-consumer marketing and
wholesale trade methods. A principal direct-to-consumer marketing method of
distribution is continuity programs whereby subscribers receive products at
regular intervals. Integrity Music Europe Limited was formed in 1988, Integrity Music PTY
Limited was formed in 1991, Integrity Media Asia Pte Ltd was formed in 1995 and
Sarepta Music Pty Ltd was acquired in 2003. These subsidiaries serve to
expand the Companys presence in Western Europe, Australia and New Zealand,
Singapore and South Africa, respectively. All subsidiaries are wholly-owned by
the Company, with the exception of Integrity Music Europe Limited, of which the
Company owns 65%. Celebration Hymnal LLC was formed in 1997 as a 50/50 joint
venture with Word Entertainment, for the purpose of producing and promoting The
Celebration Hymnal. Due to the Companys ability to control the venture, the
Company consolidates the venture and Word Entertainments interest in the joint
venture is presented as minority interest in these financial statements.
Integrity Publishers, Inc. was formed in August 2001 for the purpose of
publishing and distributing Christian books. This division published its first
books in the fall of 2002. INO Records, LLC was purchased in July 2002.
Integrity Direct, LLC, was formed in December 2002 to create a smoother
interaction between the Company and its customers. This area is a combination
of the Direct-to-Consumer and Direct-to-Church areas and includes direct mail,
continuity clubs, Internet, catalog sales, direct-to-church sales, and direct
response television. The Companys significant accounting policies are as follows: Principles of Consolidation The accompanying financial statements include the accounts of the Company
and its controlled subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company controls the
operations of the joint venture through its majority position on the Board of
Directors of The Celebration Hymnal LLC. Revenue Recognition Revenue is generally recognized when delivery has occurred and at the time
title passes to the customer. For product sales direct-to-consumers that allow
a trial or acceptance period, title is not deemed to have passed nor revenue
recognized until the acceptance periods have expired. Generally, these
acceptance periods are fifteen days after receipt of product. Provisions for
sales returns and allowances are made in the period in which the related
products are shipped or title passes based on estimates derived from historical
data. The allowance is recorded against revenue in the period in which the
related products are shipped. The returns allowance is presented, along with
the allowance for doubtful accounts, as a reduction of accounts receivable in
the accompanying financial statements. Revenue earned from licensing the use of songs or product masters in the
Companys song catalogs is generally recognized as payments are received from
licensees. If the Company has 39




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information related to the licensed use of songs that would result in the
revenue being fixed and determinable, and collection reasonably assured, then
revenue is recognized in the periods in which the license revenue is earned. Accounts Receivable At December 31, 2003, the Company had a receivable for a customer that
represented 11% of our net accounts receivable balance. 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, books 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-to-consumer sales. In accordance with the guidance contained in the
Accounting Standards Executive Committee Statement of Position 93-7 Reporting
on Advertising Costs, marketing expenditures that benefit future periods are
capitalized and charged to operations over a period of six months, which
approximates the period during which the related sales are expected to be
realized. Other marketing costs are expensed the first time advertising takes
place. Prepaid marketing costs, including artwork, printing and direct mail
packages, are included in assets in the accompanying financial statements and
approximated $1.7 million and $0.7 million (as restated, see Note 2) at
December 31, 2003 and 2002, respectively. Marketing costs expensed for the
three years ended December 31, 2003, 2002 and 2001 approximated $7.5 million,
$7.0 million and $6.2 million, respectively. Shipping and Handling The Company recognizes shipping and handling cost as part of cost of
sales. 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 $5.5 million, $6.2 million and $5.0 million of total fulfillment
expense for the years ended December 31, 2003, 2002 and 2001, respectively.
Also included in fulfillment expenses for Integrity Publishers are fees paid to
a third party service provider for data entry, generation of invoices, cash
processing and logistics services. 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 approximately 30 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 40




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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, generally
three years, using a method that reasonably relates to the amount of net
revenue expected to be realized. Management periodically reviews the product
masters amortization rates and adjusts the amortization rate based on
managements estimates for future sales. In conjunction with such analysis,
any amounts that do not appear to be fully recoverable are charged to expense
during the period the loss becomes estimable. The costs of producing a product
master include the cost of the musical talent, the cost of the technical talent
for engineering, directing and mixing, costs for the use of the equipment to
record and produce the master and studio facility charges. A significant
portion of these product master costs are capitalized costs of the Companys
resources, both personnel and equipment related, that can be primarily
associated with the creation of the product master. Impairment of Long-Lived Assets The Company evaluates impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, an impairment loss would be
recognized. Measurement of an impairment loss for long-lived assets would be
based on the fair value of the asset. Advance Royalties and Royalties Payable Royalties earned by publishers, producers, songwriters, or other artists
are charged to expense in the period in which the related product sale occurs.
Advance royalties paid are capitalized if the past performance and current
popularity of the artist to whom the advance is made demonstrates such amounts
will be recoverable from future royalties to be earned by the artist. 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 $3,587,000 and $1,898,000 at December 31, 2003 and 2002,
respectively. Royalties payable are reduced for the estimated royalties that
will not be paid due to product returns and bad debts. Intangible Assets In conjunction with the acquisition of INO Records, LLC, on June 28, 2002,
the Company recorded $5.3 million of artists contracts as an intangible asset.
This asset is amortized on a straight-line basis over seven years, which is the
period the underlying value will be realized. On an annual basis the Company
assesses the carrying value of its intangible assets to determine whether
trends or events may have caused the carrying value of such intangible assets
to exceed their net realizable value. No such trends or events were noted in
the three year period ended December 31, 2003. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of
operations. 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. 41




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Stock-based Compensation Plans The Company has elected to account for its stock-based compensation plans
under Accounting Principals Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) with the associated disclosure requirements of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation (SFAS No. 123) in Note 11. SFAS No. 123 requires that companies
that elect to not account for stock-based compensation as prescribed by that
statement shall disclose among other things, pro forma effects on net income
and net income per share as if SFAS No. 123 had been adopted. Under APB No.
25, because the exercise price of the Companys employee stock options is equal
to 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 are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share are computed by dividing net earnings by
the sum of (a) the weighted average number of shares of common stock
outstanding during the period and (b) the dilutive effect of potential common
stock equivalents during the period. The basic weighted average number of shares of common stock outstanding
for the period was 5,611,080, 5,598,783 and 5,638,067 for the years ended
December 31, 2003, 2002 and 2001, respectively. The diluted weighted average number of shares of common stock and
potential common stock equivalents outstanding for the period was 5,958,350,
6,010,862 and 6,238,090 for the years ended December 31, 2003, 2002 and 2001,
respectively. Stock options are the only common stock equivalents and are
therefore considered in the diluted earnings per share calculations. Common
stock equivalents are computed using the treasury stock method. Foreign Currencies Assets and liabilities at foreign subsidiaries are recorded based on their
functional currencies, which are their respective local currencies. Amounts in
foreign currencies are translated at the applicable exchange rate at the
balance sheet date using the rate in effect as of the period end. Revenues and
expenses of foreign subsidiaries are translated using the weighted 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. The aggregate foreign currency gain or (loss) was
($201,000), $268,000 and ($83,000) for fiscal 2003, 2002, and 2001,
respectively. 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. 42




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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, accounts receivable bad debts and returns,
inventory valuations and provisions for taxes. 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 Upon adoption of FAS 145, the Company reclassified $154,000, net of tax
from an extraordinary item to general and administrative expenses in the 2001
consolidated statement of operations. Recent Accounting Pronouncements In August 2001, FASB issued SFAS No. 143, (SFAS 143), Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after
June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 requires, among other things,
that the retirement obligations be recognized when they are incurred and
displayed as liabilities on the balance sheet. In addition, the assets
retirement costs are to be capitalized as part of the assets carrying amount
and subsequently allocated to expense over the assets useful life. The
adoption of SFAS No. 143 had no effect on the Companys financial position,
results of operations or cash flows. In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which supersedes both Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121) and
the accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (Opinion 30), for the
disposal of a segment of a business (as previously defined in that Opinion).
SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and
measuring impairment losses on long-lived assets to be held and used. In
addition, the statement provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset or group of
assets to be disposed of other than by sale be classified as held-and-used
until they are disposed of, and establishes more restrictive criteria to
classify an asset or group of assets as held for sale. SFAS 144 also retains
the basic provisions of Opinion 30 on how to present discontinued operations in
the income statement, but broadens that presentation to include a component of
an entity (rather than a segment of a business). We
adopted SFAS 144 at the beginning of fiscal 2003, which had no impact on our
consolidated results of operations, financial condition or cash flows. In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of Financial Accounting
Standards Board Statements No. 4, 44 and 64, Amendment of Financial Accounting
Standards Board Statement No. 13, and Technical Corrections (SFAS 145). In
addition to other technical provisions, this Statement rescinds Statement of
Financial Accounting Standards No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of tax. The Company as 43




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adopted SFAS 145 with the appropriate reclassifications made to our
consolidated results of operations, financial condition and cash flows. In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities(SFAS No. 146). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities,
such as restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. The Companys adoption of SFAS
146 did not have a significant impact on its financial position, results of
operations or cash flows. In November 2002, the FASB Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others was issued. The interpretation provides
guidance of the guarantors accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The
Company has adopted the disclosure requirements of the interpretation as of
December 31, 2002. The accounting guidelines are applicable to guarantees
issued after December 31, 2002 and require that the Company record a liability
for the fair value of such guarantees in the balance sheet. The Companys
adoption of FIN No. 45 did not have a significant impact on its financial
position, results of operations or cash flow. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Companys adoption
of FIN No. 46 did not have a significant impact on its financial position,
results of operations or cash flow. The Company adopted the disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment
of FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, effective January 1, 2003. SFAS No.
148 amends SFAS No. 123 Accounting for Stock-Based Compensation to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
the Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The amendments pertaining to the
alternative methods of transition are effective for financial statements for
fiscal years ended after December 15, 2002. The amendments to the disclosure
requirements are effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. As permitted
by SFAS No. 148 and SFAS No. 123, we continue to apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations in accounting for our
stock option plans and our employee stock purchase plan and the disclosure-only
provisions of SFAS No. 123 as amended by SFAS 148. We did not record
stock-based compensation expense in the twelve months ended December 31, 2003
and December 31, 2002, as all options granted under our plans had an exercise
price equal to fair market value. The adoption of the additional disclosure
requirement did not have a significant impact on our reported results of
operations, financial position or cash flows. SFAS No. 148 requires us to
provide pro forma disclosure of the impact on our results of operations had we
adopted the expense measurement provisions of SFAS No. 123. SFAS No. 123
permits the use of either a fair value based method or the intrinsic value
method to measure the expense associated with our stock option plans and our
employee stock purchase plan. The pro forma impact on our results of
operations had we adopted the fair value based method of SFAS No. 123 using the
Black-Scholes option-pricing model are shown below: 44




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Twelve Months Ended December 312001(Restated, see2003
    
    2002
    
    Note 2)Net income (loss)  as reported
    
    $
    1,882
    
    
    $
    2,216
    
    
    $
    2,658Deduct:Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    $
    175
    
    
    $
    185
    
    
    $
    213Pro forma net income (loss)
    
    $
    1,707
    
    
    $
    2,031
    
    
    $
    2,445Net income (loss) per share:Basic  as reported
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.47Diluted  as reported
    
    $
    0.32
    
    
    $
    0.37
    
    
    $
    0.43Basic  Pro forma
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.43Diluted  Pro forma
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.39
 In April 2003, the FASB issued Financial Accounting Standard No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
(FAS No.149). This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and other hedging activities entered into after
June 30, 2003. The Company does not expect the adoption of FAS No. 149, to have
a material effect on its financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a material effect on the Companys financial
statements. 45




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2. RESTATEMENT OF FINANCIAL STATEMENTS After
experiencing turnover of certain accounting personnel at our United
Kingdom subsidiary, while in the midst of testing internal controls,
evaluating the effectiveness of current procedures, and implementing
system changes, the Company identified certain account reconciliation
adjustments with respect to accounts receivable and accounts payable
and certain marketing costs incorrectly deferred, the aggregate of
which totaled $245,000 ($153,000, net of tax) and relate to fiscal
year 2001 and prior periods. The resultant restatement has been
recorded entirely in 2001 as the Company is unable to determine the
impact on periods prior thereto. The impact of these errors also
impacted the 2002 consolidated balance sheet, consolidated statement
of changes in stockholders equity, consolidated statement of
cash flows and the foreign currency translation adjustment and
comprehensive income lines in our 2002 statement of operations. The
following tables set forth previously reported amounts for fiscal
2002 and 2001 compared to the restated financial statement amounts. December 31, 2002As Previously Reported
    
    RestatedBalance sheet data (in thousands):AssetsTrade receivables
    
    $
    6,842
    
    
    $
    6,718Other current assets
    
    $
    4,558
    
    
    $
    4,496Total current assets
    
    $
    21,479
    
    
    $
    21,293Total assets
    
    $
    40,859
    
    
    $
    40,673LiabilitiesAccounts payable and accrued expenses
    
    $
    5,298
    
    
    $
    5,354Other current liabilities
    
    $
    997
    
    
    $
    924Total current liabilities
    
    $
    15,241
    
    
    $
    15,224Total liabilities
    
    $
    22,200
    
    
    $
    22,183Shareholders EquityRetained earnings
    
    $
    5,452
    
    
    $
    5,299Accumulated other comprehensive
income (loss)
    
    $
    66
    
    
    $
    50Total shareholders equity
    
    $
    18,053
    
    
    $
    17,884Total liabilities and shareholders equity
    
    $
    40,859
    
    
    $
    40,673
 December 31, 2001As Previously Reported
    
    RestatedAssetsTrade receivables
    
    $
    5,389
    
    
    $
    5,277Other current assets
    
    $
    3,512
    
    
    $
    3,456Total current assets
    
    $
    20,548
    
    
    $
    20,380Total assets
    
    $
    31,367
    
    
    $
    31,199LiabilitiesAccounts payable and accrued expenses
    
    $
    3,683
    
    
    $
    3,734Other current liabilities
    
    $
    2,375
    
    
    $
    2,309Total current liabilities
    
    $
    12,398
    
    
    $
    12,383Total liabilities
    
    $
    15,346
    
    
    $
    15,331Shareholders equityRetained earnings
    
    $
    3,236
    
    
    $
    3,083Total shareholders equity
    
    $
    15,418
    
    
    $
    15,265Total liabilities and shareholders equity
    
    $
    31,367
    
    
    $
    31,199
 46




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Year Ended December 31, 2001As Previously Reported
    
    RestatedIncome statement data (in thousands):ExpensesMarketing and fulfillment expense
    
    $
    12,815
    
    
    $
    12,983General and administrative expenses
    
    $
    15,195
    
    
    $
    15,246Income from operations
    
    $
    4,859
    
    
    $
    4,640Income before minority interest and taxes
    
    $
    4,394
    
    
    $
    4,175Provision for income taxes
    
    $
    (1,478
    )
    
    $
    (1,412
    )Net income
    
    $
    2,811
    
    
    $
    2,658Net income per share  basic
    
    $
    0.50
    
    
    $
    0.47Net income per share  diluted
    
    $
    0.45
    
    
    $
    0.43
 December 31, 2002As Previously Reported
    
    RestatedStatement of cash flow data (in thousands):Change in operating assets & liabilitiesTrade receivables (net)
    
    $
    (562
    )
    
    $
    (550
    )Other assets
    
    $
    (1,693
    )
    
    $
    (1,687
    )Accounts payable, royalties payable and
accrued expenses
    
    $
    2,590
    
    
    $
    2,597Other current and noncurrent liabilities
    
    $
    (1,251
    )
    
    $
    (1,260
    )Net cash provided by operating activities
    
    $
    5,679
    
    
    $
    5,695Accumulated other comprehensive
income (loss)
    
    $
    284
    
    
    $
    268
 December 31, 2001As Previously Reported
    
    RestatedChange in operating assets & liabilitiesNet income
    
    $
    2,811
    
    
    $
    2,658Trade receivables (net)
    
    $
    540
    
    
    $
    652Other assets
    
    $
    (1,493
    )
    
    $
    (1,437
    )Accounts payable, royalties payable and
accrued expenses
    
    $
    2,013
    
    
    $
    2,064Other current and noncurrent liabilities
    
    $
    1,961
    
    
    $
    1,895
 3. OTHER CURRENT ASSETS Other current assets consist of the following: December 31(in thousands)2002 (Restated, see2003
    
    Note 2)Prepaid expenses
    
    $
    1,240
    
    
    $
    1,307Prepaid marketing costs
    
    
    1,700
    
    
    
    641Royalty advances
    
    
    3,587
    
    
    
    1,898Deferred tax assets
    
    
    38
    
    
    
    417Prepaid publishing
    
    
    270
    
    
    
    233$
    6,835
    
    
    $
    4,496
 47




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4. PROPERTY AND EQUIPMENT Property and equipment consists of: December 31(in thousands)2003
    
    2002Land
    
    $
    625
    
    
    $
    625Buildings and leasehold improvements
    
    
    7,669
    
    
    
    2,954Construction in progress
    
    
    0
    
    
    
    2,406Computer and other equipment
    
    
    5,407
    
    
    
    4,340Studio equipment
    
    
    1,244
    
    
    
    1,171Furniture and fixtures
    
    
    3,143
    
    
    
    1,89618,088
    
    
    
    13,392Less  accumulated depreciation
    
    
    (7,179
    )
    
    
    (6,055
    )$
    10,909
    
    
    $
    7,337
 Depreciation expense approximated $1,124,000, $827,000 and $619,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. Capitalized
interest approximated $91,000, $13,000 and $0 for the years ended December 31,
2003, 2002 and 2001, respectively. 5. OTHER ASSETS Other assets consist of the following: December 31(in thousands)2002 (Restated,2003
    
    See Note 2)Music copyrights, net of
accumulated amortization
    
    $
    1,141
    
    
    $
    1,316Deferred tax assets
    
    
    657
    
    
    
    640Loan financing cost
    
    
    447
    
    
    
    569Cash surrender value of
life insurance
    
    
    482
    
    
    
    309Intangible asset, net of
accumulated amortization
    
    
    4,393
    
    
    
    4,958Other
    
    
    383
    
    
    
    445$
    7,503
    
    
    $
    8,237
 The music copyrights are being amortized over their future estimated
useful lives, which is approximately fifteen years. Accumulated amortization
at December 31, 2003 and December 31, 2002 was approximately $1,492,354 and
$1,317,759, respectively. Amortization expense was $174,595, $174,759 and $174,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. 6. ACQUISITIONS On June 28, 2002, the Company purchased all assets and assumed the
outstanding liabilities of INO Records, LLC. The Company paid, net of cash
acquired, $4.8 million to complete the transaction. The transaction was funded
partly from operating cash and the issuance of $3 million additional debt
through the Companys credit facility. The Company accounted for this
transaction under the purchase method of accounting and accordingly, allocated
the purchase price as follows (in thousands): 48




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Cash
    
    $
    103Accounts Receivable
    
    $
    905Inventory
    
    $
    62Property and equipment, net
    
    $
    20Product masters, net
    
    $
    13Intangible
    
    $
    4902Royalty Payable
    
    $
    1128
 The following pro-forma information presents the results of operations of
the Company as if the acquisition of INO Records, LLC had been completed as of
January 1, 2002 and January 1, 2001, respectively (in thousands, except per
share data): For the Year Ended December 31, 2002As Reported
    Pro-Forma (unaudited)Net Sales
    
    $
    66,345
    
    
    $
    72,046Net Income
    
    $
    2,216
    
    
    $
    2,556Basic EPS
    
    $
    0.40
    
    
    $
    0.46Diluted EPS
    
    $
    0.37
    
    
    $
    0.43
 For the Year Ended December 31, 2001 (As restated, see Note 2)Restated
    
    Pro-Forma (unaudited)Net Sales
    
    $
    70,958
    
    
    $
    75,458Net Income
    
    $
    2,658
    
    
    $
    2,394Basic EPS
    
    $
    0.47
    
    
    $
    0.42Diluted EPS
    
    $
    0.43
    
    
    $
    0.38
 On March 31, 2003, the Company purchased Sarepta Music (Pty) Ltd. In
conjunction with the purchase, the Company assumed all outstanding assets and
liabilities as of the purchase date. 7. DEBT On April 25, 2001, the Company entered into a new $20 million, five-year
secured credit facility with LaSalle Bank N. A. The credit agreement includes a
$6 million line of credit and term loans of $14 million. Through this new
credit facility, the Company refinanced its previous credit facility with Bank
Austria Creditanstalt. Effective January 29, 2004, the line of credit
increased from $6 million to $9 million. At December 31, 2003, there was $4.5
million outstanding under the line of credit and $9.8 million outstanding under
the term loans. At December 31, 2002, there was $0 outstanding under the line
of credit and $9.4 million outstanding under the term loans with LaSalle Bank
N.A. The loans with LaSalle carry an interest rate of 4.0%. At December 31, 2003, the Company had approximately $1.5 million of
available funds under the line of credit and zero under the term loans with
LaSalle. At December 31, 2002, the Company had approximately $6.0 million of
available funds under the line of credit and $2.6 million available under the
term loans with LaSalle. Of the $14 million initial term facility, $3.0
million was used for the pay-off to Bank Austria, $3.4 million was used for the
warrant repurchase described below, and $3.1 million expired, leaving $4.5
million available at December 31, 2001. The $3.1 million portion expired on
December 19, 2001, after extension of the original expiration date of October
22, 2001, due to time and use restrictions as detailed in the original credit
agreement. On March 30, 2002, the Company amended its original agreement with
LaSalle Bank N.A. to restore $1.6 million of the $3.1 million facility that
expired on December 19, 2001. On June 28, 2002, the facility was also amended
to increase the available borrowings under the term loan by $3 million. On
June 28, 2002, the Company then used this additional $3 million to partially
fund the acquisition of INO Records, LLC. The line of credit and term loan with LaSalle contain restrictive
covenants with respect to the Company, including, among other things,
limitations on the payments of dividends, the incurrence of 49




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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. Aggregate principal maturities of long-term debt at December 31, 2003 are as
follows: TotalFiscal Year
    
    (in thousands)2004
    
    $
    2,6902005
    
    
    2,6902006
    
    
    4,4292007
    
    
    0$
    9,809
 At December 31, 2003, approximately $887,821, net of accumulated
amortization of $440,588, of loan issuance costs are being amortized over the
term of the debt agreements. 8. INCOME TAXES The components of the provision for income taxes for the three years ended
December 31, 2003 are as follows: Year Ended December 31,(in thousands)2001 (Restated,2003
    
    2002
    
    see Note 2)Current provisionFederal
    
    $
    734
    
    
    $
    1,260
    
    
    $
    834State
    
    
    148
    
    
    
    339
    
    
    
    259Foreign
    
    
    (15
    )
    
    
    0
    
    
    
    (66
    )867
    
    
    
    1,599
    
    
    
    1,027Deferred provision (benefit)Federal
    
    
    345
    
    
    
    (241
    )
    
    
    374State
    
    
    38
    
    
    
    (34
    )
    
    
    11Foreign
    
    
    0
    
    
    
    (61
    )
    
    
    0383
    
    
    
    (336
    )
    
    
    385Total provision (benefit)
    
    $
    1,250
    
    
    $
    1,263
    
    
    $
    1,412
 50




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##### Table of Contents



The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal income tax rate (34%) because of the effect of the
following items: December 31,2001(Restated,2003
    
    2002
    
    see Note 2)Income tax provision at statutory rates
    
    $
    1,135
    
    
    $
    1,269
    
    
    $
    1,578State tax provision, net of federal taxes
    
    
    109
    
    
    
    157
    
    
    
    133Nondeductible expenses
    
    
    36
    
    
    
    12
    
    
    
    67Credits related to foreign income
    
    
    (103
    )
    
    
    (42
    )
    
    
    (390
    )Other, net
    
    
    0
    
    
    
    27
    
    
    
    26Foreign tax income
    
    
    (101
    )
    
    
    (160
    )
    
    
    (282
    )Deferred tax adjustment
    
    
    0
    
    
    
    0
    
    
    
    280Change in valuation allowance
    
    
    174
    
    
    
    0
    
    
    
    0Provision of (benefit) for income taxes
    
    $
    1,250
    
    
    $
    1,263
    
    
    $
    1,412
 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. Significant components of the Companys deferred tax assets and
liabilities as of December 31, 2003, 2002, and 2001 are as follows (in
thousands): 2002 (As
    
    2001(Restated,
    
    (Restated,2003
    
    see Note 2)
    
    see Note 2)Deferred assetsForeign and state net operating loss carryforwards
    
    $
    273
    
    
    $
    155
    
    
    $
    25Reserves for returns and allowances, net
    
    
    1,262
    
    
    
    1,095
    
    
    
    982Depreciation
    
    
    406
    
    
    
    450
    
    
    
    450Stock based compensation
    
    
    58
    
    
    
    62
    
    
    
    205Non compete agreement
    
    
    240
    
    
    
    215
    
    
    
    211Other
    
    
    0
    
    
    
    0
    
    
    
    182,239
    
    
    
    1,977
    
    
    
    1,891Deferred tax liabilitiesPrepaid expenses
    
    
    (564
    )
    
    
    (373
    )
    
    
    (477
    )Returns
    
    
    (375
    )
    
    
    (283
    )
    
    
    (548
    )Amortization
    
    
    (285
    )
    
    
    (131
    )
    
    
    0Other
    
    
    (146
    )
    
    
    (133
    )
    
    
    (145
    )(1,370
    )
    
    
    (920
    )
    
    
    (1,170
    )Net deferred tax asset
    
    
    869
    
    
    
    1,057
    
    
    
    721Valuation allowance
    
    
    (174
    )
    
    
    0
    
    
    
    0Current portion
    
    
    (37
    )
    
    
    (417
    )
    
    
    79Long term portion
    
    $
    658
    
    
    $
    640
    
    
    $
    642
 In 2003, the Company established a valuation allowance attributable to the
deferred tax asset related to foreign net operating losses generated in 2003.
Based on available evidence, management has determined that it is more likely
than not that such assets will not be realized. 9. 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 51




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years ended December 31, 2003, 2002 or 2001as contributions are at the
discretion of the Board of Directors. 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
$194,459, $160,840 and $144,000 during the years ended December 31, 2003, 2002
and 2001, respectively. The Board of Directors amended the 401(k) Plan in 1997
to include qualified non-elective contributions to satisfy minimum
contributions. 10. RELATED PARTY TRANSACTIONS One of the Companys exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $355,000, $378,000
and $420,000 for the three years ended December 31, 2003, 2002 and 2001,
respectively. Amounts due to the officer at December 31, 2003 and 2002
approximate $25,304 and $158,898, respectively. Due from this officer at
December 31, 2003 and 2002 was $40,000 and $10,500, respectively, advanced
against future royalties. Integrity Worship Ministries, a not-for-profit charitable organization,
received from the Company cash contributions of $150,000, $0 and $0 for the
three years ended December 31, 2003, 2002 and 2001, respectively. The
principal stockholder of the Company is a member of the board of directors of
Integrity Worship Ministries. This contribution was initiated and approved by
the Board of Directors of the Company, with the principal stockholder of the
Company abstaining from the vote. 11. SEGMENT REPORTING The Company is a multinational corporation with wholly-owned subsidiaries
in the United States, Australia, Singapore and South Africa. The Company owns
65% of the United Kingdom subsidiary. In computing operating profits, certain
corporate expenses, to the extent related to a segment, are charged to that
segment. Marketing and fulfillment costs are also attributed to the specific
segment benefited. Other expenses (income) are included in the general
corporate expenses total. The Company has determined that its reportable segments are those that are
based on the Companys distribution channels. These distribution channels are
Retail, Direct-to-Consumers, International, Book Publishing 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. The Direct-to-Consumer channel primarily
represents sales from direct mail programs, and also includes Internet sales
and sales direct to churches, including through the Companys hymnal joint
venture. The International channel represents all transactions with foreign
entities, whether they are shipped from the US or one of the Companys three
foreign subsidiaries. Christian bookstores are the primary distribution
channel for this segment, but there are also direct mail and other techniques
used for these markets. The Other channels segment includes copyright revenue
from the song catalog and other small distribution sales. The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on net revenues and
operating income before taxes. Intersegment sales are not significant. 52




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Summarized financial information concerning the Companys reportable
segments is shown in the following table, in thousands: 2001(Restated,2003
    
    2002
    
    see Note 2)Net salesDirect-to-consumer
    
    $
    15,068
    
    
    $
    16,009
    
    
    $
    29,594Retail
    
    
    35,215
    
    
    
    33,291
    
    
    
    33,401International
    
    
    10,416
    
    
    
    9,597
    
    
    
    7,942Book publishing
    
    
    8,204
    
    
    
    4,123
    
    
    
    0Other
    
    
    9,351
    
    
    
    9,097
    
    
    
    9,045Eliminations
    
    
    (3,990
    )
    
    
    (5,772
    )
    
    
    (9,024
    )Consolidated
    
    $
    74,264
    
    
    $
    66,345
    
    
    $
    70,958Operating Profit (before minority interest)Direct-to-consumer
    
    $
    3,047
    
    
    $
    1,789
    
    
    $
    5,811Retail
    
    
    5,987
    
    
    
    5,299
    
    
    
    7,041International
    
    
    661
    
    
    
    1,223
    
    
    
    1,394Book publishing
    
    
    118
    
    
    
    (560
    )
    
    
    (554
    )Other
    
    
    2,790
    
    
    
    3,754
    
    
    
    148Consolidated
    
    
    12,603
    
    
    
    11,505
    
    
    
    13,840General corporate expense
    
    
    8,849
    
    
    
    7,499
    
    
    
    9,384Interest expense, net
    
    
    415
    
    
    
    273
    
    
    
    281Income before income taxes and minority
interest
    
    $
    3,339
    
    
    $
    3,733
    
    
    $
    4,175
 2002
    
    2001(Restated,
    
    (Restated,2003
    
    see Note 2)
    
    see Note 2)Identifiable assetsDirect-to-Consumer
    
    $
    4,517
    
    
    $
    1,586
    
    
    $
    1,619Retail
    
    
    0
    
    
    
    0
    
    
    
    0International
    
    
    4,946
    
    
    
    4,415
    
    
    
    3,373Book publishing
    
    
    9,709
    
    
    
    5,583
    
    
    
    540Other
    
    
    1,142
    
    
    
    1,316
    
    
    
    1,490General corporate assets
    
    
    31,191
    
    
    
    27,773
    
    
    
    24,177Total assets
    
    $
    51,505
    
    
    $
    40,673
    
    
    $
    31,999
 The Company does not allocate any separate assets to its Retail segment as
that segment is managed based on profit centers. The primary assets used in
these segments are product masters and other intangibles that are shared among
all segments. The Company does not track property and equipment usage by
segments. 53




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The Company sells its products throughout the world and operates primarily
in the U.S. Export sales are handled through the Companys international sales
division and through certain foreign subsidiaries. Geographic financial
information is as follows (in thousands): 2001 (Restated,2003
    
    2002
    
    see Note 2)Net SalesUnited States
    
    $
    63,944
    
    
    $
    56,648
    
    
    $
    63,016Europe
    
    
    3,792
    
    
    
    4,447
    
    
    
    2,247Australia
    
    
    1,029
    
    
    
    1,088
    
    
    
    1,209Asia
    
    
    625
    
    
    
    806
    
    
    
    944Latin America
    
    
    1,275
    
    
    
    935
    
    
    
    1,138South Africa
    
    
    1,297
    
    
    
    0
    
    
    
    0Other
    
    
    2,302
    
    
    
    2,421
    
    
    
    2,404$
    74,264
    
    
    $
    66,345
    
    
    $
    70,958
 2002 (Restated,
    
    2001 (Restated,2003
    
    see Note 2)
    
    see Note 2)Identifiable AssetsUnited States
    
    $
    46,559
    
    
    $
    36,258
    
    
    $
    27,826Europe
    
    
    2,344
    
    
    
    3,122
    
    
    
    1,799Australia
    
    
    811
    
    
    
    655
    
    
    
    692Asia
    
    
    669
    
    
    
    638
    
    
    
    882South Africa
    
    
    1,122
    
    
    
    0
    
    
    
    0$
    51,505
    
    
    $
    40,673
    
    
    $
    31,199
 12. 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, 2003, 2002 and 2001. 13. STOCK COMPENSATION PLANS The Company has several stock option plans that provide for the granting
of stock options to officers, employees and non-employee directors. The 1999 Long-term Incentive Plan (the 1999 LTIP) permits grants of not
only incentive stock options, but also non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and other stock based
awards. The 1999 LTIP is authorized to issue up to 400,000 shares of Class A
Common Stock in connection with such awards. Under the 1999 LTIP, awards may
not be granted at less than the market value at the date of the grant, and
vesting terms are generally five years. At December 31, 2003, there were
387,722 options outstanding under the 1999 LTIP. No further options will be
granted under the 1999 LTIP. On November 2, 2001, Integritys Board of Directors adopted the Integrity
Incorporated 2001 Long-Term Incentive Plan (the 2001 LTIP). The 2001 LTIP
became effective as of its approval by the Board of Directors and was approved
at Integritys Annual Meeting of Stockholders in May 2002. The 2001 LTIP
permits grants of incentive stock options, non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and other stock based
awards. The Company has reserved for issuance upon the grant or exercise of
awards pursuant to this plan 400,000 shares of authorized but 54




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##### Table of Contents



unissued shares of Class A Common Stock. At December 31, 2003, there were
50,000 shares of Class A restricted stock outstanding under the 2001 LTIP.
There are 350,000 shares available for grants under the 2001 LTIP. Prior to the approval of the 1999 LTIP, the Company had the 1994 Stock
Option Plan (the 1994 Plan) for employees and officers. Under the 1994 Plan,
233,244 options were outstanding at December 31, 2003. No further options will
be granted under the 1994 Plan. The 1994 Stock Option Plan for Outside Directors (the 1994 Directors
Plan), granted 1,000 options to purchase Class A Common stock annually to
Directors following the annual meeting. Such options have an exercise price
equal to the fair market value at grant date and are exercisable six months
from date of grant. At December 31, 2003, there were 5,000 options outstanding
under the 1994 Directors Plan. No further options will be granted under the
1994 Directors Plan. On February 15, 2002, Integritys Board of Directors adopted the Integrity
Incorporated 2002 Stock Option Plan for Outside Directors (the 2002 Directors
Plan). The 2002 Directors Plan became effective as of its approval at the
Companys Annual Meeting of Stockholders in May 2002. The 2002 Directors Plan
awards 5,000 options to purchase Class A Common stock annually to Directors
following the annual meeting. Such options have an exercise price equal to the
fair market value at grant date and are exercisable six months from date of
grant. At December 31, 2003, there were 40,000 options outstanding under the
2002 Directors Plan and there were 20,000 shares available for grants. 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, 2003. Effective December 28, 1995, the Companys Board of Directors adopted the
1995 Cash Incentive Plan. Awards were granted by the Companys Compensation
Committee and were expressed in a number of units payable only in cash.
Vesting was one-fifth of the units of an award on each anniversary of the date
of grant until vested in full. Participants would have been vested in full six
months after the occurrence of a change in control (as defined by the
agreement) of the Company. The value of all units was measured as the
difference between the fair market value of the Companys stock on the grant
date and the fair market value of the Companys stock on any given date
subsequent to the grant date. To the extent the fair market value of the stock
were to exceed the fair market value at the date of grant, compensation expense
would be charged to the Companys statement of operations. As of December 31,
2000, 127,500 awards had been granted. An accrual of $30,000 was recorded as
of December 31, 2000 for the difference in the fair market value of the stock
between the grant date and the end of the year. Final distributions under this
plan were made in 2001. No further grants will be made under this Plan. We maintain a non-qualified deferred compensation plan for the benefit of
a select group of our management. The purpose of the plan is to enhance our
ability to attract and retain qualified management personnel by providing an
opportunity to defer a portion of their compensation that cannot be deferred
under our 401(k) plan. We also maintain a supplemental executive retirement
plan (defined contribution) to provide benefits to a select group of our
management who contribute significantly to our continued growth, development
and future business. The Company contributed $17,830, $0 and $0 in the years
2003, 2002 and 2001, respectively. 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 55




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##### Table of Contents



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, 2003, 2002 and 2001, respectively. 2001(Restated, see2003
    
    2002
    
    Note 2)Net income
    
    As reported
    
    $
    1,882,000
    
    
    $
    2,216,000
    
    
    $
    2,658,000Pro forma
    
    $
    1,707,000
    
    
    $
    2,030,000
    
    
    $
    2,445,000Basic EPS
    
    As reported
    
    $
    0.34
    
    
    $
    0.40
    
    
    $
    0.47Pro forma
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.43Diluted EPS
    
    As reported
    
    $
    0.32
    
    
    $
    0.37
    
    
    $
    0.43Pro forma
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.39
 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 2003, 2002 and 2001, respectively: Dividend yields of 0%,
expected volatility of 45% each year, risk-free interest rates that approximate
the yield of a five year zero coupon government bond, and a specific vesting
period for each option. The weighted-average fair value of options granted is
$4.04, $3.18 and $2.02 for the years ended December 31, 2003, 2002 and 2001,
respectively. The weighted-average remaining contractual life for all options
outstanding is 2.31 years. The following table summarizes the changes in the number of shares under
option: WeightedExercise Price Ranges
    
    Total
    
    averageshares
    
    option$0.50
    
    $2.01
    
    $5.01
    
    under
    
    price perto $2.00
    
    to $5.00
    
    to $10.00
    
    option
    
    shareOutstanding at 12/31/00
    
    
    180,027
    
    
    
    537,722
    
    
    
    7,000
    
    
    
    724,749
    
    
    $
    2.95Granted
    
    
    0
    
    
    
    4,000
    
    
    
    50,000
    
    
    
    54,000
    
    
    
    7.30Exercised
    
    
    (59,000
    )
    
    
    (7,000
    )
    
    
    (1,000
    )
    
    
    (67,000
    )
    
    
    2.02Forfeited
    
    
    0
    
    
    
    (2,000
    )
    
    
    0
    
    
    
    (2,000
    )
    
    
    2.88Outstanding at 12/31/01
    
    
    121,027
    
    
    
    532,722
    
    
    
    56,000
    
    
    
    709,749
    
    
    
    3.39Granted
    
    
    0
    
    
    
    0
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    4.95Exercised
    
    
    (13,783
    )
    
    
    0
    
    
    
    0
    
    
    
    (13,783
    )
    
    
    2.25Forfeited
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Outstanding at 12/31/02
    
    
    107,244
    
    
    
    532,722
    
    
    
    76,000
    
    
    
    715,966
    
    
    
    3.60Granted
    
    
    0
    
    
    
    20,000
    
    
    
    0
    
    
    
    20,000
    
    
    
    4.95Exercised
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    0
    
    
    
    (20,000
    )
    
    
    2.25Outstanding at 12/31/03
    
    
    97,244
    
    
    
    542,722
    
    
    
    76,000
    
    
    
    715,966
    
    
    
    3.60Exercisable at 12/31/03
    
    
    97,244
    
    
    
    345,435
    
    
    
    26,000
    
    
    
    468,679
    
    
    
    2.94Plan shares available
for future grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370,000
 The Company also had 818,897 warrants outstanding at December 31, 2000 at
an exercise price of $1.875. These warrants were issued in 1996 and 1999 with
an estimated fair value at time of issuance of $1,438,000. On September 26,
2001, the Company repurchased these warrants from Bank Austria for
approximately $3.4 million in cash. During 2001 and 1999, the Company issued 50,000 and 100,000 shares of
restricted common stock, respectively, to two officers of the Company. These
shares had a fair value of $377,000 and $375,000, respectively, at time of
issuance. The shares vest on the seventh anniversary of the dates of grant. 56




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##### Table of Contents



14. COMMITMENTS AND CONTINGENCIES On June 28, 2002, the Company entered into a commitment with a related
party requiring the payments of $250,000, $750,000, $750,000 and $750,000 in
2006, 2007, 2008 and 2009, respectively. Such payments are contingent upon the
continuing employment of this party and are recognized as expense assuming that
the party remains employed with the Company for the full commitment period.
The Company is party to various lease commitments related to office space and
equipment. Future minimum payments under these commitments consist of the
following at December 31, 2003: Operating Lease Payout Schedule2004
    
    2005
    
    2006
    
    2007
    
    2008$584,901
    
    $
    507,714
    
    
    $
    427,811
    
    
    $
    411,178
    
    
    $
    419,352
 Operating lease expense was $546,000, $524,000 and $391,000 for fiscal
2003, 2002, and 2001, respectively. The Company has no capitalized leases. 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 capital lease
agreements are not significant. 15. SUBSEQUENT EVENT On March 2, 2004, the Company issued a press release announcing the
execution of a merger agreement with Kona Acquisition Corp. that would have the
effect of taking the Company private. Kona Acquisition Corp. is wholly owned
by P. Michael Coleman, Integritys principal stockholder, President and Chief
Executive Officer. The closing of this merger is contingent upon Konas
financing and approval by a majority of Integritys stockholders who are
unaffiliated with management. 16. QUARTERLY FINANCIAL INFORMATION (Unaudited) As discussed in Note 2, we have restated our financial statements for the
fiscal year ended December 31, 2001. $89,000, net of tax, of the errors
described in Note 2 were originally corrected in the quarter ended September 30,
2003. Our financial information, as previously reported for the quarterly
period ended September 30, 2003 was as follows: net sales were $21,408,000;
gross profit was $10,889,000; net income was $1,388,000; basic earnings per
share were $0.25 and diluted earnings per share were $0.23. 2003Three Months Ended(in thousands, except per share data)Sep 30 (Restated,Mar 31
    
    Jun 30
    
    see Note 2)
    
    Dec 31Net sales
    
    $
    18,560
    
    
    $
    13,384
    
    
    $
    21,408
    
    
    $
    20,912Gross profit
    
    
    8,941
    
    
    
    6,706
    
    
    
    10,889
    
    
    
    10,495Net income
    
    
    516
    
    
    
    (696
    )
    
    
    1,477
    
    
    
    585Basic earnings per share
    
    $
    0.09
    
    
    $
    (0.12
    )
    
    $
    0.26
    
    
    $
    0.11Diluted earnings per share
    
    $
    0.09
    
    
    $
    (0.12
    )
    
    $
    0.25
    
    
    $
    0.10
 2002Three Months Ended(in thousands, except per share data)Mar 31
    
    Jun 30
    
    Sep 30
    
    Dec 31Net sales
    
    $
    15,396
    
    
    $
    11,831
    
    
    $
    22,582
    
    
    $
    16,536Gross profit
    
    
    7,219
    
    
    
    6,835
    
    
    
    11,371
    
    
    
    8,742Net income
    
    
    345
    
    
    
    (118
    )
    
    
    1,404
    
    
    
    585Basic earnings per share
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    0.25
    
    
    $
    0.11Diluted earnings per share
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    0.23
    
    
    $
    0.10
 57




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2. Financial Statement Schedule The following consolidated financial statement schedules of the Company are set
forth herewith: INTEGRITY MEDIA, INC. AND SUBSIDIARIES
Schedule II  Valuation and Qualifying Accounts and Reserves
(dollar amounts in thousands) AdditionsCharged toBalance at
    
    costs and
    
    
    
    
    
    Balance atDescription
    
    Beg. Of Period
    
    expenses
    
    Deductions (1)
    
    end of Period2003Allowance for
returns and
doubtful accounts
    
    $
    2,415
    
    
    $
    12,344
    
    
    $
    (12,459
    )
    
    $
    2,3002002Allowance for
returns and
doubtful accounts
    
    
    1,788
    
    
    
    7,233
    
    
    
    (6,606
    )
    
    
    2,4152001Allowance for
returns and
doubtful accounts
    
    
    1,241
    
    
    
    6,707
    
    
    
    (6,160
    )
    
    
    1,788
  (1)
    
    Represents write-offs during the respective period for product returns
and uncollectible accounts. AdditionsCharged toBalance at
    
    costs and
    
    
    
    
    
    Balance atDescription
    
    Beg. Of Period
    
    expenses
    
    Deductions
    
    end of Period2003Valuation on
deferred tax assets
    
    $
    0
    
    
    $
    174
    
    
    $
    0
    
    
    $
    1742002Valuation on
deferred tax assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02001Valuation on
deferred tax assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 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. 58




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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 ExhibitNumber
    
    Exhibit Description3(i)
    
    Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 4(a) to the Registrants
Registration Statement on Form S-8 (File No. 33-84584) filed on
September 29, 1994).3(i).1
    
    Certificate of Amendment to the Certificate of Incorporation of
the Registrant, dated July 21, 1995 (incorporated by reference
from Exhibit 3(I).1 to the Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).3(ii)
    
    Bylaws of the Registrant, as amended (incorporated by reference
from Exhibit 3(ii) to the Registrants Registration Statement on
Form S-1 (File No. 33-78582), and amendments thereto, originally
filed on May 6, 1994).4.1
    
    See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the
Certificate of Incorporation, as amended, and Bylaws, as amended,
of the Registrant defining rights of holders of Class A and Class
B Common Stock of the Registrant.4.2
    
    Form of Class A Common Stock certificate of the Registrant
(incorporated by reference from Exhibit 4 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001)10.1
    
    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).10.2
    
    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).10.3
    
    Amendment to Product Distribution Agreement dated as of January 1,
2000, by and between Integrity Incorporated and Word, Inc., a
division of Warner Music Group Inc., amendment effective as of
January 1, 2002. (The foregoing is the subject of a request for
confidential treatment) (incorporated by reference from Exhibit
10.4 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001).10.4
    
    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).10.5
    
    Product Development and Co-Branding Agreement dated January 10,
2000 by and between Integrity Incorporated and Time Life, Inc.
(the foregoing is the subject of a request for confidential
treatment) (incorporated by reference from Exhibit 10.17 to the
Registrants Annual Report on Form 10-K for he year ended December
31, 2000).
 59




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.6
    
    Product Distribution Agreement between Integrity Media, Inc. and
Sony Music Entertainment, dated March 4, 2002, effective January 1,
2002. (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, 2001)10.7
    
    Credit Agreement dated April 25, 2001 by and between Integrity
Incorporated and LaSalle Bank National Association (The foregoing is
the subject of a request for confidential treatment) (incorporated
by reference from Exhibit 10.1 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001)10.8
    
    Intellectual Property Security Agreement dated April 25, 2001 by
Integrity Incorporated in favor of LaSalle Bank National Association
(incorporated by reference from Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)10.9
    
    Security and Pledge Agreement dated April 25, 2001 by Integrity
Incorporated in favor of LaSalle Bank National Association
(incorporated by reference from Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)10.10
    
    First Amendment to Credit Agreement dated June 15, 2001 by and
between Integrity Incorporated and LaSalle Bank National Association
(incorporated by reference from Exhibit 10.6 to the Registrants
Amended Quarterly Report on Form 10-Q/A for the quarter ended June
30, 2001)10.11
    
    Warrant Repurchase Agreement dated September 26, 2001, by and
between Integrity Incorporated and Bank Austria AG, Grand Cayman
Branch (incorporated by reference from Exhibit 10.9 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001)10.12
    
    Lease dated August 24, 2001 by and between Park Center Partnership
II and Integrity Incorporated (incorporated by reference from
Exhibit 10.10 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001)10.13
    
    Second Amendment to Credit Agreement by and between Integrity
Incorporated and LaSalle Bank National Association, dated March 30,
2002 (incorporated by reference from Exhibit 10.3 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).10.14
    
    LLC Interest Purchase Agreement by and between Integrity Media, Inc.
and Jeffory Moseley, Carmen Moseley and the Jeff and Carmen Moseley
Charitable Remainder Unitrust, for the purchase of M2
Communications, L.L.C., dated June 28, 2002 (incorporated by
reference from Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002).10.15
    
    Stock Purchase Agreement between Integrity Incorporated and
Elizabeth Ann Williamson for the purchase of Enlight, Inc., dated
April 5, 2002 (incorporated by reference from Exhibit 10.4 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).10.16
    
    Third Amendment to Credit Agreement by and between Integrity Media,
Inc., Integrity Publishers, Inc., M2 Communications, L.L.C., and
LaSalle Bank National Association, dated June 28, 2002 (incorporated
by reference from Exhibit 10.5 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002).10.17
    
    Security and Pledge Agreement by and between Integrity Publishers,
Inc., and LaSalle Bank National Association, dated March 30, 2002
(incorporated by reference from Exhibit 10.6 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
 60




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.18
    
    First Amendment to Security and Pledge Agreement by and between
Integrity Publishers, Inc., and LaSalle Bank National Association,
dated June 28, 2002 (incorporated by reference from Exhibit 10.7 to
the Registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002).10.19
    
    First Amendment and Second Supplement to Security and Pledge
Agreement by and between Integrity Media, Inc. and LaSalle Bank
National Association, dated June 28, 2002 (incorporated by reference
from Exhibit 10.8 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).10.20
    
    Security and Pledge Agreement by M2 Communications, L.L.C., in favor
of LaSalle Bank National Association, dated June 28, 2002
(incorporated by reference from Exhibit 10.9 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended June 20, 2002).10.21
    
    Fourth Amendment to Credit Agreement, by and between Integrity
Media, Inc., Integrity Publishers, Inc., M2 Communications, L.L.C.,
Integrity Direct LLC, and LaSalle Bank National Association, dated
December 31, 2002 (incorporated by reference from
Exhibit 10.22 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2002).10.22
    
    Security and Pledge Agreement by Integrity Direct, LLC, in favor of
LaSalle Bank National Association, dated December 31, 2002 (incorporated by reference from
Exhibit 10.23 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2002).10.23
    
    Third Supplement to Security and Pledge Agreement by and between
Integrity Media, Inc. and LaSalle Bank National Association, dated
December 31, 2002 (incorporated by reference from
Exhibit 10.24 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2002).10.24
    
    Fifth Amendment to Credit Agreement, by and between Integrity Media,
Inc., Integrity Publishers, Inc., M2 Communications, L.L.C.,
Integrity Direct, LLC and LaSalle Bank National Association, dated
March 26, 2003 (incorporated by reference from
Exhibit 10.25 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2002).10.25
    
    Sixth Amendment to Credit Agreement, by and between Integrity Media,
Inc., Integrity Publishers, Inc., M2 Communications, L.L.C.,
Integrity Direct, LLC and LaSalle Bank National Association, dated
March 31, 2003 (incorporated by reference from
Exhibit 10.26 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2002).10.26
    
    Stock Purchase Agreement by and between Integrity Media, Inc. and
Anton Jacobus Bekker, Paul Michael Alcock and Sarepta Music (Pty)
Ltd dated March 18, 2003 (incorporated by reference from Exhibit
10.1 to the Registrants Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003)10.27
    
    Seventh Amendment to Credit Agreement by and between Integrity
Media, Inc., Integrity Publishers, Inc., Integrity Direct, LLC, M2
Communications, L.L.C., and LaSalle Bank National Association, dated
August 28, 2003 (incorporated by reference from Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003)10.28
    
    Eighth Amendment to Credit Agreement by and between Integrity Media,
Inc., Integrity Publishers, Inc., Integrity Direct, LLC, INO
Records, LLC, and LaSalle Bank National Association, dated January
29, 2004.10.29
    
    Agreement and Plan of Merger by and among Integrity Media, Inc.,
Kona Acquisition Corp., and P. Michael Coleman dated March 1, 2004.
 61




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ExhibitNumber
    
    Exhibit DescriptionExecutive Compensation Plans and Arrangements10.30
    
    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).10.31
    
    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).10.32
    
    Form of Stock Option Agreement under the Integrity Music, Inc.
Long-Term Incentive Plan (incorporated by reference from Exhibit
10.45 to the Registrants Registration Statement on Form S-1 (File
No. 33-78582), and amendments thereto, originally filed on May 6,
1994).10.33
    
    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).10.34
    
    Integrity Media, Inc. 2002 Stock Option Plan for Outside Directors
(incorporated by reference from Exhibit 10.18 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2001).10.35
    
    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).10.36
    
    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).10.37
    
    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).10.38
    
    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).10.39
    
    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).10.40
    
    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).10.41
    
    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).10.42
    
    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).10.43
    
    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).10.44
    
    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).
 62




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.45
    
    Integrity Incorporated 2001 Long-Term Incentive Plan, adopted by the
Board of Directors of Integrity Media, Inc. on November 2, 2001
(incorporated by reference from Exhibit 10.11 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001)10.46
    
    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).10.47
    
    Employment Agreement by and among Integrity Incorporated and Donald
Moen effective as of October 1, 2001 (incorporated by reference from
Exhibit 10.36 to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2000).10.48
    
    Employment Agreement dated June 1, 2001 by and between Integrity
Incorporated and Byron Williamson (incorporated by reference from
Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001)10.49
    
    Key Employee Change In Control Agreement dated June 1, 2001 by and
between Integrity Incorporated and Byron Williamson (incorporated by
reference from Exhibit 10.5 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001)10.50
    
    Employment Agreement dated October 29, 2001 by and between Integrity
Incorporated and Danny McGuffey (incorporated by reference from
Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001)10.51
    
    Key Employee Change in Control Agreement dated October 29, 2001 by
and between Integrity Incorporated and Danny McGuffey (incorporated
by reference from Exhibit 10.4 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001)10.52
    
    Employment Agreement by and among Integrity Media, Inc. and Jeffory
Moseley, dated June 28, 2002 (incorporated by reference from Exhibit
10.4 to the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).10.53
    
    Executive Nonqualified Excess Plan, by Integrity Media, Inc. and
Executive Benefit Services, Inc., effective as of December 1, 2002 (incorporated by reference from
Exhibit 10.50 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002)11
    
    Statement of Computation of Per Share Earnings21
    
    Subsidiaries of the Registrant23
    
    Consent of Independent Accountant31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
    
    Certification of Chief Financial Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Executive Officer of Integrity Media, Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K On November 21, 2003, Integrity Media, Inc. filed Form 8-K announcing that
it has received an offer from P. Michael Coleman, its cofounder, principal
stockholder, President and Chief Executive Officer, for a transaction which
would result in the privatization of the Company. The Form 8-K also announced
that the Companys board of directors had appointed a special committee of
independent directors to review Mr. Colemans proposal. 63




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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
April 14, 2004. INTEGRITY MEDIA, INC. AND SUBSIDIARIESBy:
    /s/ P. Michael ColemanP. Michael ColemanChairman, President and
Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 14, 2004. Signature
    
    Title/s/ P. Michael Coleman
P. Michael Coleman
    
    Chairman, President and Chief Executive Officer
(Principal Executive Officer)/s/ Donald S. Ellington
Donald S. Ellington
    
    Senior Vice President of Finance and Administration
(Principal Financial and Accounting Officer)/s/ Jean C. Coleman
Jean C. Coleman
    
    Director/s/ William A. Jolly
William A. Jolly
    
    Director/s/ Charles V. Simpson
Charles V. Simpson
    
    Director/s/ Heeth Varnedoe III
Heeth Varnedoe III
    
    Director/s/ Jimmy M. Woodward
Jimmy M. Woodward
    
    Director
 64