Share price as of Friday's close:

$5.26

Share price now:

$4.30

Change:

-18.3%

Volume:

99,750 shares, daily average 5,900 shares

Last time this low:

April 30, 2001

52-week intraday high:

$5.90

52-week intraday low:

$3.75

Forward P/E before announcement:

n/a

Forward P/E after announcement:

n/a

A LITTLE DIVINE

intervention would've been welcomed on Monday by investors in

Integrity Media

Shares of the publisher and distributor of Christian-oriented music and books tumbled 18% to $4.30, a two-year low, after Integrity posted a wider second-quarter loss. Making matters worse, revenues badly missed projections even as expenses surged. The company blamed the weak economy, a flood of product returns and a lack of new releases for its poor showing.

"We were impacted by the general weakness in the economy during the second quarter, resulting in lower-than-expected revenues in a number of our sales channels," said Michael Coleman, Integrity's president and chief executive, in a written release. "Further deterioration in sales to the Christian bookstore (CBA) retail channel was the largest contributor to the decline in sales . In addition, product returns from the CBA channel were substantially higher than normal in the second quarter, when we believe many Christian-bookstore operators sharply reduced inventories in the face of an uncertain economic environment."

Integrity, based in Mobile, Ala., reported a net loss of $696,000, or 12 cents a share, compared with a net loss of $118,000, or two cents a share, a year earlier. Revenue jumped 13.6% to $13.4 million, but fell 30% short of the company's forecast.

As was the case with books, demand for music was just as bad despite a ubiquitous TV ad campaign for its "Songs 4 Worship" CD compilations. In addition to the generally downbeat environment of the music industry as a whole, Coleman blamed his company's flagging sales on the illegal downloading of music from the Internet (though he didn't quantify the impact to the top line). Citing figures from SoundScan, a market-research firm that tracks music sales, Integrity said overall sales of Christian music fell 10% during the first six months of 2003 from prior-year levels. U.S. sales of all music were down 5% during the same period.

Costs crept up during the quarter, hurting financial performance at a time that sales were difficult to generate. General and administrative expenses surged 22.2% to $4.4 million from a year ago. By the end of the quarter, the company had $3.2 million in cash and cash equivalents on hand. Outstanding debt jumped to $14.2 million from $9.5 million at the end of 2002, due largely to an expansion of the company's headquarters.

During a Monday conference call, Chief Financial Officer Don Ellington attributed the increase in expenses to a 25% rise in health-insurance premiums, travel fees, personnel expenses and currency exchanges. He added that the new building had little effect on costs. CEO Coleman said he didn't expect to see expenses rise above current levels.

Despite Integrity's optimistic outlook for the second half of the year, based on a flurry of anticipated new releases from the likes of inspirational singer CeCe Winans and a deal with evangelist Pat Robertson, the company still lowered its guidance for all of 2003. Integrity, which had forecast 2003 earnings of 43 cents to 48 cents a share, now expects earnings of 31 cents to 36 cents a share on revenue of about $75 million. That works out to a profit of 34 cents to 39 cents a share for the second half of the year.

Quote:
"I think the main thing is the [Internet music] piracy," says Daniel Smith, an analyst at Teton Capital, a hedge fund in Austin, Texas. It took Integrity a while to fully realize the impact of that. I really don't think the CBA retail attrition is a big deal since the company is gaining ground in the general market. On the expense side, to the extent you believe management, it did start up the publishing operation a year ago, so you have extra overhead from that and the books didn't contribute much this quarter. We sold most of our stock early this year." (Smith doesn't own shares of Integrity, and Teton Capital holds a small position in the stock.)