Initiating Coverage of XM Satellite Radio (XMSR:NASDAQ) with a Buy (1) Rating and a Price Target of $40

Transcription

1 Initiating Coverage of XM Satellite Radio (XMSR:NASDAQ) with a Buy (1) Rating and a Price Target of $40 RATING Industry: Satellite, Cable & Broadcasting Current Buy (1) Analyst: David B. Kestenbaum (212) Prior -- dkestenbaum@morganjoseph.com Date: September 22, 2005 We are initiating coverage of XM Satellite Radio with a Buy (1) rating and a 12-month price target of $ We support our recommendation with the following fundamental considerations: In our opinion, continued subscriber growth and leadership of the satellite radio industry should drive long-term stock appreciation. XM Satellite delivers over 150 channels of talk and commercial-free music radio throughout the US, primarily to cars, for $12.95 per month. We expect XMSR s subscriber growth momentum to build. XM gained momentum in 2004, adding 1.9mm subscribers for a total of 3.2mm customers. We forecast XM will add another 2.9mm subscribers in 2005 and 2.8mm in 2006 to reach 8.9mm. There is a large primary US market for satellite radio, estimated at over 230mm vehicles. Each year, 15mm-18mm new cars and 6mm-7mm aftermarket car radios are sold. Also, XM s wearable and boombox products help expand the market by allowing subscribers to access the service from places outside the automobile. In our opinion, the satellite radio business should generate high margins over time. Ultimately, we believe gross margins could surpass 65% and pretax margins could reach 45%. Valuation: Our 12-month price target of $40 is based on our DCF model, which assumes a WACC of 12.4% and a terminal growth rate of 6.5%. We then tested our results against 2011 EPS and EBITDA multiples that were in line with our projected growth rate for XM in We discounted the results using higher discount rates than in our discount cash flow model and determined our DCF calculation was reasonable. However, we emphasize that, using any methodology, XMSR is highly volatile and, in our view, is not suitable for risk-averse investors at this juncture. The Disclosure section may be found on page 9 of this note. The Valuation section may be found on page 1 of this note. Price (as of close 9/21/05) $35.37 EPS FY 12/31 ($) 2004A 2005E 2006E 52-Week Range $ $ Q $(0.56) $(0.38)A Shares Outstanding (mm) Q $(0.54) $(0.46)E Market Capitalization (bn) $11.5 3Q ($0.38) $(0.43)E 3-Month Avg. Daily Volume 2,652,200 4Q ($0.60) $(0.42)E Book Value/Share (6/05) $1.22 Total $(2.10) $(1.72)E $(0.76)E Price/Book Value 29.0x P/E NM NM NM 1

2 Investment Positives XM s subscriber momentum should continue to build. In 2004, XM Satellite Radio more than doubled its subscriber base to 3.2mm from 1.4mm in In 2Q05, net additions increased 54.7%, to 647,200 from 418,400 in 2Q04. In 2005, we forecast 89.9% growth to 6.1mm subscribers, driven by positive word of mouth, improved marketing, declining equipment price points, and the everincreasing number of automobile lines offering dealer-installed and factory-installed satellite radio. XM s recent financings continue to cushion the company and allow it to maintain and reduce its heavy debt load. The primary US market for satellite radio is vast, at over 230mm vehicles. Twenty-two million of those cars and trucks are in markets that receive five or fewer FM stations, while 34mm automobiles are owned by commuters who travel over an hour per day. Increasing driving times due to rising traffic congestion and suburban sprawl are generating interest in in-car entertainment, such as satellite radio. Other markets for satellite radio include the one million long-distance truckers and the seven million owners of recreational vehicles. In addition, XM has successfully expanded the market beyond the automobile to include the home and the outdoors with its new SKYFi boombox (a portable stereo unit that can receive XM s signal) and the MyFi wearable device (allows the listener to take the music anywhere). The maritime market also shows some promise for satellite radio. We believe XM Satellite Radio has many advantages over its terrestrial radio competition. First, XM offers more programming choices than can be found terrestrially in any single US market. The extensive consolidation of the radio industry in the 1990s has led to fewer alternatives in radio programming; in our view, this monopoly should boost demand for satellite radio. Second, satellite radio sound quality is better, because it is delivered digitally compared to commercial s analog transmission. High definition radio would narrow the sound gap, if this service actually became popularized. However, the content would be more or less the same nondifferentiated programming with commercials currently being broadcast. Third, both XM and Sirius (SIRI - $ NASDAQ; Buy (1) rated, see our initiation report dated August 26, 2005) are commercial-free on their music channels. Terrestrial AM/FM stations average minutes of commercials per hour; New York City stations average over 22 minutes of commercials per hour. Finally, drivers who travel great distances can enjoy the national coverage of satellite radio. Without satellite radio service, longdistance travelers have to search for appealing stations in each individual market they pass through. Satellite radio is a relatively inexpensive entertainment choice. For little more than the cost of a movie, a subscriber can receive monthly satellite radio service. XM Satellite Radio now prices its service at $12.95 per month, the same level at which Sirius prices its service. Both companies offer discounts from the base rate when yearly subscriptions are prepaid, and both offer an identical price if a year is prepaid in a lump sum. In addition, both providers allow full-paying customers to install the service at $6.99 per month in each additional vehicle. Given the low entry price for receiver equipment (now as low as $49.99, down from as much as $299 in 2001), the value proposition for satellite radio is evident, in our view. Duopoly and strong demand enabled XM to actually raise prices. The fact that the FCC (Federal Communications Commission) has mandated licenses for only two satellite radio competitors should limit competition and enable the industry to maintain pricing power. While many believed Sirius would have to lower its prices to meet XM s pricing level, XM recently raised prices to the $12.95 per month level that Sirius was charging. Despite this move, XM Radio had solid subscriber additions and low churn in 2Q05. Long-term, we believe monthly pricing will remain fairly stable. XM s business model is attractive, in our view, because of its low-cost structure after service commences. Like most satellite projects, XM s most significant expenditure is the cost of the satellites and related network equipment as well as SAC (subscriber acquisition cost). The system is now complete and paid for, although SAC will continue to be a financial burden, in our opinion. Once SAC comes down as costs are spread over a continuously larger subscriber base, we believe the model has tremendous leverage and should prove profitable. For instance, XM s actual cost of programming content should account for roughly 6.0% of revenues. By the end of the decade, our models project peak pre-marketing cash flow margins of 60.1% and pre-tax profit margin at roughly 41.2%. In addition, we estimate the company s tax loss carryforwards should shelter profits until after We expect XM to continue to report strong subscriber additions. Over the next year, we anticipate subscriber growth to be the key determinant of XM s stock price. We estimate that XM will add 2.9mm subscribers during 2005, higher than management s guidance of 2.7mm. In comparison, we project Sirius will add 2.1mm subscribers in Our confidence is driven by a number of factors, including the rapidly expanding automobile and consumer electronics distribution channels, positive word-of-mouth, and 2

3 declining equipment costs. Many major automakers are expanding or beginning to install satellite radio at the factory or at the dealer. This should reduce costs and increase availability to the end consumer. New OEM arrangements are always possible. XM should continue to announce new arrangements with the auto manufacturers to expand the number of vehicles offering XM satellite radio installation at either the factory or dealer level. In late August 2005, XM announced that Suzuki would begin offering XM-ready vehicles beginning with the 2006 model year. Consumers purchasing a Grand Vitara or XL-7 and activating the radio get three months service for free under the plan. In July 2005, XM announced that Harley-Davidson (HDI - $ NYSE) would become the first motorcycle provider to offer a standard XM radio. Also, in March 2005, XM announced that Hyundai (HYMLF.PK - $ OTC) would offer an XM radio as a standard, factory-installed feature in its entire model line beginning in We also expect current OEM partners to expand the number of vehicle lines that offer XM radios as either a factory-installed or dealer-installed option. Announcements of higher-than-expected install rates and customer activations would be positive catalysts for the stock, in our view. The addition of content and distribution deals continues. At the end of the day, the most important component of success in the satellite radio industry is the content XMSR and SIRI provide and their ability to distribute that content to the consumer. While most of the major content deals have been signed, the possibility of additional announcements always remains. For instance, the FCC s crackdown on so-called Shock Jocks could lead to a few of them moving to satellite radio from commercial radio. With the signing of Howard Stern by Sirius Satellite Radio, we believe the last remaining big shoe to drop could be Rush Limbaugh. However, we believe Rush will likely remain on commercial radio and do not expect any more high-profile content signings on the level of Howard Stern. Investment Concerns XM s current valuation could be considered rich. XM is currently trading at a total enterprise value (TEV) of over $1,806 per estimated 2005 subscriber, a small premium over the more established DBS (direct broadcast satellite) operator, EchoStar (DISH - $ NASDAQ). DISH is currently valued at a total enterprise value of only $1,585 per subscriber, despite having much higher ARPU (average revenue per user) of $58.00 and more than 3.1x the theoretical pretax profit per subscriber ($10.44 per subscriber compared to only $3.35 for XM). Additionally, EchoStar should end the year with 12.0mm subscribers compared to 6.1mm for XM. Clearly, the value per TEV/sub will decline sharply if XM can meet our subscriber growth forecast, though any shortfall could negatively affect its equity valuation. While the valuation appears rich today, we project that next year XM should trade at a discount to DISH on a per-subscriber basis and should fall well below DISH s TEV/sub in the future. Subscriber growth could slow. At this early stage of satellite radio, we believe valuation is being driven entirely by subscriber growth. Therefore, a shortfall or just meeting published expectations could have a dramatic negative impact on the stock price. However, we feel management s forecast of 2.7mm net additions for XM in 2005 is conservative. XM added just under 1.9mm subscribers in With more OEMs installing radios, an extra year of brand and product recognition, and continually improving content, we believe the company s guidance will be easily surpassed. In 2006, we estimate the company will add 2.8mm subscribers, which on a gross add basis is 4.6mm vs. 4.0mm projected for XM must continue to drive increasing margins. XM will have to demonstrate that the widely held view that the business generates exceptionally high profit margins is true. We estimate that gross profit margins could reach 65.1% and EBITDA margins could reach 46.4% at 20.4mm subscribers in On an historical note, when the DBS (direct broadcast satellite) companies began rolling out service, many expected the business to be profitable at three million subscribers. However, it took more than double that subscriber number for EchoStar to turn a profit. One notable DBS trend was that SAC never decreased over time instead, it increased. Although the cost of the basic equipment declined, the DBS operators became more aggressive with marketing dollars to capture subscribers. Interestingly, the market rewarded them for that strategy. XM continues to increase its debt load. XM has to support a large debt level at relatively high interest rates. Today, the company has $1.1bn outstanding with another $100mm of related-party borrowings. Historically, the satellite radio companies have claimed that they were close to being fully financed, and then went on to raise more capital. Our models indicate XM has enough funding to support its operations. 3

4 Ailing satellites need to be replaced. XM s two satellites have anomalies with their solar arrays that threaten to reduce their life and power. To rectify this situation, XM launched XM-3 in February 2005 and placed it in one of its existing orbital slots in preparation for the launch of XM-4 in Though both current satellites should remain fully functional, the loss of a satellite would impair the company s service, and more importantly, its reputation. 4

5 XM Satellite Radio Annual Balance Sheets E ($ in millions) E 2006E 2007E 2008E 2009E 2010E 2011E Assets Cash & Cash Equivalents , , , , ,872.5 Marketable Securities Restricted Investments Accounts Receivable Due from Related Parties Related Party Prepaid Expense Prepaid Expense and Other Total Current Assets System Under Construction Launch Construction in Process Accumulated Depreciation (158.3) (316.6) (460.7) (609.5) (769.5) (929.5) (1054.5) (1149.5) (1224.5) (1294.5) Net Property Plant & Equipment Restricted Investments DARS License Intangible Assets Deferred Financing Fees Related Party Prepaid Exp Prepaid and Other Assets Total Assets 1, , , , , , , , , ,594.9 Liabilities & Equity Accounts Payable Accrued Expenses Short-term Notes Payable Due to Related Party Deferred Revenues and Other Current Liabilities Notes Payable and Accrued Interest , , , , Due to Related Party - Long Term Due to Related Party, net of Current Deferred Revenues and Other Preferred Stock Common Stock APIC 1, , , , , , , , , ,755.6 Retained Earnings (Accumulated Deficit) (886.0) (1,402.6) (2,112.9) (2,583.4) (2,804.9) (2,741.5) (2,338.8) (1,569.5) (454.0) Liabilities + Equity 1, , , , , , , , , ,594.9 Source: Company reports and Morgan Joseph & Co. Inc. estimates 5

6 XM Satellite Radio Annual Cash Flow Statements E ($ in millions) E 2006E 2007E 2008E 2009E 2010E 2011E Cash Flows from Operations: Net Income (Loss) ($51.9) ($284.4) ($495.0) ($584.5) ($642.4) ($553.3) ($258.7) $26.2 $365.4 $732.1 $1,078.2 $969.6 Depreciation and Amortization GM Amortization GM Deferral 0.0 (85.0) Accretion of Interest Miscellaneous Changes in Working Capital Net Cash Used in Operations ($37.0) ($203.0) ($294.3) ($245.1) ($85.6) ($150.5) $140.1 $381.5 $604.5 $895.0 $1,262.3 $1,146.8 Cash Flows From Investing: Purchases of Plant & Equipment (41.93) (58.52) (35.60) (15.69) (25.93) (40.00) (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) Expenditures for Satellite Systems (424.3) (142.3) (32.8) (4.1) (144.0) (150.0) (100.0) (100.0) Investments (36.9) (0.3) Other Investments & Insurance Claims (56.3) (32.5) (2.5) Net Cash Used in Investing ($559.4) ($221.4) ($7.0) $14.6 ($36.3) ($190.0) ($115.0) ($115.0) ($15.0) ($15.0) ($15.0) ($15.0) Financing Activities Equity Preferred Stock (10.2) Debt (2.8) (14.5) (982.7) (137.0) 0.0 Distributions (8.4) (6.2) (4.7) 0.0 Cash Provided by Financing Activities $771.1 $382.0 $151.6 $616.0 $421.4 $436.2 ($14.5) $26.5 $26.5 ($982.7) ($137.0) $0.0 Net Increase (Decrease in Cash) $174.6 ($42.4) ($149.7) $385.5 $299.6 $95.8 $10.6 $293.0 $616.0 ($102.8) $1,110.3 $1,131.8 Source: Company reports and Morgan Joseph & Co. Inc. estimates 6

7 XM Satellite Radio Quarterly and Annual Income Statements E ($ in millions) 1Q04 2Q04 3Q04 4Q Q05 2Q05 3Q05E 4Q05E 2005E 2006E Total Revenues $43.0 $53.0 $65.4 $83.1 $244.4 $102.6 $125.5 $149.6 $176.0 $553.7 $1,018.0 Yr/Yr Change in Revenue 228.9% 188.9% 142.7% 148.2% 166.2% 138.7% 136.8% 128.9% 111.7% 126.5% 83.9% Qtr/Qtr Change in Revenue 28.3% 23.3% 23.4% 27.2% NA 23.4% 22.3% 19.2% 17.7% NA NA Cost of Revenue Revenue Share & Royalties % of Total Revenue 36.0% 19.8% 16.6% 16.7% 20.7% 18.6% 16.8% 18.0% 18.0% 22.0% 18.0% Customer care and billing operations Cost of Equipment % of Equipment Sales 120.0% 120.0% 120.0% 120.0% 159.2% 115.0% 110.0% Ad Sales Satellite & terrestrial Broadcast Operations Programming and content % of Revenues 16.8% 13.4% 13.2% 11.7% 13.4% 17.1% 19.6% 18.7% 17.0% 18.1% 13.3% Total Cost of Revenue Gross Profit ($4.8) $8.0 $17.3 $22.0 $42.5 $28.3 $31.3 $43.9 $60.2 $163.5 $461.8 Gross Margin NA 15.06% 26.50% 26.43% 17.39% 27.55% 24.91% 29.32% 34.17% 29.54% 45.36% Research and Development General & Administration PreMarketing Cash Flow ($16.8) ($5.3) $3.2 $9.3 ($9.6) $14.9 $13.4 $25.9 $42.2 $96.3 $396.8 PreMarketing Cash Flow Margin NM NM NM 11.2% NM 14.5% 10.7% 17.3% 23.9% 17.4% 39.0% Retention and support Subsidies and distribution Advertising and marketing Marketing and Ad Sales SAC $73.1 $56.9 $56.8 $63.0 $63.4 $52.1 $57.4 $58.6 $47.0 $51.3 $45.9 CPGA $102.1 $100.6 $88.9 $101.5 $98.4 $90.3 $101.4 $100.5 $81.8 $88.7 $79.5 EBITDA ($78.0) ($107.8) ($62.9) ($139.7) ($388.4) ($71.3) ($89.9) ($86.9) ($81.1) ($329.2) ($41.5) % of Revenues NM NM NM NM NM NM NM Depreciation and Amortization Amortization of GM Goodwill Impairment of Goodwill Operating Income (expense) ($117.9) ($112.9) ($100.6) ($129.7) ($461.0) ($105.3) ($127.1) ($126.9) ($121.1) ($480.5) ($201.5) Operating Margin NM NM NM NM NM NM NM NM NM NM NM Interest Expense (28.1) (19.2) (19.0) (19.4) (85.8) (20.0) (24.5) (19.0) (19.0) (82.5) (69.6) Interest Income Other Income (expense) 0.4 (34.5) 0.7 (41.1) (74.5) Pretax Income ($144.5) ($165.5) ($117.4) ($187.6) ($615.1) ($119.3) ($146.0) ($140.9) ($136.1) ($542.4) ($250.7) Pretax Income Margin NM NM NM NM NM NM NM NM NM NM NM Income Tax Net Income ($170.1) ($166.1) ($118.0) ($188.2) ($642.4) ($119.9) ($146.6) ($141.5) ($136.7) ($544.8) ($250.7) Preferred Stock Div. Requirements (2.4) (2.1) (2.1) (2.1) (8.8) (2.1) (2.2) (2.1) (2.1) (8.5) (8.0) Net income (loss) ($172.4) ($168.2) ($120.1) ($190.4) ($651.2) ($122.1) ($148.8) ($143.6) ($138.8) ($553.3) ($258.7) EPS (basic) ($0.96) ($0.84) ($0.59) ($0.92) ($3.30) ($0.58) ($0.70) ($0.64) ($0.61) ($2.52) ($1.14) EPS (fully diluted) ($0.56) ($0.54) ($0.38) ($0.60) ($2.10) ($0.38) ($0.46) ($0.43) ($0.42) ($1.72) ($0.76) EPS Growth NA NA NA NA NA NA NA NA NA NA NA Shares (basic) Shares (fully diluted) Source: Company reports and Morgan Joseph & Co. Inc. estimates 7

8 XM Satellite Radio Annual Income Statements E ($ in millions) E 2006E 2007E 2008E 2009E 2010E 2011E Total Revenues $0.0 $0.5 $20.2 $91.8 $244.4 $553.7 $1,018.0 $1,438.6 $1,852.5 $2,245.2 $2,619.0 $2,969.2 Yr/Yr Change in Revenue % 355.0% 166.2% 126.5% 83.9% 41.3% 28.8% 21.2% 16.6% 13.4% Qtr/Qtr Change in Revenue NA NA NA NA NA NA NA NA NA NA Cost of Revenue Revenue Share & Royalties % of Total Revenue 128.9% 55.9% 28.8% 20.7% 22.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% Customer care and billing operations Cost of Equipment % of Equipment Sales 146.4% 159.2% 115.0% 110.0% 110.0% 110.0% 110.0% 110.0% 110.0% Ad Sales Satellite & terrestrial Broadcast Operations Programming and content % of Revenues NM NM NM 25.2% 13.4% 18.1% 13.3% 10.1% 8.4% 7.3% 6.5% 5.9% Total Cost of Revenue ,036.5 Gross Profit ($32.4) ($107.2) ($100.3) ($56.1) $42.5 $163.5 $461.8 $758.7 $1,067.1 $1,369.1 $1,660.6 $1,932.8 Gross Margin NA NA NA NA 17.39% 29.54% 45.36% 52.74% 57.60% 60.98% 63.41% 65.09% Research and Development General & Administration PreMarketing Cash Flow ($61.7) ($142.1) ($137.6) ($95.8) ($9.6) $96.3 $396.8 $691.7 $996.1 $1,290.1 $1,573.6 $1,837.8 PreMarketing Cash Flow Margin NM NM NM NM NM 17.4% 39.0% 48.1% 53.8% 57.5% 60.1% 61.9% Retention and support Subsidies and distribution Advertising and marketing Marketing and Ad Sales SAC NA NA NA $75.4 $63.4 $51.3 $45.9 $41.1 $42.4 $41.0 $40.9 $40.4 CPGA NA NA NA $137.0 $98.4 $88.7 $79.5 $72.7 $70.2 $65.4 $62.9 $61.8 EBITDA ($75.9) ($238.9) ($295.1) ($260.5) ($388.4) ($329.2) ($41.5) $239.5 $536.4 $833.8 $1,119.4 $1,377.5 % of Revenues NM NM NM NM NM NM NM 16.6% 29.0% 37.1% 42.7% 46.4% Depreciation and Amortization Amortization of GM Goodwill Impairment of Goodwill 11.5 Operating Income (expense) ($79.5) ($281.6) ($438.8) ($454.4) ($461.0) ($480.5) ($201.5) $79.5 $411.4 $738.8 $1,044.4 $1,307.5 Operating Margin NM NM NM NM NM NM NM 5.5% 22.2% 32.9% 39.9% 44.0% Interest Expense 0.0 (18.1) (63.6) (110.3) (85.8) (82.5) (69.6) (67.9) (67.9) (44.1) (6.9) 0.0 Interest Income Other Income (expense) (22.8) (74.5) Pretax Income ($51.9) ($284.4) ($495.0) ($584.5) ($615.1) ($542.4) ($250.7) $32.2 $371.4 $738.1 $1,078.2 $1,376.1 Pretax Income Margin NM NM NM NM NM NM NM 2.2% 20.0% 32.9% 41.2% 46.3% Income Tax Net Income ($51.9) ($284.4) ($495.0) ($584.5) ($642.4) ($544.8) ($250.7) $32.2 $371.4 $738.1 $1,078.2 $969.6 Preferred Stock Div. Requirements (149.5) (23.2) (20.9) (20.3) (8.8) (8.5) (8.0) (6.0) (6.0) (6.0) Net income (loss) ($201.3) ($307.5) ($515.9) ($604.8) ($651.2) ($553.3) ($258.7) $26.2 $365.4 $732.1 $1,078.2 $969.6 EPS (basic) ($4.15) ($5.13) ($5.95) ($4.83) ($3.30) ($2.52) ($1.14) $0.11 $1.53 $2.98 $4.29 $3.77 EPS (fully diluted) ($4.15) ($5.13) ($5.95) ($4.83) ($2.10) ($1.72) ($0.76) $0.10 $1.09 $2.13 $3.05 $2.70 EPS Growth NA NA NA NA NA NA NA NA 990.0% 95.4% 43.2% -11.5% Shares (basic) Shares (fully diluted) Source: Company reports and Morgan Joseph & Co. Inc. estimates 8

9 Company Description: XM Satellite Radio Holdings ( is one of two licensed providers of satellite-delivered radio programming content in the US. Along with Sirius Satellite Radio, XM transmits over 150 channels of mostly commercial-free programming nationwide consisting of talk, news, sports, and interruption-free digital music. While satellite radio content is generally delivered to the automobile, XM does make radio receivers available that can be used outside the car, in other mobile and wearable formats. Required Disclosures I, David B. Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. expects to receive or intends to seek compensation for investment banking services from the subject company within the next 3 months. Meaning of Ratings: A) Buy (1) means Reasonable out-performance relative to the market over months. B) Hold (2) means Market-type risk adjusted performance; potential source of funds. C) Sell (3) means Expected to under-perform the market. Of the securities currently subject to research coverage by Morgan Joseph & Co. Inc., the percentage rated as a Buy is 58%; the percentage rated as a Hold is 42%; and the percentage rated as a Sell is 0%. In the previous 12 months, Morgan Joseph & Co. Inc. has provided investment banking services to 21% of the companies we currently rate as Buy ; to 5% of the companies we currently rate as Hold ; and to 0% of the companies we currently rate as Sell. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2005 by Morgan Joseph & Co. Inc. 9