XM Satellite Radio Shares Fall on Negative Note From Auditor
For the third consecutive year, the auditor for XM Satellite Radio Holdings Inc. warned that the company would need to raise more funds if it is to remain in business.
The “going concern” letter from KPMG was part of XM’s annual report filed Tuesday with the Securities and Exchange Commission. The company downplayed the significance of the letter, but XM shares fell 13%, or $2, to $13 in Nasdaq trading.
Representatives of XM, which in October began providing 100 channels of radio programming direct via satellite to subscribers, said KPMG’s annual audit letter included similar language last year and in 2000.
Two analysts agreed that investors overreacted to the news. Oren Cohen of Merrill Lynch & Co. blamed the nervous atmosphere generated by the recent downfalls of formerly highflying companies such as Enron Corp. and Global Crossing Ltd.
“It’s a misplaced reaction,” Cohen said. “Given the speculative nature of an enterprise like XM, the auditor was just stating the obvious. People are not differentiating between stories out there.”
Analyst William Kidd of Lehman Bros. said individual stockholders may have overreacted to the 10-K filing.
“When you have a company with a large number of retail investors, there is the possibility they can get caught by surprise,” Kidd said.
XM raised $1.6 billion to get off the ground with the launch of two satellites and to equip a facility that includes more than 80 production studios. But the company is not yet profitable, having lost $307.5 million, or $5.13 a share, on sales of $533,000 last year.
KPMG said there is “substantial doubt” about XM’s ability to continue as a going concern unless the Washington company could raise more money through a debt or stock offering.
XM Treasurer Greg Cole said the company needs to raise an additional $40 million to $65 million for operations this year. Cohen said XM has a good record when it comes to finding investors.
“So far, they have always succeeded in raising capital when they needed it, even in tough times,” he said.
At the end of last year, XM announced it had 28,000 subscribers nationwide, most of whom listen to the service in cars or trucks. The cost to subscribers is $9.99 a month, in addition to a receiver that goes for a minimum of about $200.
A company spokesman said XM expects to have 70,000 subscribers by the end of this month, when it reports first-quarter results, and 350,000 subscribers by the end of the year. XM is not planning cutbacks or layoffs, he said.
