Today's Fool Plate Special in the Lunchtime News addressed the affirmative disclosure rules for listed public companies and questioned whether those that have analyst-only conference calls are violating the rules. Tonight's Fool on the Hill explores this issue, as well. We've got another truckload of conference call summaries for you today, including The Gap, Woolworth, Cisco Systems, Gadzooks and Conso Products.
MF Merlin's Economic News today discusses the Federal Reserve's July report on industrial production and capacity utilization, the Labor Department's weekly report on new jobless claims, the Philadelphia Federal Reserve Bank's August report on area manufacturing activity, and the National Association of Home Builders' August report on conditions in the home-building business. (Whew!) You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. Enjoy!
Yesterday's Conference Calls:
ANCOR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANCR)") else Response.Write("(NASDAQ: ANCR)") end if %>
after 11:00 a.m. EDT
1-800-633-8284 (code 1885446)
COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %>
1-800-642-1687 (ID# 963520) -- replay at 4:00 p.m. EDT
Calls for Earnings Reported Today:
WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %>
after 10:00 a.m. EDT
1-800-222-9740
STAPLES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %>
after 5:30 p.m. EDT
1-402-220-5185 (password: Staples)
One of the biggest movers in the NYSE today was ORCHARD SUPPLY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ORH)") else Response.Write("(NYSE: ORH)") end if %>, which popped up $5 to $34 3/4 after SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> announced it was taking out the home supply chain for $35 per share in a deal worth somewhere in the neighborhood of $415 million. Orchard Supply also reported its second quarter earnings today, beating estimates by 11 cents with $0.66 per share. Same-store sales were up 8%. Orchard Supply runs 61 hardware superstores in California, targeting do-it-yourself handy homeowners.
HEALTH SYSTEMS DESIGN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HSDC)") else Response.Write("(NASDAQ: HSDC)") end if %> shares jumped $1 7/8 to $13 7/8 as the company reported the first sale of its new Diamond QuickStart managed care information system, to start-up HMO Certus HealthCare, based in Texas. Health Systems explained that, "Certus HealthCare is the prototypical Diamond QuickStart customer... It's one of a growing number of start up HMOs that want key managed care functionality today, and the flexibility from an information system to support its future growth." The software system aids HMOs in managing financial risk, tracking membership and staffing, adjudicating claims, and dealing with reimbursement, among other things.
Network information security specialist CYLINK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYLK)") else Response.Write("(NASDAQ: CYLK)") end if %> offered another lesson in the nature of initial public offerings (IPOs) today. The company started trading publicly in February of 1996 at $15 per share, and following a pattern we have grown used to witnessing, shot up to its all-time high of nearly $29 in its first eight days. Shares slumped to the low teens in the ensuing months, and then suddenly plunged yesterday, falling $1 5/16 to $9 13/16 on heavy volume. What happened? Well, when a company goes public, employee shareholders, who have been awarded options, are subject to a 180-day lockout on employee stock selling. This period ended yesterday, which explains the drop. Is it a bad sign? Not at all, necessarily. If you consider that many employees may have been waiting a long time to cash in a large portion of their compensation, perhaps in order to buy a house or pay for a kid's college tuition, it doesn't seem so alarming. And indeed, today shares bounced back up nearly 20%, rising $1 11/16 to $11 1/2.
QUICK TAKES: A gold rush at the American Stock Exchange sent shares of BEMA GOLD <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BGO)") else Response.Write("(AMEX: BGO)") end if %> up $3 5/16 to $8 5/8 on news of a newly-discovered gold copper porphyry deposit... A change in its promotional practices to resolve complaints made by the Food & Drug Administration (FDA) is what is behind the $1 7/16 to $9 rebound in shares of ORTHOLOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OLGC)") else Response.Write("(NASDAQ: OLGC)") end if %> this morning... LEASING SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSSI)") else Response.Write("(NYSE: LSSI)") end if %> leapt $2 7/8 to $18 7/8 after reporting that it had reached an agreement to provide lease financing for networking equipment sold by CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %>, a major plus for the leasing concern... Medical and business paging concern PRONET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNET)") else Response.Write("(NASDAQ: PNET)") end if %> was upgraded from "outperform" to "strong buy" by Morgan Stanley and started at "hold" by NatWest. It surged $1 7/8 to $8 3/4 in response... PMR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PMRP)") else Response.Write("(NASDAQ: PMRP)") end if %> shares jumped $2 7/8 to $20 3/8 on a contract to develop acute outpatient psychiatric programs for Columbia/HCA Healthcare Corp. hospitals.
MORE QUICK TAKES: ENTREMED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ENMD)") else Response.Write("(NASDAQ: ENMD)") end if %> shares rose $2 1/4 to $13 3/8 after the company reported a second-quarter loss of $0.05 per share, versus $0.17 a year ago... MYRIAD GENETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MYGN)") else Response.Write("(NASDAQ: MYGN)") end if %> was started by Lehman with an "outperform" rating, advancing $3 to $21 1/2 a week after receiving a permit for DNA testing in New York... SENSORMATICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRM)") else Response.Write("(NYSE: SRM)") end if %> blew its estimates, posting only a penny when six cents were expected, but investors are apparently hanging on to high hopes, as shares rose $2 to $19 1/2... NORTH AMERICAN VACCINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NVX)") else Response.Write("(AMEX: NVX)") end if %> shares jumped $2 7/8 to $21 5/8 after ABBOTT LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %> agreed to market the company's diphtheria, tetanus and whooping cough vaccines, once approved by the FDA.
MEDAPHIS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MEDA)") else Response.Write("(NASDAQ: MEDA)") end if %> was dunked for $21 3/8 to $14 1/4 (yes, 60%) after the medical receivables management firm warned of a third quarter loss of $0.28 EPS to $0.33 EPS, forecasting fiscal 1997 net earnings in the range of $0.75 EPS to $0.90 EPS. The company was expected to earn $0.27 and blames its woes on reorganization expenses and weakness in its Physician Services Corp. business. Analysts were tripping over each other in their rush to downgrade the company, with Needham & Co. and Mason Cabot cutting ratings from "strong buy" to "hold," Hambrecht & Quist lowering their rating from "buy" to "hold," Donaldson Lufkin & Jenrette cutting theirs from "buy" to "market perform," and Bear Stearns ironically appearing the most bullish, downgrading the company from "buy" to "attractive."
Halting one of its three Protovir trials due to "lack of efficiency evidence," PROTEIN DESIGN LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PDLI)") else Response.Write("(NASDAQ: PDLI)") end if %> tumbled $7 5/8 to $15 1/2 this morning in heavy trading. The halted Phase II/III trial was for Protivir, a human anti-CMV retinitis antibody. Cowen & Co. downgraded the company today, dropping it from "buy" to "neutral." The trials were being conducted by the Studies of Ocular Complications of AIDS (SOCA) and Protovir is also in ongoing trials conducted by the AIDS Clinical Trial Group.
IMNET SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMNT)") else Response.Write("(NASDAQ: IMNT)") end if %> has had a rough week, falling $5 1/16 to $20 today. Two days ago it reported fourth quarter earnings of $0.35 per share, nearly half the anticipated $0.19. But today it announced that it had granted worldwide exclusive manufacturing rights and non-exclusive, non-healthcare distribution rights for its MegaSAR microfilm jukebox to SOFTNET SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SOF)") else Response.Write("(AMEX: SOF)") end if %>. Investors might be worried, but Kenneth D. Rardin, President and Chief Executive Officer (CEO) of IMNET, stated, "We believe SoftNet can produce MegaSAR products efficiently while opening up additional market opportunities outside of healthcare for the MegaSAR... This agreement will also allow IMNET to further focus its efforts on marketing and enhancing its software product offerings for the healthcare information industry, while retaining the exclusive right to market the MegaSAR in healthcare."
QUICK CUTS: CANNONDALE CORP.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BIKE)") else Response.Write("(NASDAQ: BIKE)") end if %> results looked okay as the firm reported $0.39 EPS versus estimates of $0.32 EPS on higher gross margins. However, fully-taxed, the results were more like $0.33 EPS, not quite the blow-out it first appeared, and shares dropped $1 5/8 to $18 7/8... FILENET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FILE)") else Response.Write("(NASDAQ: FILE)") end if %> shares flew South $5 3/8 to $23 3/8 after Chicago Corp. lowered its 1996 and 1997 earnings estimates and Volpe Welty cut its 1997 estimates by 30 cents to $2.00 per share.
An Investment Perspective by
Randy Befumo
(MF Templar)
FOOL ON THE
HILL
Material Facts and the Law
Every quarter's worth of earnings puts another round of conference calls underneath the Foolish belt and leaves behind another pile of paper-thin rationalizations from Investor Relations departments throughout the United States on why individual investors, the media, private analysts and the Motley Fool (some conglomeration of all three) should not be allowed into various corporate conference calls. I just wanted to spend some time today looking at the reasons why time and time again investors get denied access to calls, pointing out some culprits and suggesting some possible solutions.
LIVING IN DENIAL
Executive hubris combined with poor legal advice has led dozens of investor relations firms around the country to conclude that for some reason they can hold all of the private conference calls they want with sell-side securities analysts. Whether genuinely misinformed or actually actively attempting to control dissemination of the facts to an elite group bound to them through investment banking ties, it seems clear to any casual observer that something is not quite right here.
When earnings are reported, a company typically releases a statement to the general public and then holds a telephone conference call to clarify the press release and answer any additional questions. Often a company will add quite a bit of information in the conference call that was not in the original press release. This is either a clarification (maybe revenues broken out by geographical region and product segment) or entirely new information about the past quarter or the company's future.
The central issue here surrounds the timely disclosure of material facts to all invested parties. Does the additional information given in the conference call constitute a material fact? And if there is no additional material information in the conference call, then why is everyone sitting around paying good money to have someone read the press release to them? If this is material information, why are companies willing to screw their shareholders over in order to give Wall Street sell-side analysts and large holders privileged access?
MATERIAL FACTS
A material fact is defined in case law as any piece of information that could affect an investor's opinion of the value of the securities in question, causing someone to decide to buy or sell. Although you might think such an ambiguous definition would make people anxious enough to disclose all information in their press release, the opposite seems to be true. Companies fall all over themselves to give sell-side analysts all sorts of information they would never give individual investors, never apparently realizing that they are violating the affirmative obligation of their listing requirements.
The problem here might be that they are not actually violating the letter of the SEC law, per se. There is no clear affirmative obligation in the federal statutes, which is probably why lawyers are telling companies that doing this is not illegal. However, looking through the listing requirements it seems pretty clear that what is going on is not kosher. Check out the relevant passages from the NYSE and NASD handbooks: "202.05 Timely Disclosure of Material News Developments. A listed company is expected to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities. This is one of the most important and fundamental purposes of the listing agreement which the company enters into with the Exchange." (emphasis added)
-- New York Stock Exchange Listed Company Manual
"(16) Except in unusual circumstances, the issuer shall make prompt disclosure to the public through the news media of any material information that would reasonably be expected to affect the value of its securities or influence investors' decisions and shall, prior to the release of the information, provide notice of such disclosure to the Association's Market Surveillance Department." (emphasis added)
-- NASD Manual
These companies may not be breaking the black letter of Federal securities law, but they are certainly pushing the bounds of their listing requirements if they disclose material facts in a limited-access conference call that does not got out on a press release. Resolution of this requires someone giving a call to the exchange and filing a complaint. The exchange then gets a copy of the call, sends out a questionnaire to everyone who was on the call and asks them what they heard and compares it to the press release. If the company is found to have disclosed material facts, they are censured and risk delisting. Although technically possible, this has never been done because the power structure between Main Street and Wall Street has for so long been absolutely warped.
THIS WHOLE WAY OF LIFE MUST END
Most companies aren't dorks about their conference calls. I hope my attention to this issue has not convinced you otherwise. However, occasionally a company decides for whatever reason that telling securities analysts and large institutional holders information that they will not let anyone else know is okay. "Individual investors don't understand the dynamics of the business," they will mutter to themselves. Or even worse yet, "These aren't material facts that are released in the call."
Last I checked, it was not up to a company to determine whether the people who own it know enough about its business to be informed as they are entitled to about what is going on in corporate headquarters. Frankly, it is not even apparent to me that the institutions that companies love to dote on actually understand their businesses all that much either... when the going gets tough, the institutions get going and the stock tends to fall. It is the individual shareholders who stick it out and look twenty years ahead.
As for whether or not these things are "material facts," I only ask this: if they are not material, why would anyone want to know them at all? If all material facts were in the press release, all the analyst would have to do is read the press release. Conference calls could become an outreach program for dyslexic and blind analysts. It seems to me that quite a bit more is going on in conference calls than an honest attempt to fulfill the requirements of the Americans with Disabilities Act.
The traditional brokerage business is under siege. Electronic communications have suddenly given investors access to more information than they ever have had. Brokerages have had to try harder and harder to actually add value, and part of this task has fallen to the analyst. Using the investment banking purse strings as a collusive force, analysts and investor relations people have conspired to set up a system where you have to use a full service brokerage to get a report that says what the company you *OWN* had to say two weeks ago in the conference call. This is now information that the institutions have already reacted to. Analysts get a perk, companies get to control the information flow, and just the individual owners who separately have no voice get the shaft. Who cares, right?
Absolutely wrong. What individual investors do is storm the barricades, flood investor relations departments with irate calls, sell their shares in protest and lodge formal complaints with listing agencies to turn this around. It seems pretty clear that anyone with a vested interest in either the company or informing people about the goings on at the company should get to hear an after-hours recording of the conference call. This is not a call for live access to the masses. That would not be cost-effective. Widely-promoted recorded access, however, is a must to fulfill those listing requirements. Otherwise... man the barricades, folks.
Randy Befumo (MF Templar),
a Fool
Fool On the Hill
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing
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