The Evening News - Monday, February 24, 1997

HEROES

Computer animation company PIXAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %> rose $6 7/8 to $21 after cutting a sweet deal with DISNEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>. The companies today announced a 50/50 agreement to produce five films and share equally in the spoils of CD-ROMs, licensed characters, and videotape sales and rentals. Not only will that have a material impact on Pixar's near-term revenue picture, but the company could also benefit from an ongoing revenue stream resulting from the way Disney markets its movies, re-releasing films once or twice a generation. Disney likes Pixar's work so much that will also make an immediate $15 million investment in the company, which values the entire enterprise at more than three-quarters of a billion dollars.

While brokerage companies have been in the merger and acquisition spotlight lately, the insurance industry hasn't exactly been a sleepy backwater either. Shares in SECURITY-CONNECTICUT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRC)") else Response.Write("(NYSE: SRC)") end if %> jumped $7 7/8 to $45 3/8 today after the life insurance and annuities company agreed to be acquired by RELIASTAR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLR)") else Response.Write("(NYSE: RLR)") end if %> for $46 per share, based on the average stock exchange ratio set out in the deal. ReliaStar is an insurance holding company that has focused in the last couple years on acquiring marketing outlets for its annuity and life products. The company also acquired a mutual fund advisory business from ADVEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADV)") else Response.Write("(NYSE: ADV)") end if %> in mid-1995. It says the deal will be non-dilutive to earnings for fiscal 1997 and will be additive to earnings in 1998. ReliaStar also announced that its board has authorized a $100 million share buyback.

READ-RITE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> jumped $3 13/16 to $32 after receiving a surprise merger offer from the smaller APPLIED MAGENTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %>. That company is proposing a stock swap merger of the two disk drive head manufacturers. Applied is also proposing the ouster of the entire board of Read-Rite, which must be somewhat amusing to one of the most experienced management teams in the business, whose quarterly revenues are twice those of Applied. Because it may have made a somewhat better recovery from the last down-cycle, Applied must be feeling pretty big. However, the more deeply cyclical Read-Rite conducts more research programs and looks a little weaker at the bottom of a cycle, from which the entire industry only recovered in the last two quarters.

QUICK TAKES: Direct broadcast satellite company ECHOSTAR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DISH)") else Response.Write("(Nasdaq: DISH)") end if %> gained $3 to $18 before being halted for the dissemination of news, which is still forthcoming... CORVAS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVAS)") else Response.Write("(Nasdaq: CVAS)") end if %> jumped $1 1/8 to $7 after PFIZER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> said it will license the company's NIF, a potential stroke inhibitor... Information provider MAID PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIDY)") else Response.Write("(Nasdaq: MAIDY)") end if %> moved up $1 7/8 to $12 5/8 on announcing the formation of a joint venture to provide hotels with Internet connections... ADVANCED HEALTH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVH)") else Response.Write("(Nasdaq: ADVH)") end if %> advanced $2 1/8 to $16 1/8 after Hambrecht & Quist initiated coverage of the clinical information systems company with a "buy" rating... Online brokerage E*TRADE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> surged $2 13/16 to $22 3/16 after forming a strategic partnership with MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>... Networking equipment distributor BLACK BOX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBOX)") else Response.Write("(Nasdaq: BBOX)") end if %> gained $2 3/4 to $27 3/4 after Robertson Stephens initiated coverage with a "buy" rating... CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> rebounded $2 7/8 to $28 5/8 as the company's Chief Financial Officer told investors on Friday that the company is comfortable with estimates for the coming quarter and year... Credit card transaction processor FIRST USA PAYMENTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTI)") else Response.Write("(NYSE: PTI)") end if %> rose $3 3/8 to $29 1/8 on announcing the acquisition of a 2,300 merchant service portfolio representing annual transaction volume of $1.6 billion... CHINA EASTERN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEA)") else Response.Write("(NYSE: CEA)") end if %> rose $2 1/4 to $20 1/4 after its initial public offering (IPO) over-allotment was oversubscribed, meaning demand for the company's shares is spilling over into the secondary markets... SMITH'S FOOD & DRUG CENTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFD)") else Response.Write("(NYSE: SFD)") end if %> jumped $2 3/8 to $30 3/8 after Salomon Brothers raised its rating on the company to "buy" from "hold" and raised its earnings estimates... CHAMPION INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %> gained $2 1/4 to $44 1/4, and KIMBERLY CLARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> rose $3 1/4 to $102 on positive paper industry comments from Morgan Stanley.

GOATS

VIVUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VVUS)") else Response.Write("(Nasdaq: VVUS)") end if %> slumped $ 7 1/2 to $57 3/4 after Barron's ran a story calling into question the valuation of the maker of a new impotence treatment. The company's MUSE product holds great appeal for those with an aversion to needles, according to a doctor interviewed for the piece. The doctor says, however, that oral drugs are coming that will "completely change the medical treatment of impotence." If the efficacy of theses oral drugs is higher than that of the Vivus product, then the delivery method alone should guarantee market share for those companies. That prospect, plus the over $1 billion market capitalization of Vivus, are enough to put a twinkle in the eye of short-sellers.

HUGOTON ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HUGO)") else Response.Write("(Nasdaq: HUGO)") end if %> fell $1 1/4 to $10 after filing a registration statement to sell six million shares, one quarter of which are being sold on behalf of the company and other three quarters on behalf of investors. The oil and gas exploration and production company was put together in 1987 through the combination of limited partnerships, and has grown through acquisitions and its own drilling. In that time, production has grown markedly, especially over the past year. However, it has sucked in capital at a prodigious rate without generating much cash flow. It actually looks like an old-style limited partnership, creating lots of depreciation and depletion expenses with some income due to high spot prices for energy. In a boom year for oil and gas, though, a 4% return on invested capital is somewhat paltry. Most of the company's cash flow comes from those non-cash charges, which are returns of capital, and not from income, which is return on capital.

QUICK CUTS: NORSK HYDRO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NHY)") else Response.Write("(NYSE: NHY)") end if %> fell $3 1/2 to $52 5/8 after reporting 1996 EPS of $4.20 and saying that 1997 earnings will be flat... Semiconductor fab automation company PRI AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> lost $3 1/8 to $58 3/4 despite reporting a multi-million dollar order from TSMC, Taiwan's largest semiconductor company... INDUSTRI-MATEMATIK INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMIC)") else Response.Write("(Nasdaq: IMIC)") end if %> lost $1 7/8 to $6 7/8 after the production management software company reported disappointing Q3 results... Competitive local exchange carrier and erstwhile long-distance company WINSTAR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCII)") else Response.Write("(Nasdaq: WCII)") end if %> slumped $2 1/16 to $10 15/16 on news that AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> will enter the local loop with its own wireless system... BOYDS WHEELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BYDS)") else Response.Write("(Nasdaq: BYDS)") end if %> lost another $1 3/32 to $6 3/4 as analysts cut estimates in the wake of last week's profit warning from the company... Software tools company MAGIC SOFTWARE ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MGICF)") else Response.Write("(Nasdaq: MGICF)") end if %> lost $1 1/4 to $9 1/8 after reporting a decline in Q4 EPS of $0.19, falling well short of estimates of $0.35... MITEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLT)") else Response.Write("(NYSE: MLT)") end if %> slid $1 1/8 to $6 1/4 on announcing that Q4 earnings will come in below estimates due to price pressures and higher operating expenses... Firearms maker and golf club foundry STURM RUGER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RGR)") else Response.Write("(NYSE: RGR)") end if %> fell $1 to $18 on reporting Q4 EPS of $0.22, missing estimates of $0.33, which was somewhat presaged by the recent earnings shortfall of COASTCAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAR)") else Response.Write("(NYSE: PAR)") end if %>... GOLDEN STAR RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GSR)") else Response.Write("(AMEX: GSR)") end if %> shed $1 1/2 to $14 1/4 after announcing disappointing diamond mining samples in French Guiana.

FOOL ON THE HILL
An Investment Opinion by MF Templar

C-Cube Cheap, Even After Rise

Some questions raised about today's Lunchtime News column on C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CUBE)") else Response.Write("(Nasdaq: CUBE)") end if %> have prompted me to take a more thorough look at the company and the digital video market. Shares of the chip manufacturer vaulted $5 to $30 3/8 today after the company announced a new product, prompting some general commentary on digital video disk (DVD) and the Video CD market that unintentionally blurred the distinction between the two.

The largest existing market for digital video applications is MPEG-1 chips for Video CDs. MPEG stands for Moving Pictures Expert Group, and is an international standards organization that has defined the standard for the compression of full motion video. MPEG-1 is for video on a compact disk, whereas MPEG-2 is the video on broadcast systems like satellite or cable.

Currently, the highest volume market is MPEG-1 for Video CDs. Video CDs can record up to 74 minutes of full-screen, full-motion video with accompanying sound. As a general rule, the industry prefers hardware solutions for MPEG-1 encoding and decoding because it does not drop frames from the video. This is the market that C-Cube Microsystems, ZORAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZRAN)") else Response.Write("(Nasdaq: ZRAN)") end if %> and ESS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESST)") else Response.Write("(Nasdaq: ESST)") end if %> are currently fighting over. SIGMA DESIGNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIGM)") else Response.Write("(Nasdaq: SIGM)") end if %> has developed MPEG-1 chipsets strictly for personal computers and is selling them in the form of playback cards capable of running the MPEG software titles currently on the market.

MPEG-2 encoders and decoders are used for Digital Broadcast Satellite (DBS) and cable applications like DirectTV, Primestar and Americast. The desktop boxes that are used for DBS or cable also have the capability of linking the computer, television and DVD player into one unified entertainment appliance. At the present time, C-Cube Microsystems controls the encoder side of the market, while French-based SGS-THOMPSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> holds sway over the decoder half.

C-Cube's most promising market for MPEG-2 markets is not DBS or cable, but digital video disk (DVD) players. The DVD player is the digital replacement for the videocassette recorder (VCR) and the CD-ROM. Some analysts predict that C-Cube will grab as much as 70% of this emerging market, potentially making the standard codec (encoder-decoder chip) for millions of consumer devices. Excited proponents have even suggested that the Milpitas, California-based chip manufacturer could become the INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> of the digital video set.

DVD players have unfortunately been held up due to squabbling among the various factions vying for control of the standard. Parties with vested interests include the manufacturers of consumer electronics devices, personal computer makers, and the motion picture industry, to name a few. Although many of the important standards were worked out in 1996, DVD players made by Toshiba and Matsushita have only started to sell in Japan in the past few months at or around the $700 price point. In December, C-Cube Chief Executive Andrew Balkanski stated that he saw more than one million DVD players selling in 1997, a number than can only go up with the cheaper chipset that C-Cube announced today.

Today, C-Cube stated that it will start selling a package that includes a highly integrated DVD decoder, a DVD system-level PC reference design, DVD encoding technology and a DVD player manufacturing kit as part of its ZiVA package. C-Cube did not announce any pricing for the product, although it did say that the encoder and decoder would be available this quarter, while the PC reference platform will have to wait for next quarter. Samsung, Aiwa and Toshiba have already said that they will buy the chips because of their performance. "DVD's superior video picture quality combined with Dolby Digital audio creates an unmatched home-theater environment," said CEO Balkanski.

This product announcement takes the attention away from the deteriorating Video CD market, where newcomer ESS Technology has been heating up the competition and causing both ESS and C-Cube to cut prices. The Fremont, California-based manufacturer of integrated mixed signal semiconductor audio technology for multimedia personal computers has been competing fiercly with C-Cube in China, causing C-Cube to recently drop its prices to avoid losing market share.

Proponents of C-Cube maintain that the price cut by C-Cube allowed the company to increase its market position, turning up the heat on ESS Technology. The President and Chief Operating Officer of ESS Technology, Herbert J. Martin, resigned recently from for unknown reasons, although he remains a director and a consultant with the firm. Some C-Cube bulls have linked this departure to C-Cube's return salvo, but this is certainly only speculation at best. What is for certain is that ESS Technology does not currently make DVD chipsets, a much more promising market if DVD does eventually replace the VCR and CD-ROM technology.

C-Cube's deft move refocuses the attention on this product category by allowing it to say it is enabling manufacturers to penetrate the market with a device priced under the magical $500 threshold, something that C-Cube Chief Executive Balkanski believes will incite further demand and allow C-Cube to hit its goal of one million DVD units for fiscal 1997. How does this lower price offering affect C-Cube's cost structure? Without details on the price, it is difficult to say, but given the exuberant market reaction it would appear that investors believe C-Cube can make up in volume what it loses in percentages.

Given the current, admittedly imperfect estimates that exist on C-Cube Microsystems and ESS Technology, it appears that C-Cube is statistically cheaper. With C-Cube shares closing near $30 on almost three times normal volume, the shares are priced at 14.5 times this year's estimates of $2.06 per share and 11.3 times fiscal 1998 estimates of $2.63 per share. By comparison, ESS Technology at $26 is close to C-Cube's sticker price, but with estimates of $1.73 per share for this year and $2.14 per share for next year, it trades at 15 times this year's profits and 12 times next year's -- without an announced entree into the digital video market. Even if C-Cube does end up taking in less cash in the Video CD arena, it is not fait accompli that the stream of profits from ESS Technology has any less risk involved. Investors are invited to visit the Desktop Video forum on the Motley Fool 's AOL site for more information.

CONFERENCE CALLS

HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
(303) 446-5399 (reservation # 2348408) -- replay avail thru 2/25

AT&T Capital
Through midnight, February 25.
(800) 475-6701 code: 331034

GENZYME CORP-TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZL)") else Response.Write("(Nasdaq: GENZL)") end if %>
(402) 220-6030 -- replay through 5PM on 2/25

COMPUSERVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSRV)") else Response.Write("(Nasdaq: CSRV)") end if %>
(303) 267-1036 (code: 172231)

MORROW SNOWBOARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRRW)") else Response.Write("(Nasdaq: MRRW)") end if %>
(201) 628-6885 replay until 2/28

SAFESKIN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>
(800) 642-1687 code # 262152

02/25/97 (Tuesday)
HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
(402) 220-3005 -- replay after 12:00 noon until 2/28

02/25/97 (Tuesday)
ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %>
(402) 220-5186 -- replay through 3/7

ELTEK LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELTKF)") else Response.Write("(Nasdaq: ELTKF)") end if %>
replay after 4:00 p.m. EST
(913) 661-0487 code: 314285

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Randy Befumo (MF Templar), a Fool
Fool On the Hill

Dale Wettlaufer (MF Raleigh), another Fool
Heroes & Goats

Brian Bauer (MF Hoops), one more Fool
Editing

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