The Evening News - Thursday, March 20, 1997

HEROES

Western bank U.S. BANCORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USBC)") else Response.Write("(Nasdaq: USBC)") end if %> gained $6 7/8 to $55 1/8 after agreeing to merge with FIRST BANK SYSTEM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FBA)") else Response.Write("(NYSE: FBA)") end if %> in a stock swap valuing each U.S. Bancorp share at 0.755 shares of First Bank, or $59.08 as of last night's close. The deal links two banks with very little overlap, creating a solid combination with strongholds in the Midwest, Northwest, and to a lesser extent, the Mountain States. Both are highly efficient banks with strong non-interest revenues based in credit card fees, ATM machines, and trust services -- thus the high price-to-book ratio valuation on the deal. The company will have over $14 billion in non-interest bearing deposits working for it and almost $70 billion in assets, making it one of the largest super-regional banks in the U.S.

If it deals with digital subscriber lines (xDSL), it was probably up today, as MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> fired a somewhat low-key shot across the bows of the Baby Bells. The company announced a strategy to deliver telecommunications services -- both voice and data -- to rural customers via HDSL and ADSL hook-ups, which would be sold on a retail basis by local utilities, phone companies, cable companies, municipalities, and educational institutions. MCI will get the strategy underway with a partnership with Northwest Iowa Power Cooperative and Northwest Iowa Telephone, in which local customers will be connected to a fiber optic ring via xDSL links. PAIRGAIN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAIR)") else Response.Write("(Nasdaq: PAIR)") end if %> gained $3 to $26 3/8; WESTELL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSTL)") else Response.Write("(Nasdaq: WSTL)") end if %> rose $1 to $10 5/8; AWARE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWRE)") else Response.Write("(Nasdaq: AWRE)") end if %> picked up $1 3/8 to $10 3/4; and AMATI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTX)") else Response.Write("(Nasdaq: AMTX)") end if %> gained $5/8 to $12.

QUICK TAKES: AMERIHOST PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOST)") else Response.Write("(Nasdaq: HOST)") end if %> gained $1 7/16 to $7 1/2 after the hotel operator and manager said it is in talks to be acquired... Advertising agency THE LEAP GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LEAP)") else Response.Write("(Nasdaq: LEAP)") end if %> leaped $1 3/8 to $7 1/4 after announcing Q4 revenues of $3.8 million and earnings per share (EPS) of $0.05, as well as a new advertisement for client U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>... YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> added $4 3/8 to $29 1/8 after a number of brokerages raised ratings on the company following yesterday's announcement of a strategic alliance with NETSCAPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>... BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> rose $1 3/4 to $12 5/8 after Salomon Brothers reiterated its "buy" rating on the company, pointing to improved industry fundamentals and better same-store sales... Microfilm information systems company BELL & HOWELL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHW)") else Response.Write("(NYSE: BHW)") end if %> gained $2 to $22 3/8 after its UMI subsidiary announced a new product release this morning... GUCCI GROUP NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> popped up $5 3/8 to $74 7/8 after the luxury goods company pre-announced (a week ahead of reporting earnings) 1997 EPS of $2.60 to $2.67, beating estimates of $2.50... Oil refiner TOSCO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOS)") else Response.Write("(NYSE: TOS)") end if %> gained $1 7/8 to $28 1/4 despite unresolved union problems at four UNOCAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCL)") else Response.Write("(NYSE: UCL)") end if %> facilities it will take over at the end of the month... CLIFFS DRILLING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLDR)") else Response.Write("(Nasdaq: CLDR)") end if %> gained $5 to $56 after Lehman Brothers rated the shares of the contract oil driller a "strong buy" this morning... FLORES & RUCKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNR)") else Response.Write("(NYSE: FNR)") end if %> rode the Cliffs' draft $2 1/4 higher to $41 1/4... NEW YORK TIMES CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NYT.A)") else Response.Write("(AMEX: NYT.A)") end if %> gained $2 7/8 to $47 3/4 after the publishing and broadcasting company pre-announced Q1 EPS of $0.47 to $0.57, ahead of the First Call estimate of $0.44.

GOATS

Calvin Klein licensee DESIGNER HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DSH)") else Response.Write("(NYSE: DSH)") end if %> fell $2 7/8 to $7 3/4 after announcing it will change its marketing strategy, pulling products from certain specialty stores to focus on higher margin department store chains, selling the same stuff for higher prices. The company estimates this will result in sales growth in 1997 of up to 6% and EPS growth of 12% -- not great, but somewhat respectable given that the company recently announced a falling out with DONNA KARAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DK)") else Response.Write("(NYSE: DK)") end if %>, which was supposed to be another growth vehicle.

Network access equipment company VERILINK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRLK)") else Response.Write("(Nasdaq: VRLK)") end if %> failed to participate in today's networking rally. In fact, it lost about half its value in closing down $5 3/4 at $6 after announcing that it expects Q3 revenues to decrease 11% to 17% sequentially. The company also forecast Q3 EPS of $0.05 to $0.07, far below estimates of $0.13. Analysts said one of the principal problems was the delay of the Sprint PCS buildout by major customer NORTHERN TELECOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>. Earlier this year, NorTel probably also played a part in the downfall of remote access equipment company SHIVA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHVA)") else Response.Write("(Nasdaq: SHVA)") end if %> when Shiva reported poor results and forecast soft earnings going forward. The fall in the shares of PREMISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMS)") else Response.Write("(Nasdaq: PRMS)") end if %> can also be traced to problems in the wireless infrastructure companies.

Polypropylene film and plastics company APPLIED EXTRUSION TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AETC)") else Response.Write("(Nasdaq: AETC)") end if %> fell $1 5/8 to $10 3/8 on announcing that it doesn't expect to meet revenue goals for the second quarter because of manufacturing problems at its main facility in Indiana. The company says demand remains strong, though, and that it will be able to satisfy customer needs through its current inventories. The company built inventory up to $38 million last quarter from about $30 million in the prior quarter, which gives the company more than 10 weeks' supply, depending on the customer order mix the company will face.

QUICK CUTS: SOMATOGEN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTG)") else Response.Write("(Nasdaq: SMTG)") end if %> tumbled $3 1/4 to $6 after ELI LILLY & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> said it will discontinue support of Somatogen's rHb1.1 hemoglobin substitute... GT BICYCLES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTBX)") else Response.Write("(Nasdaq: GTBX)") end if %> lost $2 1/4 to $8 after saying it doesn't think it will meet revenue estimates or EPS estimates of $0.24 due to lower-than-expected order volumes for mountain bikes, which also caused CANNONDALE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BIKE)") else Response.Write("(Nasdaq: BIKE)") end if %> to wipe out, losing $1 3/8 to $17 7/8... Department of Defense information technology contractor NICHOLS RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRES)") else Response.Write("(Nasdaq: NRES)") end if %> fell $4 5/8 to $16 7/8 after reporting Q2 EPS of $0.23, missing estimates of $0.27... PAGING NETWORK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %> was muted for a $2 3/16 loss to $10 3/16 after the company again cut prices on its VoiceNow service... Physician practice management company PHYSICIANS RESOURCES GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRG)") else Response.Write("(NYSE: PRG)") end if %> slid $1 1/2 to $10 1/2 after Salomon Brothers dropped its rating on the company to "hold" from "buy"... CORRECTIONS CORP. OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CXC)") else Response.Write("(NYSE: CXC)") end if %> lost $2 5/8 to $24 1/4 after announcing a delay in its contract process for a 1,500 bed facility for the cash-strapped District of Columbia... Residential air conditioning distributor WATSCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: WSO)") else Response.Write("(AMEX: WSO)") end if %> lost $2 to $22 3/4 despite initiation of coverage from Smith Barney with an "outperform" rating... Paper products distributor UNISOURCE WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UWW)") else Response.Write("(NYSE: UWW)") end if %> was unrolled for a $3 3/4 loss to $16 after announcing that it expects to report Q2 EPS of $0.16 to $0.21, below estimates of $0.36, due to weak pricing.

FOOL ON THE HILL
An Investment Opinion by MF Templar

LeBow LeRat

Investors lulled into a false sense of confidence by the recent relentless rise in the shares of tobacco and food gargantuan PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> over the past few months got a nasty shock today. Richmond, Virginia-based Big Mo' plunged $6 5/8 to $115 3/8 on heavy volume for the second day in a row after another nasty bit of litigation news hit the wires. The Liggett Group announced last night that it was going to settle outstanding tobacco liability issues with 16 more states and the federal courts. This news was the latest in a series of revelations that have served to remind investors that litigation risks still exist with the tobacco companies, information that has apparently been forgotten over the past few weeks as talk of a legislated settlement from Congress has dominated the talk of portfolio managers. What has been driving the shares over the past year and how does today's news affect the intrinsic value of these companies?

All of the litigation worries began anew on March 13th when the Mississippi Supreme Court decided that the state Attorney General could sue the tobacco industry without the Governor's blessing, news that caused Philip Morris to drop more than $9 to $126 3/8. This bomb was followed yesterday by a decision by the U.S. Supreme Court to not hear a challenge by Philip Morris regarding a Florida law that affects upcoming litigation against the tobacco industry in that state. Florida and Massachusetts both have trials scheduled for this year to determine the liability of tobacco companies for Medicaid and Medicare costs in those states. It was the news of this decision that weighed on tobacco stocks yesterday, sending Philip Morris down $3 7/8 to $121 7/8.

The Liggett Group has not been playing along with Big Tobacco's legal strategy since March of 1996 when it announced that it would settle with the Castano class action lawsuit plaintiffs and the Attorneys General of five states. Liggett Group is owned by Bennett LeBow and controlled through his BROOKE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGL)") else Response.Write("(NYSE: BGL)") end if %>, and many have speculated that LeBow's real agenda is to maximize the value of his financial stakes in Liggett and RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>. Although today's addition of 16 states to the settlement is news, the actual existence of a settlement or its terms is not. Back in March, Liggett offered similar terms. The federal government was to get 5% of its pre-tax profits for 25 years (up to $50 million per year) to fund smoking cessation programs through the Castano class action, and the state governments would get 2% to 7% of Liggett's pre-tax profits for the next 24 years, depending on how many states joined the suit. According the Dow Jones, the settlement announced today has Liggett paying $25 million in damages, plus 25% of pre-tax profits over the next 25 years

LeBow is not just negotiating to maximize the value of Liggett, he is also out to offer up the head of Philip Morris to the state Attorneys General. The terms of the lawsuit shut out any entity with more than 30% market share, which currently means only Philip Morris. The most significant wrinkle in today's news is not that 16 more states have joined the litigation bandwagon with Liggett, but that Liggett wants to turn over all of its internal documents to them -- including some documents relating to the so-called Committee of Counsel -- meetings of all of the lawyers working for the tobacco companies. Although a North Carolina state court granted the other tobacco companies a temporary restraining order against this release of documents, there will be a hearing on the subject on March 31st. Liggett will also allow its employees to testify in court about tobacco and will slap a label on its cigarettes saying they are addictive and cause cancer, reversing the decades-old stance to the contrary by all of the major tobacco companies.

The last time Big Tobacco came under a barrage of fire this heavy was back in August when a Florida jury awarded Grady Carter $750,000 for the lung cancer he contracted by smoking Brown & Williamson cigarettes. Prior to that, the middle of March brought investor attention to a slew of pending cases that threatened to affect the future value of all tobacco companies. Although the companies did get some breathing room when Food & Drug Administration commissioner David Kessler announced his resignation in late November, things did not start hopping for the stocks until the new year brought hope of a legislated solution to their liability problem. In its annual 10-K filing released on March 14th, Philip Morris stated that it would consider ''enter[ing] into discussions with appropriate parties" to solve all of the pending liability issues. As of the end of 1995, there were 185 smoking and health cases filed against Philip Morris on behalf of individual plaintiffs, with the majority of them filed in Florida. Additionally, there were 17 class action suits and 26 health care cost recovery actions pending as of that date.

Although the Mississippi Attorney General was quick to say today, "This settlement will put the tobacco industry back on its heels," turning the tobacco companies into cash cows that will stuff the coffers of the states doesn't exactly mean putting them out of business. Substantial questions exist as to whether or not food-related profits could be touched by the states as they go after Philip Morris and RJR Nabisco. Even if they were, how much would the complete destruction of all outstanding liabilities affect the valuations? The healthy 17% operating margins that Philip Morris enjoys generate a heck of a lot of cash flow. Even if only half of that cash flow went to shareholders, the company could still afford its current dividend and some stock buybacks beyond that. Any agreement that has the states getting a portion of the operating profits of the tobacco companies sets them up as the goose laying golden eggs. Investors should consider the actual value of the companies as ongoing concerns and not simply write all of the tobacco-related corporations off as dead, even if the Liggett settlement becomes de rigeur.

Correction: Two days ago in the Lunchtime News "Fool Plate Special" article on NOVELL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %>, I got two things wrong. The first was my statement about President and Chief Operating Officer Joseph Marengi's role. Novell contends he was not acting Chief Executive Officer, that his role has not changed, and that he came out of sales and not marketing at the organization. Also, I incorrectly stated that it was Marengi who dumped WordPerfect in March of 1996. Bob Frankenburg was still Chief Executive in March of 1996 when Novell got rid of its applications business.

CONFERENCE CALLS

NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %>
(800) 633-8284 (reservation # 2559993) -- replay

BRODERBUND SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %>
(800) 642-1687 (reservation # 301115) -- replay avail through 3/23

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>
available after 7:00 PM EST through 7:00 PM EST on 3/21
(800) 633-8284 (reservation # 2468610) -- replay

ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %>
available until 3/20
(800) 633-8284 (reservation # 2508068)

SUNGLASS HUT INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %>
(800) 475-6701 (access code: 334838) -- replay through midnight 3/27

ROSS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROST)") else Response.Write("(Nasdaq: ROST)") end if %>
(402) 222-9905 -- replay available through 3/25

UNISOURCE WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UWW)") else Response.Write("(NYSE: UWW)") end if %>
(904) 549-9134 -- available until 3/22

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Heroes & Goats

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Editing

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