The Evening News - Monday, March 24, 1997

HEROES

Scientific information publisher MDL INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDLI)") else Response.Write("(Nasdaq: MDLI)") end if %> gained $14 to $31 1/4 after agreeing to be bought out for $32 per share by European publishing group Reed Elsevier PLC. Reed was the company that bought Mead Data Central from paper company MEAD CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEA)") else Response.Write("(NYSE: MEA)") end if %> in late 1994, which brought it the LEXIS-NEXIS service. Reed Elsevier is a joint venture between the U.K.'s REED INTERNATIONAL PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RUK)") else Response.Write("(NYSE: RUK)") end if %> and Dutch scientific publisher ELSEVIER NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENL)") else Response.Write("(NYSE: ENL)") end if %>. MDL is more a software company, focusing on chemical information management systems and licensing, than it is a traditional publisher. The purchase price of about ten times revenues, then, will be justified by Reed Elsevier based on MDL's meaty 25% operating margin, if not its 21% year-over-year revenue growth rate.

COMMUNITY BANKSHARES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBNH)") else Response.Write("(Nasdaq: CBNH)") end if %>, holding company for Concord (N.H.) Savings Bank and Centrepoint Bank, billowed $8 1/2 to $33 1/4 after the company agreed to be acquired by fellow New Hampshire bank CFX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CFX)") else Response.Write("(NYSE: CFX)") end if %>. CFX will exchange between 2 and 2.2 of its shares for each Community Bankshares share, a value around $37.95 per share, or about $96 million, based on Friday's close. The CEO of the much smaller Community Bankshares will take the reigns of CFX after the merger is complete. The ratios on the merger are 2.28 times book value, 17% of assets, and 19 times trailing earnings (which include gains on sales of securities and loans), somewhere in the middle of the range of recent banking mergers, owing to promising growth that has not yet fully come through in the operating numbers.

AVID TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVID)") else Response.Write("(Nasdaq: AVID)") end if %>, maker of software and systems for audio/visual editing and post-production tasks, received a much-needed boost of $2 to $11 1/2 after announcing a strategic alliance with INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>. Intel will infuse the company with $14.75 million in cash in return for a 6.75% equity stake, and Avid will supply software for the Intel architecture, taking a swipe at both APPLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> and SILICON GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %>, the leading workstation architectures for post-production work. Avid will also benefit by acquiring the funding necessary to move its products into consumer space.

QUICK TAKES: SHAMAN PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHMN)") else Response.Write("(Nasdaq: SHMN)") end if %> gained $1 1/8 to $5 1/8 after the San Francisco Chronicle's Herb Greenberg mentioned the company in today's "Bizinsider" column... Internet publisher CNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> rose $2 7/8 to $23 after Robertson Stephens raised its rating on the company to "buy" from "long-term attractive"... AVENOR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANR)") else Response.Write("(NYSE: ANR)") end if %> gained $1 to $17 3/8 after DOMTAR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DTC)") else Response.Write("(NYSE: DTC)") end if %> confirmed that Avenor rejected a proposed merger involving the two companies and REPAP ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RPAPF)") else Response.Write("(Nasdaq: RPAPF)") end if %>... Major tobacco companies bounced back after last week's stale performance, with PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, and U.S.TOBACCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UST)") else Response.Write("(NYSE: UST)") end if %> all staging comebacks.

GOATS

The pre-announcement triage room continues to treat new victims. Today's critical patients include healthcare information systems company MEDIC COMPUTER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCSY)") else Response.Write("(Nasdaq: MCSY)") end if %>, down $14 3/4 to $13 1/4 after saying it will report Q1 EPS of $0.14 to $0.18, below the mean estimate of $0.27. That brought down others in the healthcare information group, including bellwether HBO & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %>, down $2 3/4 to $54 1/2, and smaller software systems company HCIA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HCIA)") else Response.Write("(Nasdaq: HCIA)") end if %>, down $4 to $24. IDEXX LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDXX)") else Response.Write("(Nasdaq: IDXX)") end if %> was also given the pre-announcement brush-off today, losing $20 to $12 after the maker of veterinary and food safety diagnostic kits said the inventory channel is a little plump and that its veterinary sales are lagging. Estimates were calling for EPS of $0.21 -- the company today forecast Q1 EPS of $0.02 to $0.05.

Other companies dispatching earnings warnings today include information technology staffing firm JUDGE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JUDG)") else Response.Write("(Nasdaq: JUDG)") end if %>, which was spliced for a $2 loss to $3 1/2. Avionics equipment and networking test equipment company SBS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBSE)") else Response.Write("(Nasdaq: SBSE)") end if %> lost $5 5/8 to $16 3/8 on saying its sales mix this quarter was poor. KENNAMETAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMT)") else Response.Write("(NYSE: KMT)") end if %> was cut down $4 3/4 to $36 1/4 after the machine tool manufacturer said German sales were slow and that higher programmed operating expenses would bring earnings down to the $0.70 per share range, below estimates of $0.92. Finally, drive-in restaurant company SONIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SONC)") else Response.Write("(Nasdaq: SONC)") end if %> flopped $7 1/8 to $13 1/4 on announcing that sales at new units were lagging expectations.

MICROSOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> fell $4 to $90 today after the Wall Street Journal called into question the release date of Windows 97 (code named Memphis), or what might now be called "Windows 9.X." The Journal said the company has informed PC makers that it will not ship the next operating system release in time for Christmas sales, and that the release will be pushed out into 1998 -- shades of Windows 95 all over again. The push back, if true, is very likely a good thing for Microsoft, as companies are still migrating to Windows 95 and NT. In addition, trying to make major pushes with Microsoft Exchange and Office 97 concurrent with a major OS release doesn't match the company's time-proven practice of smoothing out revenues. Perceptions over the delay also pushed down INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> this morning before it recovered later in the day.

QUICK CUTS: HARLEY DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %> after-market motorcycle parts and accessories supplier CUSTOM CHROME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTM)") else Response.Write("(Nasdaq: CSTM)") end if %> lost $4 1/4 to $13 after reporting Q4 EPS of $0.10, missing the estimate of $0.21, on sales of $21.4 million... LEAP GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LEAP)") else Response.Write("(Nasdaq: LEAP)") end if %> fell $1 1/4 to $6 after NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> dismissed the advertising agency... Manufactured home builder CHAMPION ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHB)") else Response.Write("(NYSE: CHB)") end if %> lost $3 3/8 to $14 3/4 after announcing that Q1 EPS will fall below estimates of $0.32, but the company also said full-year results will come in at $1.62 to $1.67 per share, within the range of estimates... CONVERSE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVE)") else Response.Write("(NYSE: CVE)") end if %> slipped $1 7/8 to $18 7/8 after the footwear company announced a 4.5 million share offering intended to repay debt... Following a quarter full of discouraging news, DISCOUNT AUTO PARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAP)") else Response.Write("(NYSE: DAP)") end if %> fell $1 1/8 to $14 1/2 in advance of tomorrow's earnings release... THERMO CARDIOSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TCA)") else Response.Write("(AMEX: TCA)") end if %> fell $2 5/8 to $21 1/8 after the company said it expects to report flat revenue growth until its HeartMate ventricular-assist system is approved by the FDA.

FOOL ON THE HILL
An Investment Opinion by MF Templar

A Lesson in Size

[Note: Have you ever wanted to tell Randy Befumo (MF Templar) what for? This is your big chance. The Fool News columnist will be at the San Francisco Motley Fool April Fool's Day Party to meet with Foolish investors and explain how he pens two columns a day and still has time to play foosball.]

AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> scampered up $1 5/8 to $41 3/4 after a series of announcements about pricing for Internet access. Although isolated, these announcements are an example of how a change in the underlying assumptions about a company's basic prospects can affect the overall valuation of the company. NETCOM ON-LINE COMMUNICATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETC)") else Response.Write("(Nasdaq: NETC)") end if %> hit the wires this weekend with news that its "unlimited" $19.95 per month consumer Internet access may not be all that unlimited. Netcom cried uncle on the all-you-can-eat pricing structure in December, stating that it was impossible for the company to make money by delivering service in this manner.

As a way of containing the Internet gluttons who have been wrecking Netcom's financial model, the service has started a trial in Canada where it bumps people who are hogging up the lines. Depending on the response, Netcom will implement this system in the U.S. Anyone who wants to avoid getting knocked offline will have to pony up a little more than $19.95 -- in some cases, a lot more. Take the example of Concentric Network's "professional plan," which costs users a cool $250 a month. Don't think that you are a professional? Concentric has two prices for consumers, one at $19.95 and one at $39.95. The difference? The $39.95 customers get priority and can bump those pesky $19.95 customers right off the system.

Why does the breakdown of the $19.95 flat-fee pricing hegemony positively affect Dulles, Virginia-based America Online? If the company can maintain its price-point because of the lower cost-structure that owning AOLNet allows it, it can stand along-side Microsoft, the Baby Bells, and AT&T as a low-cost provider. To the degree that these moves indicate America Online might have more flexibility with its pricing model than people had previously assumed, America Online can enjoy more robust revenues. Although the two are mutually exclusive, the mere fact that America Online enjoys more flexibility than previously thought is viewed as a net positive.

Viewing America Online as a company with flexibility in its business model is difficult for many investors, particularly given the terrible public relations that haunts the company. Whether it is a reporter in the local paper that seems to have a personal vendetta against America Online or the media's general sensationalistic attitude, it is very difficult for the Big Blue Triangle to catch a break. An editorial in the March Boardwatch Magazine is a great example of the typical limited framework that investors often place the company within. The writer posits that America Online's customer defection will continue in spite of the $350 million expansion of AOLNet. The editor theorizes that unhappy America Online customers will be jumping ship to Internet Service Providers (ISPs), meaning that the company will have silent U.S. Robotics modem racks and large capital expenditure bills. Without users, America Online cannot deliver to advertisers, meaning the end of America Online as we know it.

Unfortunately, the analysis is a little one-sided. The whole reason people are quitting America Online is because they cannot get access the service. However, if people are quitting, then America Online's ports per users increases, meaning people can get online more easily. At some magical point, the supply and demand will come into some kind of balance, and the remaining users will be quite happy. Whether that is at one million or eight million customers, you can argue either way, but just saying that the model is crashing in flames fails to appreciate the significant number of moving parts. As for the mechanics of advertising sales, the ad contracts guarantee a number of impressions or pageviews, not a certain number of total users on the service. As long as America Online can deliver the impressions, advertising remains intact even if the overall user base were to decline.

The Boardwatch piece is representative of what has been the prevailing opinion about America Online for months, prophesying doom.Those more sensitive to changes in the prevailing business climate are seeing ISPs leave the flat-fee business entirely, or forcing consumers to pay premium prices for premium access, implying that the limited view of America Online's business model may not accurately reflect what could happen in the future. Although valuation of the company is dicey by many traditional yardsticks, the investors who are focusing on the potential value of America Online's customer base given the general environment for online services are the ones that are buying. The actual value of these customers in the future will be quite interesting to see, and is clearly the key issue for valuing the company. The underlying assumptions that caused investors to focus on other areas are what had many short the stock in the $20s.

CONFERENCE CALLS

CUSTOM CHROME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTM)") else Response.Write("(Nasdaq: CSTM)") end if %>
(800) 921-9434 -- replay available 3/24 only

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

ECHLIN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (password: New Leader) -- live and replay thru 3/28

03/26/97 (Wednesday)
COREL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COSFF)") else Response.Write("(Nasdaq: COSFF)") end if %>
(416) 626-4153 (code: 1204) -- replay avail. for 24 hours

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

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Heroes & Goats

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