HEROES

INTEGRATED LIVING COMMUNITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ILCC)") else Response.Write("(Nasdaq: ILCC)") end if %> moved up $2 1/16 to $11 1/8 after the elder care company agreed to be acquired by a private limited partnership for $11.50 per share in cash. The company isn't exactly a cash cow, only generating net income equal to 1.8% of revenues last year. However, it is pursuing a rapid growth strategy of developing assisted living communities as well as traditional nursing home facilities. Rather than trying to look at the deal on a cash flow or earnings basis, it's probably more instructive to know that acquirer Whitehall Street REIT (an affiliate of Goldman Sachs) paid less than the total assets of the company (counting cash and debt). That's slightly less than the current multiple to assets of HEALTH CARE REIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCN)") else Response.Write("(NYSE: HCN)") end if %>, which is cash flow positive, though. REIT investors looking for income and demographic growth would probably do well to look at the best-managed companies in this segment.

CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %> gained $3 1/4 to $25 1/4 on announcing that it is ready to take on INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> at the high-end with its 6x86MX, a Pentium II-compatible CPU with MMX capabilities. Whoop-de-do. So they cloned the Pentium II. "Uh-oh," one might think, seeing that Cyrix is pricing these chips at half Intel's price points. According to semiconductor industry researchers at INFRASTRUCTURE, the battle for low-priced PC systems at the consumer level will intensify. "Corporate is where it's at," many might counter, but in his article on CMP Media's Techweb today, Infrastructure principal Carl Johnson writes, "PCs for the consumer market typically comprise about 1/3 of the U.S. market and about 1/4 of world-wide unit shipments." Shifts at the margin can sometimes change profitability per unit. That concept may mean less to Intel than it does for Cyrix, as Intel can probably keep growing operating earnings with a market share hit while Cyrix's profitability will leap if it can take back market share.

Interest rate sensitive stocks had a nice outing today as the 30-year Treasury bond surged, bringing its yield down to 6.91%. Interest rate perceptions drive valuations on companies in the financial business, not necessarily because of what interest rates fundamentally do to earnings, but because of the role of interest rates in valuation methods. Although it is affected more by healthcare issues than interest rate changes, AETNA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> gained $5 1/8 to $101. Lower long-term interest rates aren't that great for production volumes in its annuity business, either. CITICORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> gained $4 1/8 to $114 3/8, even though a compression of the yield curve -- where rates at which it can lend out money come down but short-term rates do not -- isn't all that healthy. Outside of these issues, securities brokers and dealers do well as the stock market keys off lower yields. Among these, LEHMAN BROTHERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> gained $2 1/8 to $41.

QUICK TAKES: Semiconductor wafer manufacturer IBIS TECHNOLOGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IBIS)") else Response.Write("(Nasdaq: IBIS)") end if %> jumped $2 5/8 to $11 3/8 after announcing a $400,000 government research contract... NATIONAL PICTURE & FRAME CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NPAF)") else Response.Write("(Nasdaq: NPAF)") end if %> added $1 7/8 to $11 after the maker of picture frames and framed art said it has agreed to be acquired for $12 per share in cash... Telecom equipment company TEKELEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> drove $5 1/8 higher to $35 after announcing a multi-year supply agreement with BELL ATLANTIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %>... HONG KONG TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HKT)") else Response.Write("(NYSE: HKT)") end if %> gained $1 3/4 to $22 7/8 after selling $450 million in warrants with a $17.15 strike price... PC maker COMPAQ COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> gained $6 3/8 to $108 1/8 after the company's CFO said that it is having a great quarter and that it is gaining market share in all regions... J. M. SMUCKER (NYSE SJM.A) rose another $1 1/2 to $19 3/8 after pre-announcing yesterday estimate-beating year-end earnings of $1.06 per share... NOREX INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NXA)") else Response.Write("(AMEX: NXA)") end if %> surged $4 to $69 1/2 after stockholders approved a 4-for-1 stock split, after which they all celebrated by buying a pizza and cutting it into 12 pieces instead of the usual three.

GOATS

INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> dropped $12 1/4 to $151 1/2 today after having opened down $21 1/4 on issuing a revised forecast for second quarter results. Operating expense levels for the quarter are expected to follow the company's guidance as issued in its first quarter conference call. Revenues, however, will decline 5% to 10% sequentially, rather than being flat to slightly higher as originally expected. Gross margin will decline to around 60% from a record 64% last quarter, which remains in the 60% +/- range that Intel advised at the beginning of the year. Analysts jockeyed to lower 1997 earnings estimates while 1998 EPS estimates remain in the $10-$11 range, putting the company's multiple to 1998 estimates in the 13.5 to 15 range. Intel warrants <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTCW)") else Response.Write("(Nasdaq: INTCW)") end if %> fared worse than the common stock, dropping $11 7/8 to $110 7/8.

Higher quality auto lender UNION ACCEPTANCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UACA)") else Response.Write("(Nasdaq: UACA)") end if %>, which has been experimenting with sub-prime loans, was knocked down $2 3/16 to $8 13/16 after announcing that it will increase its credit loss reserve to over 4% of its portfolio from just over 3% last quarter. Although the company's sub-prime portfolio represents less than 5% of its total loans, it said consumers are less shy about declaring bankruptcy. At the 4% level, the company's reserves now sit somewhere between a regular bank's credit reserves and those of a credit card company making unsecured loans. Despite uncertainty about credit standards, the company is still priced at just under 15 times the middle of the range of the company's earnings guidance for the year. However, the price-to-book ratio has declined to near 1.5 times, where banks (with smaller interest margins) used to be priced.

QUALCOMM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> lost $5 1/8 to $48 1/4 as the company tried to reassure investors that a layoff of 600 temporary workers does not indicate slackening demand or slowing growth at the inventor of code division multiple access (CDMA) encoding for telecommunications systems. The company said its production joint venture with Sony has automated more of its facilities and that normal seasonal cycles account for the release of its temporary workers. Importantly for the company, it says higher-margin telecomm infrastructure and handset chipset ordering activity is strong. While Qualcomm failed to quantify its Q3 earnings outlook, which put some investors on edge, it said that these sales will make up for the seasonal pullback in demand.

QUICK CUTS: Transaction printer manufacturer TRANSACT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TACT)") else Response.Write("(Nasdaq: TACT)") end if %> fell $1 5/8 to $12 1/8 after announcing that 1997 revenues will be $4 million less than expected because of a customer push-out... KENNETH COLE PRODUCTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCP)") else Response.Write("(NYSE: KCP)") end if %> lost $1 3/8 to $16 after Dillon Read lowered its rating on the fashion designer to "outperform" from "buy," estimating 1997 EPS of $1.07... Industrial components manufacturer KUHLMAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KUH)") else Response.Write("(NYSE: KUH)") end if %> fell $1 5/8 to $27 5/8 after announcing last night that it will sell up to 2.5 million shares to reduce debt and redeem warrants.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Cover Your Assets

Asset management has become the watchword of the '90s. Whereas once companies piled splendid heaps of cash on their balance sheets in an effort to entice investors, today having an excess of cash is deemed wasteful and even considered mismanagement. The conventional wisdom maintains that having a high ratio of current assets relative to current liabilities is important when evaluating a business. However, the simple juxtaposition of current assets with current liabilities fails to capture the complex nature of minimizing the assets tied up in non-interest bearing areas and maximizing the amount of value created for shareholders who own the business.

The current ratio is simply defined as current assets divided by current liabilities. Almost every basic primer on investing urges investors to look for companies with current ratios about 1.5, as this essentially means that the company has positive working capital. Working capital, the different between current assets and current liabilities, is the lifeblood of operations. It is the juice that makes the company grow. Unfortunately, like blood, many are now arguing that the body can only hold so much of it and that an excess might cause swelling, bloating, or even a complete explosion of the cardiopulmonary system.

Current assets have three main components: cash and marketable securities, accounts receivable and inventories. Cash and marketable securities are the good guys, the current assets in white hats. These are completely liquid and can be put to work to help grow the business or maximize the value to the shareholder. Accounts receivable consist of the money owed to the company by its customers, a necessary evil in many businesses as they essentially run on credit, waiting to be paid for product that has already shipped. If a current asset gets to wear a black hat, it is inventories, a component that systems like "just in time" delivery have been designed to minimize or destroy. Inventory is the unsold product or components tied up on the shelves or in the warehouses, meaning that the money and labor sunk into them has not been converted into cash.

Simply looking at the current ratio or deducting inventories from the current assets and dividing the result by current liabilities to find the quick ratio (or "acid test" ratio) still may not be as helpful as investors would like. If a company passes this test because it has bloated inventories or is not quick enough at collecting money that it is due, do we really have a good company on our hands? This is why concepts like inventory turns or days sales outstanding (DSO) become important -- these are measures that cut right to the heart of a company's efficiency in working with its current assets and consequently converting them to cash.

A company needs to have adequate working capital to function, this much is clear. Tying up the working capital in inventory and accounts receivable is no way to make a business grow. To this end, some have argued that another way to slice the assets pie is to subtract cash and marketable securities from current assets and divide this by current liabilities. If this asset management ratio (as we'll call it for lack of a better name) is below 1.0, it suggests that the company has actually minimized inventories and accounts receivable while maximizing accounts payable, debt repayment, and other near-term expenses. A company with a high number of inventory turns and a low number of days sales outstanding will probably have an asset management ratio below 1.0. For example, DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, with 38 days sales outstanding and more than 30 inventory turns on an annualized basis (based on last quarter's results), has an asset management ratio of 0.85.

Even having a ridiculous amount of cash on the balance sheet can be argued to be detrimental to the company. That cash has the ability to create value for the shareholder. When it sits in corporate coffers gathering dust and interest income, investors are right to ask why the company needs their capital anyway? Are they not capable of putting it in short-term interest-bearing securities? Cash needs to be put to work either to grow the business or in the form of dividends paid out to the shareholders in the form of direct double-taxed cash payments or share repurchases. If there are no more opportunities to grow a great business, give the money back, don't engage in silly diversification. As a general rule, a company should not stockpile a cash hoard that is more than year or two's worth of earnings unless it is in a cyclical industry.

NOVELL'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> greatest sin has been letting more than a billion dollars in cash sit and grow old on the balance sheet for more than two years. Although a share repurchase last year did create some value, frittering away and not buying more stock because it might want to do a deal that involved "purchase accounting" was pretty short-sighted -- particularly now that new Chief Executive Eric Schmidt says the company is not for sale. That cash needs to be put to use for the poor, ailing shareholders of the company, whether it is to acquire fast growing networking service companies or to buy in more shares. At current prices, Novell could buy 40% of its shares back without taking out a loan. If it wanted to leverage the company a little, it could buy back 60% of the shares without blinking. If there is life left in the company, the remaining shareholders would accrue tremendous value while the faint of heart simply headed for the exits.

In the final analysis, one thing is clear -- the limited notion of asset management propounded by generations of investors is wrong-headed and potentially has them coming up with all of the wrong answers. Cash is good in reasonable amounts. Inventories and accounts receivable should be reduced. Our analysis of a company's liquidity should be designed to look at this, as these are key performance ratios, measurable and discreet, that can be used to assess management's competence. Anything else risks perpetuating decades-old ideas that might be best left to the dustbin of history.

CONFERENCE CALLS

06/02/97 (Monday)
ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %>
5:00 p.m. EDT
(402) 220-5186 -- replay available for 7 days

INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %>
(800) 839-4232 -- replay available after 6:00 p.m. EDT
(402) 220-4869 -- replay available after 6:00 p.m. EDT

PETSMART <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PETM)") else Response.Write("(Nasdaq: PETM)") end if %>
(800) 696-1563 (code: 203061)
(303) 267-1037 (code: 203061) -- replay (International callers)

MFRI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MFRI)") else Response.Write("(Nasdaq: MFRI)") end if %>
4:00 p.m. EDT
(800) 275-2442 -- live and replay available for 24 hours

NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %>
Replay
(402) 220-1010

THIS WEEK'S CONFERENCE CALL SYNOPSES

HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> Q1 Call
URBAN OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URBN)") else Response.Write("(Nasdaq: URBN)") end if %> Q1 Call
DAYTON HUDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> Q1 Call
ROSS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROST)") else Response.Write("(Nasdaq: ROST)") end if %> Q1 Call
MITY-LITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MITY)") else Response.Write("(Nasdaq: MITY)") end if %> Q4 Call

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Randy Befumo (TMF Templr), a Fool
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Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), 'nother Fool
Editing