HEROES

TINSLEY LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TNSL)") else Response.Write("(Nasdaq: TNSL)") end if %> rocketed $10 1/2 to $21 1/4 after agreeing to merge with SILICON VALLEY GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SVGI)") else Response.Write("(Nasdaq: SVGI)") end if %>, a semiconductor wafer stepper manufacturer. Tinsley, a maker of precision optical equipment, accepted an offer of 0.6594 shares of Silicon Valley Group stock for each of its shares. The transaction will be a pooling of interests and is intended to constitute a tax-free reorganization. Tinsley is set to expand its manufacturing capacity on the West Coast to support Silicon's Lithography Division. Silicon already uses Tinsley's optics in its advanced lithography systems.

DRESS BARN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DBRN)") else Response.Write("(Nasdaq: DBRN)") end if %> dressed up $2 1/4 to $24 5/8 after the women's clothing retailer reported Q4 EPS of $0.47, smashing estimates of $0.37 and climbing 86% over last year's Q4 results. Same-store sales for the quarter increased 7%. The company is in the midst of shifting to combined operations made up of Dress Barn and Dress Barn Women (the company's large-size merchandise business). Along with this change, the company has closed several underperforming stores. Dress Barn plans to increase its net square footage by 4% by fiscal year end. The company's strong private-label business has been key to its shapely revenue enhancements.

QUICK TAKES: FIRST AMERICAN FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FAF)") else Response.Write("(NYSE: FAF)") end if %> was up today $4 5/8 to $53 after signing a letter of intent with Experian Group to merge their real estate information subsidiaries into a new company with over $450 million in annual revenues... Goldman Sachs started coverage on electronic commerce software company STERLING COMMERCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SE)") else Response.Write("(NYSE: SE)") end if %> by adding the company to its recommended list, which boosted Sterling shares $3 to $35... Control systems manufacturer BERG ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEI)") else Response.Write("(NYSE: BEI)") end if %> rose $3 7/8 to $47 1/4 after Merrill Lynch raised its long-term rating on the company to "buy" from "accumulate"... MEADOWBROOK INSURANCE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIG)") else Response.Write("(NYSE: MIG)") end if %> rebounded $1 7/8 to $24 1/8 after yesterday's 12% drop when the risk management company and insurance underwriter guided down 1997 EPS estimates to $1.40 from $1.57.

GREENBRIER COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBX)") else Response.Write("(NYSE: GBX)") end if %> climbed $1 to $15 after saying that it expects to report earnings of $0.10 to $0.12 per share for the fourth quarter of fiscal 1997 before taking certain one-time charges related to the sale of particular operations... A Frost & Sullivan report crossing business wires today projected the U.S. diabetes diagnostic and monitoring markets to grow, which help boost shares of BECKMAN INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEC)") else Response.Write("(NYSE: BEC)") end if %> $2 5/8 to $42 9/16... Tour bus company COACH USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUI)") else Response.Write("(NYSE: CUI)") end if %> gained $1 7/16 to $29 9/16 after Donaldson, Lufkin & Jenrette started coverage of the company with a "buy" rating... TALX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALX)") else Response.Write("(Nasdaq: TALX)") end if %> added $2 1/4 to $9 1/4 after reporting that MICROSOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> will use its Work Number for Everyone, a system for automating employment verification.

Sprint PCS has chosen BRITE VOICE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BVSI)") else Response.Write("(Nasdaq: BVSI)") end if %> to supply its prepaid calling services under a two-year contract announced today, ringing shares $2 7/16 higher $11 1/8... New Jersey savings bank WESTWOOD FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWFC)") else Response.Write("(Nasdaq: WWFC)") end if %> gained $5 3/8 to $26 5/8 after agreeing to merge with northern New Jersey savings institution LAKEVIEW FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVSB)") else Response.Write("(Nasdaq: LVSB)") end if %> in a cash and stock deal valuing Westwood at $29 1/4 per share... Telephone health information services company NATIONAL HEALTH ENHANCEMENT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NHES)") else Response.Write("(Nasdaq: NHES)") end if %> moved up $1 5/8 to $8 5/8 on reporting a 44% increase in Q2 revenues and EPS of $0.05, compared to a loss in last year's second quarter... ENERGY CONVERSION DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENER)") else Response.Write("(Nasdaq: ENER)") end if %>, an advanced materials R&D and production company focusing on alternative energy and information technologies, gained $15/16 to $16 1/8 after reporting that it received a Japanese patent for its "basic Ovonic Battery patent for nickel-metal hydride batteries (NiMH)."

GOATS

RARE HOSPITALITY INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RARE)") else Response.Write("(Nasdaq: RARE)") end if %> slid $1 7/16 to $10 1/16 after the company guided down Q3 earnings expectations to $0.10 to $0.12 per share, below the mean estimate of $0.18 per share. The company said changes made at its LongHorn Steakhouse restaurants have been unsuccessful to this point. The company was quick to point out that an increase in food, labor, and other discretionary expenses were the fault of its recently departed CEO. Rare Hospitality says it will be focusing on building sales and controlling operating margins, but those improvements won't hit the income statement until 1998. The company also operates Bugaboo Creek Steak House and Capital Grille restaurants. Competitor OUTBACK STEAKHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSSI)") else Response.Write("(Nasdaq: OSSI)") end if %> rose $2 to $27 1/4 on the news.

TELETECH HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TTEC)") else Response.Write("(Nasdaq: TTEC)") end if %> lost $1 11/16 to $14 15/16 after competitor APAC TELESERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APAC)") else Response.Write("(Nasdaq: APAC)") end if %> announced yesterday that Q3 EPS could drop close to 86% below Street expectations. All teleservices companies are down from their 52-week highs -- APAC's annual high is $59 and TeleTech peaked out at $40 3/8. It is possible the business model for teleservices has changed within this six-month span. The moats that teleservices companies have claimed -- personnel and technology -- are quickly disappearing as competitors start to pick off key operations people from each other and computer telephony equipment has become less proprietary. Customers can get these companies to bid more competitively, too. Finally, with the extremely low cost of capital seen over the last year (the inverse of the P/E ratio), many companies went public to invest in their businesses, leading to increased capacity and driving down prices.

FREDERICK'S OF HOLLYWOOD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FOH.A)") else Response.Write("(NYSE: FOH.A)") end if %> lost $2 7/16 to $7 13/16 after an investment group announced on Monday that it has sweetened its bid for the purveyor of lingerie. Investors who were hoping for a better bid are apparently disappointed, as the board at Frederick's accepted this offer of $7.75 per share. This is the second time that Knightsbridge Capital has raised its offer for Frederick's, this time from $6.90 per share, and the time before that, to $6.90 from $6.14. Principal shareholders controlling the company agreed to the second and third offers, which was published in company press releases, but other offers have not been made public. Quite possibly, a unnamed suitor dropped out of the bidding today, leaving those looking for a higher offer high and dry.

QUICK CUTS: Machine vision systems company IMAGE GUIDED TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IGTI)") else Response.Write("(Nasdaq: IGTI)") end if %> lost $1 to $4 on announcing that it expects flat revenue in its third quarter, and that it will step up R&D and other operating expenses, resulting in a "modest" loss for the quarter... SEQUENT COMPUTER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SQNT)") else Response.Write("(Nasdaq: SQNT)") end if %> lost $4 11/16 to $24 after Merrill Lynch started coverage of the manufacturer of clustered servers with an "accumulate" rating... Identification systems company PRINTRAK INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFIS)") else Response.Write("(Nasdaq: AFIS)") end if %> fell $1 7/8 to $9 7/8 after saying it expects to make a "significant" investment in a recently acquired computer-aided dispatch and records management subsidiary... NASA contractor SPACEHAB INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPAB)") else Response.Write("(Nasdaq: SPAB)") end if %> lost $1 11/16 to $10 1/2 on reporting Q4 EPS of $0.30, meeting the First Call EPS estimate.

Semiconductor production materials and systems manufacturer EMCORE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMKR)") else Response.Write("(Nasdaq: EMKR)") end if %> fell $2 3/4 to $21 after the company said customers pushed back orders on four chemical vapor deposition systems... REGAL CINEMAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REGL)") else Response.Write("(Nasdaq: REGL)") end if %> slid $1 3/4 to $24 15/16 after Goldman Sachs cut the company's 1997 EPS estimate to $1.10 from $1.25... Telecommunications equipment manufacturer TELLABS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> lost another $4 11/16 to $52 1/8 as Hambrecht & Quist lowered its rating to "buy" from "strong buy"... MORGAN PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGN)") else Response.Write("(NYSE: MGN)") end if %> slid $1 1/2 to $7 after the building products manufacturer advised investors that it expects to report a Q3 loss of $0.08 to $0.12 per share due to manufacturing restructuring problems and customers working down inventories... Mexican engineering and construction company BUFETE INDUSTRIAL (NSYE: GBI) lost $1 1/16 to $18 7/8 after Standard & Poor's pegged the company's local and foreign currency credit ratings at BB-, lower than some had hoped, resulting in higher borrowing costs.

FOOL ON THE HILL
An Investment Opinion by Louis Corrigan

Dig the New Breed

Last week, as millions mourned Princess Diana's tragic death in a grisly automobile accident, the press played the blame game, focusing attention on the paparazzi and then on the intoxicated chauffeur. Nearly overlooked in the swirling media spectacle was the one thing that might have saved the Princess and actually did save her bodyguard: proper use of the car's passenger safety system. Also nearly lost in the mix of last week's financial news was BREED TECHNOLOGIES' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDT)") else Response.Write("(NYSE: BDT)") end if %> bold bid to become a major player in the market for such car safety systems.

Based in Lakeland, Florida, Breed makes crash sensors and airbag systems and is the world's leading producer of steering wheels. On September 2, the company announced it would pay $710 million in cash and assume $40 million in debt to acquire the automotive safety restraints business of ALLIEDSIGNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>, the largest U.S. supplier of seat belts and the third-largest supplier of air bags. Expected to close by the end of September, the deal will significantly expand Breed's operations, with the AlliedSignal unit's 7,742 employees in 14 plants and 7 countries joining forces with Breed's current base of 11,366 employees in 60 facilities spread out over 13 countries. More importantly, the Allied unit's $900 million in annual revenue will more than double Breed's sales, which hit $795 million for the fiscal year ended June 30.

In addition to broadening the company's customer base, the acquisition will allow Breed to make seat belts as part of a fully integrated occupant safety system that includes the company's inflators and airbags, sensors, electronics software, and steering wheels. For the last year, Breed has been making acquisitions designed to reposition the firm as a leader in this market. In July 1996, the company paid $131 million for steering wheel supplier Gallino, an Italian firm with $250 in annual revenue. That was followed by a deal in October 1996 to pay $153.5 million for the steering wheel business of United Technologies' automotive unit, with $150 million in annual sales. Then in March 1997, Breed paid $70 million for Custom Trim Ltd., the auto industry's leading supplier of leather-wrapped steering wheels and shift knobs, with $100 million in annual revenue. Largely as a result of these deals, sales last year increased 84% from $431.7 million in FY96.

Breed, however, is only doing what it must in order to compete in a marketplace driven to consolidate as automakers seek to control costs by dealing with fewer suppliers that deliver more complete packages. AUTOLIV INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALV)") else Response.Write("(NYSE: ALV)") end if %> and TRW INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRW)") else Response.Write("(NYSE: TRW)") end if %> are the top two suppliers in the occupant safety market and each has recently beefed up its operations. Autoliv merged with MORTON INTERNATIONAL's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MII)") else Response.Write("(NYSE: MII)") end if %> auto-safety division and TRW picked up the airbag and steering wheel business belonging to MAGNA INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGA)") else Response.Write("(NYSE: MGA)") end if %>.

Vertical integration is also important since concerns about the safety of airbags have pushed the market toward increasingly sophisticated auto safety systems. In a collision, airbags inflate at speeds touching 200 miles per hour, sometimes leading to serious injuries to children and small adults. The National Highway Traffic Safety Administration puts the death toll from airbags at around 50. That's a minuscule number given that airbags save thousands of people from death or serious injury each year, but a few highly publicized cases have put the auto industry on the hot seat. The solution appears to be a new generation of "smart" airbags that automatically adjust the rate of inflation to take into account the weight and position of the driver and front-seat passenger as well as the accident's severity. These news systems tend to require visual sensors as well as special coordination between the key safety components, including both the airbag and the seat belts. Manufacturing all of the components, then, makes sense.

To adjust to its expanding business, Breed has reorganized its operations into four product divisions: Electronics, Airbags/Inflators, Steering Wheels & Interiors, and Seat Belts. The company has also made management changes. Founder Allen Breed has given up the CEO position to his wife Johnnie Breed, who joined the firm as CFO in 1987 and has recently held the positions of President and Chief Operating Officer. The Breeds will serve as Co-Chairs of the Board. Taking over as President and COO is Fred J. Musone, a 25-year veteran of the auto industry who has recently served as President of Morton International Automotive Safety Products/Autoliv, Inc. Musone's number two at Morton/Autoliv, Robert M. Rapone, will join Breed as Executive VP of worldwide operations. For the past two years, Rapone worked as Morton/Autoliv's VP of operations, managing eight plants and 5,500 employees. Swiping seasoned executives from top competitors is often a quick and smart way for a rapidly expanding business to enhance its management team.

Managing the integration of AlliedSignal's auto safety unit and Breed's own operations is sure to be a challenge, particularly given the disappointing fourth quarter results reported August 14. Despite doubling sales to $244.2 million from $129.5 million in the year-ago period, Breed's earnings dropped to $2.3 million, or $0.07 per share, versus net income of $17.7 million, or $0.56 a share, in the fourth quarter of FY96. The results also fell far short of First Call's consensus earnings estimate of $0.18 per share. The company attributed the shortfall to opportunity expenditures, acquisition costs and higher interest expenses, costs related to establishing new facilities and plant rationalization, accelerated new program launches, and a shift to lower-margin products. Gross margins fell to 19.2% from 31.7% in the year-ago period. Interest expense soared to nearly $9 million from just $1.2 million, soaking up 54% of operating income versus just 5% in the fourth quarter of FY96. For the year, interest expenses were $26.8 million versus just $2.3 million in FY96, or 53% of operating income versus 2.6% last year.

Breed has not said what effect the new acquisition will have on earnings over the next few years or how the deal will be structured, leaving investors to wonder whether lofty interest payments might weigh on the stock. Even so, analysts seem to think the acquisition makes long-term sense. "It's a phenomenally good transaction for both companies," Furman Selz analyst Maryann Keller told Reuters. On the other hand, the weak fourth quarter numbers led two of the five analysts covering Breed to lower their FY98 estimates to the $1.25 to $1.30 per share range, dropping the consensus EPS estimate from $2.05 to $1.68. Costs associated with integrating the new business will likely put a further hit on short-term results.

Analysts say the AlliedSignal division's operating margins run in the 8% to 9% range. Meanwhile, Breed's operating margins dropped from 21% in FY96 to just 6.4% in FY97. Assuming Breed can manage 9% operating margins on its $1.7 billion in revenue this year (perhaps a bold assumption), operating income would triple to about $4.83 per share versus just $1.60 a share in FY97. Still, taxes and interest expense will take major bites out of those numbers. With the earnings picture so fuzzy, investors should probably take a wait and see attitude. Still, Breed's busy mating has taken the company from just $125.5 million in sales in FY92 to an estimated 14 times that amount next year. Sacrificing short-term profitability for sales growth via acquisitions can sometimes suggest an egomaniacal management that's out of control. In this case, though, the dealmaking appears to be part of a sensible strategic plan designed to strengthen Breed's long-term results.

CONFERENCE CALLS

HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
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09/11/97 (Thursday)
PIER 1 IMPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %>
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