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HEROES

The world's largest producer of power tools and accessories, Black & Decker Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDK)") else Response.Write("(NYSE: BDK)") end if %>, gained $3 9/16 to $41 7/8 after announcing that it expects to exceed fourth quarter 1997 consensus EPS estimates of $0.93 and report $2.33 to $2.35 per share for the year. This compares favorably with 1997 EPS estimates of $2.28, which the company had advised analysts in late November would be "challenging." Black & Decker has experienced 30% compound growth in EPS over the last five years and has seen 18% compound growth in its share price over the same period (34% in the last year). The company stated that it experienced strength in its North American Power Tools and Accessories unit, thanks to strong holiday sales of such products as Wizard rotary tools, the Wood Hawk circular saw, and VersaPak cordless items. Black and Decker has managed to reduce its interest payments on debt to 28% of operating earnings (its debt to equity is 125%), down from almost 50% a year ago. The company's housewares unit, which accounts for 16% of sales, has been a drag on the company and rumors have circulated that it may be sold or made smaller in 1998.

Structural Dynamics Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDRC)") else Response.Write("(Nasdaq: SDRC)") end if %> moved $3 7/16 higher to $25 7/8 after it announced that it has engaged in a multi-year agreement with Nissan Motor Co., which has used Structural products since 1995. Nissan will implement mechanical design and testing software developed by Structural and will invest more than $100 million in Structural's products and services over a seven-year period in a bid to reduce the time that it takes to design and produce a car. The average U.S. auto production cycle is roughly 36 months, and Nissan can currently sketch and crank out a car line in 19 months. The company's goal is to reduce this time to 12 months. The annual equivalent ($14.2 million) of the total anticipated Nissan investment represents 4% of Structural Dynamic's current trailing sales. The fact that Structural Dynamics added roughly $116 million in market capitalization on the news can only be justified if investors feel strongly that the success of this relationship can be leveraged into the acquisition of other large contracts down the road.

Consumer retailer Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> became a "buy" for some investors today as its share price rose $3 7/8 to $41 3/4 after posting sales of more than $1.52 billion for the five-week period ended January 3, compared with $1.30 billion for the year-ago period. Comparable-store sales increased 12.6% and total store sales rocketed up 17%. Best Buy expects to post 4Q net of roughly $1.00 a share, which is 35% above the First Call mean estimate of $0.74 a share. A startling segment increase came in the sale of video games, which rose 50% over the prior year period, which suggests that the company may be taking market share away from toy retailers. Meanwhile, UBS Securities raised its rating on Best Buy shares to "strong buy" from "hold."

QUICK TAKES: Applied Digital Access <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADAX)") else Response.Write("(Nasdaq: ADAX)") end if %> gained $1 to $7 1/2 after the company was raised to a "long-term buy" from "market perform" at Robinson-Humphrey Co. The company announced today that integrated telecommunications company WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> had selected its Centralized Test System as its comprehensive testing platform... Hemodialysis products company Aksys Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AKSY)") else Response.Write("(Nasdaq: AKSY)") end if %> rose $1 1/8 to $7 1/4 after engaging in a strategic alliance with Teijin Ltd. of Osaka, Japan. Teijin will purchase 493,097 newly issued Aksys common shares at a price of $10.14 per share (subject to certain conditions) and will also make cash payments to Aksys totaling up to $5 million.

Slovak news agency TASR quoted Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> manager for central and eastern Europe, Volker Haebel, as saying that Slovakia "should see a five-fold increase in the number of mobile phones per person by the year 2001," which will benefit a consortium named Globtel. Member company France Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTE)") else Response.Write("(NYSE: FTE)") end if %> Mobile International gained $2 to $37 1/2 on the news... Apparel designer Nautica Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NAUT)") else Response.Write("(Nasdaq: NAUT)") end if %> gained $2 to $25 after the company reported Q3 EPS of $0.48 versus prior year EPS of $0.37.

GOATS

Atmel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATML)") else Response.Write("(Nasdaq: ATML)") end if %>, a maker of semiconductor products such as flash memory, EPROMs (electronically-programmable read only memory devices), and EPROMs, as well as programmable logic, microcontrollers, and application-specific devices (ASIC), fell $2 to $17 3/8 after announcing yesterday that revenues for its 1997 fourth quarter are expected to be flat sequentially. Atmel also expects to report a loss in the fourth quarter due to $160 million in charges for the write-off of accounts receivable from Asian customers, markdown of inventory valuations, and consolidation of its fabrication facilities in France. Although the company expects to see modest sequential revenue growth in the first quarter and expressed confidence in market demand for its advanced and custom devices, at least one analyst, Jonathan Joseph at NB Montgomery Securities, cut his rating on the company to "hold" from "buy."

Fool favorite Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> plunged $12 3/16 to $18 9/16 after the theme restaurant company announced last night that same-store sales fell 11% at the three of its restaurants that have been open for more than 18 months. Located at the Mall of America and two suburban Chicago malls, investors had expected that erratic sales results at the company's older restaurants had subsided. Rainforest Cafe officers have routinely said that same-store sales growth in the year after the "honeymoon period" is difficult, because in the first year of business consumers come out in droves to try out the new concept. In addition to results at older units being down, same-store sales results at Tysons Corner, Sawgrass Mills, and South Coast Plaza were also lower than expected, causing the company to project Q4 EPS of $0.23 to $0.24, just below the mean analyst estimate of $0.25. For more on Rainforest Cafe, see today's Fool Plate Special.

Generic diaper maker Paragon Trade Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTB)") else Response.Write("(NYSE: PTB)") end if %> dropped $5 7/8 to $5 after the company announced this morning that it has filed for Chapter 11 bankruptcy protection a week after a judged ruled that the "leg gather" features on Paragon's store-brand diapers infringed on the intellectual property of Procter & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %>. At that time, Paragon estimated that it could be hit with damages of $160 million to $200 million. As of its most recent quarter, the company reported shareholders' equity of $230 million, which included at least $35 million in intangibles. Under such circumstances, it would be hard for Paragon to realize the full value of its goodwill assets, meaning only the softest of payment terms from P&G would not have destroyed the remaining equity of Paragon. As of the bankruptcy filing, Paragon claimed $68 million in shareholders' equity. Rather than press on with what looked like losing countersuits, the company decided to seek protection fearing that P&G was moving to lay claim on the company's assets, which Procter & Gamble denied today.

QUICK CUTS: California thrift H.F. Ahmanson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> fell $3 7/8 to $57 7/8, Golden State Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GSB)") else Response.Write("(NYSE: GSB)") end if %> lost $2 15/16 to $34, and Ohio-based savings bank holding company Charter One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COFI)") else Response.Write("(Nasdaq: COFI)") end if %> slipped $3 3/4 to $57 1/8 as investors feared the effects of a flattening yield curve and the possible damage to net interest margins from mortgage pre-payments. Coast Savings Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSA)") else Response.Write("(NYSE: CSA)") end if %>, which Ahmanson is acquiring through a stock swap, lost $4 1/16 to $60 9/16 in tandem with Ahmanson... Israeli telecom equipment manufacturer Teledata Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLDCF)") else Response.Write("(Nasdaq: TLDCF)") end if %> fell $8 1/8 to $11 15/16 after the company said it expects to report record fourth quarter sales of $22.5 million but that management is revising its outlook for slower growth in 1998 due to economic problems in Asia and a decline in Teledata's backlog.

Bankers Trust Alex. Brown lowered its rating on MetaCreations Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCRE)") else Response.Write("(Nasdaq: MCRE)") end if %> to "market perform" from "buy," sending the shares down $2 5/16 to $6 7/8. On Tuesday the software maker stated that it foresaw weak fourth quarter EPS between $0.01 and $0.04, versus expectations for $0.18... Patient monitoring systems company Protocol Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCOL)") else Response.Write("(Nasdaq: PCOL)") end if %> dropped $2 1/8 to $7 1/4 after it preannounced Q4 EPS of $0.10 to $0.12 versus estimates of $0.23. The results are in part due to a $2 million revenue shortfall on a decrease in overseas sales... Welded steel pipe maker Northwest Pipe Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWPX)") else Response.Write("(Nasdaq: NWPX)") end if %> was cut $2 7/8 to $20 1/8 after it announced that it plans to enter the mechanical and structural tubing markets by purchasing closely held Southwestern Pipe Inc. and P&H Tube Corp. for $39 million.

Bar code systems maker PSC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSCX)") else Response.Write("(Nasdaq: PSCX)") end if %> declined $1 11/16 to $10 3/8 after an arbitrator failed to award the company declaratory relief in an action the company had taken against Symbol Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBL)") else Response.Write("(NYSE: SBL)") end if %>. PSC said the royalties on certain scanners it sells will not exceed the present 3% of sales that it currently pays... Property & casualty insurance company HCC Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCC)") else Response.Write("(NYSE: HCC)") end if %> slid $3 7/16 to $16 1/2 after the company told analysts that earnings estimates are too high due to a continuation of cruddy prices in the insurance industry. According to Reuters, the company told analysts it will earn $1.50 per share in 1998 and $1.65 per share in 1999... Amway Asia Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAP)") else Response.Write("(NYSE: AAP)") end if %> fell $2 1/8 to $17 7/8 after the consumer products marketer reported that first quarter 1998 revenues fell 25% from last year and EPS declined 70% to $0.15, $0.02 below estimates.

Amway's poor results also pulled down consumer products network marketing company Nu Skin Asia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NUS)") else Response.Write("(NYSE: NUS)") end if %> by $1 9/16 to $16 7/16. Earlier this week, Nu Skin said it is on track to meet fourth quarter estimates... Ventricular-assist systems company Thermo Cardiosystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TCA)") else Response.Write("(AMEX: TCA)") end if %> was taken down $2 1/2 to $23 after announcing that it expects to report an increase in Q4 revenues of at least 15% as well as a 35% increase in sales of its HeartMate device... Casual outdoor and active footwear company Track 'n Trail <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKTL)") else Response.Write("(Nasdaq: TKTL)") end if %> dropped $1 3/4 to $6 1/8 after announcing that Q4 earnings will be between $0.30 and $0.35 per share versus estimates for $0.38.

FOOL ON THE HILL
An Investment Opinion by Louis Corrigan

Sony Connects with NextLevel

Sony Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> entered the U.S. cable business on Monday by forming a "strategic alliance" with NextLevel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NLV)") else Response.Write("(NYSE: NLV)") end if %>, sending shares of the cable-box manufacturer up 9% to $19 11/16. The broad terms of the alliance point to some exciting developments finally taking hold in the cable industry, where multimedia hype has often run years ahead of actual products and even consumer demand. The deal also reinforces the growing impression that NextLevel is the best-positioned player in a marketplace where Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, and other technology giants are vying for a piece of the action. Yet what the Sony deal suggests that the other recent activity in the industry really had not is that the old abused cable box could be on the way to becoming a consumer product, a multitasking entertainment and communications device for the digital living room.

Sony is expected to pay $25 apiece for 7.5 million newly issued shares of NextLevel, which had 147.9 million shares outstanding as of November. That price represents a 38% premium over last Friday's closing price of $18 1/8 and over NextLevel's 1997 high of $21 1/2. (On July 28, NextLevel, General Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEM)") else Response.Write("(NYSE: SEM)") end if %>, and CommScope <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTV)") else Response.Write("(NYSE: CTV)") end if %> emerged from the former General Instrument Corp.) The press release indicated that the companies are "discussing future generations of digital cable TV devices and high definition television (HDTV) products, as well as incorporating new features like Sony's Home Network architecture into NextLevel's advanced digital set-top boxes."

In effect, Sony is paying for the chance to use new generations of digital cable boxes only now rolling out as a kind of Trojan horse for its own consumer electronics products. These products may be embedded within a more or less conventional box, or they might accompany that box in an entirely new, consumer-friendly configuration. Digital cable boxes should redefine the market since they allow broadband, high-speed, two-way signaling. Cable companies will be able to expand their channel offerings and provide interactive services that simultaneously combine the functionality of cable television with that of a modem-enabled personal computer. Fast Internet access, Internet telephony, video-on-demand, and push-button electronic commerce are some possibilities. Now imagine Sony cable boxes that also include new Digital Video Disks (DVD) or the functionality of a Sony PlayStation.

Meanwhile, NextLevel will pocket $187.5 million in cash while repositioning itself as more than just an important but low-profile equipment supplier for cable companies such as Tele-Communications Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>. Concerned about brand recognition, NextLevel announced last month that it would change its name back to General Instrument, with its ticker symbol becoming GIC around February 2. Yet even General Instrument has little cachet with consumers. Sony, however, is one of the most widely recognized and respected brands in the world. NextLevel reportedly joined up with Sony rather than rival Thomson Electronics for exactly that reason.

Under the new deal, every NextLevel box will carry the Sony name. Moreover, NextLevel gains an entirely new distribution system that includes essentially every major consumer electronics outlet. The details remain sketchy, but it's suddenly possible to imagine a world where Americans shop for souped up cable boxes sporting variable options with the same interest they currently bring to the purchase of a PC and perhaps even the enthusiasm once shown for VCRs and Sony's own Walkman.

The Sony agreement is just the latest piece of good news for NextLevel after a rocky fourth quarter. On October 16, The Wall Street Journal ran a story discussing Microsoft's burgeoning interest in television, including its $1 billion investment in cable operator Comcast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCSA)") else Response.Write("(Nasdaq: CMCSA)") end if %>, its $425 million acquisition of WebTV Networks, and its desire to invest $1 billion in Tele-Communications Inc., in part to help speed the rollout of advanced cable services. Microsoft sees TV as the next software frontier and the source of lucrative recurring revenues for interactive services, like downloading movies. The giant has been pushing its Windows CE software as the standard operating system for digital cable boxes. But NextLevel reportedly possesses encryption technology crucial for pay-TV services. That has put the firm in continued discussions with Microsoft, with some speculating that Microsoft might buy the company outright.

The day after the Journal article, NextLevel stunned Wall Street with a third quarter revenue shortfall. It also said that fourth quarter results would miss the $0.24 per share estimates, coming in between $0.09 and $0.11 per share before restructuring charges. Moreover, FY98 earnings would be $0.45 to $0.50 per share versus estimates of $0.75 per share. Chair/CEO Richard S. Friedland resigned. The Board announced that the acting CEO would be Edward D. Breen, president of the company's broadband unit, which includes the cable box business and accounts for 70% of the firm's revenues and all of its profits. The stock plunged $5.44 to $13.44. Within weeks, the company was hit with class action lawsuits. Around the same time, a court determined that NextLevel had to fork over $141 million to DSC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIGI)") else Response.Write("(Nasdaq: DIGI)") end if %> to settle a lawsuit.

On December 17, however, new Chair/CEO Breen came back with good news. The company had cut 1,325 positions in its satellite TV operations, leaving it with annual savings of $0.05 to $0.07 per share per year beginning in 1998. The struggling satellite unit, which makes receivers for PrimeStar, had been generating around $500 million in revenues but operating at a slight loss. Next, Breen said the company will likely spin off the NextLevel Communications telephony unit, which recorded its first $3 million in revenues in the third quarter but is expected to record a $30 million after-tax loss for FY97 ($0.20 per share) and an after-tax loss of $23 to $28 million ($0.15 to $0.18 per share) for FY98. Assuming this spin-off occurs, NextLevel now expects to report FY98 earnings of $0.65 to $0.75 per share, after also excluding an after-tax charge of $65 to $100 million ($0.42 to $0.64 per share) to be spread over the fourth quarter of '97 and the first quarter of '98.

Breen also announced a blockbuster deal with nine of the nation's cable TV system operators, including Tele-Communications Inc., to provide up to 15 million digital boxes over the next 3 to 5 years. The agreement is worth at least $4.5 billion. Despite the aggressive $300 per unit price, Breen said the huge deal provides NextLevel with high profit margins due to manufacturing economies. Moreover, some industry watchers have suggested that NextLevel could sell up to 25 million boxes worth $7.5 billion over the next five years. As with the Sony deal, this agreement aligns the parties' economic interests because the cable companies will receive warrants allowing them to buy about 16% of the NextLevel's shares at $15 apiece. The warrants become exercisable as the set-top boxes are delivered between now and 2000. NextLevel also agreed to give Tele-Communications Inc. another 10% equity stake in itself in exchange for that firm's digital transport and authorization technology, which should help provide a secure platform for the cable industry's digital future.

Despite this flurry of activity, is NextLevel a good investment? Hard to say. Priced around $19 a share, the company trades at 25.8 times best case FY98 earnings estimates. Yet that doesn't account for shares to be issued to Sony or potential future dilution from the warrants. Whether profits can really grow fast enough to justify that multiple is an open question. Digital product sales were nearly nonexistent a year ago, but they made up 31% of the firm's broadband sales in the third quarter. Even so, NextLevel has shipped only 700,000 digital set-top boxes so far.

On the other hand, NextLevel has helped deploy the infrastructure making it possible to provide 24 million households with digital cable services. With Microsoft and Intel pressing for rapid digitization of entertainment, the delays that have so often plagued the introduction of new cable services might just be over -- assuming that the fight over standards doesn't go on and on. Still, the more advanced digital boxes reportedly won't be out for at least two years, and demand for digital boxes will probably cannibalize analog sales. Conservatively, NextLevel could see just $900 million a year over the next five years from the cable deal. Yet the broadband unit responsible for 70% of the firm's sales recorded $953 million in revenues for the first nine months of 1997. While the Sony agreement seems to add significant new spice to cable's future, investors should channel any interest in NextLevel into some serious homework lest they get boxed in.

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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
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Louis Corrigan (TMF Seymor), Fool Four
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