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HEROES

Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %> announced that it will acquire CitFed Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTZN )") else Response.Write("(Nasdaq: CTZN )") end if %> for $688.2 million in stock, sending CitFed up $11 5/8 to $49 3/8 and Fifth Third down $4 1/2 to $76 on the news. CitFed shareholders will receive 0.67 shares of Fifth Third for each CitFed share, valuing the Dayton-based bank at $53.94 per share based on last night's closing price. With one of the highest valuations in the entire banking world at 27.5 times 1998 earnings estimates, Fifth Third has a wonderful currency to do smaller filler transactions without significant dilution to its current shareholder value. Based in Ohio, which contains such fast-growth cities as Akron and the Cleveland miracle, Fifth Third will very likely continue to grow faster than most other mid-size banks. At 21% of assets, too, this acquisition is cheaper than many done over the last twelve months, considering that Fifth Third can bring cost savings as well as new products to the CitFed customer base. If Fifth Third can achieve a return on assets (ROA) from CitFed anywhere near the ROA it achieves in its business, few would call this an expensive acquisition.

PC direct marketer Micron Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> gained $1 7/8 to $10 15/16 after the company announced that it has hired Joel Kocher, former President of Apple Macintosh cloner and direct PC marketer Power Computing. Kocher not only profitably ran a company selling computers driven by an operating system losing market share, but he also spent 10 years as an executive at Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, the master of direct PC marketing. With recent screwups such as ramping up inventory in advance of getting orders, which misses the concept of a made-to-order manufacturer turning inventory quickly throughout its supply chain, Micron seemed destined to flounder with the idea of being a direct PC company. With Kocher on board, such mistakes look a little less likely and execution on the business plan more likely.

QUICK TAKES: Shipping and logistics services company Vitran Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTNAF)") else Response.Write("(Nasdaq: VTNAF)") end if %> added $3 5/8 to $5 3/4 after telling investors that the company is comfortable with the current mean EPS estimate of $0.57 for fiscal 1997... Specialty chemicals company Arrow-Magnolia <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARWM)") else Response.Write("(Nasdaq: ARWM)") end if %> gained $1 1/16 to $6 5/8 on announcing that it expects revenues for the full year to grow more than 20%, to $12.6 million... Caretenders Healthcorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTND)") else Response.Write("(Nasdaq: CTND)") end if %> picked up $1 1/8 to $8 1/8 on announcing an agreement to acquire VNA of Palm Beach County, Florida, a home healthcare company that generated over $6 million in revenues for 1997. Caretenders reported $21.2 million in net recurring revenues last quarter.... Medical device manufacturer Rochester Medical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROCM)") else Response.Write("(Nasdaq: ROCM)") end if %> gained $2 3/16 to $15 11/16 after receiving FDA clearance to market its Nitrofuran Delivery Catheter... Coldwater Creek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CWTR)") else Response.Write("(Nasdaq: CWTR)") end if %> moved $4 3/8 higher to $36 7/8 after Robertson Stephens raised its rating on the catalog retailer to "buy" from "long-term attractive." Customer response to the newest mailings and brands has been positive, according to analyst Janet Kloppenburg.

Electronics distributor and contract manufacturer Kent Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNT)") else Response.Write("(NYSE: KNT)") end if %> rose $1 15/16 to $23 after the company reported Q3 EPS of $0.38 versus expectations for $0.36. Diluted EPS, reported under new guidelines, came in at $0.36... Zenith Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZE)") else Response.Write("(NYSE: ZE)") end if %> gained $1 7/8 to $7 7/16 after it announced the appointment of Jeffrey Gannon as president and chief executive officer, effective January 19. Gannon, an executive with General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, will lead a management team that includes "turnaround expert" chief financial officer Robert Dangremond... Specialty lines insurer Meadowbrook Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIG)") else Response.Write("(NYSE: MIG)") end if %> tacked on $3 5/16 to $28 1/2 after Furman Selz started coverage of the company with a "buy" rating and a spot on its recommended list. The institutional brokerage firm estimated 1998 EPS of $1.75, in line with the range of current expectations as reported by First Call... Mortgage investment company Apex Mortgage Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXM)") else Response.Write("(NYSE: AXM)") end if %> gained $1 3/16 to $13 1/8 after announcing that its board has authorized a repurchase of 750,000 sales. The company came public just last month in a $15 per share offering of 6.7 million shares.

GOATS

DEKALB Genetics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> was cut $3 15/16 to $28 1/8 today, experiencing the largest decline in the company's history after it announced that it expects fiscal 1998 earnings to be "comparable" to the $0.80 per share earned in 1997 -- expectations were for 1998 EPS of $0.99. The size of the company's seed harvest available for future sale is expected to decline from 4.1 million units to 3.8 million units, which hurts the company's gross margins because its fixed costs will be matched with a lower total possible take from seed sales. The company also said that the cost of producing its winter seed crop will be higher than expected due to increased transportation costs. DEKALB added that the higher average selling prices expected to offset some of these problems will not materialize. The total margin decline will translate into $2.00 less per unit (bag of seed) compared with 1997. Finally, DEKALB projected that its swine breeding unit will lose $3 million to $4 million in 1998. Despite the grim outlook for 1998, DEKALB is still a clear leader in its segment along with Pioneer Hi-Bred <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHB)") else Response.Write("(NYSE: PHB)") end if %>, and both are set for explosive growth rounding the turn of the century.

Splash Technology Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLH)") else Response.Write("(Nasdaq: SPLH)") end if %> dropped $10 5/16 to $13 7/16 after the maker of servers that work with color laser photocopiers reported Q1 EPS of $0.29, 10% higher than its prior year period, but after a charge of $26.9 million to write off purchased R&D, EPS came in at loss of $1.65 per share. More importantly, the company announced that it sees slower growth in 1998 and subsequently lowered its 1998 revenue growth estimates to 20-25% from 35-45%. Splash was downgraded by Piper Jaffray to "buy" from "strong buy" on the news. Splash sells its color server products to the two leading providers of color copiers, Xerox and Fuji Xerox, and weakness in Japan has hurt sales (50% of Splash's revenues come from Japan). With Electronics for Imaging <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EFII)") else Response.Write("(Nasdaq: EFII)") end if %> dominating the market for these products (70% market share) and it experiencing a high-profile blow up back on December 12, investors in Splash are kicking themselves for not anticipating the decline. Electronics for Imaging attributed order delays from several large Japanese resellers for its shocking shortfall.

Auto dealership operator United Auto Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAG)") else Response.Write("(NYSE: UAG)") end if %> declined $4 1/16 to $15 15/16 following an announcement yesterday after the close of trading that it will take pre-tax charges of $28 million to $32 million for the divestiture of nine auto dealership franchises and other corporate items. Most of those charges will be taken for closing down nine dealerships, seven of which are located in the New York City metro area and the others are "in the Southeast," according to the company. With the prospect of an operating loss of up to $0.60 per share before charges for this quarter, well below the mean estimate of positive EPS of $0.22, this will be the fourth time in five quarters that United has missed its numbers. Rolling up an industry, or consolidating a fragmented industry, is one of the hot things on Wall Street these days. That's a wonderful thing when you're talking about consolidating great businesses, but the auto industry is a low-margin, management-intensive affair, made all the more difficult by competition from big names like the AutoNation business of Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> and CarMax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMX)") else Response.Write("(NYSE: KMX)") end if %>.

QUICK CUTS: Telecom equipment maker Ace*Comm Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACEC)") else Response.Write("(Nasdaq: ACEC)") end if %> withered $3 5/8 to $6 5/8 after the company announced that it expects a Q2 loss between $0.24 and $0.27 per share, attributing the shortfall to "Asian economic turmoil" and a delay in a government contract. Expectations were for the company to earn $0.12 per share for the quarter... Seller of water rights to municipalities, Western Water Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWTR)") else Response.Write("(Nasdaq: WWTR)") end if %>, dropped $1 3/16 to $10 1/8 after terminating talks to buy Vidler Water Co. from Canadian investment bank Global Equity Corp... Chip maker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> fell $2 7/16 to $18 7/16 after announcing that it will not be able to produce enough of its K6 microprocessors to compete with Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>.

Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> lost $1 1/4 to $17 13/16 after announcing that it will lay off up to 13% of its 3,200 person workforce... Prudential Securities lowered its rating on LeCroy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCRY)") else Response.Write("(Nasdaq: LCRY)") end if %> to "hold" citing concerns over the company's exposure to Japan, which crushed the stock for $11 1/2 to $20 3/4... Printing services company John H. Harland Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JH)") else Response.Write("(NYSE: JH)") end if %> dropped $2 5/8 to $17 7/8 after CEO Robert Amman resigned due to "differences of opinion" over corporate strategy... Steel pipe and tube maker NS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSS)") else Response.Write("(NYSE: NSS)") end if %> lost $1 3/16 to $14 1/4 after posting Q1 EPS of $0.26, which was $0.05 shy of estimates.

FOOL ON THE HILL
An Investment Opinion by Louis Corrigan

Cherokee Dividend Confusion

Corporate dividends aren't created through alchemy. They actually represent company assets distributed to shareholders rather than reinvested in the business. This may be a smart move if there's no better way to spend the money. Yet investors must understand that when a firm distributes cash to shareholders, its stock price should fall by a more or less equal amount.

In most cases, a company issues a press release declaring the amount of a dividend and indicating a record date and a payable date (when the money is actually distributed) that falls about two weeks later. Because investors have three business days to settle a trade, a stock typically trades ex-dividend, or without its dividend, two business days before the record date. To get the dividend, then, you must own the shares at the close of business the day before the ex-dividend date, when the stock falls roughly by the amount of the dividend.

Some institutional investors practice a dividend capture strategy, buying a stock and then selling on the ex-div date, when it has declined but hopefully by just a tad less than the dividend. The result is a quick profit, but one so small that it takes huge volume to make such maneuvering pay off.

Recently, individuals speculating in shares of Cherokee <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKE)") else Response.Write("(Nasdaq: CHKE)") end if %> tried a dividend capture strategy but discovered that what you don't know about dividends can hurt you. The question is, who really is to blame for this debacle?

Cherokee pulls down 80% net margins by licensing its casual clothing brand to retailers that then manufacture and market the clothes. On November 13, the company signed a new agreement with Dayton Hudson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> Target Stores, its major customer, that guarantees Cherokee at least $60 million over the next six years. On December 23, the company moved to reward its loyal shareholders by declaring an extraordinary dividend of $5.50 a share. The majority of the special dividend represents a return of capital to shareholders and not a return on capital, since the cash is not being paid out of retained earnings.

Using the Target deal as collateral, Cherokee basically got a cash advance on its future profits. The downside? Most of Cherokee's earnings for the next six years would go to pay off this loan. The record date was set as January 2, the payable date as January 15. The stock, which had doubled to $13 in the previous six months, headed higher.

Enticed by a $5.50 payout, some individual investors thought they had found a way to have their cake and eat it too. Some were speculating without understanding that Cherokee's stock ought to drop by $5.50 per share after the dividend was paid. Others were speculating without understanding the typical relationship between the ex-div date and the record date. Indeed, the stock sold off $2 1/4 on December 30, what some might have thought was the ex-dividend day. It also dropped as much as $2 1/8 on January 5, when others sold, thinking they had locked in the dividend by owning the stock on the record date. Both groups were mistaken. The dividend actually goes to shareholders at the close of business tomorrow, January 15. Some posters on Yahoo's message boards who suffered a trading loss as well as missing the dividend charged that Cherokee's press release had been fraudulent or at least misleading. One investor talked of launching a shareholder lawsuit.

What happened? The markets and exchanges are responsible for determining the ex-dividend date. Under NASD rule 11140b, Nasdaq pushes it out to the day after the payable date whenever the dividend represents 25% or more of the security's value on the declaration date. The NYSE and AMEX exchanges have similar rules. They exist, apparently, to reduce volatility from speculators trying to get something for nothing and to allow folks trading on margin to pocket the dividend before the stock price falls, thus avoiding a margin call.

Cherokee's CFO Carol Gratzke prepared the December press release. She says she knew nothing of Nasdaq's rule until Monday January 5 when she started getting inquiries from befuddled investors. She contacted Nasdaq, where officials assured her that informing investors of the delayed ex-div date was not the company's responsibility. They told her those are the rules, and everybody ought to know the rules if they're going to play the game. She asked why she was getting inquiries from confused brokers. She says Nasdaq officials told her, "If they don't understand this, then they're not doing their homework.... It's in every manual."

Gratzke herself is convinced that investors or their brokers are responsible for knowing how Nasdaq works. She thought at the time that the press release thoroughly covered all the bases, even explaining the tax ramifications of the special distribution. At the same time, she is slightly regretful. "Maybe now, looking back on it, I wish Nasdaq would have said, 'You know, Carol, this is a special dividend. Maybe you ought to explain it so you don't confuse an unsophisticated investor.'" Putting herself in this category, she says, "Believe me, I've gotten an education in the last week in my discussion with Nasdaq concerning dividends."

Yesterday I spoke with Mike Shokouhi, Nasdaq's market information specialist. He found the relevant passage in the Nasdaq manual but couldn't find any attorneys at the market who knew the rule well enough to explain the rationale for it. The only person at Nasdaq that the staff considered qualified to speak on the matter was not available.

Let's face it. If a rule is so arcane that the folks who wrote it can't readily explain it, then no one should assume that the average investor knows about it, much less understands it. Still, there's plenty of blame to go round here. First, individual investors have no business trying a dividend capture strategy. It's not only speculation but fairly dopey speculation when you're not even informed about how normal dividends work. However, both companies and markets have a responsibility to educate the investing public.

Despite Gratzke's best intentions, the December press release simply didn't cover all the bases because Nasdaq didn't tell her what she didn't know. To the extent practicable, the markets must attempt to explain their arcane rules to the unwashed masses, starting, in this case, with the CFOs of companies declaring special dividends. The markets should also insist that press releases announcing such dividends spell out the ramifications. Alternately, Nasdaq could simply mail out 150 million NASD Manuals to potential investors who might like to do their own homework in the future.

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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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