<THE EVENING NEWS>
Thursday, September 24, 1998
MARKET CLOSE
DJIA             8001.99   -152.42      (-1.87%) 
 S&P 500          1042.72    -23.37      (-2.19%) 
 Nasdaq           1720.34    -39.93      (-2.27%) 
 Value Line Index  803.08    -13.23      (-1.62%) 
 30-Year Bond    105 6/30     +5/32    5.16 Yield 
 

HEROES

Going once... going twice... SOLD! Shares of online auction house eBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> fetched some pretty high bids today, as the company climbed $29 3/8 to $47 3/8 from its initial public offering price of $18 per share. All told, the company auctioned off a 9% stake today, or 3.5 million shares. The first day jump was noteworthy considering the IPO market has been drier than a James Bond martini lately, as share prices have gone up and down over the past month like a pogo stick designed by Q that has gone haywire. But unlike several other Internet-related companies that have taken the plunge into the public markets this year, the excitement over eBay's IPO can be partly explained by the fact that the company actually has earnings. The firm, which sells everything from Beanie Babies to antique Victorian chairs on its website, reported earnings of $874,000 on $5.7 million in revenues in fiscal 1997.

Bed Bath & Beyond <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBBY)") else Response.Write("(Nasdaq: BBBY)") end if %>, which operates 163 retail outlets selling oversized towels and other housewares in 32 states, bubbled $2 3/16 higher to $24 9/16 after reporting fiscal Q2 EPS of $0.18 versus $0.14 a year ago, beating the Street's mean estimate by a penny. Net sales rose 29.2% from a year ago to $344.9 million, while the firm's same-store sales posted a 6% increase year-over-year during the quarter. The company is benefiting from the current housing boom across the country, as homeowners are looking to retailers like Bed Bath & Beyond to outfit their new digs. To take greater advantage of this trend, the company plans to open 19 new 42,000-foot superstores from now until February 1999, including outlets in such booming areas as Columbia, South Carolina and Chandler, Arizona.

QUICK TAKES: Metals distributor and processor Inland Steel Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IAD)") else Response.Write("(NYSE: IAD)") end if %> forged a $1 gain to $21 after offering to acquire the 13% stake in metal services firm Ryerson Tull <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RT)") else Response.Write("(NYSE: RT)") end if %> that it does not already own for about $58 million in stock. Separately, Inland authorized the repurchase of up to 2.5 million Inland shares on top of its 2.35 million share buyback plan already in effect... Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> sprinted ahead $3 1/8 to $41 7/8 on anticipation that the sneaker maker made some positive comments about its business in a meeting with analysts today... Auto structures and suspension systems maker Tower Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWR)") else Response.Write("(NYSE: TWR)") end if %> drove $1 1/4 higher to $17 5/8 after saying its fiscal Q3 earnings will be about 10% higher than the $0.32 per share expected by the Street, despite a $0.04 per share hit owing to this summer's strike at General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>.

British enterprise application software developer and Year 200 problem-solver Micro Focus Group PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIFGY)") else Response.Write("(Nasdaq: MIFGY)") end if %> gained $3 5/16 to $24 1/2 after shareholders approved the company's merger with software configuration management firm Intersolv <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISLI)") else Response.Write("(Nasdaq: ISLI)") end if %>. The companies were expected to close the deal today... Carbon and graphite electrodes maker UCAR International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCR)") else Response.Write("(NYSE: UCR)") end if %> gained $1 7/16 to $15 3/8 after announcing a restructuring plan aimed at saving a total of $330 million over the next three years. The company added that it will report fiscal 1998 EPS between $2.30 and $2.45 (excluding a $150 million charge in Q3), which will be shy of the First Call mean estimate of $2.65.

Customer service management systems developer TeleTech Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TTEC)") else Response.Write("(Nasdaq: TTEC)") end if %> rang up $1 15/16 to $9 1/2 after winning a contract from privately held Science Applications International Corp. for call center support for firearms background checks... Wireless communications carrier Leap Wireless International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LWIN)") else Response.Write("(Nasdaq: LWIN)") end if %> rose $3 1/2 to $8 on its first day of trading following its spin-off from Qualcomm Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %>... Package shipping and logistics company FDX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> delivered a $1 3/8 gain to $51 3/8 after reporting fiscal Q1 EPS of $1.00 per share, beating the Street's mean estimate of $0.97... Paper towels, napkins, and plates manufacturer Fort James Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FJ)") else Response.Write("(NYSE: FJ)") end if %> added $1 5/8 to $32 1/2 following a Prudential Securities upgrade to "strong buy" from "hold."

Automated cell and tissue testing technologies developer Ventana Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VMSI)") else Response.Write("(Nasdaq: VMSI)") end if %> picked up $3 1/4 to $16 7/8 after announcing a 750,000 share buyback plan... Getchell Gold Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GGO)") else Response.Write("(NYSE: GGO)") end if %> rose $2 1/8 to $16 5/8 after Salomon Smith Barney upgraded the gold exploration and mining company to "buy" from "outperform"... Internet advertising firm DoubleClick Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCLK)") else Response.Write("(Nasdaq: DCLK)") end if %> gained $1 to $22 1/4 after licensing its DART online advertising technology to several "leading European publishing companies," including the French newspaper Liberation... CDW Computer Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDWC)") else Response.Write("(Nasdaq: CDWC)") end if %> moved up $3 1/4 to $52 1/4 after Morgan Stanley Dean Witter started coverage of the direct marketer of computer products with an "outperform" rating.

Audio books direct marketer Audio Book Club <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: KLB)") else Response.Write("(AMEX: KLB)") end if %> gained $1/2 to $9 1/8 after signing an advertising agreement with Deja News to be the exclusive book club of the online discussion forums service... Supply chain execution systems provider Manhattan Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANH)") else Response.Write("(Nasdaq: MANH)") end if %> rose $1 5/8 to $11 5/8 on reports that the company's management told investors that the firm will meet its fiscal Q3 earnings estimates, according to Bloomberg News... ChiRex Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHRX)") else Response.Write("(Nasdaq: CHRX)") end if %> moved up $1 3/4 to $11 1/2 after Legg Mason reiterated its "buy" rating with a price target of $30 per share for the provider of outsourced pharmaceutical manufacturing services.

GOATS

Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> fell $1 7/16 to $56 9/16 on news that the soft-drink giant has called a meeting tomorrow morning to brief about 30 selected analysts on third quarter earnings expectations and the impact economic turmoil in certain international markets is having on the company's beverage business. With all the secrecy surrounding the unusual briefing called on such short notice, it seems likely that the company will guide analysts to lower their near-term estimates. But because Coke has declined to disclose the content of the meeting and only analysts hand-picked by the company will be allowed in the special 8 a.m. (Eastern time) meeting in New York, the rest of us mortals will have to rely on the trickle-down effect: Basically, we'll get whatever's left over after the journalists are done with whatever scraps the analysts throw their way -- after briefing their coveted institutional investors, of course. Although many analysts already have cut estimates on Coke's earnings recently based on currency concerns, an earnings warning straight from the horse's mouth likely will lead to further downgrades by Wall Street. For more details, see today's Breakfast With the Fool.

Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> fell $4 1/14 to $53 3/4 today as larger money center financial institutions declined on news that they are basically being forced, situationally, to bail out giant hedge fund Long-Term Capital. The way hedge funds work is pretty much the way banks work. With asset-to-equity ratios of 20-to-1, a hedge fund or bank can control one dollar of assets for an equity investment of only five cents. The rest of the capital the company has to borrow. When those assets are mortgages or Treasury securities, there's little danger of them blowing up in one day. When they're Russian sovereign debt or naked puts on Treasury securities, that's not the case. Those assets can fizzle very quickly, reducing the equity supporting them even more quickly. With Merrill being a lender to Long-Term Capital and infusing new money in the company, its exposure to the fortunes of Long-Term Capital actually increased today, which makes investors wonder about the true extent of Merrill's exposure to situations such as this. There are lots of places where failures of trading outfits could potentially pose counter-party risks to Merrill's own leveraged balance sheet. (Also see the Motley Fool's Response to Merrill Lynch.)

Other money center financial institutions declined with Merrill Lynch today as they stepped up to inject new capital into Long-Term Capital Partners (a misnomer if there ever was one, actually). Hearkening back to the days of volatility in 1994, Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> dropped $3 5/8 to $64 7/16, Salomon Smith Barney parent Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> fell $3 5/162 to $39 5/8, and Travelers merger partner Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> shed $5 5/8 to $99 7/8. Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> was dropped for a $3 5/8 loss to $46 1/2 and Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> also fell $5 11/16 to $51 9/16 as all are on the hook for $300 million in new investments in Long-Term Capital. No stranger to bailing out broken traders in the 20th century, J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> was also in the group and paid the price today, dropping $6 1/8 to $87. Junior money center institution lender NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> fell $4 3/8 to $54 3/8, taking down merger partner BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> $5 1/4 to $60.

QUICK CUTS: Investment banking firm Friedman Billings Ramsey Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FBG)") else Response.Write("(NYSE: FBG)") end if %> sank $1 3/16, or 18.8%, to $5 1/8 after announcing that it anticipates a Q3 loss of $0.70 to $0.75 a share, compared with earnings of $0.26 per share in the same year-earlier period and analysts' expectations of a breakeven quarter. The firm blamed the loss mostly on trading losses... Enterprise software company SAP AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> American depositary receipts fell $5 1/4 to $42 after CS First Boston downgraded its rating on the company to "hold" from "buy"... Phone equipment maker Alcatel Alsthom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALA)") else Response.Write("(NYSE: ALA)") end if %> shed $1 3/4 to $18 1/4 as several law firms filed class action lawsuits against the company alleging that the company engaged in a scheme to artificially inflate its stock price.

Ciena <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> was ditched for a $1 loss to $13 7/8 as Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> CEO John Chambers dismissed rumors that his company might acquire the telecommunications equipment maker... Oilfield equipment and services company Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> slid $2 5/16 to $21 7/16 after warning it expects operating EPS for the quarter ending September 30 before charges to be about half of the analysts' mean estimate of $0.36... Asthma and allergies drug developer Dura Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DURA)") else Response.Write("(Nasdaq: DURA)") end if %> dropped $1 5/16 to $10 5/8 after announcing it expects Q3 EPS of $0.05 to $0.07 and Q4 EPS of $0.16 to $0.19, compared with analysts' mean estimates of $0.19 and $0.33, respectively, for the two quarters.

Medical devices maker Guidant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %> was cut $3 to $76 3/8, Arterial Vascular Engineering <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVEI)") else Response.Write("(Nasdaq: AVEI)") end if %> slid $2 7/8 to $38 3/4, and Boston Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> tumbled $4 1/4 to $55 1/2 on concern about stent prices... High-end accessories company Gucci Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> went out of fashion today, falling $4 7/16 to $35 1/16, after reporting fiscal Q2 EPS of $0.65, down from $0.69 in the same prior-year period though slightly higher than analysts' expectations of $0.63... Communications and electronic products maker Harris Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRS)") else Response.Write("(NYSE: HRS)") end if %> shed $3 5/8 to $33 7/16 after announcing it expects EPS from operations will be "slightly below" a year ago and roughly 10% lower than analysts' mean estimate of $0.58 for its fiscal Q1, with the same pattern for results for the full year.

Home mortgage company Countrywide Credit Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCR)") else Response.Write("(NYSE: CCR)") end if %> lost $2 11/16 to $41 15/16 on concern that its servicing portfolio may exceed that of the mortgages it originates, which would further dampen returns as prepayments increase... Toy and gifts maker Equity Marketing Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMAK)") else Response.Write("(Nasdaq: EMAK)") end if %> plummeted $6 3/8 to $7 7/8 after saying it expects Q3 EPS of $0.02 to $0.04 before charges, far short of analysts' mean estimate of $0.49. The company blamed Asia, Latin America, and slow sales of its Godzilla toys... Furniture rental and sales retailer Aaron Rents <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RNT)") else Response.Write("(NYSE: RNT)") end if %> lost $2 13/16 to $13 1/4 after warning that although its Q3 revenues will be more than 20% higher than last year, earnings will fall short of analysts' estimates and may be flat from a year ago.

Packaging manufacturer and ceramics and other engineered materials company ACX Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACX)") else Response.Write("(NYSE: ACX)") end if %> plunged $4 to $13 after announcing that it expects Q3 EPS of $0.28 to $0.33, before restructuring charges, as well as lower-than-expected Q4 EPS due to heavy price competition. Analysts were forecasting Q3 EPS of $0.48 compared with last year's $0.41... SCI Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCI)") else Response.Write("(NYSE: SCI)") end if %> dropped $2 to $27 13/16 after the contract manufacturer of electronics for computer makers warned that fiscal Q1 revenue may be "below analysts' expectations by a single digit percentage," though earnings will approximate current expectations.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

Balance Sheet Checklist, Part 1

On Monday in this space, we promised to present a "checklist of sorts" for investor-sleuths seeking to ask all the right questions about a management's various judgment calls on balance sheet accounts. These columns are a far cry from comprehensive; indeed, tomes have been written exclusively on the categories presented here. However, my next few columns should surrender themselves nicely to the printer and may be useful as a handy reference guide to various mechanical balance sheet manipulations whose levers may or may not be pulled by management in any given period.

The idea for this mini-collection stems in part from the writings of CPA/CFA/BMOC Jack T. Ciesielski of the Analyst's Accounting Observer, and more specifically his write-up, "A Tour Guide to 1997 Annual Reports," which documents a "laundry list of judgement items that analysts should examine as they survey the balance sheet and the footnotes." Examining these "soft spots" is largely the purpose of this column as well. The first area we will peruse is not balance sheet-related at all, but nevertheless is open to substantial manipulation.

Revenue Recognition -- This problem is really an age-old (or accounting-old) one. When is a sale a sale? According to the accrual principle (some wags have noted that it sounds like "a cruel principle"), revenue is recognized as soon as "the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received." With language that only attorneys could love -- and in this case accountants as well because it allows more flexibility -- it is fairly evident why there is no strict interpretation of the ruling.

The already muddy waters become even cloudier by virtue of the fact that some (many) manufacturers have deals with their distributors whereby the distributors can return unsold merchandise. In this instance, conservative accounting would dictate that the sale cannot be recorded until the distributor makes a sale. Until this happens, the merchandise has to remain (at least on paper) in inventory. Is revenue recognized at shipment? If so, and this is often the case, the opportunity is always there to ship to customers before they want or need the goods. A good place to look for clues is in the 10K report under "allowance for sale returns" to see whether or not this number has been jumping around at all.

Examine the specifics surrounding the companies that are involved. Do loose internal controls allow for the shipment of merchandise well in advance of scheduled delivery dates, or even partial merchandise shipments? Again, the types of products being sold (or more to the point, not being sold) is extremely relevant, in some instances it's OK for a company to record revenues before it ships inventory. Companies that engage in long-term construction contracts with clients can either wait until the job is completed or opt to record revenues on an installment basis -- known as the "percentage of completion" method.

This approach is used when realization of revenues is based on the evidence that the ultimate proceeds are available and on the consensus that the result is a better measure of periodic income -- that is, it is proven to more adequately satisfy the matching principle. In other words, revenue is generally recognized when (a) the earning process is complete or virtually complete, and (b) an exchange has taken place. Next week we will quickly review the promised balance sheet considerations.

CONFERENCE CALLS

Please see the Motley Fool's Conference Calls page for call information and links to synopses.

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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Editing
Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last