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FOOL PLATE SPECIAL
An Investment Opinion
by Brian Graney
Amazon Does Some Bonding
Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMZN)") else Response.Write("(NYSE: AMZN)") end if %> took its first baby steps into the big, scary world of high-yield bonds yesterday by way of a so-called private placement. Yes, dear Fools, this column will digress from the wonderful world of stocks for a spell in order to hopefully shed some light on a subject not often addressed in this forum -- namely, the bond market. Bear with me, as I will endeavor to make this often arcane subject as interesting as possible.
Amazon's private placement is also called a Rule 144A offering, in reference to the Securities and Exchange Commission (SEC) regulation that made this type of financing possible about eight years ago. The rule allows companies to sell securities (usually bonds) to "qualified" buyers such as pension funds, mutual funds, and other institutional investors managing at least $100 million in assets. The securities are not registered with the SEC in a formal prospectus. However, the company (or issuer) has the right to register them at a later date, usually three to six months off. Bypassing the lengthy registration process gives the company quick access to capital while also permitting it to take advantage of a sudden change in interest rates.
Over the past few years, a growing number of companies have seen the advantages of issuing securities under Rule 144A. Companies sold $254 billion worth of privately placed securities in 1997, representing one-sixth of all of the securities sold during the year, according to Securities Data, which tracks these sorts of things. Amazon's offering was a fairly typical private placement and was raised from an originally planned $275 million to just under $326 million. The bonds mature in 10 years and were sold at a discount to their face (or par) value -- in this case, $615.07 per each $1,000 face value amount. To attract the interest of institutional buyers, the bonds were sold with a yield to maturity of 10%. Interest will be paid starting Nov. 1, 2003. However, Amazon can avoid paying interest altogether by paying-off (or calling) the bonds before May 1, 2003 at a price equal to the interest rate of the 10-year U.S. Treasury note plus 50 basis points, or half of a percentage point. This is a pretty good deal, especially if interest rates continue their recent downward trend.
Amazon plans to use the offering to repay a $75 million term loan. The remaining proceeds will be used to cover future operating losses and possibly acquisitions by the firm. The offering carries an inherent risk, stemming from the fact that Amazon has yet to turn a profit and lacks tangible assets (factories, equipment, etc.) to back up the bonds. Therefore, the Moody's credit rating agency rated the notes "Caa2," placing them firmly in junk bond territory. However, the bonds provide Amazon with valuable flexibility in how it finances its operations. Specifically, the company has increased its capital base without diluting its outstanding shares by selling more stock. Moreover, it can use the proceeds from the bonds to buy other companies in cash transactions, instead of using its stock as currency.
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> gained $6 3/16 to $47 5/8 after the No. 3 U.S. automaker and German conglomerate and Mercedes-Benz manufacturer Daimler-Benz AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %> confirmed that they are in talks that include discussions of a merger. As the bigger of the two companies in terms of revenue and market capitalization, Daimler-Benz would acquire Chrysler in a stock-for-stock transaction valued at more than $35 billion and become the world's fifth-largest automaker. Talks so far indicate that the companies' managements would be combined, with the heads of the two companies becoming co-CEOs. Daimler-Benz rocketed up $7 5/16 to $109 3/8.
Data communications equipment company Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> rose $1 3/4 to $75 3/8 after reporting third quarter earnings of $0.45 a share (before charges) compared with $0.35 for the prior-year period and the analysts' mean estimate of $0.44. Also, Cisco today announced a joint initiative with Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and U.S. West Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USW)") else Response.Write("(NYSE: USW)") end if %> to make easy-to-use, ultra-fast asymmetric digital subscriber line (ADSL) modems that provide Internet access at speeds up to 125 times faster than today's 56K traditional modems, all over existing phone lines.
General Magic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMGC)") else Response.Write("(Nasdaq: GMGC)") end if %> soared $5 5/8 to $14 31/32 after the smart agent software company announced extended U.S. trials of its new virtual assistant Portico. Bell Atlantic Mobile, BellSouth Cellular Corp., Cellular One, and Triton Communications will start testing the Portico service. Portico allows users to access, retrieve, and redistribute information across computer and telephone networks using any telephone and a normal speaking voice. It also integrates voicemail, email, address books, and calendars as well as Internet-based information such as news and stock quotes.
Medical diagnostic applications developer Cytyc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYTC)") else Response.Write("(Nasdaq: CYTC)") end if %> gained $2 15/16 to $18 1/4 after announcing that five more independent Blue Cross & Blue Shield health plans have established reimbursement for the company's ThinPrep Pap Test. The five plans represent more than 10 million additional covered lives, and bring the number of lives eligible for ThinPrep Pap Test reimbursement from Blue Cross & Blue Shield health plans to 20 million.
Immunotherapy drug developer CEL-SCI Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HIV)") else Response.Write("(AMEX: HIV)") end if %> leapt $9/16 to $5 7/8 after announcing positive preliminary results of a 10-patient head and neck cancer trial using its immune boosting product Multikine. During the three-week treatment period, Multikine reduced tumor size and local pain, stopped tumor ulceration, and increased tongue mobility in the case of tongue tumors.
Schein Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHP)") else Response.Write("(NYSE: SHP)") end if %> gained $1 3/16 to $27 1/8 after the generic pharmaceutical company reported first quarter earnings of $0.26 per share (before gains), up from $0.14 for the year-earlier period. Q1 revenues were driven by an increase in sales of new products and a rise in patent challenge settlement revenues. The company went public April 9 at an initial offering price of $17.
Computer peripherals maker Logitech SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LOGIY)") else Response.Write("(Nasdaq: LOGIY)") end if %> added $1 1/4 to $15 3/8 after telling analysts it expects earnings to increase 20% to 30% this fiscal year, which started in April. The company is aiming for an operating margin of 8% in the long term, up from 4.2% percent now, and is seeking to keep gross margins around 29% to 31%.
Avondale Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVDL)") else Response.Write("(Nasdaq: AVDL)") end if %> advanced $2 7/16 to $28 11/16 after announcing a "Dutch auction" cash tender offer to repurchase up to 1.25 million shares, or 8.6% of the company's outstanding shares. Under the terms of the offer, shareholders will be invited to tender shares by specifying prices between $26.50 and $29. The company will then designate a purchase price that will enable it to purchase the 1.25 million shares.
Restaurant operator O'Charley's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHUX)") else Response.Write("(Nasdaq: CHUX)") end if %> gained $1 1/2 to $20 1/2 after reporting first quarter EPS of $0.32, up from $0.27 a year ago and higher than the First Call mean estimate of $0.30. The restaurant operator also announced a 3-for-2 stock split.
Wireless utility meter reporting equipment maker Itron Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITRI)") else Response.Write("(Nasdaq: ITRI)") end if %> moved up $1 3/8 to $16 3/4 after announcing it will repurchase up to 1 million shares, or roughly 7% of the total outstanding shares. The company said it believes its stock is undervalued.
Network Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSOL)") else Response.Write("(Nasdaq: NSOL)") end if %> dropped $3 3/8 to $45 3/8 after Barron's Online questioned the stock's recent rise given that the company will face competition in its core business of assigning Internet addresses after its exclusive contract with the National Science Foundation expires later this year.
The American depositary shares of Italian footwear maker Fila Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> slipped $1 1/4 to $22 3/8 after reporting a Q1 loss of $0.33 per share versus a profit of $1.22 per share a year ago. Total revenues fell 44% to $305.1 million in the quarter, due mostly to lower sales in the U.S. and Korea.
Biopharmaceutical company EntreMed Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENMD)") else Response.Write("(Nasdaq: ENMD)") end if %> fell $6 9/16 to $36 9/16 after the National Association of Securities Dealers (NASD) said it is investigating whether some trades of the company's shares earlier this week were reported late, suggesting that some investors might have paid higher prices than the prices that prevailed in the market when they traded the stock, according to Bloomberg News.
Uniform rental firm Unitog Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UTOG)") else Response.Write("(Nasdaq: UTOG)") end if %> sank $3 21/32 to $20 3/4 after pre-announcing Q1 EPS between $0.22 and $0.25, which is below the Street mean estimate of $0.30 per share. Revenues from its direct sales division slipped 13% to $13 million in the quarter due to lost volume from four large national accounts and the delay of some new national accounts.
Children's book publisher Golden Books Family Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBFE)") else Response.Write("(Nasdaq: GBFE)") end if %> lost $7/8 to $10 3/8 after reporting a Q1 loss of $0.85 per share versus a loss of $0.41 per share a year ago, which was worse than the $0.41 loss per share expected by the Street. Revenues slid 21% to $46.5 million in the quarter, excluding $9.5 million in revenues during the first quarter of 1997 from operations that have been sold.
Truckload service provider Trailer Bridge <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRBR)") else Response.Write("(Nasdaq: TRBR)") end if %> slid $3 to $5 1/2 after reporting Q1 EPS of $0.01 versus $0.14 a year ago, which was below the $0.15 expected by the sole analyst surveyed by First Call.
Online content aggregator America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> slid $2 3/16 to $87 5/16 after Prudential Securities downgraded the stock to "hold" from "buy" ahead of AOL's Q1 financial report, expected after the close of trading today.
Consumer services giant Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> slipped $9/16 to $24 after telling The Wall Street Journal that an investigation into alleged accounting irregularities at the company will take longer than initially thought, forcing it to postpone its annual meeting scheduled for May 19. Lehman Brothers reduced its fiscal 1998 EPS estimate to $1.15 from $1.27. Its 1999 estimate was lowered to $1.48 to $1.60.
Air carrier Northwest Airlines Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NWAC)") else Response.Write("(AMEX: NWAC)") end if %> slumped $2 7/16 to $50 1/8 after being downgraded to "hold" from "buy" at CS First Boston.
Packaging foam and systems maker Sealed Air Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEE)") else Response.Write("(NYSE: SEE)") end if %> dropped $9 3/8 to $53 1/2 after the company's chairman and CEO said fiscal 1998 earnings will be "adversely affected" by its recent acquisition of W.R. Grace's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRA)") else Response.Write("(NYSE: GRA)") end if %> Cryovac packaging unit. However, the company should see "significant growth" in 1999 if economic conditions remain stable. Morgan Stanley downgraded the company to "outperform" from "strong buy."
Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> slid $2 13/16 to $49 1/16 after reporting its April passenger load factor, which measures the percentage of seats on all flights filled by paying passengers. The gauge of air traffic fell to 67.5% from 67.7% a year ago at its Alaska Airlines unit. During the first quarter, the load factor at the unit decreased to 65.5% from 66% last year. However, the airline carried 3.9 million passengers during the quarter, up 4.3% from a year ago.
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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
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