Tuesday, December 23, 1997
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MAS Technology (Nasdaq: MASSY) jumped $2 1/4 to $14 1/2 after Digital Microwave (Nasdaq: DMIC) announced it would acquire the New Zealand-based manufacturer of digital microwave products. MAS Technology shareholders will get 1.2 shares of Digital Microwave for every share of MAS that they own. The deal combines the low-frequency microwave technology that MAS specializes in with the medium- and high-frequency microwave products (higher capacity) that Digital Microwave makes -- both companies' products are used to create wireless links between telephone systems. MAS will provide some excellent revenue streams for Digital due to its presence in a number of high-growth markets, including Africa. Converting the new shares issued to a dollar figure based on Digital's price of $13, Digital ended up, in effect, paying (in shares) roughly 0.83 times the trailing sales and 9.47 times the trailing earnings (converting New Zealand dollars to U.S. dollars at 0.58240) of MAS.

Ocean Energy (NYSE: OEI) rose $1 3/4 to $51 3/4 after United Meridian (NYSE: UMC) announced that it would merge with the independent oil and gas producer to create the ninth-largest company devoted to the exploration of oil and gas in the world, with daily production at 58,000 barrels of oil and 350 million cubic feet of gas. Ocean Energy shareholders will get 1.3 shares of the new company for each share they hold while United Meridian shareholders will get 2.34 shares of the new company for each share they own, giving 53.6% of the company to Ocean Energy owners. Shares of United Meridian did not respond well to the news, falling $2 5/8 to $29 5/8. There are numerous compelling qualities to the deal, including the fact that the new company is better diversified by region -- Ocean Energy has most of its holdings in the Gulf of Mexico and United's best properties are off the coast of Africa. The deal should add to earnings in 1998, and on a cash flow basis one will not dilute the other (United trades at 11 times cash flow and Ocean Energy trades at 8 times). The increased cash flow of the combined entity should give it some leverage when exploiting big strikes in deeper waters.

QUICK TAKES: Flat rolled carbon and stainless steel products maker Olympic Steel (Nasdaq: ZEUS) gained $1 1/2 to $15 1/4 after the company was raised from "neutral" to "buy" at Salomon Smith Barney with a 12-month price target of $23... J.C. Nichols Co. (OTC: NCJC) leapt $5 1/8 to $57 1/8 after office and industrial property real estate investment trust Highwoods Properties (NYSE: HIW) announced it would purchase the Kansas City real estate operating company. The acquisition is priced at $570 million, including the assumption of $250 million in debt and net of about $65 million in cash... Sinclair Broadcasting Group (Nasdaq: SBGI) rose $1 15/16 to $43 11/16 after Goldman Sachs analyst Richard Rosenstein put the radio broadcaster on the firm's "recommended list" with a 12-month price target of $58.

Sovran Self Storage (NYSE: SSS) popped up $13/16 to $30 7/8 after Standard & Poor's announced that the firm would replace Allied Corp. (Nasdaq: ALCC) in the Standard & Poor's REIT Composite Index... Union Corp. (NYSE: UCO) jumped $3 9/16 to $31 1/16 after the accounts receivable management firm was acquired by privately held Outsourcing Solutions for $190 million in what appears to be a cash tender offer. Union Corp. shareholders will get $31.50 per share while Outsourcing Solutions gets a business that did $121.7 million in revenues in the last fiscal year ended June 30th... Capital One Financial (NYSE: COF) jumped another $1 11/16 to $51 15/16 after rising yesterday on news that it would beat fourth quarter earnings estimates by about 10 cents per share.

John Hindelong of Donaldson, Lufkin & Jenrette reiterated his "recommended list" rating on shares of Health Management Associates (NYSE: HMA), pushing shares up $1 5/8 to $23 1/4. Hindelong's 12-month price target is $28... Medical products maker Mentor Corp. (Nasdaq: MNTR) shot $1 3/4 higher to $32 1/4 after the company announced that its flexible MemoryLens was cleared for marketing by the Food & Drug Administration. The product is used for patients undergoing cataract surgery... Automotive parts supplier O'Reilly Automotive (Nasdaq: ORLY) proposed an offer of $4.35 per share in cash o acquire Hi-Lo Automotive (NYSE: HLO), which gained $15/16 to $4 3/16... Borden Chemical (NYSE: BCU) announced today that it has reached a definitive agreement with Sun Coast Industries (NYSE: SN) to acquire the chemicals division of Plastics Manufacturing Co. (PMC), a wholly owned subsidiary of Sun Coast. Sun rose $5/16 to $5 1/16 on the news.

Hotel operator Prime Hospitality Corp. (NYSE: PDQ) gained $1 1/16 to $19 1/16 after it announced the reopening of the Frenchman's Reef and Morningstar Beach Resorts and the completion of a $45 million property renovation... Music retailer Musicland Stores Corp. (NYSE: MLG) danced $7/16 higher to $6 11/16 after saying today that it has done more than $1 million in sales of Digital Video Discs (DVD)... Pharmaceutical company Novo-Nordisk (NYSE: NVO) gained $3 3/16 to $69 after the Food and Drug Administration (FDA) approved its drug Prandin to treat Type 2 diabetes... Genome mapping biotech Incyte Pharmaceuticals (Nasdaq: INCY) gained $3 3/8 to $36 1/2 after the company was reiterated "strong buy" at Genesis Merchant Group.

Data products company Acxiom Corp. (Nasdaq: ACXM) rose $1 to $17 7/8 after the company received an "outperform" rating from Salomon Smith Barney with a 12-month target of $20... GenRad (NYSE: GEN) climbed again today, adding $1 9/16 to $28 9/16 on the heels of receiving an order from Sun Microsystems (Nasdaq: SUNW) that it valued at all of $1 million. The company has added $109 million in market capitalization over the last two days... Wine and fine spirits company Canandaigua Brands "A" shares (Nasdaq: CBRNA) were up $3 7/8 to $52 7/8 and its "B" shares (Nasdaq: CBRNB) rose $4 1/4 to $53 on news that Q3 EPS came in at $0.90, smashing estimates of $0.69.


Apple South (NYSE: APSO) and Applebee's International (Nasdaq: APPB) are parting company. Apple South announced today that it will divest itself of all 264 franchised Applebee's Neighborhood Bar and Grill units that it owns, news that caused shares of Apple South to plummet $3 3/16 to $13 7/16. Instead of managing Applebee's and paying licensing fees to Applebee's International, Apple South will instead concentrate on its wholly owned chains like Don Pablo's and Harrigan's. The company has had problems for months because of an inability to get skilled managers to run its restaurants. Apple South has already arranged the sale of about 92 Applebee's units for a total of $208.4 million, and it thinks it can raise as much as $300 million in additional cash over the next 12 to 18 months by selling the rest of its Applebee's units. All of this activity will reduce Apple South's fourth quarter earnings to $0.06 to $0.10 a share and throws 1998 earnings estimates out the window.

Applebee's International (Nasdaq: APPB) did not have a good day either, as its shares fell $5 to $18 3/4. In addition to seeing 264 of its units suddenly up for grabs, the company is having problems with higher costs for new menu initiatives, more expensive unit openings, and lower-than-expected sales at its new Rio Bravo Cantina units. All combined, Applebee's International now anticipates earning only $0.30 to $0.32 per share in the fourth quarter, $1.43 to $1.45 per share in fiscal 1997, and $1.75 to $1.80 per share in fiscal 1998. Although the sale of the Apple South units looks bad in the short term, long term it might actually help both companies. Apple South was limited in expanding the Applebee's units as Applebee's International determined how many went where. The two companies have sparred numerous times in the past over how many Applebee's units Apple South could own, and Applebee's had put a limit on this. Instead of one large and potentially problematic partner, Applebee's now will either own the stores itself or have numerous, smaller franchisees to deal with.

FSI International (Nasdaq: FSII) fell $2 1/32 to $11 3/16 after the capital equipment company reported earnings of $0.08 per share in its fiscal first quarter, $0.03 below estimates. The company expects 1998 sales to beat last year's $252.4 million, but due to economic dislocation in East Asia sales will probably not go much above $300 million, capping revenue growth at 18.9%. Although on the surface this sounds bad, 18.9% revenue growth is hardly anything to sneeze at. In fact, you have to wonder what expectations were before the recent economic instability in Asia. Although FSI blamed the East Asian turmoil for its problems, looking beneath the surface yields inconclusive results. The disk drive thin-film head manufacturers that FSI sells to were having problems before the Asian crisis started. As for South Korea, that country is really just completing the three-year economic implosion that began in 1994, long before any of this Asia stuff hit the front page of the business section. Korea's free money culture simply saddled companies with more debt than they could handle, and they are now starting to pay the price of this disastrous strategy.

Lattice Semiconductor (Nasdaq: LSCC) dropped $8 3/8 to $45 7/8 after the company told analysts that demand in South Korea will be rotten for the next six to nine months, which is bad news since South Korea makes up 5% of Lattice's sales. Lattice visited Korea after the bankruptcy of its largest distributor in that country, Woo Young Tech Co., put $3.5 million of sales in jeopardy. Unfortunately, the company discovered that it was "improbable" that it would get that $3.5 million. Even worse, because of currency fluctuations Lattice chips now cost twice as much since Korean customers buy in U.S. dollars and sell in Korean won, meaning that sales are going to grow much more slowly. John Lazlo of PaineWebber cut fiscal 1998 EPS estimates to $2.37 from $2.52 and fiscal 1999 estimates to $2.75 from $3.15. Programmable logic device (PLD) competitor Altera (Nasdaq: ALTR) also dropped $2 11/16 to $33 15/16 on the news.

Remedy Corp. (Nasdaq: RMDY) was dumped for $11 5/16 to $21 9/16 after influential Goldman Sachs analyst Rick Sherlund downgraded the company on concerns that the acquisition of Remedy competitor Software Artistry (Nasdaq: SWRT) by IBM's (NYSE: IBM) Tivoli Systems unit would hurt sales. IBM had previously had an informal agreement with Remedy to refer customers who wanted helpdesk software to that company. As the agreement was informal, Remedy does not know how badly this could hurt its sales, but in a market with no tolerance for uncertainty this was enough to scrunch the shares. IBM, the largest software company in the world (Microsoft is only the largest separately traded software company), has an awful lot of clout with its customers. Sherlund reduced 1997 EPS estimates to $0.90 from $0.97 and 1998 estimates to $1.25 from $1.42. Competitor Vantive Corp. (Nasdaq: VNTV) fell $2 3/8 to $24 7/8 in sympathy.

QUICK CUTS: Call-Net Enterprises (Nasdaq: CNEBF), which owns 100% of Sprint Canada, continued to fall, dropping $3 1/8 to $14 3/8 after being downgraded last week on fears of increasing price competition in the long-distance business... Being reiterated a "buy" at Black & Co. did nothing for shares of Nike (NYSE: NKE), which fell $7/8 to $39 as 1998 earnings estimates were trimmed to $2.02 and 1999 estimates were cut to $2.39... Chemicals producer Stephan Co. (NYSE: SCL) fell $1 1/2 to $29 3/8 after the company announced its fourth quarter earnings would be off by 12 to 18 cents because of the devaluation of the Philippine peso... Universal Stainless & Alloy Products (Nasdaq: USAP) dropped $2 3/4 to $12 1/2 after announcing that it expects fourth quarter earnings to be flat relative to last year's $0.26 per share.

Banker's Trust (NYSE: BT) slumped $7 to $112 5/8 due to concerns that earnings would be hurt by the terrible trading environment in Asia over the last few weeks. J.P. Morgan (NYSE: JPM), another global bank with a trading desk, was also down $4 to $111 7/8... Catalina Lighting (NYSE: LTG) was crunched $1 1/8 to $4 3/8 after the company revealed that first quarter sales fell as much as 15%, or $10 million, possibly causing the company to lose money in the quarter... Franklin Resources (NYSE: BEN) slipped $1 to $86 7/8 after it announced that it would close down a mutual fund specializing in Japanese stocks... NPC International (Nasdaq: NPCI) was dumped for $1 7/8 to $10 1/8 as the leading Pizza Hut franchisee put earnings for the third quarter in the $0.10 to $0.12 range, below the previous $0.15 to $0.19 range the company had provided. Tricon Global Restaurants (NYSE: YUM), which owns Pizza Hut, fell $1 7/16 to $28 3/8 in sympathy.

STM Wireless (Nasdaq: STMI) tumbled $2 1/2 to $8 after the manufacturer of satellite and communications products said it expects to lose $0.30 to $0.34 per share in the fourth quarter after halting the spin-off of its Direc-To-Phone International unit... Tadiran Telecommunications (Nasdaq: TTELF) was pounded for $5 1/8 to $14 after the Israeli telecom equipment manufacturer said fourth quarter earnings would fall right around last year's $0.15 per share. About 15% of the company's revenue comes from South Korea... Tadiran Ltd. (NYSE: TAD), the parent corporation of Tadiran Telecommunications, also slumped $3 11/16 to $33 1/4. Tadiran reports part of Tadiran Telecom's income in its consolidated results, so it will miss earnings estimates as well.

Tidewater (NYSE: TDW) fell $3 11/16 to $48 5/16 after it was cut to "neutral" by Mark Urness at Salomon Smith Barney. Urness cut 1998 earnings estimates by 17 cents to $4.13 per share and 1999 estimates by 65 cents to $4.95 per share... Kofax Image Products (Nasdaq: KOFX) fell $2 to $5 1/8 after the software and hardware company for the imaging and document management markets announced that it expects Q2 EPS to be between $0.12 to $0.14, which holds out the possibility of being slightly lower than estimates for $0.14... International phone concern Pacific Gateway Exchange (Nasdaq: PGEX) slipped $4 to $49 after being downgraded by to "neutral" by PaineWebber.

An Investment Opinion by Jim Surowiecki

Presstek, SEC Reach Settlement

Shares of printing-equipment maker Presstek (Nasdaq: PRST), once one of the highest-flying of growth stocks, slipped lower Monday to $32 1/8 when the Securities and Exchange Commission (SEC) announced that it had reached a settlement with the company ordering it to avoid future violations of securities laws and fining Presstek's chairman and president a total of $2.9 million in civil penalties for having led the company to disseminate materially misleading information about its sales and future prospects. Presstek itself was not fined, but consented to what is called a cease-and-desist order from the SEC. Company chairman Robert Howard and president Robert Verrando, who paid the fines without "admitting or denying" the allegations, will continue on as heads of the corporation.

Although Presstek itself insisted that the SEC's decision came as a relief, the ruling could complicate the company's position in a series of ongoing class-action lawsuits filed by shareholders who bought Presstek stock at the height of 1996's speculative frenzy -- when shares reached a split-adjusted $100 -- only to see it come crashing down almost immediately. A suit filed on June 16, for instance, alleges that "Presstek, the Cabot Heritage Corp. and others related to them issued materially false and misleading financial statements which materially overstated the financial condition of Presstek." This language is uncannily similar to that of the SEC. And while Verrando and Howard have essentially taken the responsibility for the misstatements onto their shoulders by agreeing to pay the fines, it's not clear whether a jury will be willing to make the fine distinction between the company and its chief executives.

Cabot Heritage, the company that is mentioned in the shareholder complaint, was an important part of the SEC's investigation of Presstek. The company publishes the Cabot Market Letter, an offline financial newsletter given to the aggressive touting of individual stocks, including most notably Presstek. According to the SEC, in 1994 and 1995 chairman Howard got Presstek to distribute to analysts and investors thousands of copies of different issues of the Cabot Market Letter, even though Howard knew that the newsletter was projecting earnings for Presstek that were way out of line with the company's own numbers.

Similarly, and perhaps more strikingly, the SEC alleges that in late 1995 Howard actually edited an analyst's bullish report on the company, clarifying some of the projections but making others "more misleading" and leaving information he knew he to be incorrect in the report. For six months after that episode, Presstek distributed the report to people inquiring about the company's prospects, and did so without the disclaimers that normally accompany any forward-looking statements. Among other things, that report overstated by 400% the revenue the company expected to derive from the sale of printing plates in 1996. Needless to say, that's an overstatement that would have had a material effect on investor evaluations of Presstek's future value.

Howard's editing of the analyst report allegedly followed his and Verrando's drafting and authorization of a Presstek press release that neglected to mention that its largest customer, Germany's Heidelberg Drucksmaschinen, had cut back on its orders from Presstek, emphasizing instead 500 sales of presses with Presstek technology that Heidelberg had supposedly made. (Actually, Heidelberg had only received orders for the presses.) The Heidelberg announcement was crucial in the run-up of Presstek's stock, with the share price rising 15% the day after the press release. But in SEC filings for a year after the release, the company never told investors about the order cutback.

The $2.7 million fine that Howard himself will be paying is among the largest that the SEC has ever levied against an individual. But the Presstek case is potentially historic in other, more important, ways. In the first place, the SEC's discussion of Howard's revision of that analyst's report suggests that once companies agree to review analysts' reports, they have the same obligation to ensure they're materially accurate as they do about their own releases. Surprisingly, companies often look over and revise analysts' reports, as well as distribute them to interested investors, and if you go to many companies' websites, for instance, you'll find links to the analysts who cover them. The implicit logic of the SEC's position in the Presstek case is that if a company sends out an analyst's report, it is responsible for what's inside. (Of what use analysts are if the company is telling them what will happen remains somewhat unclear.)

The case is also important because, Howard and Verrando's demurrals notwithstanding, it represents a relatively powerful statement about the responsibility of companies to their investors and about the need for the transparent dissemination of information to shareholders. It also suggests that what's wrong with speculative frenzies is precisely the way they encourage people to rely on short-term forecasts instead of long-term valuation. What the SEC alleges Howard and Verrando did, after all, only makes sense in a world in which a company's executives see shareholders not as equals to be leveled with, but as sheep to be deceived and led. Why would it have been in anyone's interests for shareholders to think that the company was going to earn more in 1996 than it was? Eventually the numbers were going to come out. But short-term run-ups often allow those in the know to dump shares and reap enormous profits, leaving small investors holding the bag.

The part of this story that's gone unremarked by the offline press, unsurprisingly, is that although Presstek was one of the stocks that gave the Internet a bad name in the summer of 1996, everything contained in the SEC allegations happened offline. Had the Cabot Market Letter been an online forum, for instance, you can be sure the phrase "Internet hype" would have laced every story on the case. But somehow the phrase "print hype" doesn't have the same ring to it. The Cabot Market Letter was hyping Presstek, and the consequences show that print is just as congenial to exaggerated projections as the Internet ever was. It's not the medium that determines the value of the information. It's the information that determines the value of the medium. In looking at a company like Presstek, which is still enjoying solid year-over-year earnings growth, discounting the hyperbole and looking at the numbers is still the only recipe for success. Though it does get kind of tricky when you can't even trust the people running the company.


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