Monday, March 30, 1998
DJIA:           8782.12  -13.96      (-0.16%) 
 S&P 500:        1093.55   -1.89      (-0.17%) 
 Nasdaq:         1818.70   -4.92      (-0.27%) 
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 30-Year Bond   102 1/32   -9/32  5.98% Yield 


Coca-Cola (NYSE: KO) popped up $3 1/8 to $78 3/16 after the soft-drink giant projected a first quarter rise in unit case volume of about 13% to 14%. Excluding sales from the four additional shipping days over last year, the company estimates case volume increased 9% to 10%, compared with 9% for the year-earlier period. That's still more than the 8% predicted by analysts. Atlanta-based Coke, which generates about 70% of sales and 80% of profits from abroad, expects substantial case volume growth overseas for the quarter, with growth of 18% to 19% in Latin America, 17% to 18% in both Africa and the Middle and Far East, and 16% to 17% in Greater Europe. The strong growth overseas will offset the 5% gain in North America, where Coke reported 8% growth in Q1 1997. The solid increase in case volume internationally will likely translate into higher first quarter operating results, which Coke is expected to announce around April 15. Q1 EPS could well exceed the analysts' mean estimate of $0.34 compiled by First Call.

Pharmaceutical firm Pfizer Inc. (NYSE: PFE) continued to rise in heavy trading, gaining $1 15/16 to $97 11/16 following the Food and Drug Administration's approval on Friday of male impotence drug Viagra. The company has declined to speculate on potential sales, but has said the drug will cost $7 a tablet wholesale. An estimated 30 million men in the U.S. are affected by erectile dysfunction. Assuming a mere one-tenth of these men opt to use Viagra just once a week, that could mean up to $1.1 billion a year for Pfizer -- no small amount for a company that last year reported sales of $12.5 billion. If a third of those 30 million men decided to use Viagra once a week, Pfizer could rake in $3.64 billion per annum in the U.S. alone. Viagra is expected to be available by prescription by mid-April. Pfizer has two other drugs to boost sales this year, as well. It started selling Trovan, a new antibiotic, earlier this year, and it expects to begin selling Zeldox, a new drug for schizophrenia, later this year.

Fast-food restaurant chain Koo Koo Roo (Nasdaq: KKRO) jumped 72%, up $1 7/16 to $3 7/16 after announcing that current board member, former chairman of Chrysler (NYSE: C) Lee Iacocca will become acting chairman following the resignation of Kenneth Berg, who recently underwent preventive open heart surgery. Iacocca and CEO William Allen will "immediately undertake a major restructuring of the company." Koo Koo Roo features skinless flame-broiled chicken and operates 52 restaurants in California, Las Vegas, Florida, and the Washington, D.C., area, including 14 Hamburger Hamlet restaurants. The company could sure use anything the nation's best-known auto executive can dream up -- it has yet to report a profitable quarter and expects to report a "significant" loss for 1997. Though Iacocca isn't exactly known for his expertise in chicken or fast-food retailing, he has put his money where his mouth is -- he owns 59,000 shares, and his Iacocca Capital Partners helped place $14 million in private equity for the company in 1995.

[Correction: In a Hero that appeared in last Friday's Evening News, we wrote that Ron Baron had sold 35% of his stake in American Mobile Satellite (Nasdaq: SKYC) during 1997. Today we were informed by Baron Capital that this was not the case. Staying true to the firm's buy and hold strategy, it sold only 0.0006 (3000 shares) of its position, which barely scratches the surface of its 5,373,128 share total.]

QUICK TAKES: Flash data storage solutions developer M-Systems Flash Disk Pioneers (Nasdaq: FLSHF) surged $2 9/32 to $8 3/32 after announcing that it has signed a license agreement with Microsoft (Nasdaq: MSFT) to include M-Systems' DiskOnChip and linear flash drivers in the Microsoft Windows CE operating system... Seattle-based coffee chain Starbucks (Nasdaq: SBUX) gained $2 1/8 to $44 7/8 after saying it plans to focus on long-term investment and expansion in Asia despite the region's current financial turmoil, according to The Wall Street Journal and Reuters. The company hopes to have 200 stores across Asia by 2000... Educational programs and services provider Children's Discovery Centers (Nasdaq: CDCR) jumped $1 7/8 to $12 after announcing it has agreed to be acquired by privately held Knowledge Beginnings Inc., a subsidiary of Knowledge Universe LLC. Knowledge Beginnings will pay $12.25 per share in cash for all outstanding shares of Children's Discovery Centers.

Ready-to-assemble furniture manufacturer Ameriwood Industries International (Nasdaq: AWII) jumped $2 11/32 to $9 15/32 after announcing that it has agreed to be acquired by Dorel Industries. Dorel will pay $9.625 per share in cash for each Ameriwood share for a total purchase price of approximately $41.1 million... Sodexho Marriott Services (NYSE: SDH) gained $3 5/8 to $26 5/8 as it kicked off trading today and as its chairman stated he aims to cut the company's $1.2 billion debt load by about $600 million over the next six years, according to Reuters. "We expect to grow our EBITDA by 8% to 10% over the next few years," said Chairman Charles O'Dell. (We're hoping he meant "per year"). Sodexho Marriott is the result of a combination of Marriott International's (NYSE: MAR) spun-off North American food and facilities outsourcing services business and the North American operations of France's Sodexho Alliance.

McDonald's (NYSE: MCD) continued to climb today, adding $2 to $59 3/8 after last week's announcement that it plans to install a new food-preparation system that would make hotter and fresher food made to order. The announcement has prompted several research analysts to raise their ratings on the company... Ennis Business Forms (NYSE: EBF) jumped $1 1/4 to $11 3/8 after a Barron's article suggested that it might be time for the custom business forms maker to turn around under the leadership of new CEO and industry veteran Keith Walters... Eyeglasses maker Luxottica Group (NYSE: LUX) gained $5 7/16 to $93 5/8 after announcing that it has received approval for a 5-for-1 stock spilt... Odetics Inc. (Nasdaq: ODETA), which supplies digital data management products and communications equipment for the TV broadcast, video security, and telecommunications markets, leapt $1 9/16 to $8 after announcing that it has won a $70.6 million patent suit against Storage Technology (NYSE: STK).

Drug company SONUS Pharmaceuticals (Nasdaq: SNUS) gained $4 7/16 to $25 11/16 in advance of the company announcing that the Committee for Proprietary Medicinal Products, a review committee for the European Medicines Evaluation Agency, has issued a positive opinion on EchoGen Emulsion for use in patients with suspected or established cardiovascular disease... Asynchronous transfer mode (ATM) and ethernet data switch company FORE Systems (Nasdaq: FORE) gained $1 1/2 to $16 9/16 after ZDNet reported that the company will roll out a super high-capacity 40 gigabit-per-second ATM backbone switch... Video processing equipment maker Faroudja Inc. (Nasdaq: FDJA) rose $1 1/32 to $9 after announcing that Fox Broadcasting, a subsidiary of News Corp. (NYSE: NWS), has purchased the Video Solutions 30 Hz Format Translator from Faroudja's line of digital TV processors... Cable TV set-top box converter company General Instrument Corp. (NYSE: GIC) gained $1 1/16 to $21 3/4 after it said it has shipped its one-millionth MPEG-2 DCT-1000 digital converter.

RATINGS CHANGES: Advanced Micro Devices (NYSE: AMD) added $1 7/8 to $26 9/16 after Volpe, Brown Whelan raised its rating on the microprocessor maker to "buy" from "neutral" and set a 12-month price target of $35... Centocor Inc. (Nasdaq: CNTO) rose $2 5/16 to $45 15/16 after Merrill Lynch raised its price target on the biopharmaceutical company's stock to $70 per share, and Deutsche Morgan Grenfell raised its price target to $48 a share from $43 a share... Mexican steel maker Grupo Imsa (NYSE: IMY) tacked on $1 5/8 to $20 after it was upgraded to "strong buy" from "outperform" by Morgan Stanley Dean Witter based on the stock's valuation and "good news regarding a potential joint venture" with Brazilian steel maker Companhia Siderurgica Nacional... Interstate/Johnson Lane upgraded its rating on IQ Software (Nasdaq: IQSW), which provides enterprise reporting solutions, to "strong buy" from "long-term buy" due to the recent pullback in the stock price, driving the company's stock up $2 3/8 to $11.


Shaving blade and razor manufacturer American Safety Razor Co. (Nasdaq: RAZR) was nicked $4 3/4 to $18 1/8 after saying on Friday that it expects earnings to come in between $0.06 and $0.09 per share for the quarter, which is below the I/B/E/S mean estimate of $0.36 per share. The company will also take a $1 million restructuring charge against fiscal Q1 earnings, which will cover the closing of its Sparks, Nevada, cotton operations and the consolidation of its shaving products and cotton items sales force. Additionally, the firm said the marketing efforts of some if its competitors are causing some razor burn. The company derived about 41% of its fiscal 1997 revenues from its store- and value-brand shaving razors and blades, which compete face-to-face with products from heavyweights Gillette Co. (NYSE: G), the Schick division of Warner-Lambert (NYSE: WLA), and France's Societe Bic.

Telecommunications services provider Tel-Save Holdings (Nasdaq: TALK) dropped $1 1/8 to $22 3/16 after the company said it would offer a new long-distance rate to America Online (NYSE: AOL) members of 5 cents per minute during April and May. The company had previously offered a 9 cents per minute rate to AOL subscribers, which was lower than the rates offered in similar plans by rivals AT&T (NYSE: T) and Sprint Corp. (NYSE: FON). The company's chairman and CEO said the new, lower rate is "slightly" below the cost of providing the service -- $0.05 is estimated to cover gross margin expenses -- highlighting Tel-Save's desire to grab market share at the expense of some short-term profitability. With 1998 EPS estimates at $0.61 and only $0.05 slated for the first two quarters, the company will be even more dependent on its ability to retain customers in order to generate its second half returns.

Chemical transportation company Matlack Systems (NYSE: MLK) tanked $2 1/8 to $8 7/8 after a merger offer from investment partnership Apollo Management expired without an agreement between the two parties. If the deal had been done, Matlack shareholders would have received $12 per share in cash. The letter of intent to merge signed on Feb. 25 included an interesting provision: if the merger could not be closed by the expiration date, Matlack agreed to pay Apollo a $5.75 million break-up fee. Currently, it does not appear that Matlack will have to pay the fee, which is more than twice the $2.7 million earned by the firm in fiscal 1997. The letter's termination clause will prohibit Matlack from looking around for another merger partner, at least for a while. If Apollo decided not to proceed with the merger, then the non-merger time span, or "tail period," is three months. However, the companies reportedly are still in talks to work out an agreement.

QUICK CUTS: Shares of four aluminum companies fell today after being downgraded to "hold" from "buy" at Prudential Securities. Reynolds Metals (NYSE: RLM) slid $1 3/4 to $61 15/16, Kaiser Aluminum (NYSE: KLU) skidded $1/8 to $9 15/16, Alcan Aluminum (NYSE: AL) slipped $1 1/16 to $31 1/2, and Aluminum Co. of America (NYSE: AA) slumped $2 7/16 to $68 5/16... Interactive entertainment software developer Broderbund Software (Nasdaq: BROD) tumbled $1 3/4 to $18 7/8 after the company fired 70 employees, or more than 6% of its workforce, due to higher-than-expected marketing costs for its Riven game... Contract furniture maker Shelby Williams Industries (NYSE: SY) fell $1 5/16 to $14 15/16 after saying lower export sales and a weak Hawaiian market will result in flat fiscal Q1 sales and earnings below the Street estimate of $0.27 per share for the quarter.

Graham-Field Health Products (NYSE: GFI) lost $1/2 to $7 9/16 after shareholders filed a class action suit against the medical products distributor on Friday alleging that the firm failed to disclose material information about its financial situation... Information technology staffing firm General Employment Enterprises (AMEX: JOB) slid $3 5/8 to $10 3/4 after saying it expects fiscal Q2 EPS will come in between $0.14 and $0.15, below the Street estimate of $0.21, due to slower growth in placement fee revenues. Schroder & Co. cut the company to "neutral" from "buy"... Shoe maker Penobscot Shoe Co. (AMEX: PSO) was tripped $3/8 to $6 1/8. On Friday, the company reported fiscal Q1 EPS of $0.25 versus $0.11 a year ago.

Packaging test instruments manufacturer Modern Controls (Nasdaq: MOCO) dropped $3/4 to $9 after saying its fiscal Q1 sales and earnings will be below last year's levels. The company said sales have been delayed as prospects await more certainty in Asia... Year 2000 problem solver Peritus Software Services (Nasdaq: PTUS) dropped $3 1/32 to $5 5/8 after saying that it expects a fiscal Q1 loss of $0.19 per share to breakeven due to lower-than-anticipated license revenue because of "sales force integration issues"... Ferrofluidics Corp. (Nasdaq: FERO), which makes ferrofluids products used in audio loudspeakers, sealing devices, and semiconductors, leaked $13/16 to $4 13/16 after announcing it will take a $3.5 million charge to fiscal Q3 earnings for severance costs, write-downs of assets, and other costs.

Marine support and transportation services company Hvide Marine (Nasdaq: HMAR) sank $1 7/16 to $17 13/16 after saying its fiscal Q1 earnings will be about 25% below the Street's estimate of $0.57 per share due to lower utilization rates in its offshore energy support business... Westcorp (NYSE: WES), which owns auto finance company WFS Financial (Nasdaq: WFSI) and the Western Financial Bank commercial bank, fell $1 3/4 to $17 5/8 after saying it will report a fiscal Q1 loss on top of a previously announced restructuring charge and will cut its quarterly dividend to $0.05 from $0.10 per share. The company said the loss is due to deteriorating delinquency and loss trends at WFS Financial. WFS Financial fell $1 3/8 to $10 7/8 on the news.

Legal pad inventor American Pad & Paper Co. (NYSE: AGP) was shredded $5/8 to $7 3/16 after reporting a Q4 loss of $0.52 per basic share. The Street had been expecting a loss of $0.37 per diluted share for the quarter. Rising paper and other production costs were blamed for the loss... PhyCor Inc. (Nasdaq: PHYC) lost $2 15/16 to $22 7/16 after Salomon Smith Barney downgraded the operator of multi-specialty medical clinics to "neutral" from "buy"... Eatertainment purveyor Planet Hollywood International (NYSE: PHL) lost $1/2 to $10 5/8 today on no news. However, it was reported that Saudi Arabia's Prince Alwaleed bin Talal increased his stake in the firm to 4% from 1%.

An Investment Opinion
by Jim Surowiecki

The State of Apple

When you look at the ongoing pas de deux between Steve Jobs and Apple Computer (Nasdaq: AAPL), the company he co-founded and now runs as interim CEO, it's hard to resist the rather crude thought: "Why buy the cow when you can get the milk for free?" The only problem, though, is that both Jobs and Apple seem to believe they're the ones getting the milk for free, and in the long run that almost certainly bodes ill for the future of the company, if not of Jobs.

Apple's stock has now more than doubled since the year began, mainly on news that Apple will actually report profits for two quarters in a row -- the first time that's happened in more than a year -- and on the rumors that Jobs would finally commit to the CEO position full-time. At the beginning of last week, the stock bumped up to a 52-week high of $28 in anticipation of the March 24 Apple board meeting, at which the company's directors were expected to ask Jobs to make a decision about his future. Business Week quoted one company "insider" as saying: "Some members of the board don't want to leave loose ends open for eons," while The Wall Street Journal reported that some form of ultimatum would certainly be made at the meeting. Investors saw this as very good news, since they assumed that when push came to shove Jobs would not abandon his own creation. One analyst said, "I don't think they'll let him walk out of there without making a decision."

Well, so much for those predictions. In fact, although the board would clearly like Jobs to stay on permanently, and although it has made him a very generous offer -- heavily weighted toward cheap stock options -- in order to convince him to stay, it did not hand down any kind of ultimatum at that March 24 meeting, and it did let him walk out of there without making a decision. Apple now seems to believe that labels really don't matter, and that as long as Jobs is sticking around and giving the company a recognizable and believable public face, as well as a new and tighter strategic focus, his interim status is just not that important. As board member Edgar Woolard told the Journal, "Whether we call him interim or not interim is a nonissue with us. We hope he will stay a long time."

The board's position is, of course, understandable. Although the company's financial performance has shown mild improvement over the last two quarters, the run-up in the stock price has been closely tied to Jobs' very public stewardship of the corporation. If the company were to dismiss him without having a high-profile candidate as a replacement, investor backlash would likely be severe. And at a time when Apple is in a fierce struggle to reclaim some small portion of the mindshare that it lost over the last five years, signs of disarray are the last thing that Apple needs. In addition, Jobs' panache and blissful self-confidence -- as well as the still cult-like devotion that many Mac fans feel for him -- are welcome additions to a company that has floundered its way down to seven-dollars-a-share in annual losses and a market share of less than five percent.

Apple has made a number of good decisions since Jobs has arrived. Killing the Newton, cutting prices on the Power PC, streamlining inventory and distribution, selling computers on the Web, and finally producing a computer for the sub-$1,000 market -- these were all relatively obvious moves, but they were moves that Apple had missed for a long time. Similarly, the "Think Different" ad campaign, for all of its grammatical dubiousness and its essential hubris, created a buzz that hadn't surrounded Apple in years, while the newer "Toasted Bunny" campaign, by attacking Intel (Nasdaq: INTC) directly, at least creates the impression that Apple and Intel are on the same playing field. Finally, the job cuts and reductions in operating costs that Apple has made were harsh but necessary for a company whose operating margins were nonexistent and whose gross margins have hovered below 20% for the past couple of years.

Having said all that, though, it's important to recognize that the improvements in Apple's position have been relative at best, and that this is still a company in deep trouble, a company that needs a full-time CEO who can pay real attention to its needs. When Apple reported a profit in its last quarter, it did so on sales that were down almost 25% on a year-over-year basis, and with still-low gross margins. The difference between operating income in that quarter and operating income in the one before it was just $73 million, which on sales of $1.6 billion doesn't really scream "Turnaround!" Even if this quarter is as bright as Jobs has promised, earnings for FY 1998 are expected to come in around $150 million, or a net margin of less than 3%.

Of course, the fact that Apple is in so much trouble, while Jobs' other company, Pixar (Nasdaq: PIXR), is doing so well, undoubtedly makes Jobs unwilling to commit to Apple full-time. In a sense, he's in a perfect position. If Apple does right itself, then he'll be acclaimed as a savior, while if it continues to struggle (it's hard to imagine it ever disappearing, since it is the only alternative to Wintel) he has an excuse ready at hand. The Apple board, though, should think hard about how much longer it wants Jobs to remain in this in-between position. By remaining tied to Jobs, Apple is cutting itself off from potential CEOs who would relish the chance to turn the company around. Novell's (Nasdaq: NOVL) future is still very much up in the air, but it's in infinitely better shape than it was before it was able to get Eric Schmidt to leave Sun Microsystems (Nasdaq: SUNW). And candidates similar to Schmidt in ability and vision have hovered around Apple ever since Gil Amelio left.

To be genuinely heretical, it's not really clear that Jobs is the right man to run Apple. His hostility to the makers of Mac clones, which resulted in Apple cutting all ties to the clonemakers, suggests that he still sees Apple as an integrated hardware-software company, even though virtually everyone else in the world of technology does one or the other. While Jobs' leadership skills are unquestioned, his management skills leave something to be desired, and there hasn't been much evidence that he can make Apple the kind of lean-production dynamo it will have to be if, as it seems to be doing, it's going to model itself after Dell (Nasdaq: DELL). But in a sense, whether Jobs is the ideal candidate isn't anywhere near as important as is the need to have him make a decision. In allowing Jobs to continue dallying with Apple without actually promising anything for the future, Apple's directors are choosing short-term benefits over long-term gains. Eventually, that's a choice that will come back to haunt them.


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