<THE EVENING NEWS>
Monday, December 28, 1998
MARKET CLOSE
DJIA             9226.75       +8.76      (+0.10%)
S&P 500          1225.49       -0.78      (-0.06%)
Nasdaq           2180.30      +17.27      (+0.80%)
Value Line ndx    897.76       +0.51      (+0.06%)
30-Year Bond   101 17/32          +1  5.15% Yield

HEROES

Online brokerage E*Trade Group (Nasdaq: EGRP) rocketed ahead $11 3/4 to $56 3/4 today after announcing that half a million people have signed up for its Destination E*Trade website since its official launch in September. Since the Destination site is the company's investment data and research site, today's report was not about new accounts for the brokerage. But as today's Fool Plate Special explained, the former is a very good leading indicator of the latter, and E*Trade's figures compare favorably to numbers put up by America Online (NYSE: AOL) circa 1996. Whether E*Trade can convince its Destination visitors to open up actual brokerage accounts with the firm remains to be seen and is the larger and more important long-term question from a shareholder's point of view.

Facilities-based competitive local exchange carrier (CLEC) RCN Corp. (Nasdaq: RCNC) jumped $7 1/4 to $20 5/8 after announcing it has completed the internal integration of its recent Internet service provider (ISP) acquisitions, which will now be marketed under a common RCN.com brand name. Over the past year, RCN has gone from no Internet customers to almost a half a million by gobbling up ISPs Erol's, UltraNet, and JavaNet. The company's plan is to use its fiber optic network to provide online, long-distance and local phone, and cable TV services to densely populated urban and suburban areas in the Northeast and, in the future, California. Although analysts do not expect the company to be cash flow positive until 2000 at the earliest, investors are expecting RCN's "dense market" strategy to pay off down the road. Also watching with interest are 41% owners Peter Kiewit Sons and Level 3 Communications (Nasdaq: LVLT), which rose $2 to $41 1/2 today.

QUICK TAKES: In-flight catalog and online retailer SkyMall Inc. (Nasdaq: SKYM) soared $23 to $35 9/16 after saying its Internet sales have tripled to about $1 million so far in the fourth quarter compared to a year ago, mirroring a three-fold increase in the number of hits at its skymall.com website during the same span... Biotechnology company Cephalon (Nasdaq: CEPH) gained $1 to $9 3/16 after the FDA approved its Provigil drug for treating the "excessive daytime sleepiness" associated with the sleeping disorder narcolepsy. The non-amphetamine Provigil is the first Cephalon drug to gain marketing approval in the U.S... Broadvision Inc. (Nasdaq: BVSN) rose $2 to $34 5/8 after ABN AMRO started coverage of the enterprise application software company with an "outperform" rating.

DaimlerChrysler AG (NYSE: DCX) sped ahead $4 1/16 to $98 1/4 after saying it expects 1998 revenues to increase by 13% to $148 billion and 1998 earnings to "reach a significantly higher level" than pro forma combined figures for 1997 for Daimler-Benz AG and Chrysler Corp. on higher than expected unit sales... Computer systems integration and maintenance services firm Unisys Corp. (NYSE: UIS) picked up $1 1/2 to $35 3/16 after Goldman Sachs placed the company on its "recommended list." Goldman had started coverage of the stock just last month with a "market outperform" rating... Biopharmaceutical firm Abgenix (Nasdaq: ABGX) moved up $1 11/16 to $18 after signing a joint research agreement with drug developer Centocor (Nasdaq: CNTO), which will result in unspecified payments from Centocor to Abgenix.

Online live event ticketing and city guide service Ticketmaster Online CitySearch (Nasdaq: TMCS) tacked on $4 7/16 to $69 15/16 after Bear Stearns started coverage of the stock with an "attractive" rating and NationsBanc Montgomery Securities gave it an initial "buy" rating. Both brokerages were underwriters for the company's initial public offering earlier this month... Wireless telecommunications power amplifier company Microwave Power Devices (Nasdaq: MPDI) climbed $3 1/4 to $11 1/8 thanks to an upgrade to "strong buy" from "hold" by CIBC Oppenheimer... Aerospace and industrial fasteners maker Kaynar Technologies (Nasdaq: KTIC) secured a $2 7/8 gain to $27 1/2 after agreeing to be acquired by fellow fastener manufacturer Fairchild Corp. (NYSE: FA) for about $267 million, plus $98 million of assumed debt. Fairchild moved up $11/16 to $14 9/16 as well.

E-TEK Dynamics (Nasdaq: ETEK), which makes components for wavelength division multiplexing and optical amplification systems, added $4 1/4 to $27 1/8 after Goldman Sachs started coverage with a "market outperform" rating. Goldman was an underwriter for the company's initial public offering earlier this month... Active Apparel Group (Nasdaq: AAGP), which markets activewear under the Everlast, Converse All Star, and MTV's The Grind brand names, leapt $10 1/4 to $11 1/2 after announcing the launch of its e-commerce website at www.everlastusa.com... Fertilizer producer and distributor IMC Global (NYSE: IGL) tacked on $1 11/16 to $21 5/16 after agreeing to sell its soda ash and boron chemicals business to privately held Mincorp LLC for about $520 million. IMC expects the deal to "slightly accretive" to its EPS in fiscal 1999.

Payment systems company First Data Corp. (NYSE: FDC) gained $1 1/16 to $30 1/4 after signing a long-term credit, debit, and commercial card processing agreement with Bridgeport, Connecticut-based People's Bank (Nasdaq: PBCT)... Auto parts, electrical controls, and network technologies company SPX Corp. (NYSE: SPW) added $3 1/8 to $66 3/16 after saying it will take a $210 million to $250 million Q4 charge to close former General Signal facilities and lay-off about 1,000 workers. Despite the restructuring, the company remains "confident" it will meet its previous fiscal 1999 EPS guidance of $4.85.

Engineering measurement tools provider Keithley Instruments (NYSE: KEI) advanced $1 5/16 to $9 after announcing a plan to repurchase up to 1 million shares, or about 13% of its outstanding stock, over the next two years... Document processing company Xerox Corp. (NYSE: XRX) gained $4 3/4 to $115 1/4 after Prudential Securities raised its 12- to 18-month price target to $155 per share from $130 per share, citing improving business conditions in Europe and Brazil and recent cost-cutting efforts by the firm... CD and video cassette retailer Musicland Stores Corp. (NYSE: MLG) moved up $1 13/16 to $14 15/16 after saying it sold $5 million of digital video disk (DVD) products during the last seven days of the Christmas shopping season, bringing its total DVD sales for the year to more than $50 million.

GOATS

It was a double whammy of sorts for telecommunications access products designer Premisys Communications (Nasdaq: PRMS), which fell $1 1/2 to $8 3/8 today on news of disappointing international direct sales orders and the loss of CEO Nick Williams for several months. Premisys said it expects to report fiscal Q2 EPS of between $0.08 and $0.10 on Jan. 14, missing both the Street's $0.16 consensus estimate and last year's $0.15 figure. International figures came in about one-fifth of expectations for Q2, and the company's failure to ship a key new product didn't help results. Williams, meanwhile, is being treated for frostbite in a San Francisco hospital and Premisys may appoint an interim replacement; he expects to return "sometime in the June 1999 quarter," according to the company. Given the details of the CEO's saga -- he spent two sub-zero nights lost in the California mountains during a recent ski vacation -- he can be forgiven for needing some time off.

Last week's euphoria over Ziff-Davis' (NYSE: ZD) plans for an IPO of its ZDnet Internet operation cooled today after a Morgan Stanley Dean Witter analyst cut his rating on the company's stock to "neutral" from "outperform." Doug Arthur based his revision on a recent rise in the company's stock price -- it jumped as high as $23 1/2 last week -- following its filing of an IPO for a tracking stock that will follow ZDnet, a popular site that lists software downloads, product reviews, and investment information among its features. Ziff-Davis hopes the IPO will help unlock the Web operation's value. Investors, perhaps saddened by the fact that they'll have to wait until 1999 for another Internet IPO, pulled Ziff-Davis' shares down $2 3/4 to $18 today. The Fool's Louis Corrigan flipped through the publisher and trade show operator's pages in mid-October when the company fell to around $4 per share.

Integrated energy company KN Energy (NYSE: KNE) sprung a leak today after it said unseasonably warm weather in November and December, particularly in the Midwest, hurt revenues in the fourth quarter, typically the company's strongest period. KN lost $1 15/16 to $36 3/8 after it said it expects Q4 EPS of between $0.08 and $0.32, a far cry from both last year's $0.89 figure and Wall Street's $0.92 consensus projection. Also hurting results are high natural gas inventories industry-wide and low crude oil prices. KN also said it expects to take a pretax charge no larger than $30 million in Q4. The company hopes the new TransColorado pipeline, set to become operational in February (among other endeavors), combined with a return to "normal weather" will fuel its recovery.

QUICK CUTS: Mega-retailer Wal-Mart (NYSE: WMT) slipped $1 1/4 to $79 7/8 on reports that the company doesn't expect to match last year's 6.4% same-store sales jump for January... Water well drilling and maintenance company Layne Christensen (Nasdaq: LAYN) lost $1 1/8 to $6 7/8 after it said it expects a fiscal Q4 loss of between $0.17 and $0.21 per share, compared with the $0.02 loss expected by two analysts surveyed by First Call... Medical imaging drugs distributor Syncor International (Nasdaq: SCOR) fell $1 1/8 to $24 on news that it may lose up to $15 million in revenue, or 4% of last year's top line, after losing part of an account for radiopharmaceuticals to a competitor... Telecommunications billing and customer service software maker LHS Group (Nasdaq: LHSG) retreated $2 3/8 to $52 1/4 following comments by hedge fund manager David Rocker in this week's Barron's suggesting that the company derives significantly more of its earnings from unbilled work than its competitors.

Technology development company CVF Technologies (AMEX: CNV), which enjoyed a nice pop of $1 13/16 on Christmas Eve following news of its plans to launch a website selling nutritional and herbal supplements, dropped $1 to $5 today... The rollercoaster ride that is Zapata Corp. (AMEX: ZAP), the fish oil and web portal company, continued today as its stock added to Friday's losses, shedding $1 3/8 to $11. Zapata's hills and valleys were documented in a July Daily Double and, four months later, in a Daily Trouble... Auction mainstay Sotheby's Holdings (NYSE: BID), which gained $4 1/2 on Thursday in light of a Merrill Lynch upgrade, dropped $3 to $35 today.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

That's Entertainment

It has been said that media conglomerates are capitalism's answer to the circus. They operate on the premise that if the high-wire act fails to impress the audience, perhaps the juggler will, or maybe even the dancing bear. In practice, some of the acts invariably leave the audience a little listless, and even the reliable crowd pleasers eventually slip for lack of the ringmaster's wholehearted attention.

A more succinct, albeit prurient, lesson is provided by Warren Buffet who said, "If you have a harem of 40 women, you never get to know any of them very well." The point seems to be -- the 1960s aside -- that if corporations are involved in too many different lines of business, investors should be somewhat leery.

How does an investor go about unlocking the value of cable TV channels, sports teams, movie studios, TV producers, book publishers, radio stations, newspapers, magazines and theme parks -- all at the same time! One factor that must be considered is that these seemingly disparate business branches are all outgrowths from the same tree: the oak that is the production and distribution of content. Vertical integration and cross-marketing are the order of the day, with the largest media companies gaining significant economies of scale. The recession resistant strain of the cable network business is associated with the subscription fees that the cable operators pay to programmers (about 50% of revenues) and are independent of the ratings or economic environment.

Some of the mega-media concerns are anchored with cable cash flows, with Viacom (NYSE: VIA) taking in roughly 40% of its cash flow from cable networks and Time Warner (NYSE: TWX) garnering about the same percentage of cash flow from its cable systems. Disney (NYSE: DIS), on the other hand, has its "creative content" segment to point to as its base, with a little over 40% of its operating revenue coming from its film business, television programming production, home video, and consumer products groups. Historically, the "wild card" for all the mega-media companies has been the relative success of the movie offerings over the course of the year. And that's where we'll turn with this column today.

With all that vacation, the summer months and the December holiday season are crucial times for the movie studios. Here is a run-down of some of the biggies and their public owners: Disney (NYSE: DIS) owns Touchstone, Miramax, and Walt Disney Studios; Viacom (NYSE: VIA) owns Paramount; Seagram (NYSE: VO) owns Universal; Time Warner (NYSE: TWX) owns New Line and Warner Brothers; Columbia Pictures is owned by Sony (NYSE: SNE); and Twentieth Century Fox is owned by Fox Entertainment (NYSE: FOX) -- that is News Corp. (NYSE: NWS). Here are the numbers for the box office gross over the Christmas weekend:

(Revenues and Total in millions)
Movie Revs Screens Wks Out Avg/Screen Total
1. Patch Adams $25.3 2712 1 $9,329 $25.3
2. Stepmom $19.4 2358 1 $8,227 $19.4
3. You've Got Mail $19.1 2756 2 $6,930 $48.6
4. Prince of Egypt $15.3 3218 2 $4,755 $40.2
5. The Faculty $11.8 2365 1 $4,989 $11.8
6. Mighty Joe Young $10.9 2502 1 $4,357 $10.9
7. A Bug's Life $10.1 2456 6 $4,112 $114.6
8. Star Trek $7.5 2677 3 $2,802 $47.9
9. Enemy $5.2 1505 6 $3,455 $87.4
10. Jack Frost $4.0 2142 3 $1,867 $22.6


The gross for the top 12 films came in at $133.9 million, which beat last year's numbers by 3.4%. As far as the studios that benefited, Disney was at the top of the field with $38 million, followed by Universal's $25.3 million, Warner Brother's $23.1 million, Sony's $19.4 million, and Paramount's $7.5 million. None of the public companies that own these studios made appreciable movements in trading today. The primary reason is that only about three out of every ten motion pictures are actually successful on their own -- that is, without substantial downstream revenue participation. The numbers get baked into the securities very quickly.

The points of distribution for the movie "product" have grown enormously over the last five years, coming not only from multiplex build and overseas distribution, but from home video, pay-per view, premium channels and cable network growth as well. When even an unsuccessful film can sell 100,000 copies for rental -- at around $60 per copy wholesale -- this can have some dramatic impact on the financial equation (real hits can sell 500,000 - 700,0000 copies).

The natural result of increasing distribution alternatives is a crowded marketplace, with film lifecycles getting more and more abbreviated. Typically, a film these days has about two or three weeks to prove itself in the theater market before it heads for pay-per-view, home rental, or foreign shores -- primarily because marketing and exhibition costs become too onerous. Film costs have been rising along with the increased distribution opportunities at a compound rate of about 10% over the last five years, primarily due to increasing marketing costs in getting the word out across all the disparate channels, as well as some inelastic supply issues (the top talent and the duplicate-what-has-worked syndrome).

Many studios are looking to retrench a little bit in 1999 by getting partners to finance more flicks and by simply making fewer movies. Disney has reported that it is looking to cut back to about 15 movies in 1999, compared with the current rate of 20-25.

Another interesting issue in terms of movie distribution that investors might want to look at in 1999 is the DVD effect. Most observers feel that with DVD sales booming, price points will come down quickly in 1999 -- with $200 players being the magic number. This move, in tandem with DVD disks eventually falling into the CD price range a few years out, will not be that great for rental companies that need to duplicate inventory, but will be a boon for media companies that need to re-issue titles (like the companies with substantial music libraries in the LP to CD days). Time Warner and Disney will be two beneficiaries of this trend. Enjoy the last days of 1998, and see you at the movies.

CONFERENCE CALLS

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

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