<THE EVENING NEWS>
Wednesday, February 24, 1999
MARKET CLOSE
DJIA             9399.67     -144.75     (-1.52%)
S&P 500          1253.41      -17.77     (-1.40%)
Nasdaq           2339.38      -36.97     (-1.56%)
Russell 2000      395.26       -3.75     (-0.94%)
30-Year Bond     96 8/32     -1 5/32  5.51 Yield

HEROES

Enterprise middleware solutions provider BEA Systems (Nasdaq: BEAS) moved up $1 5/16 to $17 1/4 after reporting pro forma Q4 EPS of $0.05 (excluding charges), flat with last year's results but a penny ahead of the Zacks mean estimate. Revenues were up 53% year-over-year, which restored enough confidence in the company within the analyst community to warrant upgrades from at least three brokerage firms today. Late last year, BEA's shares took a nearly 50% one-day nosedive after the firm warned of slowing revenues due to what it termed "a lengthening [of] the enterprise software sales cycle." Revenue growth definitely slowed in Q4 -- coming in at a less-than-heart-stopping 1.4% sequential rate -- but at least it didn't go negative. The Q4 results are still a far cry from the 17% sequential revenue growth the company had averaged over the prior six quarters.

Telecommunications dense wavelength division multiplexing (DWDM) systems designer Ciena Corp. (Nasdaq: CIEN) was lifted $2 5/8 to $27 1/4 after BancBoston Robertson Stephens raised its rating on the company to "buy" from "long-term attractive," citing an improved "pricing environment, customer concentration, and revenue stream visibility." The customer concentration issue is a lingering thorn in Ciena's side that may finally be working its way out. The firm's continuing shift from relying on a few big customers to many diverse but smaller clients will smooth out future earnings and will give the company some padding against the competitive threat posed by much larger rival Lucent Technologies (NYSE: LU). Moreover, the concentration shift is probably the largest differentiating factor between Ciena's business today compared to what it looked like at this point last year, when the company's shares were trading near $44 per share.

QUICK TAKES: Fiber-optic network operator Qwest Communications International (Nasdaq: QWST) ventured $2 1/4 higher to $61 3/16 after saying it has completed the roll-out of end-to-end local business telecom networks in 10 major U.S. cities and plans to expand into 9 other local metropolitan markets by the end of this year... Air carrier Delta Air Lines (NYSE: DAL) ascended $3 1/16 to $61 after Merrill Lynch named the stock a "Focus 1 selection" and boosted its fiscal 1999 earnings estimate to $6.70 per share from $6.50 per share... Christian music products producer Integrity Inc. (Nasdaq: ITGR) gained $1 5/16 to $5 3/16 after forming online direct selling relationships with Amazon.com (Nasdaq: AMZN) and Didax's (Nasdaq: AMEN) Crosswalk.com site.

Women's fashion footwear designer Nine West Group (NYSE: NIN) strode ahead $1 3/16 to $20 3/4 following a NationsBanc Montgomery Securities upgrade to "buy" from "hold"... Lansing, Michigan-based bank holding company CFSB Bancorp (Nasdaq: CFSB) gained $5 to $26 after agreeing to be acquired by financial services provider Old Kent Financial (NYSE: OK) for about $242 million in stock, or $28 per CFSB share... 3D graphics chipset maker NVIDIA Corp. (Nasdaq: NVDA) tacked on $1 3/4 to $23 3/4 after posting fiscal Q4 (ended Jan. 31) EPS of $0.27, crushing last year's $0.06 figure. Revenues jumped 178%, compared to the same period a year ago, to $65.5 million.

FedEx and RPS parent FDX Corp. (NYSE: FDX) delivered a $3 9/16 gain to $93 7/16 following a Schroder & Co. upgrade to "outperform significantly" from "perform in line." The brokerage also bumped up the company's fiscal 1999 earnings estimate to $3.91 per share from $3.43 per share... Financial and mortgage guaranty reinsurer Capital Re Corp. (NYSE: KRE) climbed $2 to $16 13/16 after a subsidiary of specialty liability insurer ACE Ltd. (NYSE: ACL) agreed to make a $75 million equity investment in the company, acquiring roughly an 11% stake... Air carrier Northwest Airlines (Nasdaq: NWAC) flew $1 1/16 higher to $25 1/4 after about 18,000 Northwest union-represented ground crew and other workers ratified a new labor contract.

International telecommunications services provider Global Crossing Ltd. (Nasdaq: GBLX) moved up $4 1/4 to $57 7/8 after naming former AT&T (NYSE: T) executive and Teleport founder Robert Annunziata as its new CEO... Gas detection and monitoring equipment maker Industrial Scientific Corp. (Nasdaq: ISCX) rose $7 to $27 1/2 after agreeing to a $28.50 per share cash buyout offer from the company's chairman and its CEO, who intend to take the company private... Internet software provider Vignette Corp. (Nasdaq: VIGN) added $3 3/4 to $45 after signing a joint software marketing and technology agreement with e-commerce technologies firm Open Market (Nasdaq: OMKT)... Paper and building materials company Georgia-Pacific (NYSE: GP) tore ahead $3 5/16 to $71 11/16 after Morgan Stanley Dean Witter raised its fiscal 1999 earnings estimate to $2.30 per share from $1.50 per share.

GOATS

As if paying Uncle Sam wasn't bothersome enough, food products maker Vlasic Foods International (NYSE: VL) now says the pinch of the Argentine taxman is expected to take the crunch out of some of its pickles. Vlasic was chomped for a $2 7/8 loss to $14 7/16 after the company said a new minimum tax law imposed on business assets by the Argentine government in December will affect the future operations of its Swift-Armour division, hurting fiscal 1999 EPS by approximately $0.05 per share. The company now says it won't go ahead with a planned sale of some of Swift-Armour's assets -- expected to account for a further $0.18 of EPS in 1999 -- and will consider other options, possibly including the sale of the whole unit. "We remain comfortable with the range of Wall Street operating earnings estimates for fiscal 1999, adjusted for Argentina," said CEO Robert Bernstock. The company reported fiscal Q2 EPS of $0.24, ahead of Wall Street's $0.20 estimate, but $0.02 behind last year's mark.

What's another industry in which the growth of the Internet appears to be affecting traditional business? Try greeting cards, where you're only a few clicks away from never forgetting an anniversary again. While number-two cardmaker American Greetings (NYSE: AM) looks fine online, it wants to upgrade its traditional greeting card business and decided to tear a sizable chunk out of fiscal 2000 earnings to do so. Investors weren't sending the company "I Love You" notes today, however, as the shares wilted $11 3/16, or 32%, to $23 7/8 after the company announced a new "productivity initiative" expected to cut fiscal 2000 EPS to between $2.00 and $2.10 per share, well off the $2.97 estimate four analysts gave First Call. "While we'd prefer to do this without next year's downturn in earnings," said CEO Morry Weiss, "this initiative is in the best long-term interest of our shareholders." News of a planned buyback of up to 5 million shares of company stock, about 7% of the total outstanding, didn't win many smiles today; neither did the company's assertion that it expects to report Q4 EPS of between $0.80 and $0.90 on March 25, on track to meet the Street's $0.85 projection.

Online "books, music, and more" retailer Amazon.com (Nasdaq: AMZN) can add one more product category to its advertising pitch -- drugs. Late today, the company announced it has a 46% stake in privately held Drugstore.com, which plans to sell health, beauty, and wellness products over the Internet and also operate a licensed pharmacy. The firm's shares ended the day down $4 1/4 at $110 15/16. Under the deal, Amazon will help drive new customers to Drugstore.com through a strategic alliance. Amazonian chieftain Jeff Bezos will sit on the board of directors for Drugstore.com, which already sports former Microsoft (Nasdaq: MSFT) senior executive Peter Neupert as its President and CEO and backing from Silicon Valley venture capitalist firm extraordinaire Kleiner Perkins. At the very least, the deal can only add to Amazon's already stellar e-commerce competitive positioning down the road. For more insight on the news, check out what Fool shaman David Gardner has to say in tonight's Rule Breaker Portfolio report.

QUICK CUTS: Nutritional products maker Twinlab Corp. (Nasdaq: TWLB) fell $2 1/2 to $7 after announcing earnings below expectations for 1998, a restatement of earnings for the prior three quarters, and projections that the first quarter of 1999 will fall "significantly" short of last year's (restated lower) first quarter. For more on the announcements, head back to today's Lunchtime News... PC maker and direct seller Gateway (NYSE: GTW) lost $3 3/8 to $79 1/8 today. The company announced plans to include a year of Internet access with systems bought for over $1,000 and the purchase of about a 20% stake in privately held NECX, an e-commerce company, for about $21 million... Immunex Corp. (Nasdaq: IMNX), which announced a 2-for-1 stock split last night, lost $12 1/16 to $146 1/2 today. The company's shares ran ahead $21 5/8 yesterday, grabbing about $10 in the last 15 minutes of the session; some analysts reportedly expected a 3-for-1 split.

Telecom equipment company Advanced Fibre Communications (Nasdaq: AFCI) frayed $1 7/16 to $8 1/8 today. According to Bloomberg, NationsBanc Montgomery Securities lowered its Q1 EPS estimate to $0.03 from $0.06 with overseas sales seen coming in lower than expected... Auto parts maker Aftermarket Technology Corp. (Nasdaq: ATAC) braked $2 1/8 to $4 3/4 after it said it expects to report full-year 1998 EPS of $0.50 before charges, well off the $0.81 estimate reported by First Call... Hotel operator Marriott International (NYSE: MAR) gave back $1 1/4 to $37 amid rumors that the company will buy Prime Hospitality Corp. (NYSE: PDQ). Prime's CFO said he wasn't aware of any such talks, but the stock advanced $5/8 to $10 1/4 nonetheless.

Bookseller Barnes & Noble (NYSE: BKS) shed another $1 3/16 to $30 (it gave back $4 9/16 yesterday) after saying it expects to report 1998 year-end EPS of $0.76 (excluding a $0.53 one-time gain) next month, $0.04 shy of the First Call mean estimate... Document processing company Xerox Corp. (NYSE: XRX) burned away $3 3/8 to $58 today. The company's stock split 2-for-1 after the market's close yesterday... Bar code scanning products maker Symbol Technologies (NYSE: SBL) reported Q4 EPS of $0.43, up from $0.33 and Wall Street's $0.42 consensus estimate. The shares, however, slid $5 3/4 to $54 3/8 today, as EPS was $0.39 after charges associated with a terminated acquisition.

Title insurance company Chicago Title (NYSE: CTZ) weakened $1 7/8 to $35 7/16 after announcing the purchase of Oak Harbor, Washington-based Island Title Co. Terms of the deal weren't available... Aircraft maker Boeing (NYSE: BA) moved back $1 3/4 to $35 5/8 following reports in The Wall Street Journal showing that a quarter of the $13 billion that the aerospace giant is investing in its product lines will produce no meaningful returns... Pet supply superstore PETsMART (Nasdaq: PETM) dropped $1 3/4 to $7 1/4 after BT Alex. Brown cut its rating on the stock to "buy" from "strong buy." Last night, the company reported Q4 EPS of $0.15, up from $0.02 last year but flat with market estimates.

Website developer and operator Telescan Inc. (Nasdaq: TSCN) fell $3 to $13 7/8 after it cancelled plans to spin off its non-financial services operations because of "consistent improvement in their operations and strategic value in the high-growth Internet industry." Q4 losses were $0.31 per share including a pre-tax write-down of the non-financial operations of $1.53 million and other charges... Timeshare operator Silverleaf Resorts (NYSE: SVR) dulled $2 1/16 to $8 after it said it will delay its Q4 and full-year 1998 earnings report for a week. It was expected today... Car-rental company Budget Group (NYSE: BD) skidded down $2 11/16 to $11 after reporting a Q4 loss of $1.28 per share before one-time items, compared to a $0.09 loss last year and Wall Street's estimated $0.90 loss.

Telecommunications and data communications products maker Teltrend Inc. (Nasdaq: TLTN) fell $4 5/8 to $19 1/2 despite reporting fiscal Q2 EPS of $0.18, up from $0.13 last year and $0.02 better than the five-analyst estimate provided by First Call. Stephens Inc. reportedly downgraded the stock to "outperform" from "buy" this morning... Computer reseller MicroAge (Nasdaq: MICA) fell $2 3/4 to $9 9/16 after CEO Jeffrey McKeever said the company expects fiscal Q2 EPS to come in between breakeven and $0.10, disappointing the $0.22 consensus estimate five analysts gave First Call... Enterprise software maker Brio Technology (Nasdaq: BRYO) lost $6 1/8 to $17 5/8 after Credit Suisse First Boston cut its rating on the stock to "buy" from "strong buy," spurred by Brio's acquisition of privately held SQRIBE Technologies, an enterprise reporting and enterprise information portal software company.

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Bluefly Passes GO, Investors Collect $200 Plus

Today, Bud Fox liked Bluefly (Nasdaq: BFLY). Shares of this new discount e-tailer (www.bluefly.com) of name-brand apparel and accessories returned briefly to the azure height of $15 7/8, last seen in late January, before closing at $12 13/16, up $2 9/16 for the day. Not bad considering the shares traded for less than $9 Monday and for less than $2 last summer.

The news today was that Bluefly has signed a marketing deal with the GO Network, the revamped Internet portal site run by Infoseek (Nasdaq: SEEK) and partly owned by Disney (NYSE: DIS), which has been promoting the site heavily on its ABC television network. Bluefly reportedly will be featured on the GO shopping page and will become one of two "Gold Merchants" promoted in the specific apparel & jewelry area. Terms of the deal were not disclosed but probably include some minimum payments by Bluefly plus some revenue sharing.

As e-commerce has exploded in recent months and the major Internet portals race to participate in this money-grab, Bluefly has made a name for itself by securing some prime real estate on these leading websites. The company's stock ran to a high of $23 1/4 in early December after it announced a co-branded version of its online store on Yahoo!'s (Nasdaq: YHOO) shopping site, launched November 17. Bluefly has formed similar "strategic marketing alliances" with @Home (Nasdaq: ATHM), Lycos (Nasdaq: LCOS), and America Online (NYSE: AOL), which features the company in its apparel area on its shopping channel. As Bluefly's executive VP Jonathan Morris said today in the press release, "Bluefly is committed to working with the best portal companies and securing key areas of online real estate in an effort to establish itself as the premier place to shop for name brand apparel, fashion accessories and house and home products at outlet store prices."

The Bluefly value proposition is pretty straightforward. The company wants to become the Web's brand-name apparel outlet store, offering deep discounts of 25% to 75% on end-of-season items and excess inventory from big name designers like Polo Ralph Lauren (NYSE: RL), Tommy Hilfiger (NYSE: TOM), Donna Karan (NYSE: DK), Prada, and Calvin Klein. While apparel retailers like the Gap (NYSE: GPS), J Crew, Federated Department Stores' (NYSE: FD) Macy's, and Intimate Brands' (NYSE: IBI) Victoria Secret have all had recent success selling clothes online, there's not yet any major player offering closeout prices on a wide assortment of leading brands. Bluefly wants to fill that niche.

And it could prove a healthy niche. According to Discount Store News, off-price retailers such as Loehmanns (Nasdaq: LOEH) and TJX Co.'s (NYSE: TJX) T.J. Maxx and Marshalls units sold $18.5 billion worth of goods in 1997, while factory outlet stores sold $8.3 billion worth of apparel and accessories. Such stores function both as alternative outlets for first-run goods as well as a cost-effective means for retailers to clear out unsold merchandise. From a customer's perspective, though, they're less than ideal. Getting to a factory outlet can be a trek since it's not likely to be near your local mall. Also, if you're like me, you can only stand to sift through so many bargain bins, finding mostly lime green shirts or super smalls and extra extra extra larges, before you give up.

Bluefly hopes to solve both of these problems by giving you access to discounted items without the hassle. Better yet, it aims to use data about your personal size and tastes to create what it calls "MyCatalog," a discount store specific to you. As its promotional copy reads, MyCatalog instantly delivers "a personalized, up-to-the-minute catalog of the things you like best and at the prices you want most -- 'printed' fresh every time you log on."

All of this sounds quite compelling. So it's no surprise the company has gotten some positive attention. On November 25, Red Herring's Peter Henig noted that research outfit Jupiter Communications expected online apparel sales to rise from $330 million in 1998 to $2.8 billion in 2002. "Even with the stock now trading at $10 per share, Bluefly's market cap is only $27 million. When was the last time you saw a valuation that low on a rising pure-play Internet stock?"

The stock also jumped last month after Ryan Jacob, portfolio manager of The Internet Fund (the top mutual fund performer of 1998, with a 196% return), posted on the fund's website that Bluefly was the only new entry among the fund's top 25 holdings. Last Sunday's New York Times Style section even gave Bluefly a favorable nod.

Still, executing on a good idea is ultimately far more difficult than finding one. In that regard, the jury is still out on Bluefly. On the positive side, CFO Patrick Barry, who joined the firm in July, was formerly CFO at Warner Music Enterprises and Controller of Book-of-the-Month Club, both direct response companies. Bluefly also recently added Martin Keane, formerly design director at online music vendor N2K (Nasdaq: NTKI). The company's board includes figures like Cris Popenoe, formerly president of Putnam New Media, an interactive media publisher, and Goldie Burns, NYU faculty member and head of New York governor Pataki's Task Force on New Media and the Internet.

However, trying to log onto its website today was, well, like trying to place an online stock order through E*Trade (Nasdaq: EGRP) or even Schwab (NYSE: SCH): frustrating and even impossible. I got just far enough to know I might as well turn off the computer and head to the nearest outlet store instead. Sure, today's publicity probably led to a spike in traffic, but getting the technology in place to handle site traffic is harder than it seems. Plus, Onsale (Nasdaq: ONSL) recently veered away from its focus on sales of closeout computer gear because it simply couldn't get enough merchandise to scale its business, especially in the heavy holiday buying season. Will Bluefly experience the same problem?

With Bluefly's short track record (the site launched September 8), it's hard to say much of anything about its actual business. As the company announced January 28, Q4 gross sales before returns and allowances topped $300,000, a tiny figure but "well ahead" of management's expectations. Its online store saw 664,230 unique visitors (average spending, then, was 50 cents a visitor), and the total number of registered users rose from 1,573 at the end of September to 26,048. The average visitor spent 11 minutes on the site and clicked 18 pages per visit. It's a start, right?

Though Bluefly seems like a start-up company, it isn't. Yet, there's little in its past to inspire real confidence. From 1991 until last summer, this company, formerly known at Pivot Rules, Inc. (old ticker: PVTR), was in the business of designing, sourcing, and marketing golf sportswear for men. Although this now discontinued operation saw sales rise from $8.6 million in FY96 to $10.7 million in FY97, net income dipped from $0.61 million to $0.09 million. The accumulated deficit stood at $0.38 million by the end of 1997. The business was going nowhere, so last May, the board established the Internet division and the company has completely refocused since then.

Also, founder Kenneth Seiff, 33 years old, has been Chair/CEO of the company since its inception. That means he oversaw the selection of GKN Securities as underwriter for the firm's May 1997 initial public offering. That New York investment bank is part of what used to be known as GKN Holdings but, last year, changed its name to Research Partners International (Nasdaq: RPII). The name change may have had something to do with the fact that back in January 1997, GKN was fined $725,0000 as part of a settlement with the Securities and Exchange Commission (SEC) and NASD Regulation (NASDR). GKN and 29 of its supervisors and brokers were also forced to repay a total of $1.4 million to some 1,300 investors "who were overcharged as the result of a two year-long program of excessive markups in eight securities" underwritten by GKN, according to an NASDR press release in August 1997. The NASD charged that GKN had "dominated and controlled the immediate after-market trading" in these securities from December 1993 through April 1996.

Small companies are often hard-pressed to find an underwriter, but Seiff must have known about GKN's history. Of course, what's past is not necessarily prologue. Yet, Bluefly will almost certainly be looking to raise more money in the next year or so. By recently calling for the redemption of outstanding warrants, the company did manage to raise some $10.2 million, trading warrants for common stock at $5 a share. However, that money probably won't last long given the need for heavy advertising and marketing to build a brand name. Still, even with the 4.85 million fully diluted shares now outstanding, according to CFO Barry, Bluefly's market cap is just $62.1 million. That's a lot for an outfit with virtually no sales and a spotty track record. But for an e-tailer building some brand recognition, it's low enough to make the Bluefly story worth following.

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