Tuesday, March 2, 1999
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Large appliances maker Whirlpool Corp. (NYSE: WHR) spun ahead $2 3/4 to $43 3/4 after saying it expects double-digit operating earnings growth for the first quarter and for the year, brightening the company's near-term outlook. In January, Whirlpool said its Q1 net earnings could fall below last year's levels due to the devaluation of the Brazilian real. However, the firm's business in Brazil is not looking quite as bad as first expected, with its Multibras home appliance unit performing "relatively well." Whirlpool has also decided to hang onto its compressor manufacturing subsidiary in Brazil rather than follow '70s rocker Steve Miller's advice to "take the money and run." The improving Brazilian outlook alleviates some near-term uncertainty for Whirlpool, which derives about 15% of its annual sales from that country. Relieved, the company announced it will buy back up to $250 million in stock.

After a run-up of around 40% in the last two weeks, data networking firm Xylan (Nasdaq: XYLN) gained $8 13/16 to $35 3/4 today on the heels of the announcement that it will be acquired by French telecommunications giant Alcatel SA (NYSE: ALA) for $37 a share. The $1.9 billion deal comes in at 5 times Xylan's trailing sales, roughly 48 times trailing earnings (35 times forward numbers), and around 34 times trailing cash flow. The deal is hardly a surprise considering Alcatel's oft-stated desire to fill in all the gaps in its product portfolio. In fact, a deal to acquire a remote access equipment provider is also reportedly in the works. With Xylan in tow, Alcatel now appears to be leading the race to become Europe's premier one-stop shopping center for "data solutions." For more details, see today's Fool Plate Special.

Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) blasted ahead $19 1/4 to $79 3/4 after saying strong demand for its Star S2 excimer laser system will lead to Q1 EPS between $0.51 and $0.55, well ahead of the $0.36 the company said analysts had been expecting. BancBoston Robertson Stephens raised its opinion of the firm to "buy" from "long-term attractive" and boosted its fiscal 1999 revenue projection 32% to $218 million. The brokerage is gauging that 600,000 procedures will be performed with VISX systems this year, although that number could end up being a bit myopic itself. While the VISX website pegs the Star S2's list price at $525,000 a pop, incremental revenue growth is really driven by the $260 in licensing and access card fees the firm charges for each procedure. Under this pricing structure, a slight 1% positive variation in Robbie Stephens' procedures estimate will result in a boost to VISX's revenues for this year to the tune of $1.56 million.

QUICK TAKES: Several airline stocks were cleared for takeoff today after Goldman Sachs raised its ratings on three of the industry's big players. American Airlines parent AMR Corp. (NYSE: AMR) gained $1 3/4 to $57 7/8, United Airlines' big daddy UAL Corp. (NYSE: UAL) was lifted $3 3/8 to $65 3/8, and Continental Airlines (NYSE: CAI.B) added $15/16 to $37 thanks to upgrades. Tagging along for the ride, US Airways Group (NYSE: U) advanced $2 5/16 to $51 1/4, Southwest Airlines (NYSE: LUV) moved up $1 1/4 to $31 3/8, and Alaska Air (NYSE: ALK) rose $2 1/4 to $53 1/16... Cable-based Internet services provider @Home Network (Nasdaq: ATHM) moved up $8 7/16 to $115 9/16 after setting a two-for-one stock split. Credit Suisse First Boston started coverage of the firm with a "buy" rating today, estimating the company's fiscal 1999 loss at $0.03 per share.

Computer telephony systems components maker Dialogic Corp. (Nasdaq: DLGC) dialed up a $3 1/8 gain to $34 after Microsoft (Nasdaq: MSFT) agreed to make a $24.2 million equity investment in the company, which works out to a 5% stake. Microsoft also agreed to license Dialogic's CT Media server software in exchange for $20 million in payments over the next four years... Mining and lumber holding company Maxxam Inc. (AMEX: MXM) logged a $9 13/16 gain to $57 11/16 after its Pacific Lumber Co. subsidiary reached a last-minute agreement with federal and state agencies to preserve thousands of acres of old-growth redwood forests in California. Maxxam will reportedly receive about $480 million for its logging rights.

Brand name apparel manufacturer Warnaco Group (NYSE: WAC) climbed $1 3/4 to $22 1/2 after reporting Q4 EPS of $0.78, which was in line with the Zacks mean estimate. The company also said it has acquired the distribution rights for Calvin Klein Jeanswear in Canada and a 70% stake in U.K.-based perfume and soap retailer Penhaligon's... Speech recognition technologies developer Lernout & Hauspie Speech Products (Nasdaq: LHSPF) was lifted $2 15/16 to $30 1/2 on news that founders Jo Lernout and Pol Hauspie plan to buy up to an additional $40 million of the firm's stock... Call center automation systems designer InterVoice (Nasdaq: INTV) gained $2 1/16 to $13 1/2 after pre-announcing fiscal Q4 (ended Feb. 28) EPS between $0.24 and $0.26, topping the $0.19 currently expected by the four analysts surveyed by Zacks.

Office products retailer OfficeMax (NYSE: OMX) added $13/16 to $8 11/16 after posting Q4 EPS of $0.36 (before charges), a penny ahead of the First Call mean estimate. The company also said it will restart its $200 million share repurchase plan, which had been halted last year... Business-to-business e-commerce software provider Sterling Commerce (NYSE: SE) picked up $1 13/16 to $29 1/16 after announcing a 5 million share repurchase plan last night... Radio station operator Citadel Communications Corp. (Nasdaq: CITC) gained $3 1/8 to $25 7/8 after receiving upgrades from Prudential Securities and First Union Capital Markets.

Enterprise network security products developer Pilot Network Services (Nasdaq: PILT) rose $13/16 to $8 11/16 after announcing a high-security wide access network (WAN)-to-Internet Virtual Private Network services provider partnership with router maker Cisco Systems (Nasdaq: CSCO)... Motorcoach and airport shuttle services provider Coach USA (NYSE: CUI) motored ahead $3 to $28 after reporting Q4 EPS of $0.56 (before extraordinary items), which was in line with the Zacks mean estimate... BJ's Wholesale Club (NYSE: BJ) rose $4 to $47 11/16 after posting Q4 EPS of $0.50, up from $0.43 last year and $0.03 ahead of the First Call mean estimate... Dairy products distributor Suiza Foods (NYSE: SZA) moo-ved up $1 7/8 to $39 13/16 after Goldman Sachs started coverage of the firm by placing it on its "recommend list."


Iridium World Communications (Nasdaq: IRID) may have stumbled in the race with Globalstar Telecommunications (Nasdaq: GSTRF) to launch a global satellite-based wireless telecommunications service. Iridium's shares fell $2 13/16 to $21 9/16 after it said delays to the rollout of global service are likely to pull the company short of its first-quarter target numbers. It confessed that changes to the subscriber and revenue targets for the company's $800 million credit facility are likely needed. Iridium maintains that the delays in its subscriber ramp-up aren't indicative of flagging market demand but of distribution problems. Iridium has had difficulty getting the proper phones -- the launch of Kyocera Corp.'s hand-held phones was delayed almost three months -- pagers, and fully trained salespeople. As noted by the Fool's Alex Schay in a column last month, Iridium expects 500,000 subscribers by the end of this year, and its satellites, unlike Globalstar's, are already in place. Iridium changed its ticker symbol to IRID from IRIDF after the market's close yesterday.

Dutch enterprise software company Baan (Nasdaq: BAANF) was dumped for $15/16 to $8 5/16 after announcing a fourth-quarter net loss of $1.45 per share, well off the $0.54 per share loss estimate provided by First Call. The company has concerns about slowing market conditions in the coming year and "expects that it will continue to be negatively impacted by these trends during 1999." Market conditions are a common rallying cry among software executives in down times -- competitor PeopleSoft (Nasdaq: PSFT) issued similar words of caution when it reported year-end results in late January -- particularly as enterprise software companies have regularly bemoaned their customers' Year 2000 worries and economic uncertainties that have slowed spending. Baan has completed a restructuring that represents "significant steps to solidify our cash position and improve the predictability of our business model," said Chairman and CEO Tom Tinsley.

QUICK CUTS: Data networking firm 3Com Corp. (Nasdaq: COMS) dropped $3 11/16 to $27 after Merrill Lynch's Joseph Bellace cut his fiscal Q3 EPS estimate to between $0.28 and $0.32 from the market's $0.36 consensus. Trading was halted after the bell, at which point the company said EPS is expected to be even worse at $0.23... PC direct seller Micron Electronics (Nasdaq: MUEI) dropped $2 5/8 to $11 13/16 after warning that its fiscal second quarter (ending March 4) sales will drop 6% to 9% from the $403.5 million it reported in the first quarter. While overall gross margins will be flat compared with the previous quarter, PC gross margins are projected to fall about 1 percentage point from 15% in Q1... Chip giant Intel (NYSE: INTC) was sliced for a loss of $7 1/4 to $109 13/16 after a NationsBank Montgomery Securities analyst cut his rating on the stock to "hold" from "buy" on concerns of fading PC demand.

Shares of the Boston Celtics (NYSE: BOS) bricked today, missing $1 15/16 to $14 7/16. Majority owner Castle Creek Partners' $17 per unit tender offer for 16% percent of the team's outstanding limited partnership units expired yesterday... International long-distance phone service provider Star Telecommunications (Nasdaq: STRX) dimmed $1 9/16 to $10 13/16 today. Star said Q4 EPS was $0.10, up from $0.06 last year and a penny better than estimates... Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC) gave up $7/8 to end at $14 7/16 after closing the acquisition of Division Group PLC, a British developer of product data visualization, simulation, and integration tools.

Women's apparel designer Jones Apparel Group (NYSE: JNY) frayed $1 3/8 to $25 15/16 after CNBC reported rumors that the company might buy Nine West Group (NYSE: NIN) in a stock swap valuing Nine West Group at $27 per share, about a 19% premium over yesterday's closing price. Nine West's shares were essentially flat despite trading more than twice their 30-day average volume... U.S. oil power Texaco (NYSE: TX) leaked $1 1/16 to $45 3/8. The company filed with the SEC to increase the number of authorized common shares to 850 million from 700 million. The company halted its share buyback program in September, according to Reuters.

Network integrator Pomeroy Computer Resources (Nasdaq: PMRY) lost $1 5/8 to $20 11/16. The company announced a three-year contract worth approximately $75 million to provide computer, software, and peripheral procurement and support services to consumer products giant Procter & Gamble (NYSE: PG)... Performance Technologies (Nasdaq: PTIX), which makes communications, networking, and data storage interface systems products, slid $3/8 to $11 3/8 despite turning in Q4 EPS of $0.26, better than last year's $0.18 and First Call's three-analyst $0.22 consensus estimate... Drug developer Immune Response Corp. (Nasdaq: IMNR), which appointed Rand Mulford CFO and senior vice president today, shed $11/16 to $8. Mulford had been president and CEO of San Diego's World Blood Inc.

Swimwear designer and marketer Sirena Apparel Group (Nasdaq: SIRN), which announced plans for an online store in Yahoo!'s (Nasdaq: YHOO) shopping area, dried up $1 1/16 to $5 9/16 today... Medical supplies distributor PSS World Medical (Nasdaq: PSSI), downgraded to "hold" from "buy" by Needham & Co., fell $5/8 to $10 3/4... Information technology education centers operator Computer Learning Centers (Nasdaq: CLCX) lost $3/4 to $5 7/8 today. The company added $2 5/16 yesterday after Illinois' superintendent of education allowed the company's Schaumburg operation to resume normal operations, canceling a December cease-and-desist order.

Biopharmaceutical company Hollis-Eden Pharmaceuticals (Nasdaq: HEPH) extended yesterday's losses, dropping $3 to $15 3/4. The stock fell $2 5/8 yesterday after President and Vice Chairman Terren Peizer resigned... Natural gas pipelines and fiber optic network operator Williams Cos. (NYSE: WMB), downgraded to "hold" from "accumulate" by Prudential Securities, lost $1 15/16 to $33 5/8. The stock shed $1 7/16 yesterday after a review of the company's energy marketing and trading unit resulted in a reduction of fiscal 1998 EPS to $0.28 per share from the $0.31 reported last month... Disk drive maker Quantum Corp. (Nasdaq: QNTM) spit out $1 1/8 to $18 7/16 after recording a gain of $3 1/8 yesterday on news that it plans to enter the network storage device market later this year.

An Investment Opinion
by Warren Gump

Saving Patriot an Expensive Endeavor

Patriot American Hospitality (NYSE: PAH), the once high-flying paired-share hotel Real Estate Investment Trust (REIT) that almost crashed into bankruptcy, yesterday announced a definitive agreement for a $1 billion equity infusion that will resolve its current liquidity crisis. This agreement means that management can now once again focus on operating and building the company's core Wyndham hotel brand without worrying about repaying its debt. To obtain this peace of mind, however, current shareholders will see their ownership stake diminished substantially, with the new investors initially owning about 29% of the company. An abridged version of the Patriot story follows.

In 1997, the company paid around $195 million to obtain the tax-advantaged paired-share REIT structure, which analysts thought would dominate the industry. Only five of these structures existed and no more could be created because of changes in the tax law. To reap the benefits of having this structure, Patriot and the other paired-share companies went on an acquisition binge. Their stocks soared throughout 1997 as strong underlying hotel fundamentals and an influx of capital boosted prices.

These stocks began turning in late 1997, however, at the pinnacle of this acquisition spree. Patriot had just agreed to acquire Interstate Hotels, a major hotel owner and manager. Starwood Lodging (NYSE: HOT), another paired-share REIT, had finalized an agreement to acquire ITT (owner of Sheraton and other brands) after a bitter battle with Hilton Hotels (NYSE: HLT). These two substantial acquisitions raised the ire of non-paired-share competitors. They lobbied Congress and the president, complaining that the paired-share companies had an unfair tax advantage. As rumors of potential legislation spread, investors shied away from the stocks, fearful that future growth would slow. In early 1998, the president proposed legislation that would limit the benefits of the paired-share structure, which Congress passed in the middle of 1998.

To fund its acquisition spree, Patriot took on a good deal of debt, much of it short term. Of the company's expanded $2.7 billion credit facility used to complete the Interstate transaction, $750 million was due within the first year and another $450 million was due within the second year. At the time this facility was entered, Patriot intended to float a longer term debt offering to pay off the short-term maturities. In fact, it even entered into several treasury lock transactions to protect itself against rising interest rates.

Another financing mechanism used by Patriot was an "equity forward," where the company borrowed money with shares of its own stock as collateral. If its stock price rose, it would pay off the debt with stock (obtaining the benefit of the higher stock price). If the stock price fell, the company intended to repay the forward with borrowing from its line of credit or from a long-term debt issuance. Management (as well as many investors and analysts) were anticipating great performance for the company and expected the stock price to rise.

Needless to say, the rosy scenario expected by analysts and investors didn't pan out. Several combined events engaged the emergency brakes on the Patriot train. The governmental restrictions on the future use of the paired-share structure hindered prospects for growth via acquisition and turned investment sentiment away from the paired-share REIT stocks. An agreement to settle a lawsuit with Marriott over Interstate reduced the benefit Patriot would realize from that transaction. On top of these issues, the severe market slump between August and October closed the door to the fresh capital that the company so desperately needed.

Patriot's capital structure, however, was the devastating factor. Having significant debt and forward equity maturities when the company had no cash and extremely limited access to capital crippled the company. It was at the mercy of bankers and scavengers interested in picking up specific assets at fire-sale prices. After months of negotiations, the company settled on an agreement that will preserve Patriot's assets, but cost current shareholders at least 29% of the company.

Patriot is actually fortunate to have found an investor group willing to pony up $1 billion. Right now, only limited capital is being allocated to the lodging sector. I believe the willingness of these investors to team up with Patriot is indicative of the high quality asset pool the company has accumulated over the past couple of years. In addition, the company has a strong operating management team led my just-promoted CEO Jim Carreker. (Former CEO Paul Nussbaum, the dealmaker who assembled all of the pieces of Patriot, resigned yesterday.)

This current deal, while dilutive to shareholders, is much preferable to the alternatives. The most discussed alternative for Patriot was a substantial asset sale to Hilton. In essence, Hilton would have stripped Patriot of some of its key properties, including flagship resorts and difficult-to-build urban hotels. Taking these assets out of the Wyndham system would have weakened, if not destroyed, Patriot's objective to build a preeminent nationwide brand over the next few years. Another alternative was settling the equity forwards with common stock, flooding the market when nobody wanted to buy. And the least appealing option was bankruptcy.

Although the company is in better shape than it was, the immediate future is not necessarily going to be rosy for Patriot stock. Investors have been burned by the company and will be leery until it demonstrates that its strategies are working. Shareholders holding the stock because of its high dividend and REIT status will pull out since the company is planning to convert to a traditional corporation and significantly reduce, if not eliminate, its dividend. In addition, the company will still have substantial leverage, although there won't be significant maturities for five years.

From an operational perspective, however, the Patriot management team can now focus on what it does best: increasing the value of its hotel brands. It can spend time integrating the various operations it has acquired over the past two years. One of the highlights expected later this year will be the launch of a new guest loyalty program. In addition, the company can continue expanding its distribution by adding new management contracts and franchise agreements. With a focus on operations rather than debt restructuring, the company should remain an important player in the lodging industry.

The most valuable investing lesson I learned from the Patriot fiasco is to look not only at debt/equity ratios, but also at the debt maturities of highly leveraged companies. If Patriot didn't have substantial principal payments due over the next year, it wouldn't have faced such a dire predicament -- it would have had more time to restructure debt and divest non-strategic assets. Although few people expected Patriot to face problems refinancing its credit facilities in late 1997, creditor perspectives can change on a dime. Investors in companies with substantial short-term debt maturities should be aware of this risk and the high toll extracted by a liquidity crisis.

For more on Patriot and paired-share REITs, check out last December's Daily Trouble on Patriot, or post your comments and questions on the FOTH message board.


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