<THE EVENING NEWS>
Wednesday, April 7, 1999
MARKET CLOSE
DJIA           10085.31 +121.82     (+1.22%)
S&P 500         1326.89   +9.00     (+0.68%)
Nasdaq          2544.43  -18.74     (-0.73%)
Russell 2000     397.77   -3.31     (-0.83%)
30-Year Bond    96 9/32   +6/32  5.50 Yield

HEROES

Cosmetics and beauty products company Revlon (NYSE: REV) strutted $3 9/16 higher to $23 9/16 after saying it has hired Goldman Sachs and Lazard Freres to advise it on "strategic alternatives," including the possible sale of one or more of its business units. The company said that the proceeds from a sale, if one is to come about, would be used to pay down debt. Investors cheered the possibility of an improved financial condition at Revlon, whose free cash flow situation (defined here as earnings plus depreciation and amortization plus or minus investment) is going from bad to worse. For fiscal 1997, Dale Wettlaufer (TMF Ralegh) calculated that Revlon had a cash outflow of $28.5 million, or $101.5 million if an outflow simply labeled "other" is factored in. In 1998, the total outflow jumped to $135.3 million, or $206.7 million including the "other" item on the firm's cash flow statement.

Internet software developer Spyglass Inc. (Nasdaq: SPYG) sneaked ahead $4 3/4 to $13 5/8 after signing a three-year, $20 million licensing deal with software giant Microsoft (Nasdaq: MSFT). Spyglass will help develop and integrate multiple applications for Internet devices using Microsoft's Windows CE operating system. The deal is a big win for Spyglass, whose stock has been crunched for a 74% loss over the past four months. When combined with another $20 million deal with General Instrument (NYSE: GIC) signed last fall, today's agreement should provide the company with enough of a revenue boost to get it back into the earnings promised land. Pro-rating the Microsoft money over three years gives a $6.66 million revenue pop per year, which is equal to 57% of Spyglass's fiscal 1998 Internet technology revenues of $11.7 million and 32% of its total net revenues of $20.5 million.

QUICK TAKES: Internet service provider FlashNet Communications (Nasdaq: FLAS) streaked $2 3/4 higher to $43 1/2 after signing a co-branding alliance with Web portal Lycos (Nasdaq: LCOS) that will enable FlashNet customers to create a customized online start page using a template developed by the two companies... Web content integrator and aggregator InfoSpace.com (Nasdaq: INSP) gained $21 7/8 to $111 1/2 after setting a two-for-one stock split payable on May 4... Managed care software developer Health Risk Management (Nasdaq: HRMI) rose $1 to $8 3/4 after pre-announcing fiscal Q3 basic earnings of $0.22 per share, up from $0.01 per share a year ago, on a 203% year-on-year increase in gross revenues to $51.5 million.

Seagram (NYSE: VO) gained $4 1/16 to $59 after the media and spirits giant's Universal Music Group formed a joint venture with the BMG music unit of Germany's Bertelsmann to promote and sell music over the Internet. For more details on the deal, which was confirmed during a press conference this afternoon, see this morning's Breakfast With the Fool... Copper, aluminum, and fiber-optic cable and wire maker General Cable (NYSE: GCN) strung together a $2 13/16 gain to $12 5/16 after saying it has agreed to acquire the worldwide power cable and business cable systems assets of Britain's BICC PLC for about $440 million in cash... Aluminum producer Alcoa (NYSE: AA) gained $2 15/16 to $44 after reporting Q1 EPS of $0.60, down from last year's $0.62 but ahead of the First Call mean estimate of $0.54.

Generic drug maker Watson Pharmaceuticals (NYSE: WPI) rose $3 13/16 to $46 on news that it will be added to the Standard & Poor's 500 Index after the close of trading Friday, replacing Aeroquip-Vickers (NYSE: ANV), which is being acquired by Eaton Corp. (NYSE: ETN). Univision Communications (NYSE: UVN), which will take Watson's place in the S&P MidCap 400 Index, advanced $4 9/16 to $55 1/2... Discount broker Charles Schwab (NYSE: SCH) gained $8 3/4 to $116 after The Wall Street Journal's "Heard on the Street" column fueled speculation that the company might split its stock... Dallas-based home-equity lender Amresco (Nasdaq: AMMB) picked up $1 19/32 to $7 19/32 after Friedman, Billings, Ramsey raised its rating on the company to "buy" from "accumulate."

Mining and paper-making equipment distributor Harnischfeger Industries (NYSE: HPH) gained $1 11/16 to $7 5/8 after a major shareholder reported in a federal filing that the company had received a buyout offer from an unidentified firm at a premium to its share price... Online healthcare information provider Mediconsult.com (Nasdaq: MCNS) tacked on $4 9/16 to $17 5/8 after ING Baring Furman Selz started coverage of the company with a "strong buy" rating. The brokerage was an underwriter of a five-million-share secondary offering for the firm completed earlier this week... Digital subscriber line (DSL) online access firm Rhythms NetConnections (Nasdaq: RTHM) danced ahead $48 1/8 to $69 1/8 after selling 9.4 million shares in an initial public offering at a price of $21 per share. Fiber-optic network operator Qwest Communications (Nasdaq: QWST), which gained DSL connectivity in 31 major metropolitan markets today through a $15 million investment in Rhythms NetConnections, rose $5 1/4 to $87 7/16.

GOATS

If the old adage was "buy on the rumor, sell, then short on the news," shareholders of next-generation Internet video company FVC.COM (Nasdaq: FVCX) might not be feeling so blue today. FVC.COM stock was clubbed for a $10 7/16, or 60%, loss to $6 15/16 today, reversing yesterday's $4 7/16 gain. The briskly traded upward move came in advance of last night's announcement that first-quarter losses are expected to be between $0.20 and $0.22 per share, well short of First Call's $0.03 profit estimate. Investors may have looked for the company to issue its fourth consecutive quarterly upside earnings surprise; they didn't get the surprise they were looking for. The company blamed, among other things, a significant decline in business from Bay Networks -- down to about 25% in Q1 compared with approximately 43% in Q4 -- now that Bay, FVC.COM's largest customer over the last several years, is a part of Nortel Networks (NYSE: NT). However, CEO Rich Beyer believes the company can recoup the lost sales to Bay, as business with non-Nortel companies rose 25% year-over-year.

With the fledgling baseball season fresh in the minds of Americans, enterprise modeling and simulation technologies company Engineering Animation (Nasdaq: EAII) CEO Matthew Rizai got into the spirit of things by stepping up to the plate to take a fastball on the shoulder after his company issued an earnings warning for Q1. "We simply did not execute as well as expected," Rizai said in a statement last night. "In particular, we failed to close several significant deals that were essential for achieving our quarterly goals." The company's shares dropped $18 1/4, or 45.7%, to $21 11/16 after it said an anticipated 15% revenue shortfall is seen dragging Q1 EPS below Wall Street's $0.26 consensus estimate. Investors no doubt appreciated the candor but may also be reading some uncertainty into Rizai's comment that "we anticipate that these deals will be completed successfully.

QUICK CUTS: Enterprise network security and management software company Network Associates (Nasdaq: NETA) tumbled $5 15/16 to $16 today, adding to yesterday's $7 1/2 loss, after it was hit with an earnings warning virus. Head back to today's Lunchtime News for a closer examination... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) lost $12 3/16 to $110 13/16 after announcing plans to sell 4 million shares of company stock, nearly a 30% boost in the current outstanding, to fund capital expenditures... Shares of online services giant America Online (NYSE: AOL) lost $8 1/2 to $159 today as rumors that it will buy CBS Corp. (NYSE: CBS) continued to swirl.

Business-to-business communications company Check Point Software Technologies (Nasdaq: CHKP) slid $3 3/8 to $26 3/4 after ING Barings Furman Selz downgraded the stock to "hold" from "buy" on worries about Q1 EPS, cutting its Q1 estimate to $0.38 per share from $0.44, the market's mean projection... Interactive entertainment software developer Acclaim Entertainment (Nasdaq: AKLM) was beaten down $1 5/16 to $7 5/8 after reporting fiscal Q2 EPS of $0.21, flat with market projections... Automaker General Motors (NYSE: GM) lost $4 3/8 to $86 11/16 after reporting that March light vehicle sales fell 2.2% from last year's levels despite a 7.9% boost across the industry.

Internet portal Lycos (NYSE: LCOS) lost $10 11/16 to $98 1/8 after picking up $17 7/8 yesterday, reportedly on rumors that USA Networks (Nasdaq: USAI) will sweeten its offer for Lycos in an attempt to assuage renegade shareholder CMGI (Nasdaq: CMGI)... Telecom billing and customer service software provider Saville Systems PLC (Nasdaq: SAVLY) cooled $3 13/16 to $6 1/4 after saying it expects Q1 EPS to be between $0.05 and $0.09 when it reports earnings around April 27... Manufacturing, planning, and financial software systems developer Symix Systems (Nasdaq: SYMX) fell $3 to $7 after saying it expects fiscal Q3 EPS of between $0.09 and $0.11. Last year's figure was $0.09; Wall Street was looking for a $0.13 profit.

Telecom giant MCI WorldCom (Nasdaq: WCOM) tuned out $3 9/16 to $86 today, likely because of disfavor for the company's rumored acquisition of unprofitable wireless phone company Nextel Communications (Nasdaq: NXTL)... Cigarette maker Philip Morris (NYSE: MO) burned off $1 3/16 to $33 9/16 today. A state court judge in San Francisco cut in half a jury's $50 million award in punitive damages against a former smoker with inoperable cancer but upheld the February verdict... Analytic application software developer Hyperion Software Corp. (Nasdaq: HYSL) faded $1 3/32 to $11 13/16 after the company said it expects fiscal Q3 EPS to be "significantly below" analysts' estimates, although the company expects to show a profit.

Video teleconferencing equipment maker PictureTel Corp. (Nasdaq: PCTL) dimmed $1 13/16 to $4 3/4 after it said it expects to report a Q1 loss of $0.68 per share, well off First Call's $0.09 loss estimate... Banking company Hibernia Corp. (NYSE: HIB) chilled $15/16 to $11 1/2 following a report in The Wall Street Journal that raised questions about the quality of the company's loans... British publisher Reed International's (NYSE: RUK) American depositary shares lost $1 1/4 to $34 3/4 following the news that an eight-month search for a new CEO Reed Elsevier -- jointly owned by Reed and Elsevier NV (NYSE: ENL) -- will drag on after talks with the lead candidate collapsed. Elsevier slipped down $3/16 to $29 3/8.

Semiconductor optoelectronic integrated circuits and lasers company SDL Inc. (Nasdaq: SDLI), which cancelled a 1 million-share stock buyback plan announced in October, lost $1 1/4 to $80 15/16. No shares were repurchased under the plan... Contract offshore drilling company R&B Falcon (NYSE: FLC) gave away $7/8 to $6 5/8 after it said Steven Webster will step down as president and CEO on May 31. Chairman Paul Loyd Jr. will fill Webster's shoes... Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC), which announced nearly $8 million in software and services orders from two companies, nevertheless lost $1 3/4 to $16 1/2 today.

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

ZDNet Adds Zip to Ziff

When I last looked at Ziff-Davis (NYSE: ZD), a leading publisher of tech-oriented magazines and host of the popular Comdex trade shows, the stock had been pummeled to a lowly $4 a share. Just six months later, it sits at $20 1/16, up 400% but still well off its high of $29 hit just last Tuesday.

Arguably, Ziff-Davis was simply cheap back in October, with its Internet assets valued at close to nothing. So as the overall market recovered from panic, this stock had even further to climb than most. Moreover, Ziff depends on advertising spending by PC companies. As it became clear that the U.S. economy would not fall into a recession that would exacerbate global troubles for tech companies, the overall outlook for ad spending brightened.

On the other hand, Ziff's recent results have hardly been the stuff of five-baggers. For the December period, revenues declined by 6.3% year-over-year to $378 million. Even backing out a Q4 FY98 restructuring charge of $52 million, pre-tax income fell 6.7% to $68 million. Excluding the charge, net earnings per share sank to $0.40 from $0.73 a year ago. Media companies are often valued based on their EBITDA (earnings before interest, taxes, depreciation, and amortization), but Ziff's EBITDA plunged 13% to $138 million in Q4.

The reasonable conclusion, then, is that most of Ziff's stellar performance since October can be chalked up to one thing: ZDNet, the firm's Internet unit. Last Wednesday marked the introduction of a tracking stock for ZDNet (NYSE: ZDZ), with 10 million shares sold to the public at an IPO price of $19. The stock quickly doubled, topping out at $55 1/2 on Monday before closing today at $39. Though ZDNet's results will still be consolidated with those of the parent company, which retains an 84% ownership stake in ZDNet, the new stock is designed to track this separate unit, allowing investors to participate more directly in its success and failure. (Click here for more on tracking stocks.).

What's striking is that ZDNet's market cap is now greater than that of Ziff-Davis, despite the latter's 400% appreciation since October. Indeed, the parent's substantial remaining interest in ZDNet is alone worth more than Ziff's entire market cap. At least in theory, that means that for a fixed amount of money, investors can buy ZDNet stock directly -- or, they can purchase Ziff-Davis shares and get a similar stake in ZDNet plus the rest of the Ziff-Davis empire for less than nothing. Consider these numbers.


ZDZ shares outstanding: 71.5 million*
Value @ $39: $2,789 million
Shares of ZDZ owned by ZD: 61.5 million
Value @ $39: $2,399 million
Shares of ZD outstanding: 103.1 million
Value @ $20 1/16: $2,068 million

*(excludes 10 million shares that may be purchased for $4.29 per share upon exercise of options).

What's doubly striking, of course, is the kind of Internet premium afforded ZDNet. This Internet unit consists of some 60 interconnected sites devoted to content about technology products and services, with over 1,200 news stories a month. It includes content from the parent company's publications, such as PC Magazine, the nation's most widely circulated business magazine. ZDNet had 1.84 million registered community members at year end and 6.4 million average daily page views in the fourth quarter. Media Metrix ranked ZDnet the 14th most popular Web site, ahead of rival CNET (Nasdaq: CNET), which came in 16th. Nonetheless, ZDNet's pro forma FY98 results look like this:


Revenue $56.1 million
Pre-tax operating income ($7.5 million)*
Net profit $8.6 million)
EPS ($0.12)
EBITDA ($0.9 million)*

*(excludes stock-based compensation)

Although ZDNet's revenue rose 74% last year, its results don't begin to compare with the parent's. Consider Ziff-Davis's pro forma FY98 numbers, excluding ZDNet.


Revenue $1,052.7 million
Pre-tax operating income $38.6 million
Net profit ($46.5 million)*
EPS ($0.46)*
EBITDA $241.0 million

*(excludes restructuring charge)

Of course, the Internet business is growing rapidly while Ziff-Davis's regular publishing business has been weak. Moreover, Ziff-Davis carries a whopping $1,393 million in debt after the offering and just $32 million in cash. Add $1,361 million (debt net of cash) to the $2,068 million market cap, and Ziff-Davis sports an enterprise value of $3,429 million. So its ZDNet stake really accounts for just 70% of its overall value.

In addition, ZDNet's rich price partly reflects pure supply and demand dynamics. It's just unlikely the stock would be hanging around $39 if Ziff tried to liquidate its stake by spinning off ZDNet to shareowners who could trade it freely. That's why many investors discount the value of such ownership positions, often using a multiple of about 0.6 to value them. So in this case, ZDNet's imbedded $2.4 billion value for Ziff would translate into an asset worth $1.44 billion ($2.4 billion x 0.6), valuing the rest of Ziff at about $2 billion. Given that Ziff had $1.5 billion in debt net of cash as of October, when it traded for $4 a share (market cap of about $400 million), one could argue that Ziff-Davis now trades exactly where it should given the price of ZDNet. That is, minus ZDNet, it trades exactly where it did in October, when few were assigning any value at all to the Internet unit.

Clearly, though, Ziff shareowners have enjoyed this little effort to maximize shareowner value because it's worked exceedingly well given the market's continued love affair with Internet issues. The share price appreciation is obvious, but consider the other accomplishments. Before subtracting underwriting expenses, the offering raised $161.5 million for Ziff and $28.5 million for ZDNet. Ziff will use the money to pay down some debt. For comparison, in order to raise a similar amount from the sale of Ziff-Davis stock, the company would have been forced to issue 40 million shares at the October low, or about 40% of the total then outstanding. Meanwhile, ZDNet now has capital to grow its business. It also has a premium currency for dealmaking.

In addition, Ziff now enjoys a kind of long-term option on its Internet unit. The prospectus explains the complex terms of the arrangement. But under different conditions, Ziff can exchange Ziff-Davis stock for ZDNet stock at a premium of just 15%. Or, it can issue ZDNet stock in exchange for Ziff-Davis stock at a 15% premium. Or, it could exchange the stock on a value for value basis. While ZDNet investors today literally own a stake in the parent company, this exchange option makes that doubly true. Though this relationship could ultimately dampen ZDNet's ability to fly ever higher on the wings of Internet valuations, it ensures that Ziff-Davis can operate using whichever currency ultimately proves more valuable.

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