Wednesday, June 17, 1998
DJIA             8829.46   +164.17      (+1.89%) 
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 Nasdaq           1776.40    +23.28      (+1.33%) 
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 30-Year Bond   105 16/32   -1 9/32  5.74% Yield 


Internet services company America Online (NYSE: AOL) jumped $4 7/8 to $93 7/8 after reportedly saying "no thanks" to a merger offer from long-distance phone giant AT&T (NYSE: T). A source told Britain's Financial Times that AT&T was ready to pay "comfortably above" AOL's present market capitalization of $19 billion. The news prompted investors to take another look at the usual Internet suspects, as maybe this World Wide Web stuff is for real. Amazon.com (Nasdaq: AMZN) gained $5 3/8 to $79, Yahoo! (Nasdaq: YHOO) picked up $8 11/16 to $130 5/8, Excite (Nasdaq: XCIT) rose $8 13/16 to $76 1/8, and Lycos (Nasdaq: LCOS) moved up $2 3/4 to $59 1/2. N2K Inc. (Nasdaq: NTKI) rose $2 11/16 to $17 7/16, CNET (Nasdaq: CNWK) added $10 1/2 to $56, and Onsale (Nasdaq: ONSL) moved up $2 3/8 to $24 1/2.

Shares of several large banks and financial services companies moved higher today as Federal Reserve Board Chairman Alan Greenspan urged Congress to quickly pass landmark banking reform legislation that would update the Depression-era laws currently used to regulate financial services in the U.S. Greenspan, the country's top banking regulator, told the Senate Banking Committee today that he would like to see modernization "as soon as feasible." Merrill Lynch (NYSE: MER) rose $4 to $89, Travelers Group (NYSE: TRV) tacked on $2 to $62, and Lehman Brothers (NYSE: LEH) advanced $3 11/16 to $75 1/2. Chase Manhattan (NYSE: CMB) gained $1 7/8 to $69 5/8, Citicorp (NYSE: CCI) added $5 3/4 to $152, Bankers Trust (NYSE: BT) moved up $4 1/8 to $114 1/8, and Norwest Corp. (NYSE: NOB) climbed $2 5/16 to $77 9/16.

Inhale Therapeutic Systems (Nasdaq: INHL) picked up $3 1/2 to $31 1/4 a day after saying Phase IIb trials of its inhaled powder-form of insulin resulted in blood glucose control levels comparable to traditional insulin injections. The firm added that the 121 patient trial group "significantly favored" inhaling insulin instead of receiving injections. Eli Lilly & Co. (NYSE: LLY) and Denmark's Novo-Nordisk (NYSE: NVO), which is also working on inhalable insulin with drug delivery systems developer Aradigm Corp. (Nasdaq: ARDM), currently dominate the $3 billion to $4 billion worldwide insulin market. Inhale Therapeutics said it will conduct more trials of the product with marketing partner Pfizer (NYSE: PFE) in November. Diabetics interested in participating in the trials can receive more information by calling (800) 438-1985.

QUICK TAKES: Coca-Cola Co. (NYSE: KO) added $1 5/16 to $80 5/16 after the carbonated beverage maker said new improvements to the packaging of its juices, sports drinks, and iced tea lines are resulting in higher sales of the products... Copier maker Xerox Corp. (Nasdaq: XRX) climbed $4 1/4to $95 9/16 after CIBC Oppenheimer reiterated its "strong buy" rating on the stock... Telecommunications services company MCI Communications (Nasdaq: MCIC) climbed $3 3/8 to $54 3/4 after the Washington Post reported that the company and merger partner WorldCom (Nasdaq: WCOM) expect the European Union will approve their proposed combination as early as Friday. WorldCom gained $1 13/16 to $45 13/16... Credit card, travel, and financial services company American Express Co. (NYSE: AXP) charged ahead $3 9/16 to $104 15/16 after agreeing to buy France's largest travel agency, Havas Voyages, from French publishing and media giant Havas S.A. in a deal valued at about $167 million.

Office supplies retailer Staples (NYSE: SPLS) picked up $1 7/8 to $29 after Standard & Poor's raised the company's debt ratings yesterday and removed it from CreditWatch now that the firm's outlook is "stable"... Varco International (NYSE: VRC) rose $1 to $20 7/16 after Stephens Inc. upgraded the oil drilling tools maker to "outperform" from "neutral"... Electronic scoreboards maker Daktronics (Nasdaq: DAKT) advanced $1 15/16 to $9 7/8 after reporting fiscal Q4 EPS of $0.37, more than triple the $0.12 earned a year ago... Harman International Industries (NYSE: HAR), maker of Infinity and JBL audio equipment, rose $2 to $39 after announcing plans to buy back up to 1.5 million of its outstanding shares over the next 12 months... Biotechnology firm OXiGENE Inc. (Nasdaq: OXGN) jumped $2 11/16 to $13 3/16 after saying preclinical studies of its Combretastatin A4 drug "significantly enhanced" cancerous tumor response in mice when combined with standard radiation and chemotherapy treatments.

Commercial and military electronics maker Raytheon Co. (NYSE: RTN.B) rose $2 3/16 to $54 3/16 after winning a $141 million contract from the German Air Force to upgrade ground equipment for its Patriot missile air defense systems. Raytheon also named former AlliedSignal Corp. (NYSE: ALD) vice chairman Daniel Burnham its new president and COO... Swedish telecommunications equipment maker Ericsson AB (Nasdaq: ERICY) picked up $1 1/16 to $27 7/16 on market rumors it may make a bid for networking products company Ascend Communications (Nasdaq: ASND)... Online discount broker E*Trade Group (Nasdaq: EGRP) rose $1 9/32 to $22 3/16 after being chosen as a new addition to the Standard & Poor's SmallCap 600 index... Internet and client/server application software developer Progress Software Corp. (Nasdaq: PRGS) added $9 to $41 1/4 after reporting fiscal Q2 EPS of $0.36, beating the Street's estimate by $0.06. The firm also announced a three-for-two stock split payable July 13.

Wireless communications services provider Western Wireless Corp. (Nasdaq: WWCA) gained $1 13/32 to $17 29/32 after Lehman Brothers raised its rating on the company to "buy" from "outperform"... Offshore contract oil driller R&B Falcon Corp. (NYSE: FLC) moved up $1 7/8 to $23 5/8 after Credit Suisse First Boston upgraded the company to "strong buy" from "buy"... Rent-to-own electronics and appliance store operator Renters Choice (Nasdaq: RCII) tacked on $5 7/16 to $31 1/2 after agreeing to buy the 1,400 rent-to-own units operated by Thorn Americas Inc., a subsidiary of Thorn PLC (Nasdaq: THRNY), for about $900 million in cash. Thorn rose $1 3/8 to $15... Software.net Corp. (Nasdaq: SWNT) rose $4 1/4 to $13 1/4 after the online marketer of computer software sold 5 million shares in an initial public offering today at a price of $9 per share... MedImmune (Nasdaq: MEDI) advanced $5 1/2 to $56 1/4 after BancAmerica Robertson Stephens upgraded the biotechnology company to "strong buy" from "buy."

Network Solutions (Nasdaq: NSOL) climbed $2 1/2 to $39 1/2 after Prudential Securities started coverage of the registrar of Internet domain names with a "buy" rating... Internet marketing firm THINK New Ideas (Nasdaq: THNK) tacked on $3 5/8 to $25 5/8 after being hired by Time Warner's (NYSE: TWX) Turner Broadcasting System to help develop a new corporate Intranet for the unit... PSS World Medical (Nasdaq: PSSI) gained $1 1/2 to $15 after BT Alex. Brown upgraded the distributor of medical supplies and equipment to "buy" from "market perform"... Women's apparel designer and retailer bebe stores (Nasdaq: BEBE) gained $2 3/16 to $13 3/16 after selling 2.5 million shares in an initial public offering at a price of $11 per share.


Computer and game graphics accelerator company 3Dfx Interactive (Nasdaq: TDFX) plummeted $3 9/16 to $18 on no news, although small firm Fahnestock & Co. started coverage of the company with a "buy" rating and a target price of $40. 3Dfx told us that it has no idea why the stock is moving because it has made no announcements regarding earnings or any other matter. "We're kind of baffled," said company spokesman Steve Schick, who added that the rumors circulating on the Internet message boards regarding statements made by the company's CEO or CFO are completely unfounded.

Grand Rapids, Michigan-based office furniture maker Steelcase (NYSE: SCS) sank $4 1/8 to $23 3/8 in heavy trading after reporting first quarter earnings in line with analysts' estimates and explaining that delayed orders by some of its major customers affected results. The company's Q1 earnings increased to $0.35 a share from $0.30 a year ago. The company said it got off to a "soft start" for its fiscal year because customers have postponed major account buying until the second half of its fiscal year. Steelcase is now trading below its initial public offering price -- it made its trading debut on the New York Stock Exchange in February at $28 a share.

Electrical and industrial equipment manufacturer Raychem Corp. (NYSE: RYC) lost $1 9/16 to $32 3/16 after announcing that Q4 earnings will be 20% to 25% lower (before charges) than previous estimates due to a continuing downward sales trend in Asia and slowing sales within the electronics industry. This will be the third consecutive quarter that Raychem will report lower-than-anticipated earnings. Prudential downgraded the company to "hold" from "buy." Raychem expects lower sales of its PolySwitch devices, continued weakness in its heat tracing and copper cable accessories businesses, and slower sales in its access network electronics business. The end result likely will be a 5% drop in revenues (in constant currency terms). The company expects 7% sales growth (again in constant currency terms) this year and 10% in 1999.

QUICK CUTS: Intel (Nasdaq: INTC) was trimmed $9/16 to $69 1/4 after Morgan Stanley Dean Witter lowered its 1998 EPS estimate for the Pentium chip maker to $3 from $3.25 and its 1999 estimate to $3.80 from $4.25 on concern over weak demand for microprocessors and aggressive price cuts... Hewlett-Packard (NYSE: HWP) lost $13/16 to $58 5/8 after Merrill Lynch cut its short-term rating on the maker of printers, workstations, PCs, and medical and industrial metrology equipment to "neutral" from "accumulate" and its long-term rating to "accumulate" from "buy"... Business and consumer services company Cendant Corp. (NYSE: CD) fell $1 1/16 to $18 9/16 after Paine Webber lowered its Q2 EPS estimate for the company to $0.23 from $0.32, its 1998 estimate to $1.10 from $1.20, and its 1999 estimate to $1.40.

Semiconductor assembly equipment company Kulicke & Soffa (Nasdaq: KLIC) lost $1 5/16 to $14 5/16 after warning it expects lower-than-anticipated Q3 and Q4 sales, which will result in a Q3 loss "somewhat greater" than the analysts' mean estimate of a loss of $0.03 per share and an "even greater loss" in Q4... Perhaps in part due to Kulicke & Soffa's earnings warning and the earnings revision on Intel, semiconductor wafer fabrication systems maker Applied Materials (Nasdaq: AMAT) slid $1 5/8 to $27 1/2 after SoundView Financial lowered its 1998 EPS estimate to $1.29 from $1.35 and its 1999 estimate to $1.38 from $1.66. SoundView maintained its "short-term hold" and "long-term buy" ratings... Yield management and process control company KLA-Tencor (Nasdaq: KLAC) fell $15/16 to $27 3/16 after announcing the acquisition of privately held VARS Inc. of San Jose, Calif., which makes image archiving and retrieval systems for semiconductor equipment.

Consumer electronics retailer Best Buy (NYSE: BBY) was down $1 1/2 to $34 5/8 despite beating Q1 EPS estimates yesterday as investors took profits. The better-than-expected earnings weren't a big surprise since the company pre-announced last week... Optimization modeling and search technology company Zitel Corp. (Nasdaq: ZITL) skidded for a $7/16 loss to $4 25/32 after announcing it has completed a private placement of $10 million in principal amount of 3% Convertible Subordinated Debentures to institutional investors. The debentures are subject to a conversion price based on a formula that includes a 10% discount... Teen clothing retailer Delia*s Inc. (Nasdaq: DLIA) sank $2 3/16 to $16 1/4 after saying its Q2 earnings will be negatively impacted by the cost of expansion and cuts in its catalog mailings.

Shares of contract electronics manufacturer Jabil Circuit (NYSE: JBL) fell $2 13/16 to $31 11/16 after the company reported Q3 fiscal 1998 earnings and announced it expects lower operating income in the next two quarters... Specialty and protective packaging materials company Sealed Air Corp. (NYSE: SEE) tanked $6 3/8 to $40 1/2 after warning it expects Q2 EPS before charges to fall in the range of $0.20 to $0.25 compared with analysts' expectations of $0.37... Commercial laser company Spectra-Physics Lasers (Nasdaq: SPLI) plunged $3 7/8 to $12 3/4 after warning it expects lower-than-anticipated Q2 sales, which will result in EPS of $0.11 to $0.13 compared with $0.11 for the prior-year period... Embedded computer components and subsystems maker RadiSys Corp. (Nasdaq: RSYS) dropped $3 1/8 to $19 3/8 after announcing that it expects Q2 and Q3 revenues to be lower than anticipated and predicts it will be "slightly profitable" in the two quarters. Analysts had expected EPS of $0.24 and $0.39, respectively, for Q2 and Q3.

Specialty materials producer Dexter Corp. (NYSE: DEX) shed $1 15/16 to $35 15/16 after announcing it expects its Q2 EPS to be essentially flat with the $0.69 earned in the same year-ago period compared with analysts' mean estimate of $0.77... Wide-area network and Internet access company Digital Link (Nasdaq: DLNK) was cut $1 1/8 to $7 1/16 after announcing it anticipates a Q2 loss of $0.14 to $0.16 (before charges) compared with analysts' expectations of a profit of $0.03... Electronic components and computer products distributor Arrow Electronics (NYSE: ARW) was shot down $1 5/16 to $22 after announcing it expects Q2 EPS will be below analysts' expectations and about 20% lower than the $0.43 it earned in Q1... Cerprobe (Nasdaq CRPB), which makes testing equipment for integrated circuits, dropped $1 3/4 to $11 7/8 after warning that Q2 earnings will be lower than expected due to weak demand for semiconductors.

An Investment Opinion
by Louis Corrigan

Asensio, Dreyfus, and Color Chromatics

Investors leery of short-selling must still recognize its entertainment value, at least when Manuel Asensio is involved. Asensio & Co. is an institutional money management firm based in New York City that's developed a following over the last few years after making a number of bold public calls on crappy companies trading at ridiculous valuations. He's the guy who issued a "strong sell" recommendation, which CNBC's Joe Kernan read verbatim on the air, when removable drive maker SyQuest Technology (Nasdaq: SYQT) unaccountably -- and briefly -- shot up to $18 in May of 1996.

With other major league disasters like the bankrupt Solv-Ex and the former Diana Corp. on his resume, Asensio deserves attention. He's also noisy enough that he eventually gets it. Of course, he's also frequently wrong on certain details of the stories he tells. And until recently, his reports, which are usually posted to his website (www.asensio.com), have suffered from grammatical deficiencies that hardly inspire confidence. While he may be righting investment wrongs (albeit for his own profit), he seems more hatchet man than superman -- unless you consider it superhero material to dare corporations to sue you for libel. Still, Asensio has often been spectacularly correct on the big picture. He also has a compelling talent for giving a story a certain maudlin yet predictable drama akin to that seen in soap operas and professional wrestling.

Asensio's latest targets are Color Chromatic Sciences International (Nasdaq: CCSI), a small company that's developed an FDA-approved non-invasive device that helps monitor jaundice in newborns, and the money manager of two Dreyfus mutual funds that have been among Color Chromatics' major shareholders. The assault began Monday June 8 when Asensio issued the first of several "strong sell" reports on Color Chromatics arguing that the firm has "no material sales or earnings potential" and that "the shares will soon trade below $1.00 per share." Indeed, Asensio has charged that the company is "nothing but a vehicle used by certain individuals to defraud investors," adding that its principal business is "distributing false information." The stock had closed the previous Friday at $10 3/4, having fallen from a late May high of $17, partly on rumors that Asensio would issue a report. The stock closed that Monday at $8 13/16 and then hit an intraday low of $4 1/2 the next day.

What has attracted heightened media attention is Asensio's charge that Dreyfus fund manager Michael L. Schonberg has actively participated in this alleged fraud for personal gain. Schonberg was lead portfolio manager of the Dreyfus Aggressive Growth Fund and the Dreyfus Premier Aggressive Growth Fund from August 1995 to April of this year, when Dreyfus replaced him with Paul LaRocco. A unit of Mellon Bank (NYSE: MEL), Dreyfus is a respected name in money management, overseeing more than $100 billion in assets in its numerous funds. Yet the Schonberg-managed funds have both lost money over the last 2 1/2 years, with the Premier Aggressive fund down 2.4% in '96, 13% last year, and around 16% this year. While small-cap funds have generally trailed the market indexes in recent years, few have done quite so poorly.

Fewer still have placed such heavy bets on companies favored by short-sellers. As of last December, for example, Schonberg held over a million shares of Ultrafem (Nasdaq: UFEM), whose lead product is a novel plastic tampon designed to cap the cervix and collect rather than absorb menstrual blood. Schonberg had even praised the stock in Business Week's "Inside Wall Street" column in January 1997. Yet poor sales and bitter disputes among top executives have since landed Ultrafem in bankruptcy. After trading as high as $36 a share in mid 1996, its stock is now worthless.

Schonberg's funds also held as much as 1.45 million shares of Macrochem (Nasdaq: MCHM), whose lead product is a gel designed to treat male impotence. Early findings showed that nearly all patients using the gel experienced some degree of skin irritation, though the company says the problem is resolved if the gel is applied properly. The Wall Street Journal's "Heard on the Street" column for May 5 discussed why the company is a favorite of short-sellers. Asensio also claims that Schonberg's funds owned 500,000 shares of Systems of Excellence (formerly Nasdaq: SEXI), the single best example thus far of an Internet stock promotion and one that has led several of the participants to plead guilty to felony charges.

Business Week has reported that Schonberg bought 20,000 shares of Color Chromatics at $2.50 each for his personal account before joining Dreyfus. At Dreyfus, he loaded up on the company's stock, with data from December showing it was the number one holding of the Aggressive Growth fund (7.8% of the fund's assets). Between both funds, Dreyfus owned nearly two million shares of the stock, or about 13.5% of the company.

Asensio has argued that Schonberg helped drive up the value of his personal holdings by buying Color Chromatics stock for his funds. Moreover, in arguing that "even the most novice analyst can readily recognize that the company has no intrinsic value," Asensio has claimed that Schonberg, a chartered financial analyst, is essentially too smart to invest in Color Chromatics without being part of the alleged stock rig. In turn, he charges that Dreyfus has "failed to provide forthright disclosures or restitution plans for investors who lost money in this scheme."

Schonberg himself has not commented on the matter, though it's been reported that he still owns the 20,000 shares. Dreyfus spokesperson Patrice Kozlowski has said that Schonberg complied with the firm's disclosure policies. "[B]ased on our knowledge to date, we believe these allegations are totally baseless." Nonetheless, Dreyfus says it is conducting its own internal review.

For its part, Color Chromatics has come out swinging. On June 9, the firm issued a statement denouncing Asensio's reports as full of false allegations and misrepresentations. It said it has contacted the SEC and is exploring possible legal action. Two days later, it issued a more detailed rebuttal of Asensio's report, with extensive point-by-point commentary from Dr. Jeffrey Maisels, Chairman of the Department of Pediatrics at William Beaumont Hospital, and Dr. Ian Holzman, Chief of Newborn Medicine at Mt. Sinai Hospital and lead investigator of the trials that tested the firm's Colormate III bilirubin measurement device.

The rebuttal rejected Asensio's claim that there is a limited market for such bilirubin tests, arguing that some 90% of the world's 132 million babies born each year would be "potential subjects" and 16 million tests are conducted each year in the U.S. Furthermore, Maisel said Asensio's claim that the Colormate III clinical trial only compared bilirubin measurement performance to those of a physician's visual assessment of a newborn's coloring was "patently false." Though the FDA approved the device last summer, the company has thus far sold no products nor even established manufacturing facilities. Nonetheless, management says it's now in "late-stage negotiations" for a global distribution deal after receiving proposals from "a number of large international medical companies," many of which included manufacturing arrangements.

The stock has now stabilized around $7 a share. Still, it's interesting that Color Chromatics has not disputed Asensio's June 12 outline of its history of private stock placements. He claims that starting in 1994, the company retained the small New York investment firm Janssen-Meyers to raise a net total of $3.3 million for Color Chromatics by selling 2.7 million shares (half as much as were then outstanding) at up to 50% below the market price. Meanwhile, Asensio says that Janssen-Meyers pocketed a huge chunk of the $1.3 million in expenses to do the deals plus 2.7 million warrants that could be converted into common stock at $1.67 per share.

TheStreet.com has reported that Schonberg participated in several such private placements conducted by Janssen-Meyers and other smaller investment firms. Janssen-Meyers is run by Peter Janssen and Bruce Meyers, former employees of D.H. Blair, a firm that's been a repeat target of regulators. Janssen was himself once fined and temporarily suspended for falsifying account information.

Given this backdrop, Asensio's charges seem at least plausible. He argues that Janssen-Meyers controlled half of Color Chromatics' fully diluted shares (including the warrants). That allegedly allowed the firm to manipulate trading in the stock. In turn, Asensio sees Schonberg as an accomplice in this conspiracy. Regardless of whether these allegations prove true or simply a good story, they don't necessarily validate Asensio's claims about the Colormate III device. Development stage biomedical firms are often desperate for cash and sometimes they seem willing to do deals with the devil if need be. Nonetheless, that sort of corporate history should inspire deep skepticism. As always, it will be interesting to see how Asensio's latest short story plays out.


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