<THE EVENING NEWS>
Monday, February 1, 1999
MARKET CLOSE
DJIA            9345.70      -13.13     (-0.14%)
S&P 500         1273.04       -6.60     (-0.52%)
Nasdaq          2510.09       +4.20     (+0.17%)
Russell 2000     426.08       -1.14     (-0.27%)
30-Year Bond   101 1/32    -1 15/32  5.18 Yield

HEROES

Specialty chemicals and salt company Morton International (NYSE: MII) popped up $9 3/4 to $35 5/8 after agreeing to be acquired by fellow specialty chemicals maker Rohm and Haas (NYSE: ROH) for $4.9 billion in cash and stock, including $268 million in assumed debt. Rohm and Haas expects the deal will generate $200 million in cost savings, add immediately to its cash flow, and boost earnings by the second year. Besides the well-known Morton Salt brand, the deal gives Rohm and Haas a diverse specialty chemicals business with $1.7 billion in fiscal 1998 sales. Innovative new products, such as Morton's Lamineer powder coating for wood, will nicely supplement Rohm & Haas' bread-and-butter performance polymer business, which makes coatings and additives that go into everything from Sherwin-Williams (NYSE: SHW) paint to Procter & Gamble (NYSE: PG) detergents.

The online discount brokerage community got a collective shot in the arm today as The New York Times gave the sector some love in a rosy write-up. The article stressed that the companies in the industry are here to stay and are growing quickly, referencing a CS First Boston report that online trading rose an undefined 34% in Q4 as proof of that fact. The perceived stamp of approval sent the shares of online brokers of all shapes and sizes higher today. Ameritrade (Nasdaq: AMTD) gained $24 3/4 to $105, National Discount Brokers (NYSE: NDB) added $5 7/8 to $24 7/8, Southwest Securities (NYSE: SWS) picked up $3 3/16 to $32 1/8, JB Oxford Holdings (Nasdaq: JBOH) jumped $2 31/32 to $5 9/16, Siebert Financial (Nasdaq: SIEB) rose $6 13/16 to $19 1/8, and DLJdirect parent Donaldson, Lufkin & Jenrette (NYSE: DLJ) climbed $3 7/8 to $54. E*Trade Group (Nasdaq: EGRP), which split its stock two-for-one today, traded up $7 1/4 to $62 7/16.

QUICK TAKES: Chip maker Advanced Micro Devices (NYSE: AMD) added $1 15/16 to $24 7/8 after a report in PC Week Online said boxmaker Gateway (NYSE: GTW) will start offering PCs with AMD's K6-3 chip in March, backing away from its history of offering machines based solely on chips from AMD arch rival Intel (Nasdaq: INTC)... Biopharmaceutical company Scios Inc. (Nasdaq: SCIO) jumped $3/4 to $10 5/8 after an FDA advisory panel recommended the company's Natrecor congestive heart failure management drug for approval... Casual restaurant operator and franchiser Applebee's International (Nasdaq: APPB) gained $2 to $23 7/8 after Morgan Stanley Dean Witter raised its rating to "strong buy" from "neutral" with a 12-month price target of $32 per share.

Airline Continental Airlines (NYSE: CAI.B) rose $2 5/16 to $36 5/16 following an upgrade from BT Alex. Brown to "strong buy" from "market perform." Several other air carriers also gained altitude after Northwest (Nasdaq: NWAC) followed some of its rivals' leads and raised its fares on Friday, setting the stage for more price increases further down the runway. US Airways (NYSE: U) added $1 11/16 to $51 7/16, United Airlines parent UAL Corp. (NYSE: UAL) ascended $1 5/8 to $63 7/8, American Airlines big daddy AMR Corp. (NYSE: AMR) moved up $1 5/8 to $60 3/8, and Alaska Air (NYSE: ALK) rose $3 3/16 to $53 9/16... Defense contractor Northrop Grumman Corp. (NYSE: NOC) moved up $5 5/8 to $62 5/8 after PaineWebber raised its rating to "buy" from "neutral," citing the company's attractive valuation and dividend yield.

PC and computing products maker Hewlett-Packard (NYSE: HWP) gained $3 9/16 to $81 15/16 after Merrill Lynch raised its near-term rating to "accumulate" from "neutral" on improved near-term earnings estimates and expectations that the company will launch a unified Internet strategy... Number 1 automaker General Motors (NYSE: GM) raced ahead $3 5/8 to $93 3/8 after reportedly telling analysts on Friday that it has set performance targets to achieve fiscal 1999 earnings above analysts' current estimates of $8.62 per share... Athletic footwear and apparel maker Nike (NYSE: NKE) sprinted $2 7/16 higher to $47 15/16 after Chairman and CEO Phil Knight reportedly intimated over the weekend that the company's fiscal 1999 earnings will be higher than expected. For more details on the company's rebound, see today's Fool Plate Special.

Database software company Oracle (Nasdaq: ORCL) picked up $3 3/4 to $59 1/8 after setting a three-for-two stock split, payable Feb. 26... Industrial, aerospace, and auto components maker Aeroquip-Vickers (NYSE: ANV) soared $20 3/4 to $56 after agreeing to be acquired by Cleveland-based Eaton Corp. (NYSE: ETN) for $1.7 billion, or $58 per share in cash. The purchase price represents a 65% premium to Aeroquip-Vickers' closing price of $35 1/4 per share on Friday. Eaton fell $2 13/16 to $66 13/16... Toymaker Mattel Inc. (NYSE: MAT) trampolined $2 3/8 higher to $25 1/16 after Merrill Lynch reiterated its near-term "accumulate" rating, citing expected benefits from its pending merger with The Learning Co. (NYSE: TLC) and good vibes for the company's Q4 earnings report tomorrow. The Learning Co. added $2 1/8 to $26 3/8.

Bookseller Barnes & Noble (NYSE: BKS) logged a $1 3/4 gain to $39 3/16 after a German magazine reported that Germany's Bertelsmann AG will ask for a public listing for its 50% stake in its online retailing joint-venture barnesandnoble.com at the end of this month. Barnesandnoble.com CEO Jonathan Bulkeley was a recent guest on the Fool's StockTalk... Computer telephony systems components maker Dialogic Corp. (Nasdaq: DLGC) added $3 5/8 to $29 1/8 after BancBoston Robertson Stephens raised its rating to "buy" from "long-term attractive" on the expectation that the company will launch its new CT Media server in fiscal Q1... Contract electronics and printed circuit board manufacturer Dii Group (Nasdaq: DIIG) climbed $1 3/8 to $29 3/4 after Needham & Co. raised its rating to "strong buy" from "buy."

Movie listing and ticketing service MovieFone (Nasdaq: MOFN) advanced $1 1/2 to $26 1/2 after online services conglomerate America Online (NYSE: AOL) agreed to acquire the company for about $388 million in stock... Online and TV-based specialty retailer Shop At Home (Nasdaq: SATH) rose $7 1/8 to $24 1/4, adding to Friday's 44% gain, on news that the company would consider a serious acquisition offer from the right kind of media or Internet company... Telecommunications switching and access products maker World Access (Nasdaq: WAXS) shined $1 3/8 to $11 3/4 after Interstate/Johnson Lane raised its long-term rating to "buy" from "neutral" and set a 12-month price target of $19 per share.

GOATS

News that publishing tools company Inso Corp. (Nasdaq: INSO) will restate revenues for the first three quarters of 1998 crushed the company's stock today as the shares were dumped by $15 19/32, or 62.4% to $9 13/32. Inso said it will reverse $7 million in revenues because of sales from international distribution agreements that shouldn't have been recognized. Inso reported a 23% increase in receivables since the beginning of the year, while revenues as reported declined 12% over the same time period. That's never a good sign to begin with -- and it helps explain why DSOs (days sales outstanding) ballooned so rapidly. The company now says it expects to post losses for the fourth quarter and fiscal year. Two analysts surveyed by First Call currently project EPS of $0.23 and $0.44 for the respective periods, but given today's revelations those estimates are essentially meaningless.

Let's play "Pop Goes the Business Plan!" It was just inside of three months ago that CustomTracks Corp. (Nasdaq: CUST) made official its move into the online music retailing business -- the company was developing technology for personalized CDs -- with the Nov. 10 sale of its Cardkey Systems electronic security unit to Johnson Controls (NYSE: JCI) for $41 million. Today CustomTracks gave back $1 3/32 to $7 17/32 after saying it is reevaluating its decision to develop personalized CDs because of recent music industry developments. The company now plans to develop a system for conducting transactions over the Internet, the concept for which arose out of its now out-of-favor music efforts. CustomTracks CEO David Cook, who founded and then ran Blockbuster Video until 1987, said the transaction system should be running by the third quarter. As his own recent history shows, however, a lot can happen in a few months' time.

QUICK CUTS: PC multimedia card company Creative Technology (Nasdaq: CREAF) slid $3 1/4 to $11 5/8 after turning in fiscal Q2 EPS of $0.64, down from last year's $0.79 mark and flat with Street estimates. Several analysts expressed disappointment in a Reuters report, concerned that forward guidance was unexpectedly cautious... Finnish wireless telecom equipment company Nokia (NYSE: NOK.A) hung up $7 3/4 to $136 3/8 as Morgan Stanley Dean Witter lowered its rating on the stock to "neutral" from "outperform." On Friday the company announced plans for a 2-for-1 stock split and said Q4 net earnings rose 66% in local currency terms. The Fool reported on a Nokia Double in mid-December.

Perfume seller Perfumania (Nasdaq: PRFM) lost $4 1/4 to $6 7/8 following Friday evening's news that CFO and COO Simon Falic is resigning, with CEO Ilia Lekach filling Falic's shoes... Senior citizen living facility operator Assisted Living Concepts (AMEX: ALF) was slashed $6 5/8 to $6 after American Retirement Corp. (NYSE: ACR) agreed to end its proposed $500 million merger with Assisted Living, which will restate earnings for fiscal 1997 and the first three quarters of fiscal 1998... The bad fortune for enterprise resource planning (ERP) software firm PeopleSoft (Nasdaq: PSFT) continued today as the stock, beat down for a $2 5/8 loss Friday on disappointing earnings news, gave up a further $1 1/16 to $18 3/4 today. A shareholder lawsuit was filed against PeopleSoft and Momentum Business Applications (Nasdaq: MMTM) alleging that executives of the companies artificially inflated the company's stock price, allowing it to issue shares of its Momentum subsidiary. Momentum slowed $1 1/4 to $9 7/8 today.

Spyglass (Nasdaq: SPYG), a developer of Internet software and technologies for TV set-top boxes, network computers, and cellular phones, cracked $1 11/16 to $10 7/8 today following Friday afternoon's news of a shareholder lawsuit alleging securities fraud by members of management... Boston-based energy holding company Eastern Utilities Associates (NYSE: EUA) fell $15/16 to $28 5/8 as New England Electric System (NYSE: NES) agreed to buy the company for $31 per share, about a 5% premium on Friday's closing price... Consumer products maker Sara Lee Corp. (NYSE: SLE) rotted $1 1/2 to $24 as the company expanded the recall of meat products potentially infected with a harmful bacteria. The Zeeland, Michigan, plant of Sara Lee's Bil Mar Foods division, which made the products, has been closed since Dec. 22.

National Propane Partners (NYSE: NPL) burned off $3/4 to $4 7/8 after reporting a net loss for 1998 compared to net income of $3.8 million last year. The company also said it is in discussions with "several" parties about strategic options including a possible sale or merger... Group and individual disability insurer Unum Corp. (NYSE: UNM) slumped $1 3/16 to $59 1/4 after the FTC said it wanted more information on the company's planned merger with Provident Companies (NYSE: PVT). Provident backed up $1/8 to $42 3/4 today... Drip-Quip (NYSE: DRQ), a designer and manufacturer of offshore drilling and production equipment, dripped away $1 3/16 to $14 13/16 as Morgan Stanley Dean Witter downgraded the stock to "outperform" from "strong buy" in part of a broad, 16-company drilling downgrade meant to increase focus on larger international companies.

PC maker Compaq Computer Corp. (NYSE: CPQ) moved back $3/4 to $46 7/8 as Soundview Securities downgraded the stock to "buy" from "strong buy." Compaq, as detailed in today's Breakfast With the Fool, says its direct sales are cutting into the efforts of its competitors... Richardson Electronics (Nasdaq: RELL), which makes electron tubes and power semiconductors, dropped $2 3/4 to $6 3/4 after reporting Friday night that fiscal Q3 EPS is seen coming in below Wall Street's $0.19 consensus estimate... Cruise line operator Royal Caribbean Cruises (NYSE: RCL) sailed down $1 3/4 to $38 despite docking Q4 EPS of $0.17, a nickel above last year's mark and better than analysts' $0.13 consensus estimate. EPS was $0.12 after a charge for two canceled cruises.

Slot machine maker Anchor Gaming (Nasdaq: SLOT) paid out $2 13/16 to $51 9/16 after BT Alex. Brown downgraded the stock to "market perform" from a "strong buy" rating... Enterprise productivity company RWD Technologies (Nasdaq: RWDT) wasted away $2 1/4 to $18 15/16 after Adams, Harkness & Hill lowered its rating on the stock to "accumulate" from "strong buy."

[Correction: In last Thursday's "Quick Cuts" section we reported on GumTech International's (Nasdaq: GUMM) joint venture to "create" a nasal gel to fight colds. In fact, the homeopathic nasal gel has already been developed, and the joint venture is marketing and distributing that product.]

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

Meteor Looming Over Competitive Landscape?

Today, the largest communications provider in the U.S., AT&T (NYSE: T), teamed up with the largest media and entertainment company, Time Warner (NYSE: TWX), to form a joint venture that has the potential of impacting the competitive landscape of the local telecommunications market like a meteor. Whether or not the meteor breaks-up before impact depends on the joint venture's ability to become the "real" low cost provider in the system -- as well as the subsequent adoption rates for the various service offerings in its target markets. Under the terms of the deal, AT&T will own 77.5% of the venture and Time Warner will own 22.5%.

The potential reach is certainly crucial -- as the number one cable provider, Time Warner gives the AT&T/Tele-Communications Inc. combination the potential to reach a total of 42.7 million homes (over 40% of the country). If affiliates are included in the calculation, the joint venture has the possibility of reaching half of the country with video and data offerings, and roughly two-thirds of the country with some form of telephony. If the joint venture meets with some initial success, more ventures could materialize rapidly.

Tele-Communications Inc. (to be acquired by AT&T)
- 17.7 million homes passed
- Majority of subs in CA, IL, WA, CO, TX
- 17.9 million affiliate households passed
(7.6 million already covered through joint
venture agreements)
- @Home Relationship

Time Warner Cable
- 20 million homes passed in 33 states
- Majority of subs in FL, NY, NC, OH, TX
- 70% of plant is 2-way
- Most systems upgraded to 750 Mghz
Source -- JV analyst presentation

For Time Warner, the deal is almost a no-brainer, fulfilling the oft-stated objective of maximizing the value of its broadband cable infrastructure. Time Warner has been spending gobs of capital on its two-way switched digital network, on the order of $6 billion thus far, or $1.5 billion per year. Through the joint venture, Time Warner is capturing some nice incremental growth with no investment of incremental capital beyond its existing plans to upgrade to the 750 Mghz architecture. The firm expects that roughly 85% of its upgrades will be completed by the end of this year, and the remainder will come by the end of 2000.

The joint venture will pay Time Warner $15 per home passed for the privilege of receiving access to each home reached by Time Warner's network ($7.50 on delivery of the home at signing -- contingent on the home being 2-way upgraded and powered -- and the balance a year from now). This comes to a total outlay of around $300 million. Of the 20 million homes that Time Warner currently reaches, roughly 12.6 million presently subscribe to the firm's cable TV services.

As well, Time Warner will receive benefits from the following recurring payment schedule once the telephony service is up and running:

The joint venture pays Time Warner a monthly fee for each telephony customer
--Yrs. 1-3 = $1.50; Yr. 4 = $3.50; Yr. 5 = $4.50; Yr. 6+ = $6.00

...and guarantees the following minimum penetration rates (market-by-market) of
--Yr. 1 = 0%; Yr. 2 = 5%; Yr. 3 = 10%; Yr. 4 = 15%; Yr. 5 = 20%; Yr. 6+ = 25%

Finally, Time Warner will also receive a 15% share of the average telephony revenues (in a particular cable system) in excess of $100 per customer following the fifth year of certification. Of course, the minimum market share guarantees don't reflect what the joint venture actually thinks the partnership can do. AT&T Chief Executive Michael Armstrong opened the "big" conference call today with the "conservative" assessment that the joint venture could see 25% penetration in the first three to four years -- or about $4 billion in revenues and a fourth year break-even point.

Assuming this penetration rate comes to pass, it could mean up to $400 million of incremental revenue and $300 million of incremental cash flow for Time Warner. That's pretty peachy for Time Warner (and is also good for AT&T, considering its overall ownership stake in Time Warner), but certainly doesn't jibe with the price move today, slipping $3/16 to $62 5/16 -- implying that current multiples might be a bit rich, or that the market is taking a wait and see attitude on the penetration rates.

Overall, AT&T expects the joint venture to spend $300 to $500 for each customer that signs up for the service -- assuming use of internet protocol (IP) telephony that will be available in the year 2000. For circuit switched network customers, the joint venture will pay $750 for each person who signs up for the service. AT&T noted that it will pay an additional $15 per subscriber to place backup power systems on the cable network.

AT&T fared better than its joint venture partner today, moving up $2 13/16 to $93 9/16. The firm took another strong step toward its goal of becoming the leading carrier of end-to-end facilities-based communications services, and investors are reacting warmly to the announcement. With twisted pair wire and coaxial cable providing only the most tenuous of links to the American consumer, it's extremely important from a strategic standpoint for telephone powerhouse AT&T -- which pays upwards of $10 billion per year to the local phone providers -- to try and control cable. And while AT&T continues with its cable adventures, it looks like it's going to redefine a number of industries in the process.

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