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daily02-23-00's DAILY BULLETIN

February 24, 2000

Market Data as of Close, 2/23/00:

o Dow Jones Industrial Average: 10,225.73 down 79.11, -0.77%

o Nasdaq Composite Index: 4,550.33 up 168.21, 3.84%

o S&P 500: 1,360.69 up 8.52, 0.63%

o TSC Internet: 1,167.48 up 82.58, 7.61%

o Russell 2000: 549.91 up 8.96, 1.66%

o 30-Year Treasury: 101 23/32 down 17/32, yield 6.135%

Companies in Today's Bulletin:

Citigroup (C:NYSE) (PCLN:Nasdaq)

Allied Waste (AW:NYSE)

In Today's Bulletin:

o Banking: Citigroup Exec Heads to priceline, Where One Has Gone Before
o The Buysider: A Postmortem on Aurora
o Evening Update: Allied Waste Misses Fourth-Quarter Consensus
o Bond Focus: Treasuries Retreat From Highs

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Europe: The Anglo File: Prudential's Egg Soon to Float

The U.K. insurer's hot online bank faces rising costs, steep competition and uncertain future profit.

Banking: Citigroup Exec Heads to priceline, Where One Has Gone Before


Peter Eavis

Senior Writer

2/23/00 7:07 PM ET

The surprising departure of



top finance executive, Heidi Miller, for shopping Web site


has left some observers wondering whether top employees at the financial-services giant are seeing better compensation and more freedom elsewhere.

Suggesting that Miller hadn't prepared Citigroup for her departure, the bank didn't immediately name a replacement. In December, Joe Plumeri, Citi's head of direct sales and branch distribution, left the bank. Citigroup declined to comment beyond a brief press statement noting Miller's departure.

Miller, the bank's chief financial officer and a member of the firm's powerful management committee, is scheduled to leave Citigroup March 15 to become CFO and a board member at In doing so she will join former


President Richard Braddock, who is priceline's chairman and chief executive.

Red Tape?

"Heidi's departure could be part of a disturbing trend in which Citigroup loses good operating people but gains chairmen," says Sean Ryan, head of research at White Plains, N.Y.-based broker

Byrne Ryan

, referring to Citi's decision last year to make former Treasury Secretary Robert Rubin its third co-chairman, alongside John Reed and Sandy Weill. (Byrne Ryan doesn't rate Citigroup and it has no underwriting relationship with the firm.)

"The fact that they didn't name a new CFO means they weren't ready for this," says Charles Peabody, banks analyst at New York-based

Mitchell Securities

, which rates Citi a hold and has no underwriting relationship with the bank. "It comes as a shock -- on the bank's last conference call, Sandy Weill only had wonderful things to say about her."

Ryan says that in an organization of Citi's size -- it has $718 billion in assets and offices in around 100 countries -- it's hard for top executives to have much of an effect on the overall direction of the firm, and therefore its share price. "There's a breakdown between individual performance and the stock with which they are incentivized," he says.

Red Carpet?

Miller's choice of is also raising some questions. The company's stock is off 16% over the last six months, even after taking into account priceline's 9% jump in after-hours trading Wednesday evening to 56 31/64. It would be fair to assume that Miller, voted the nation's second-most powerful businesswoman by


magazine last year, will receive a hefty stock options package. Whatever Miller's motive, Braddock will be pleased to have lured her, according to Peabody. He says that considerable tension apparently existed between Reed and Braddock, who left Citibank in 1992. "There may be an element of revenge here," says Peabody. "That's ridiculous," responds a priceline spokesman, who declined to give details of the 46-year-old Miller's compensation package.

In the press release marking Plumeri's departure, Weill and Reed offered extensive glowing remarks about the outgoing exec. By contrast, in the press release for Miller, Weill, Reed and Rubin merely said: "Heidi is an executive of exceptional talent and creativity, as well as a great colleague and friend."

The Buysider: A Postmortem on Aurora


Jeff Bronchick

Special to

2/23/00 2:52 PM ET

Yes, it would have been wonderful to report a week ago on the accounting irregularities at

Aurora Foods


which just announced the near-wholesale

firing of its executive team in the wake of said problems.

I didn't own it, I wasn't looking at it and, frankly, I am only peripherally familiar with it. But, I wondered, were the problems detectable from nothing more than a careful examination of the public financial documents? In the continual effort to improve performance by reducing mistakes, what, if anything, could I learn and impart to



First, a little history. Aurora has pursued what is essentially a roll-up strategy in the food industry. They are buying up second-tier or simply very niche brands from the megaliths of the food industry, who in classic

Jack Welch

fashion, are shedding tertiary product lines in order to focus on what are presumably their strengths.

On that note, Aurora started in the frozen-food aisle with Van De Kamps frozen seafood and desserts from




, Mrs. Paul's seafood from

Campbell Soup


and Aunt Jemima frozen breakfasts and Celeste pizzas from

Quaker Oats



More recently, Aurora has attempted to corner the syrup market buy buying Mrs. Butterworth's from



and Log Cabin from

Philip Morris'


Kraft Foods

. (I guess the

Justice Department

is too busy with



to care). The company also added Duncan Hines from

Procter & Gamble


and recently bought Lender's Bagels from




This is a conceptually interesting strategy: Buy niche brands at bargain prices from disinterested food giants; consolidate and cut expenses; then aggressively market and promote what probably had been ignored brands. And, yes Virginia, there is reasonable money to be made by growing unit volume a few percent a year, grossing it up to the mid-single digits at the operating line and achieving 10% earnings-per-share growth through either debt reduction or share buybacks.

So Aurora did some privately levered deals, consolidated them and went public in June of 1998. The company's public financials -- while confusing because of a variety of one-time charges, transition costs and the vagaries of acquisition -- looked reasonably on track.

Fast forward to last week when the company announced the "resignations" of nearly the entire senior management team, citing accounting differences with the auditors in regard to how promotional expenses paid to retailers were booked.

Details are extremely sketchy and Wall Street is, predictably, ticked off: Two choice quotes in

The Wall Street Journal

were, "They lied to me," and, "It doesn't sound like anyone knows what's going on." (I would add that the latter is a quote we are going to hear repeated

ad nauseam

in the future.)

Despite the fact that the Internet and B2B are going to revolutionize the world, in the jungle in which we presently live, there are still a number of games being played between packaged-goods manufacturers and retailers in an attempt to gain/maintain shelf space and gain/maintain manufacturing volume.

An additional 2%-capacity utilization at the packaged-goods manufacturing plant can vastly leverage the profitability of the manufacturers, hence the temptation to goose sales here and there. Estimates from some industry sources indicate that more than 50% of some retailers' net margins come from promotional dollars delivered from the manufacturer to the retailer either in cash or trade discounts. So these are big issues.

Here's how it's done: The manufacturer can offer "money" to retailers in two basic ways: 1) through lower unit prices if the retailer hits certain volume targets, and 2) through actual cash paid for slotting goods in prime-store real estate or for the retailer to set up special promotions.

What remains both tricky and a very gray area is how to account for this behavior. Some promotional expenses can be legitimately capitalized for short periods, but the rules are not black and white as to how much and what characterizes a true promotion as opposed to the ordinary cost of doing business.

Moreover, a manufacturer can also choose to accrue promotional expenses based on their estimate of the expected sales of the item being promoted. If sales come in below this estimate, at some point there must be a sudden "whoosh" of expenses hitting the P&L to play catch-up. And that appears to be what happened here.

So back to our initial question: Was it possible to see this coming in Aurora's reported financial numbers? Clearly some people saw something, because the stock was already down from 18 to 7 prior to the announcement, an ugly drop even given the sorry state of the packaged-food industry. But even some of Aurora's bankers did not see it coming, as they upped Aurora's credit line late in 1999 for the Lender's acquisition.

After looking at the last year of financial statements, I don't know if an attentive investor could have predicted trouble just from an examination of the numbers. There was some notation that promotional expenses were down year-over-year in the last quarter, but that seemed reasonable in light of a relative dearth of new-product introductions vs. a year ago -- and besides, promotional expenses can be very seasonal.

Another flag was that cash flow from operations was negative for the first nine months of the year vs. positive EPS, but there is inventory build-up for the company's seasonally big fourth quarter, and the numbers can be confusing with a bunch of acquisitions. Prepaid expenses were up and accrued liabilities were down, which can often be curtains drawn to keep expenses off the income statement for as long as possible. But it's tough to say if this was material without comment from management, which is obviously lacking at the moment.

Which brings us to the issue that, as noted here in the past, good securities analysis is not just about sitting in an office and playing with the numbers. It's about getting out and talking to competitors, suppliers and customers to get a feel for the relative strengths and weaknesses of the company's management, products and manufacturing, distribution or selling process.

It's also about focus. I would bet that a dedicated analyst who called a variety of distributors, retailers and competitors to check up on Aurora would have probably elicited a comment from someone to the effect that, "those guys are being very aggressive with promotions" -- which would have been a definite cause for concern.

My conclusions at this point are tentative at best.

  • A wholesale firing of management seems like more than just a few million dollars worth of accounting disagreements here or there. Well educated, seasoned professionals who are determined to "paint" financial statements will often succeed because it is tough to see it unless you are told what to look for.
  • Not all acquisitive companies turn out to be disasters, but often disasters have their roots in acquisitions which were both poorly conceived and overpriced.
  • It also pays to be wary of companies in slower growth industries that are growing much faster than their competitors. The packaged-food industry is unbelievably competitive and is getting squeezed by smarter retailers. So while it does make sense that a management team paying attention to smaller brands that have been ignored by a colossus like Kraft can rejuvenate some growth (the Earthgrains (EGR) spinoff from Anheuser-Busch (BUD) is an enormously successful case of this), it's still an uphill battle.

Once again, it comes down to management. Buying the equity seems like an absolute crapshoot right now for those tempted to bottom-fish. If tempted, I would do some serious investigation first. And let me know what you find!

Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value fund. At time of publication, RCB held a position in Anheuser-Busch, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at

Evening Update: Allied Waste Misses Fourth-Quarter Consensus


Eileen Kinsella

Staff Reporter

2/23/00 8:45 PM ET


, the Internet company that allows consumers to bid on everything from T-bone steaks to airplane tickets, said it named Heidi Miller as chief financial officer. Miller, who was formerly chief financial officer at



, will also join the priceline board of directors and be senior vice president, strategic planning and administration. Now if she could only do something about those


In other postclose news (

Earnings estimates from First Call/Thomson Financial; earnings reported on a diluted basis unless otherwise specified.


Earnings/revenue reports and previews

Allied Waste


posted fourth-quarter earnings of 18 cents a share, missing the five-analyst estimate of 20 cents. The company said it didn't provide year-ago figures because such comparisons wouldn't be meaningful because of the magnitude and financial structure of the



Becton Dickinson


announced a recall of certain catheters that it expects will impact its first-quarter earnings by about 5 cents a share.

Budget Group


said it will delay the release of its fourth-quarter results until March 2. The company said its sees results in line with the six-analyst estimate of a loss of 45 cents, excluding charges. Budget expects charges of about $105 million.

Department 56


reported fourth-quarter earnings of 35 cents a share, missing the three-analyst estimate of 41 cents and the year-ago 38 cents. The company said additional reserves on customer balances, higher operating expenses due to the implementation of a new computer system and the one-time write-off of certain acquisition-related inventory costs and costs associated with consolidation hurt earnings. Department 56 warned it expects 2000 earnings per share to fall below those of 1999 due to higher costs.

Kenneth Cole Productions


reported fourth-quarter earnings of 58 cents a share, beating the seven-analyst estimate of 55 cents and the year-ago 30 cents. The company also approved a 3-for-2 stock split.



reported third-quarter earnings of 23 cents a share, in line with the 32-analyst estimate and up from the year-ago 18 cents. The company warned that the impact of exchange rates at current values would take $18 million away from its fourth-quarter results. Medtronic said it expects earnings per share to grow to 91 to 93 cents in fiscal 2000.



, which sells the

George Foreman

grill, said it expects to earn $5.60 to $6.00 a share in fiscal 2000, exceeding the six-analyst estimate of $5.30 a share. CEO Leon Dreimann said the company had met with several investment banks to discuss various possible strategic alliances to boost its e-commerce presence.

Tom Brown


reported fourth-quarter earnings of 16 cents a share, well above the seven-analyst estimate of 8 cents and the year-ago loss of $1.22 which includes items.



posted a fourth-quarter loss of 77 cents, wider than the four-analyst estimate of 61 cents but narrower than the year-ago loss of 84 cents.

World Access


posted a fourth-quarter loss of 71 cents, including a $37.8 million restructuring charge. The two-analyst estimate was for earnings of 1 cent, while the year-ago loss was 8 cents a share. No per-share figures from operating income were provided.

Mergers, acquisitions and joint ventures

Associated Banc-Corp


said it agreed to sell its $130 million credit card portfolio to

Citibank USA

, a unit of Citigroup. Associated Banc-Corp plans to offer an Associated-brand credit card through Citibank to its 300,000 cardholders. Associated said it expects to recognize a gain of about $12 million once the deal has closed.

Offerings and stock actions



said it plans to file a registration statement for an underwritten public offering of about 4 million shares of its common stock.

Morgan Stanley Dean Witter

priced 9.375 million ADRs of

Carrier1 International


at $17.4835 each, slightly above the $15 to $17 range. Each ADR is equal to five ordinary shares. Luxembourg-based Carrier1 provides voice, Internet, bandwidth and related telecommunications services in Europe.



said it filed a registration statement with the


for a proposed public offering of 3 million shares of its common stock. Managing underwriters for the offering are



Nomura International




said it authorized the repurchase of up to 1 million of its outstanding shares.


Pharmacia & Upjohn


said the

Food and Drug Administration

asked it for another study on


, an antidepressant drug which has been awaiting the agency's approval since 1998.

US Airways


said it would be forced to shut down operations if it does not reach a contract with its flight attendants by the end of a 30-day cooling-off period.

Bond Focus: Treasuries Retreat From Highs


Elizabeth Roy

Senior Writer

2/23/00 4:06 PM ET

Treasuries gave back a large portion of

yesterday's big gains, which dropped the yields of the 10-year note and 30-year bond to their lowest levels of the year.

Yesterday, the benchmark 10-year Treasury note gained 30/32, dropping its yield to 6.363%, the lowest since Dec. 20. The 30-year bond gained 30/32, dropping its yield to 6.086%, the lowest since Nov. 16.

The move started before



Alan Greenspan's

appearance before the

Senate Banking Committee

, and reflected profit-taking more than anything else, market analysts said.

Greenspan's appearance generated some intriguing headlines, but from a market perspective it turned out to be a nonevent. The Fed chairman

repeated word for word the


testimony he delivered to the

House Banking Committee

last Wednesday. Then he took Senators' questions. But while his responses were interesting, they weren't market-moving.

The Treasury's monthly two-year note auction also kept traders on their toes today. Strong bidding at an auction can set a positive tone in the market, while weak demand can set a negative tone. The Treasury sold $12 billion of new two-year notes at a yield of 6.590%. The measure of demand -- the bid-to-cover ratio, which compares the volume of securities bid for to the volume offered for sale -- was better-than-average, at 2.66. The previous 12 auctions produced an average bid-to-cover ratio of 2.15. But that was mostly due to the fact that the amount offered was smaller. The previous 12 auctions sold either $14 billion or $15 billion of notes. So the impact of the results was muted.

"A small pullback from the highs would be expected on a two-year auction day, and there was a bit of caution given that Greenspan was in a Q&A," said Ray Remy, executive managing director at

HSBC Securities


The benchmark 10-year Treasury note ended down 14/32 at 100 18/32, lifting its yield 5.9 basis points to 6.422%. The 30-year Treasury bond, which has lost its benchmark status in recent weeks because the government's plans to reduce the supply of the issue has boosted its value, fell 23/32 at 101 17/32, lifting its yield 5.1 basis points to 6.137%.

At the

Chicago Board of Trade

, the March

Treasury futures contract lost 20/32 to 95 20/32.

Economic Indicators

Only weekly economic indicators today, some of them delayed from Tuesday because of the long weekend. This week's highlights are the

durable goods orders

report for January tomorrow and the initial revision to fourth-quarter


on Friday.


Mortgage Applications Survey

detected a slight decline in refinancing activity and an increase in new mortgage activity. The Refinancing Index fell to 372.9 from 373.1. The Purchase Index rose to 291.1 from 270.8.


BTM/Schroder Weekly Chain Store Sales Index

rose 0.2%, following a 1.2% gain the previous week.


Redbook Retail Average

rose 0.8% in the first three weeks of February, compared with January.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 111.15, up from 110.86 yesterday. The euro was worth $1.0025, down from $1.0038 yesterday.

Crude oil for April delivery at the

New York Mercantile Exchange

rose to $29.33 from $28.92 yesterday.


Bridge Commodity Research Bureau Index

fell to 210.13, from 212.02 yesterday.

Gold for April delivery at the


fell to $302.5 an ounce from $307.7 yesterday.


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