Publish date:

daily10-13-99's DAILY BULLETIN

October 14, 1999

Market Data as of Close, 10/13/99:

o Dow Jones Industrial Average: 10,232.16 down 184.90, -1.77%

o Nasdaq Composite Index: 2,801.27 down 71.16, -2.48%

o S&P 500: 1,285.55 down 27.49, -2.09%

o TSC Internet: 692.21 down 31.97, -4.41%

o Russell 2000: 419.32 down 5.36, -1.26%

o 30-Year Treasury: 97 30/32 down 20/32, yield 6.288%

Companies in Today's Bulletin:

Tyco International (TYC:NYSE)

Covad (COVD:Nasdaq)

Apple (APPL:Nasdaq)

In Today's Bulletin:

o Herb on TheStreet: *Extra* Trying to Figure Out the Tangled Web of Tyco
o Networking: Covad Keeps Up the Momentum in DSL Service
o Evening Update: Tyco Schedules Conference on Accounting Practices and Apple Beats the Street
o Bond Focus: Long Treasury Yield Makes New High for the Year

Also on

Mutual Funds: SEC Proposals Would Give Mutual Fund Boards the Means to Challenge Management

The rules would put 'meat on the bones' of the industry's own proposals, says the SEC, though skeptics say they don't go far enough.

The Buysider: So Sue Me

A high-profile lawsuit against a money manager for taking chances and underperforming a benchmark will solve ... what, exactly?

Consumer Products: At Pepsi, a Crispy Threat to Snack Food Dominance

Frito-Lay remains the snack aisle's 800-pound gorilla, but some analysts think crackers are set to steal stomach share.

Europe: From Underdog to Ubermensch: Murdoch Hits Fast Forward in Germany

Speculation is rife that News Corp. is angling to become a dominant player in the German free-TV and pay-TV markets.

Herb on TheStreet: *Extra* Trying to Figure Out the Tangled Web of Tyco


Herb Greenberg

Senior Columnist

10/13/99 9:37 PM ET

Tyco talk:

Don't be surprised if

Tyco International


comes out in its conference call with analysts tomorrow morning and says that all is well with its accounting. Trading in the company's stock was halted today after a 6% plunge that followed rumors of accounting irregularities at Tyco.

In a statement issued late tonight, Tyco officials said rumors about the company "are false, unfounded and malicious."

Tyco: Join the discussion on


Message Boards.

"I heard the reports being circulated about our company," L. Dennis Kozlowski, Tyco's chairman and chief executive officer, said in the statement, "and I can state unequivocally that they are false and baseless. Because we take our commitment to our shareholders and our reputation very seriously, we will pursue this matter until we are satisfied that both have been adequately protected.

"We are confident results for our fourth fiscal quarter, to be reported next week, should exceed consensus earnings estimates," Kozlowski said. "We also are comfortable with the consensus earnings estimate for fiscal year 2000. The strength of our earnings is further enhanced by our focus on the generation of free cash flow. As a testament to the quality of these earnings, our free cash flow expectation for next year represents a very high percentage of our expected net income."

So, what actually happened? Apparently,


reporting ace David Faber mentioned, in passing, concerns raised in a report by David Tice of Dallas'

Behind the Numbers


(BEARX) - Get Federated Prudent Bear A Report

Prudent Bear Fund. (Tice, who has no Tyco positions, short or otherwise, was the original


bear on



. Right, Sunbeam -- I can still remember


denial that it had a problem and that it was going to be making gobs of money.)

Never mind that Tice's report first came out Monday. The mere mention of accounting irregularities in a market as jittery as this -- especially involving an active acquirer like Tyco, which has benefited from the controversial "pooling" accounting method -- is enough to spook investors who are looking for a reason to sell (or who don't really know


they own!).

Then there's the timing of the report: It comes just as Tyco's fiscal fourth-quarter results are being shipped off to its auditors for review, as is customary.

Tice, who was early in nailing the way he believed Sunbeam had been dipping into restructuring charges to help earnings, has similar concerns for Tyco. "The bottom line," he told me late today, "is that Tyco has $2.3 billion of earnings after $3.9 billion of charges over the last three and a half years. It's easy to show a nice progression of $2.3 billion in earnings when you have $3.9 billion to play with through the application of more normal operating expenses against reserves. It's all subject to great discretion."

Will Tice be right? Way too soon to say. Either way, if he


right, investors will have wished they had paid attention to what a week ago looked like a routine


report on insider selling at Tyco. According to the report, Mark Belnick, Tyco's chief corporate counsel, filed with the SEC to sell about $7.5 million in stock through an exercise of options and from an employee benefit plan.

"The counsel has been in his current position since September 1998 and before joining Tyco he was a senior partner at the international law firm of

Paul, Weiss, Rifkind, Wharton & Garrison

since 1987,"



The only thing worse than the CFO selling is when the chief lawyer bails.

Tyco officials didn't return calls for comment.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.

Networking: Covad Keeps Up the Momentum in DSL Service


Kevin Petrie

Staff Reporter

10/13/99 7:00 PM ET

SAN FRANCISCO -- It's early yet in the race to pipe digital subscriber lines into small companies craving high-speed Internet access. But already,



has built a lead that will be hard for rivals to overcome.

Covad is taking full advantage of an early head start. The Santa Clara, Calif.-based company started commercial services in early 1998 -- one year ahead of other DSL start-ups






. As of June 30, according to the

Yankee Group

, Covad commanded a 65% market share among start-ups that focus on providing DSL to companies with fewer than 500 employees.

"They really are the leader right now," says Michael Bowen, with

Deutsche Banc Alex. Brown

, a Covad underwriter. Bowen upped his rating on the stock to a strong buy when Covad unveiled plans last month to double its reach to 100 cities. (Bowen rates Rhythms and NorthPoint a buy. His firm has no underwriting relationship with either company.)

An early lead is crucial because it will help Covad secure partnerships with long-distance carriers and ISPs. It will position Covad to control a good chunk of the DSL market, which Yankee expects to grow to an estimated $109 million in revenue in 2001 from an estimated $20 million this year. And should deep-pocketed telecom come looking for DSL companies, as analysts expect, Covad will be the belle of the ball.

Covad said Monday it was running 31,000 subscriber lines as of Sept. 30. While NorthPoint has reached as many cities as Covad, it was running 12,000, according to Bowen's estimates. Partly because Rhythms is investing in fatter pipes and more elaborate private network services, it has connected just an estimated 6,500 end users.

Prospects for DSL Bode Well
Expected growth of the business DSL market

Source: Yankee Research Group

"It's not just a small lead," boasts Covad CEO Bob Knowling. Having a broader reach for its network is the best way to distinguish Covad from Rhythms and NorthPoint, he says.

Covad's early advantage is likely to stay intact in coming years. Bowen expects Covad to have roughly 57,000 lines running by year end and nearly 300,000 at the end of 2000. NorthPoint is expected to increase to 27,000 this year and 134,000 next year, while Rhythms is expected to reach 11,000 this year and 35,000 next year.

Like other Internet contests that boil down to a race for eyeballs, the winner of the DSL land grab will likely be rewarded lavishly.



is king with investors because it speaks for 105 million users. In 1997,




(MSFT) - Get Microsoft Corporation (MSFT) Report

as a buyer by signing 9 million free email accounts in just 18 months.

While Covad's numbers pale by comparison right now, it's building what analysts regards as a vital link to local telephone and data services. Covad helps ISPs such as






pipe DSL to business offices through the networks of the

Baby Bells

. Although competitors, the local phone companies often partner with DSL resellers such as Covad.

Covad has done particularly well wrestling with what its CEO Bob Knowling calls the "planned incompetence" of local phone companies. Last Tuesday, Knowling and top Covad executives joined a field trip with technicians, and found some Covad customers getting short shrift because of delays from

Pacific Bell

, which is now part of



. A Pac Bell spokesman says that while results vary, Pac Bell serves Covad as well as its own direct customers.

Knowling, himself an alumnus of

U S West


, has quickened deployment by helping the phone companies define trouble spots on the network.

Keeping things simple has done a lot to put Covad ahead: The company offers speeds ranging from 144 kilobits to 1.5 megabits per second, while Rhythms offers as much as 7.1 megabits. Covad plans to upgrade to higher speeds when companies demand them. Analyst Matt Davis with Yankee Group says that right now, many of Covad's smaller businesses are happy with download rates of less than one megabit per second, as long as they can upload at the same speed. (Yankee consults several DSL carriers, but Davis declined to name clients.)

The edge that Covad is building is slowly becoming apparent. Covad showed revenue of $21.4 million in the most recent four quarters, compared with $3.8 million and $2.3 million for its peers Rhythms and NorthPoint, respectively. And Covad shares trade above their closing price on the first day of trading in January. Both Rhythms and NorthPoint have slipped below their first-day closing prices in April and May, respectively. On Tuesday, Covad finished down 3 3/8 at 41 1/4.

And yet the stock is attractively valued by some measures. Bowen says Covad's "enterprise value" (market cap plus net debt, minus cash) to expected 2000 revenue is about 19, compared to 23 for NorthPoint and a whopping 66 for Rhythms. This ratio gauges the start-ups' investments against the revenues those investments are starting to generate. Bowen does not expect the three companies to be profitable any time soon, because of the steep costs of constructing a network.

Covad seems confident about investors' appetite. Even though its public float of 20 million shares already exceeds those of its peers by 5 million to 10 million shares, the company now plans to issue another 13 million shares later this year in order to bankroll its massive construction. After the offering, 94 million shares will be outstanding.

Beyond the offering, should Covad keeps the lead, its subscriber count might become its biggest asset in the eyes of potential acquirers. For years, upstart carriers have merged with larger companies in order to expand territory, add services and lower operating costs per subscriber.

"One of their strategies might be to build it to the point at which they fold it into a much larger enterprise," says Phillip Coburn, global tech strategist with

Warburg Dillon Read

. Coburn owns shares of Covad. His firm has no investment banking relationship with Covad.

Covad, Rhythms and NorthPoint each declined to comment on potential plans to be acquired by larger carriers.

Evening Update: Tyco Schedules Conference on Accounting Practices and Apple Beats the Street


Tara Murphy

Staff Reporter

10/13/99 9:51 PM ET

TheStreet Recommends

Prudent Bear

fund manager David Tice -- author of the

Behind the Numbers

report -- expressed concerns about

Tyco International


; the stock was down 6.2% before being halted amid rumors of accounting irregularities. Tyco has reportedly denied that there are any problems with its accounting and plans to hold a conference call tomorrow morning on the issue.


(AAPL) - Get Apple Inc. (AAPL) Report

posted fourth-quarter earnings of 51 cents a share, beating the 17-analyst estimate of 45 cents but down from the year-ago 68 cents. The results come as a pleasant surprise after the company warned investors last month that third-quarter earnings would miss Wall Street estimates, blaming the expected shortfall on problems in obtaining

PowerPC G4

chips from



for its

G4 PowerMacintosh


Apple said that it evaluated the processor speeds of its PowerG4 Macintosh line to pair demand with Motorola's chip supply. Apple also announced that -- beginning in the first half of 2000 --


(IBM) - Get International Business Machines (IBM) Report

will be on board as an additional supplier of G4 chips. Apple CFO Fred Anderson said the company is, "poised for a very strong December quarter."

After-Hours Markets

Apple was the most actively traded stock in after-hours trading after releasing its earnings.


Island ECN


Zany Brainy


was not only No. 2, but it was a whole lot of fun to say. Say it. Zany brainy! Fun stuff.


Market XT

, techs dominated the chart.


(MSFT) - Get Microsoft Corporation (MSFT) Report

was No. 2,

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

was No. 3 and


(QCOM) - Get QUALCOMM Incorporated Report

was No. 3.

Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EDT. Prior to Sept. 15 Island offered trading from 8 a.m. to 5:15 p.m. EDT


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter's (MWD) Discover Brokerage and Mellon Bank's (MEL) Dreyfus Brokerage Services. Clients can trade 200 of the most actively traded New York Stock Exchange and Nasdaq Stock Market issues, 4:30 p.m. to 8 p.m. EDT Monday through Thursday. Prior to Oct. 12, Market XT traded issues from 6 to 8 p.m.

updates the most active issues on both MarketXT and Island ECN in Got a Minute? and in the Evening Update.


Eric Gillin

In other post-close news (earnings estimates from

First Call/Thomson Financial

; earnings reported on a diluted basis unless otherwise specified):

Mergers and acquisitions

Talks between online travel agents

Preview Travel


and Microsoft's


have fizzled, according to a source close to Preview.

Expedia was still in

pursuit of Preview Travel, even after the company announced a merger on Oct. 4 with

Sabre Group's

(TSG) - Get Stars Group Inc. Report


Web site. "They hit a stumbling block," the source said. "If it doesn't happen when the iron is hot, it doesn't happen."

Preview was in talks with both Travelocity and Expedia before making its decision to merge with Travelocity, two sources told

Microsoft spokesman Tom Pilla said the company "doesn't comment on rumors." Preview executives couldn't be reached.

Preview's stock is up more than 70% since the deal was announced. Sabre's stock is up 7%.


Suzanne Galante

Earnings/revenue reports and previews



cautioned that it would report sales and earnings for the final five months of its fiscal year below earlier forecasts. In September, ABC-NACO said it was transitioning from a fiscal year into a calendar year, beginning Jan. 1. The company said that beginning Jan. 1, factors including certain product orders from railroads and uncertainty in the new freight car market caused a drop in sales.

Becton Dickinson

(BDX) - Get Becton, Dickinson and Company Report

said it anticipates posting fourth-quarter earnings in line with the 17-analyst estimate of 42 cents a share. Separately, the company announced that Kenneth Weisshaar plans to step down from his role as CFO to pursue other interests.

Tasty Baking

(TBC) - Get AT&T Inc 5.625 % Notes 2018-01.08.67 Global Report

, maker of


baked goods, warned investors that it expects to post third-quarter earnings between 7 cents to 9 cents a share, missing the three-analyst estimate of 16 cents and the year-ago 17 cents. The company attributed the expected earnings disappointment on pricing pressure and the East Coast's summer heat waves.




said it has settled two separate lawsuits involving


(LBY) - Get Libbey Inc. Report

, which was previously interested in acquiring the flatware maker. A spokesman for Oneida said the company has settled both an April 1999 suit, claiming that Libbey's distribution plan was anti-competitive, and an August 1998 proceeding, which involved glassware that Libbey planned to launch.

PECO Energy

(PE) - Get Parsley Energy, Inc. Class A Report

said it has forged an agreement with

Schlumberger Resource Management Services

to automate meter reading for all of its southeast Pennsylvania service area.


said that it has brought legal proceedings in the U.S. district court in Connecticut against


(MSFT) - Get Microsoft Corporation (MSFT) Report

, alleging that a new hotel price matching system on Microsoft's travel Internet service breaches one of its patents. priceline said the suit comes after eight months of negotiations between the companies, over an agreement that would have included joint marketing programs, while giving Microsoft rights to use priceline's system, "name your own price." After the talks ended, Microsoft opted to launch its own

Hotel Price Match Service

last month, which sparked the patent suit, claiming Microsoft broke the state of Connecticut's Unfair Trade Practices Act. is seeking patent violation protection along with actual and punitive damages.

Bond Focus: Long Treasury Yield Makes New High for the Year


Elizabeth Roy

Senior Writer

10/13/99 4:59 PM ET

So much for that particular record.

The benchmark 30-year Treasury bond's yield reached a new high for the year today as its price tumbled in response to rising commodity prices, a heavy corporate new issue calendar and anticipation of big economic numbers in the days ahead.

No major economic reports were released today, but a key commodity price index, the

Bridge/Commodity Research Bureau Index

, closed at a new high for the year. Even though the

gain owed much to sharply rising coffee prices (drought conditions in Brazil are threatening the crop), a record is a record, and the long bond shed 19/32 to 98 1/32, lifting its yield 4 basis points to 6.27%. The previous high closing yield of 6.26% was set on Aug. 12.

The Bridge/CRB Index rose 4.17 to 209.37, its highest close since July 1998.

"It's really a global phenomenon," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "There's a global economic upturn under way, particularly in industrial production, and that's pushing commodity prices higher."

The decline in Treasuries accelerated over the course of the day as the Treasury bond futures contract listed on the

Chicago Board of Trade

made new lows for the year, triggering automatic selling, Crescenzi said.

A heavy slate of new corporate and federal agency issuance helped force prices lower as some investors sold Treasuries in order to make room for the new issues, which included a $5 billion 3-year note from

Freddie Mac


and a $1 billion 5-year bond from the

Inter-American Development Bank

. "There were a lot of corporate issues and that caught people having to sell where they didn't want to, at the lows," said Michael Pianin, vice president at

ING Futures & Options


Also forcing prices lower was apprehension of key economic reports due out tomorrow and Friday -- the

retail sales

report and the

Producer Price Index

, both for September.

Economists surveyed by


are predicting, on average, that overall retail sales will be unchanged, and that sales of everything but motor vehicles will rise 0.3%. But John Liscio, publisher of

The Liscio Report

, an economic newsletter, turned some heads with the forecast that sales will rise 0.7% overall and 0.9% excluding autos. "The wild card is the hurricane," he said in an interview, explaining that while Hurricane Floyd probably depressed sales during the early part of the month, purchases related to rebuilding during the subsequent three weeks may greatly inflate the final numbers.

As for the PPI, it is expected to advance as much or more in September than it has all year -- 0.5% overall and 0.4% at its core, which excludes volatile food and energy prices -- due in large measure to a one-time tobacco price hike. But

Merrill Lynch

senior economist Martin Mauro said, "It's a case now where the whisper number is higher."

So the question becomes whether all the selling that has preceded the retail sales and PPI releases inoculates the Treasury market from another bout of retching in the event that the numbers are as strong as expected or even stronger.

"You can get a slight degree of comfort knowing that the market is pricing in bad news for Friday," Crescenzi said.


Roland Jones Chatting on

Thursday, October 14

TSC reporter Roland Jones will chat with Net Slaves co-author Steve Baldwin at 12:30 p.m. on

Find out why not everyone working for an Internet company is cashing in on the dot-com phenomenon.

Ben Holmes Chat on Yahoo!

Thursday, October 14

Join Ben Holmes for an hour-long chat on IPO's. Ben will discuss the "ins and outs" of initial public offerings and help you decide if you should try to get in or safely stay out. Join Ben on Yahoo! at 5 p.m. EDT.

Register for Yahoo! Chat at: It's free!

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