Skip to main content


  • Author:
  • Publish date:'s DAILY BULLETIN

November 12, 1999

Market Data as of Close, 11/11/99:

o Dow Jones Industrial Average: 10,595.30 down 2.44, -0.02%

o Nasdaq Composite Index: 3,197.29 up 41.33, 1.31%

o S&P 500: 1,381.46 up 8.00, 0.58%

o TSC Internet: 820.91 down 13.69, -1.64%

o Russell 2000: 447.49 down 1.23, -0.27%

o 30-Year Treasury: 100 15/32 unchanged , yield 6.090%

Companies in Today's Bulletin:

Diversinet (DVNT:Nasdaq)

Microsoft (MSFT:Nasdaq)

Conseco (CNC:NYSE)

In Today's Bulletin:

o Banking: Cash-Flow Leak Threatens Debt-Heavy Conseco
o Banking: Pro and Con on Conseco Cash-Flow Data
o Evening Update: Bank One Won't Sell First USA Card Unit
o Silicon Babylon: AEA Conference: Small-Caps Come Looking for Love

"" on Fox News Channel

Robert Friedman from the Mutual Series joins us again for "Stock Drill."Find out how his original stock picks did and which stocks he has his eye on now.

We'll get the "Word on TheStreet" on taking profits in this bull market and having a little cash on the sidelines. Gary and Adam tackle Microsoft after the big ruling last week and consider which company they think could gain the most if Microsoft is severely penalized. And don't miss predictions -- especially with next week's Fed meeting on interest rates looming.

"" on the Fox News Channel airs Saturdays at 10 a.m. and 6 p.m. ET and Sundays at 10 a.m. ET.

FNC is Fox's 24-hour cable news channel. To find Fox News Channel in your area, call your local cable operator or see our "TSC on Fox TV" page at

Also on

Market Features: Drop in Manufacturing Jobs Doesn't Mean Labor Markets Aren't Tight

The numbers tell the tale. Industrial output remains strong, but the amount of workers chasing those once-cherished jobs has fallen off.

Mutual Funds: Success Brings Scrutiny: SEC Moves Slowly in Approving Jacob Internet Fund

Portions of the fund's prospectus dealing with Jacob's triple-digit returns at his previous fund appear to be under the microscope.

Latin America: The Winners and Losers in the Sanctions Game

With U.S. companies locked out of valuable opportunities in Cuba and Iran, critics say it's time to look at other tactics.

Semiconductors: Fabless Firms Feel the Pinch From Taiwanese Earthquakes, Rising Demand

The firms, which depend on others for chip production, stumble after the quakes hamper production and demand soars.

Banking: Cash-Flow Leak Threatens Debt-Heavy Conseco


Peter Eavis

Senior Writer

11/11/99 8:45 PM ET



parent company could be in the grips of a cash-flow squeeze that threatens to throw the financial-services firm off its fast-growth strategy, according to three observers.

The problem is that in aggressively trying to build a financial-services giant offering insurance and lending products to middle America, Chairman Stephen Hilbert took on too much debt, these people say.

Conseco is no stranger to unfavorable analyses of its financial health and strategy. In fact, in the early '90s the company shrugged off a barrage of criticism of its accounting methods and grew rapidly. Investors who stuck by the company have been awarded with a 1,000%-plus return on Conseco stock since 1990.

But now, investors appear to be listening to the bears: At recent levels around 20, the company's stock is down nearly 40% from its 1999 high of 34 3/8, posted March 12. And just this week the stock has slipped nearly 3 from Friday's close of 22 7/8.

Carmel, Ind.-based Conseco responded to only one query from a list of questions about cash flow and declined to say whether figures used in this article are accurate.

Skeptical Stance

Prominent among the skeptics is Colin Devine, an insurance analyst at

Salomon Smith Barney


Devine calculates that each quarter Conseco's parent company spends about $100 million more than it makes. (Salomon last helped underwrite a securities issue for Conseco in October 1998, and Devine rates Conseco a hold.) Conseco declined to comment on the cash-flow deficit alleged by Devine. (Conseco's cash flow wouldn't be a source of disagreement if the company's financial documents showed how much cash is used separately by the parent company and its

Green Tree

lending unit. Instead, the cash-flow table in Conseco's public accounts is consolidated.)

Investors closely monitor cash flow at Conseco's parent because that's where the firm takes on most of its debt. And after a burst of capital markets activity starting this summer, the parent's debt obligations are up considerably, rising nearly 20% to $3.45 billion now, from $2.91 billion in June.

The post-June financing, which consisted of $550 million in two debtlike securities issues and $1 billion in bonds, also increased servicing costs for the parent. The three issues have added an estimated $110 million to the parent's payments on debt and debtlike securities, taking the total to about $470 million a year.

Faced with heavier and more expensive leverage, Conseco may have to slam on the brakes at its

Green Tree

subprime lending division, say Devine, the ratings agency

Moody's Investors Service

and one New York-based hedge fund manager who's short Conseco (a position that would allow him to profit from a decline in the company's shares).

Moody's gives Conseco and Green Tree a Ba1 rating, and since September has had both entities on positive outlook, which signals to investors that it's more likely to award Conseco a better rating than keep it the same or lower it.

But the ratings agency now is reassessing its optimism. "We believe that Conseco will slow down growth at Green Tree," says Patrick Finnegan, insurance analyst at Moody's. "If they don't, the positive outlook won't be sustained." This would be a blow to Conseco, which has stated that it's counting on better ratings to lower debt costs.

Defenders of the Faith

Conseco does have plenty of defenders. One is Jon Reichert, an analyst at the ratings agency

Standard & Poor's

. He disputes the assertion that the Conseco parent company has a cash-flow deficit. Instead, he estimates that the parent company is running a $20 million surplus, with its revenue totaling around $723 million a year and its costs at $702 million. (S&P rates Conseco triple-B-plus, three notches above Moody's.)

And two mutual fund managers say the debt concerns are unwarranted, arguing that the higher borrowing is being used to fund the fast growth at Green Tree, which made $553 million in pretax operating earnings in the year's first nine months.

Green Tree needs to expand aggressively to snatch market share from its competitors, many of which are faltering, says Robert Rodriguez, manager on the


FPA Capital fund, which holds Conseco shares.

And if there comes a need to reduce parent company leverage, "Conseco can always upstream earnings from Green Tree," adds Rodriguez.

Indeed, Reichert estimates that Green Tree could pay up $400 million in dividends this year, a sum that includes the $200 million paid by Green Tree to the parent in the year's second quarter.

"Leverage is going up with the growth in receivables at Green Tree," says the other mutual fund manager, who declined to be named. He believes that Conseco's shares are poised to soar when the fears over liquidity are proven baseless. (This manager's fund owns Conseco shares.)

Fall Foliage

But the New York hedge fund manager who's short thinks Conseco's stock has further to fall. He reckons that Green Tree doesn't have enough spare cash to give the parent because it needs that money itself to fund the rapid expansion of its loan book.

In the third quarter, Green Tree's loan origination was up a hefty 23% to over $7 billion from the year earlier period.

"The Conseco story is all about liquidity," says the hedge fund manager. He doesn't believe that Green Tree is generating much excess cash. If it is, why didn't the Conseco parent company use the cash to pay off debt since June, rather than issue more obligations that added significantly to debt costs? "If Conseco's generating free cash flow, its interest costs should not be going up," he remarks.

The mutual fund manager who didn't want to be identified isn't worried by higher servicing costs. True, he says, the $1 billion in bonds were more expensive, but they also have a longer maturity than much of the debt they replaced, meaning Conseco is less exposed to any possible reduction in demand for lower-rated corporate debt.

Clearly, the battle lines between Conseco fans and detractors are drawn. A useful task for undecided investors is to look closer at the methods used by each side to arrive at their cash-flow numbers. For an attempt to do just that, see



story on Conseco.

Banking: Pro and Con on Conseco Cash-Flow Data


Peter Eavis

Senior Writer

11/11/99 8:45 PM ET

Views of



are positively Manichean, with a wide gulf separating the company's supporters from its detractors when it comes to assessing cash flow to the parent.

If Conseco disclosed more, the differences between the camps might not be so stark. After all, until 1997, the company gave investors a cash-flow table for the parent company in its annual report. What follows is an attempt to recreate that table for 1999, according to the bearish and bullish approaches. (Conseco declined to provide such a table using current numbers.)

Using the methodology of Colin Devine, an insurance analyst at

Salomon Smith Barney

, the Conseco parent has annualized costs of $807 million vs. inflows of $413 million, leaving a shortfall of $394 million. The table below breaks down these numbers. (Salomon last helped underwrite a securities issue for Conseco in October 1998, and Devine rates Conseco a hold.)

The method used by Jon Reichert, an analyst at the rating agency

Standard & Poor's

, is encapsulated in the table below.

Reichert's numbers differ mainly in that he predicts much higher revenue. In particular, he's expecting more than $600 million from insurance operations, against the $353 million forecast by Devine. Both have the $202.5 million for insurance subsidiary dividends, since that number is stated in the company's 1998 annual report as the total amount of dividends that can be paid in 1999 from the subsidiaries without permission from state insurance regulators.

Reichert says Conseco guided him toward the $400 million number for the line called "other revenue from insurance subsidiaries," which includes fees as well as interest and principal payments from so-called surplus debentures held by Conseco's insurance subs (surplus debentures are essentially loans made by the parent to its subs).

State of Grace

So why does Devine's approach arrive at a much lower revenue total from insurance operations? In short, it rests on the belief that, due to state regulations, Conseco can't draw


the $202.5 million in dividends stated in the 1998 annual report and as much as $400 million in fees and debenture payments this year.

That's because dividend capacity is dependent on the amount of fees as well as interest and principal paid out on the debentures -- and vice versa. In other words, the more paid out by the debentures, the less that can be paid in dividends and fees, and vice versa.

This relationship was confirmed by Conseco in its only reply to

for this article. In an email, the company stated: "As clearly explained under 'Statutory Information' in our

second quarter financial statement filed with the

Securities & Exchange Commission

, when a subsidiary pays fees or interest on a surplus debenture, those amounts reduce the statutory earnings on which the subsidiary can pay dividends."

And past results suggest this, too. Although Conseco had dividend capacity of $165.1 million in 1998, according to the company's 1997 annual report, it drew only some $103 million from insurance subsidiaries in dividends last year, according to an examination of statutory filings.

Recognizing this interdependency, Devine's approach estimates an overall fixed sum that the insurance subs can pay out each year in dividends, fees and debenture principle and interest. In 1998, it appeared to be $308 million, so his method adds an extra $45 million to account for insurance business growth in 1999 to arrive at $353 million for this year.

There'd be less of a dispute over cash flow if investors were able to track exactly how much is being paid to the parent through the year. But it's impossible to arrive at a full picture.

According to the company's second-quarter financial SEC filing, the insurance subs had made principal payments of $62.1 million from their debentures and $36 million in dividends in the year's first half. And the filing stated that it could pay another $166.5 million in dividends from insurance subs in the year's second half. But, pertinently, the filing didn't say how much in the way of debenture payments and fees could be made in the second half.

Paying Dividends

Naturally, eyes have turned to Conseco's two largest potential sources of dividends this year: the Texas-based insurance companies

Bankers National Life


Jefferson National Life Insurance


Conseco Life Insurance of Texas

in the second quarter), which had 1999 dividend capacity of $75.3 million and $81.9 million, respectively, according to 1998 statutory filings. Their combined total of $157.2 million of potential dividends is equivalent to a sizable 78% of the 1999 total capacity of $202.5 million.

Bankers National paid $36 million in dividends to the Conseco parent company during the year's first half, while Conseco Life Insurance of Texas paid nothing, according to quarterly financial statements filed with the

Texas Insurance Department


That means the companies have $121.2 million of dividend capacity left, assuming that hasn't been whittled down by other payments. That $121.2 million is equivalent to 73% of the $166.5 million that Conseco said it had available in dividends for the year's second half.

A Texas Insurance Department official declined to comment on how much the two companies could pay to the parent in the year's second half, citing the agency's policy of not making such information public.

As a result, Conseco's parent company revenue stream remains murky. By publishing clear cash flow numbers, the company could easily spark a rally in its beaten down stock and blow away the short-sellers and bears like Devine in the process. So why the wait?

Evening Update: Bank One Won't Sell First USA Card Unit


Tara Murphy

Staff Reporter

11/11/99 8:09 PM ET

Bank One


Chairman and CEO John McCoy said the bank has no plans to sell its

First USA

credit-card division, even though the unit is making a dent in its earnings. Yesterday, the company cautioned investors for the second time that fiscal 1999 earnings would miss expectations due to problems with its First USA credit-card business.

joint newsroom covered Bank One's credit-card unit troubles in a

story this afternoon.



reported third-quarter earnings of 18 cents a share, meeting its revised outlook, which was scaled down due to a computer components shortage. The report was in line with the 27-analyst estimate and up from the year-ago 14 cents. CEO Michael Dell said in a phone interview with


that he sees a "healthy" fourth-quarter and Y2K concerns easing, with "a group of customers buying at a more intense level, strong enough that they offset any Y2K effect." According to Dell's third-quarter report, its consumer PC sales grew 100%.

joint newsroom covered Dell's report in a

story this evening.

After-Hours Trading

People will have to keep waiting for Dell to freeze over. The company was red-hot in after-hours trading on

Island ECN

, moving a whole lot of shares.

After the bell, the company announced its third-quarter earnings.

joint newsroom has the complete


Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EST.


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter'sundefinedMorgan Stanley Dean Witter Online and Mellon Bank'sundefinedDreyfus 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. EST Monday through Thursday.


explains how the rules change when the sun goes down in Investing Basics: Night Owl, a section devoted to after-hours trading.


Eric Gillin

In other postclose news (earnings estimates from

First Call/Thomson Financial

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

Mergers, acquisitions and joint ventures

BP Amoco


and California Gov.

Gray Davis

(D) said they have struck a deal to resolve the state's gripes over the company's plans to take over

Atlantic Richfield


. According to the terms, BP Amoco said it would begin removing MTBE, a gasoline additive which pollutes water, prior to the mandate at Arco's Carson refinery. The company also agreed to continue pricing Arco's gasoline at a discount to its competitors.


said it has forged agreements with



Turner Sports




that start in the 2001 season. Although none of the parties would discuss their deal's terms, one analyst sees the agreement exceeding $2.4 billion over the life of the contract. Nascar's pact with

News Corp.'s


Fox division is in effect for eight years, while its deal with NBC, a business of

General Electric


, and

Time Warner's


Turner Sports will cover six years. Nascar's new deal replaces its 20-year union with



and with







Software developer



said it has made a pact with



, to potentially create

Microsoft Office 2000

software as an online service. USinternetworking, which is part of a test program to deliver

Microsoft Office Online

, said the agreement would enable its customers to receive the Microsoft Office package via the Web.

Earnings/revenue reports and previews

CKE Restaurants


announced its plans to cut its workforce at its


restaurant headquarters in Rocky Mountain, N.C., in half, by roughly 150 jobs. The restaurant chain owner said its expects to post third-quarter earnings of 5 cents to 8 cents a share, greatly missing the 11-analyst estimate of 19 cents a share.

ESC Medical Systems


said it sees third-quarter losses in the range of $55 million to $57 million due to charges.

Hain Food Group


reported first-quarter operating earnings of 17 cents a share, in line with the eight-analyst estimate and up from a year-ago 12 cents a share.



posted third-quarter earnings of 25 cents share, missing the 21-analyst estimate of 27 cents and down from the year-ago 27 cents.

Pep Boys


posted third-quarter earnings of 20 cents a share, missing the 14-analyst estimate of 25 cents but up from the year-ago 6-cent loss, which included charges that reflect costs associated with a sale.

Sterling Software


posted fourth-quarter earnings of 54 cents a share, well above the five-analyst estimate of 47 cents and up from the year-ago 46 cents.

Offerings and stock actions

Lehman Brothers

priced a 3.5 million-share IPO for



below its expected $11-to-$13 price range at $10 a share.

Merrill Lynch

priced an 8.15 million-share IPO for



above its expected $16-to-$18 price range at $19 a share.

Lehman Brothers priced an 8.5 million-share IPO for

Somera Communications


in the middle of its expected $11-to-$13 price range at $12 a share.

Silicon Babylon: AEA Conference: Small-Caps Come Looking for Love


Cory Johnson


11/11/99 1:42 PM ET

SAN DIEGO -- The second session of the

American Electronics Association

conference, focusing on companies with market caps or revenue of $150 million to $250 million, might offer some of those stocks with upside potential. They are post-start-ups (largely non-Internet) or fallen angels. Or worse. But, to be sure, with 150 companies, there are plenty of dogs around. And AEA veterans, who see the same stocks in the second session year after year, are wary.

"I think there is a rule," says the loquacious Nick Moore, a tech-stock analyst with

Jurika & Voyles

, "that if a company goes more than two years in the second session of AEA, it's about to be delisted. Or it should be."

Someone Oughta Call Security

If there was ever a reason


to buy a stock based on technicals, it is the tiny Toronto-based Internet stock



. The chart of this stock, which has risen to 11 from 3 this year, is a thing of beauty. But a testy presentation filled with ravenous short-sellers was downright ugly.

Diversinet offers digital certificates for the hottest area of e-commerce -- no, not


auctions, but wireless Internet. The presentations here at AEA were crowded with investors hoping for another four-bagger. But although CEO Nagy Moustafa kept displaying slides with

Palm Pilots







pagers and logos from



, he offered little evidence that the company is closing deals with those companies. More egregious was a remarkable dearth of numbers. As Moustafa dragged on, investors began to get up and walk out of the room.

"Our applications," he said, "will work with Palm to develop authentication over the BellSouth network..." One testy fund manager interrupted. "But I already have a

Palm VII

and can trade my




your product," he said. "Do you actually


a deal with Palm?"

"We have a relationship with BellSouth," Moustafa said. "They are looking at Palm."

It got worse from there. Another slide highlighted research and development. Said Moustafa: "There is a large investment in R&D..."

"Define large," a money manager interrupted.

"Large? It's very big," Moustafa said.

"Define large," the manager persisted.

"How about $10 to $15 million?" Moustafa said.

On further review (as they say in the


) it came out that a guy who used to run Diversinet (back when it was called

Instant Publisher

) bought the central technology in 1996 for $10 million. Where is that guy now? "He's gone," Moustafa said without further explanation.

Another short-seller asked about a former associate of the company named Bobby Genovese.

"Who is Bobby Genovese?" Moustafa asked.

"Wasn't he in company management?" the money manager asked.

"Bobby Genovese is a former investor relations person who is no longer affiliated with the company," Moustafa said tersely, his memory suddenly on the mend.

Amazingly, Moustafa concluded his presentation without any slides addressing past revenue, earnings, margins or any other basic financial information. Investors left the room shaking their heads.

Interleaf Stock Flourishes With XML Translation Program

Yet another Web software company appeared on investors' horizons at this conference. Waltham, Mass.-based



makes, among other things, a software that translates




files into documents coded in XML, the state-of-the-art Internet markup language. "As the government has just stated, Word is kind of a monopoly," said CEO Jaime Ellerston. "We have the only application that allows you to do XML authoring via Microsoft Word."

XML is the hottest thing going among Web programmers. Short for E






anguage, XML has replaced the Web's standard language of HTML. Here's the deal: HTML turns text into a Web page. But XML turns text into almost any format. So prices, names or stock quotes can be used for all sorts of applications. With XML, static Web pages are empowered like a database.

Interleaf makes a product called


, which claims to be the only product to seamlessly transform Word files to XML. "We believe that ultimately almost all e-business will be focused on XML," Ellerston said.

Ellerston said that the product will let companies take single Word files and instantly transform them across any number of platforms, from Web pages to email to Internet-enabled mobile phones, all on the fly. It is those mobile connections that Ellerston thinks will light a fire to his company's prospects. "There are something like 280 wireless devices out there. There will be 2000 in the next few years," Ellerston said. "Garter says there will be 600 million mobile phones out there by 2002. And everyone from









is trying to figure out how to use these mobile devices to get their message out. Write once, output everywhere, and our product lets them do that."

Ellerston said Microsoft is a partner and he doesn't fear that the company will try to encroach on his business. And investors, too, appear unafraid. Some were so excited by the presentation that they were putting in orders with a sales trader who stood in the doorway. The stock rallied big as the presentations went on, rising 25% on strong volume Wednesday to close at 38 1/8.

Cory Johnson files weekly from's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

For more columns by Cory Johnson, visit his column



Copyright 1999,