Fool Portfolio Report
Monday, October 7, 1996

by David Gardner

ALEXANDRIA, VA, October 7, 1996 -- The Fool Portfolio continued its impressive string of market losses Monday, managing for the fifth day in a row to underperform both market indices.

Monday was highlighted by a $5/8 rise in shares of Quarterdeck -- which we're short -- following the company's announcement of a restructuring plan. In addition to the planned restructuring, Quarterdeck also announced it would report fiscal fourth quarter (ended September) losses substantially greater than expectations.

The stock opened at $5 3/4, gapping down $3/4 at the open... just an eighth of a point above its 52-week low. Over the course of the rest of the day, it came back to even and then in the later afternoon fought through to impressive gains, closing at an ask of $7 1/8 on volume of 1.1 million shares. It was indeed an interesting day.

As we currently hold a short position in QDEK, you'll have to permit me a bit of skepticism as I look at today's release. Read my words, therefore, with a questioning eye. I'll do my best to be fair-minded, but the Fool in me cannot help but point out euphemism and obfuscation.

We'll just look at the first three sentences:

FIRST SENTENCE OF RELEASE: Quarterdeck Corporation (Nasdaq: QDEK) today announced a comprehensive company restructuring that includes steps that re-shape the company's operations and are designed to return the company to profitability.

A FOOL: Not only does the company currently lack a full-time management team to effect the restructuring, but Quarterdeck lost $28.6 million in its most recent quarter on sales of $16 million. Given the lack of competitive edge to its products, huge current losses, the compulsion to spend on marketing in order to keeps its name in front of the public, and the likely difficulty of finding good, successful managers to take over this troubled franchise, the "return to profitability" theme looks unlikely to be fulfilled at any point in 1997, at least.

SECOND SENTENCE OF RELEASE: In addition, the company has strengthened its balance sheet with the completion of a $20 million convertible preferred stock offering.

A FOOL: Ah, euphemism. Excuse me, but Quarterdeck needs to keep itself afloat any which way it can (it has been gobbling up cash in huge amounts). The company was forced to find $20 million to stem the latest losses. Earlier this March, it floated a $25 million 6% convertible subordinated note... this time it's preferred stock. (The company has also diluted itself over the past 12 months by issuing 9 million more common shares.) Keep in mind, these new financing instruments would -- in the case of bankruptcy -- pay off their new investors before long-time shareholders of the common stock get paid off. I'm not saying the company is going bankrupt... I am pointing out that a onetime small-cap growth stock issuing $45 million in increasingly complicated convertible instruments is not a good sign. "Strengthened its balance sheet" is not the most apt phrase to accurately characterize the significance of the latest offering.

THIRD SENTENCE OF RELEASE: Also, the company said that primarily as a result of these steps and other operational issues, results for the fiscal fourth quarter and year-end will fall well below expectations.

A FOOL: "Primarily as a result of these steps"? The restructuring may result in a charge (we'll see when Quarterdeck announces its results in a month), but I hardly think it was primarily these steps. "Other operational issues" would, in my mind, be the primary reason why the financial statements will show moderate to huge losses for the quarter just ended September 30th. Keep in mind, the best guide to the current quarter is what happened in the previous one. In its previous quarter, QDEK spent more money on marketing expenses than it gained in overall sales. In fact, the line item expenses of R&D, sales & marketing, and general & administrative each on their own exceeded the company's gross profits (revenues minus cost of revenues). You can go back and read our analysis of company finances in our initial sell report for more details. "Other operational issues" is another euphemism; for it, substitute in the third sentence of the release the phrase "failure of the core business."

I'll leave my comments at that, having no wish to belabor these points. Suffice to say that the move down to $5 3/4 this morning seems to me more reflective of the company's value and prospects going forward than the close at $7 1/8. I expect the future will reflect that thinking.

So anyway, restructurings are generally events attributed positive connotation by stock market investors. Thus, I'm unsurprised the stock rose today. Hey, it's the same reason the Foolish Four approach works year after year... the market loves it when those huge Dow behemoths announce reorganization and trimming down. This formula, I submit, is not as pleasing when used by a small-cap company. Quarterdeck said it was trimming down its workforce by 40%, while doing more financing. Eeesh.

At the same time, I applaud the making of these moves by King R. Lee and Anatoly Tikhman, the two men who currently make up the company's "Office of the President." QDEK was in desperate need of paring down, and Messrs. Lee and Tikhman are moving el compania in the right direction. Our only disagreement would be over the usefulness and value (or lack thereof) of the company's existing products. It's all very well to pare down any company, any operation... but does your newly thinned company have good products to lure customers?

America Online continued its dispiriting nose dive, down $2 1/4 to close bidding $27. How much has AOL lost in value in the past five days? Well, $8 5/8, for starters. Another way of looking at it? Fully one-quarter of its overall value in one daggone week. Another way? Seven hundred and eighty million in market value out the window.

I got a note today from a friend who bought the stock earlier this year. He was frustrated. Heck, I am too. It's hard to know what to say in cases like this, when market sentiment is completely against one of your holdings. I did for him what we did for our readership much of the summer: talked about the long term. It may be kind of a lame fallback, but it generally works. As companies like C-Cube (Nasdaq:CUBE) and Iomega were more than cut in half in the summer selloff, Fooldom's message was simple, "These are great companies; don't get caught up in short-term market fickleness." And they came storming back, doubling from their lows. You generally end up being rewarded when you take a long-term view toward market leaders in dynamic growth industries. We'll see if AOL manages to prove that maxim again. Our money remains where our mouth is: long.

Speaking of great companies, 3Com hit another new all-time high today, up $1 3/4 to bid $66 3/4. The company announced a stock-swappin' acquisition of OnStream Networks. OnStream has two specialties: (1) Asynchronous Transfer Mode (ATM) products, which further bolster 3Com's leadership in the enterprise market, and (2) broadband wide area network (WAN) and access products, making Trois Com more competitive (with companies like Ascend) in the battle for the business of Internet service providers and network service providers. The transaction is valued at $245 million.

Don't know what every single one of the terms in the preceding paragraph mean? It's probably time to stop by Fooldom's Networking Area, where you can click the Networking Fundamentals button to read highly Foolish features like The Networking School (with its full glossary of terms) and Networking Financials 101. In addition, our highly talented MF MOM just published a recap of last week's Montgomery Securities Conference in the weekly Network Update. Click and learn.

Just to close with a brief contextual note: With regard to the "enterprise market" mentioned above, as networking continues to spread like wildfire over our planet, large "enterprises" are moving their existing networks to standardized, high performance ATM switched networks. The standardization will produce integrated voice and video with data, at even cheaper costs. The OnStream acquisition addresses this very market.

Now for the official closing note... how 'bout that Chevron? Up another $7/8... new high. Very, very Foolish.

We look forward to... y'know... maybe, like, beating the market at some point soon. Maybe. Y'know.

--- David Gardner, October 7, 1996

Today's Numbers

Day Month Year History FOOL -0.68% -5.49% 44.26% 169.36% S&P 500 +0.27% 2.33% 14.19% 53.43% NASDAQ +0.26% 1.95% 18.88% 73.68% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 21.88 768.41% 8/5/94 680 AmOnline 7.27 27.00 271.24% 8/13/96 250 3Com Corp. 46.86 66.75 42.45% 8/11/95 125 Chevron 50.28 65.38 30.01% 8/12/96 110 Minn M&M 65.68 69.88 6.39% 8/12/96 130 AT&T 39.58 40.00 1.07% 9/27/96-890 Quarterdck 7.08 7.13 -0.58% 8/12/96 280 Gen'l Moto 51.97 49.25 -5.24% 10/1/96 42 LucentTech 47.62 44.00 -7.59% 8/24/95 130 KLA Instrm 44.71 21.13 -52.75% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 43968.75 $38905.62 8/5/94 680 AmOnline 4945.56 18360.00 $13414.44 8/11/95 125 Chevron 6285.61 8171.88 $1886.27 8/12/96 110 Minn M&M 7224.44 7686.25 $461.81 8/12/96 130 AT&T 5145.11 5200.00 $54.89 9/27/96-890 Quarterdck -6304.75 -6341.25 -$36.50 10/1/96 42 LucentTech 1999.88 1848.00 -$151.88 8/11/95 280 Gen'l Moto 14552.49 13790.00 -$762.49 8/24/95 130 KLA Instrm 5812.49 2746.25 -$3066.24 8/13/96 250 3Com Corp. 11714.99 16687.50 $4972.51 CASH $22563.12 TOTAL $134680.50 Transmitted: 10/7/96