An important note to clients: Clients who have been with us for a while have enjoyed giant appreciation in Qualcomm. For many portfolios it is now an over-weighted position. These accounts are thereby exposed to increased risk, volatility, and potential reward. I believe Qualcomm will go higher, and I learned from Medtronic fifteen years ago that one should not sell a company simply because it has appreciated. Sale should be based on expectations for future return on investment. However, because of the weight Qualcomm has in many accounts, I am concerned about the pain it will cause if it declines. If you believe, in your particular case, that you should not own a concentrated position in Qualcomm, please call me.

Excite @ Home had 620,000subscribers at the end of the second quarter with annualized growth then running over 100%. The geographical placement of its fiber assets gives it proximity to half of the homes and businesses in the U.S. and Canada. The packet-based design of its network allows very rapid transmission of Internet data, with downloads of large files taking literally seconds rather than hours on competing "dial-up" connections such as AOL. Also, users can have an "always on" connection without overloading system capacity. AOL’s network structure is slow and threatened by obsolescence, a significant long-term competitive advantage for Excite @ Home. AOL’s 19 million subscribers want a faster connection. Because AOL is late in providing it, they are losing subscribers to Excite @ Home. AOL is making attempts to provide faster service through a technology called DSL, or through a rumored cable access deal with AT&T, but the cost obliterates profitability at AOL’s $21.95 monthly rate.

The Excite Internet portal, added in a merger earlier this year, has 38 million registered users, a huge growth rate, and one of the ‘net’s most frequently accessed search engines. The goal is to keep visitors on the site longer, so as to grow advertising and transaction revenue.

Although Excite @ Home’s stock is now less than half its $99 high, it is still expensive compared to the current magnitude of business. A highly risky guesstimate of year 2002 results would include a subscriber count over 10 million, revenues over $2 billion, and net operating profit after tax and before amortization (NOPAT) over $400 million. On the current share count of 400 million, that works out to NOPAT per share of about $1.00. Note that this assumes that currently spectacular analyst projections of Internet growth prove correct. Nevertheless, with over $7 billion of capital employed, the NOPAT of $400 million is not a rate of return to write home about.

Bottom line: high growth, high price, high risk.

Verisign gained its position in this rapidly growing field by entering it first, becoming the name brand associated with secure connections across the ‘net. It is three years ahead on the learning curve, is predominant in relationships with Internet Service Providers and Fortune 500 companies selling products on the ‘net, and has the most extensive collection of foreign partners. These sizable advantages will be needed to combat the attraction of better-capitalized companies to this nascent industry.

However, Verisign does not own blocking technology or intellectual property rights. Companies of much larger reach and capitalization have recently entered the field. Verisign is likely to maintain its dominance as long as it makes no errors. A breach of the security it sells would open the door to competition, and damage the stock price, perhaps severely. Certificate issuers like Verisign insure their customers against fraudulent certificates, a long tail liability.

One new competitor is a partnership between Equifax and IBM. Their assets include IBM’s name brand recognition combined with Equifax’ huge credit database. These two companies also have deep customer relationships. Central to issuing certificates of authorization is the verification that an applicant for a certificate is who he says he is. Equifax owns a database to defend against the issuance of fraudulent certificates, whereas Verisign settles for a lower level of security. In fact, Verisign at one time used Equifax to verify identities. Because Equifax would not approve 30% of the certificates Verisign wanted to issue, Verisign ended the relationship. Verisign says no claims have been filed against it as of the date of our visit. We are concerned that the door has been left open for a problem that could do a lot of damage to Verisign’s reputation and business.

Barring such an occurrence, Verisign will continue to grow explosively. In the next five years, Verisign could conceivably reach $500 million in annual revenues with handsome profit margins. This is one of relatively few good business plans on the Internet. Verisign currently has $164 million in capital and 52 million shares outstanding. There is a real opportunity here for stellar earnings per share growth and a handsome return on capital. The emerging smart card market is another big opportunity for them.

As a purveyor of enabling Intern commerce technology, Verisign has exciting growth potential. It also possesses the risk of a permanent loss of capital.

Coke met with investors in New York in June to assure investors that it fully expects to return to 7-8% volume growth and 15-20% earnings per share growth beginning sometime in 2000. Pricing has improved and management expects to benefit from economic recovery in developing markets. Management stated that the fundamentals of the business are as strong as they have ever been, perhaps even stronger.

Upcoming visits include Monsanto, Qualcomm, and Disney.

Steven L. Re´, CFA

The above is for information purposes only and is not to be construed as a recommendation to purchase or sell securities. It should not be assumed that investments in any of the above mentioned securities will be profitable, and past performance is not a guarantee of future results. Earnings projections often miss, and markets don’t always go up. The employees and families of Quality Growth Management, Inc. may own the above mentioned securities in their own accounts, and may trade them at any time without notice.