4th Quarter, 2007

Bear Stearns collapse saddens us. Over the years we have benefited from advice given by sensible, capable professionals who were and are at Bear. The former CEO, James Cayne, was not among them.

The Federal Reserve’s decision to move swiftly and decisively last Friday to prevent customer and counterparty flight from Bear from escalating into a catastrophic financial panic is reassuring. We feel as a climber might upon seeing the guide expertly traverse a route above an unexpected precipice. Having no choice other than to place one’s trust in the expert, evidence of competence is comforting. Bernanke’s Fed has handled a bad situation well. The Federal Reserve’s approval of JPMorgan Chase’s takeover of Bear Stearns at a price confirming the firm’s imminent insolvency reveals that 40% of the assets on Bear’s balance sheet cannot be valued. These dicey assets must be financed by the Fed indefinitely at its own risk. In connection with the disposal of Bear, the Fed immediately activated its announced $200 billion Securities Lending Facility available to primary U.S. Government security dealers. In the aftermath of last week’s $16 billion default by Carlyle Capital Fund, this pool of liquidity, which is accessible upon hypothecation of mortgage backed securities, may prove necessary for the continued orderly functioning of the markets in overnight money and short-term debt. Amazingly, Carlyle Capital Fund, sponsored by the world’s second largest private equity fund, borrowed $32 for every dollar of equity it raised to buy $22 billion of debt issued by Fannie Mae and Freddie Mac.

We cannot divine if the Fed’s determination to come to the aid of the market with gobs of liquidity is inflationary, nor have we any confidence in predictions about the onset or depth of a recession. We know a lower dollar exchange rate makes us poorer and raises commodity prices. We never have forgotten that the quality of the assets on a company’s balance sheet measures management’s realism and prudence.

State Street Corporation

After rising 16% last year State Street’s stock price is unchanged since the start of 2008. The reason its stock price has held up better than all but a handful of other bank stocks is its strong earnings growth and the quality of the assets carried on its balance sheet which have required no writedowns. None of the securities held by State Street have been downgraded.

State Street’s fourth quarter operating earnings of $1.38 per share rose 66% above the 86¢ earned on the final quarter of 2007. Revenues rose 53% during the quarter while operating expense increased 40%. Once again, management delivered operating leverage. Full year operating earnings of $4.57 per share were 32% higher than the $3.46 earned in 2006. During 2007 State Street produced revenues of $8.3 billion, 32% more than 2006 revenues. Non-U.S. revenues constituted 41% of the total and generated 62% of the company’s operating income. At year end assets under custody reached $15.3 trillion, up 29% from the amount at the end of 2006.

Perception of State Street’s excellent results were initially blurred by the company’s correct decision to take a $629 million pre-tax charge against fourth quarter earnings to establish a reserve to compensate investors in State Street’s Global Advisors actively managed fixed income funds. The four funds used thirteen different strategies to trade debt instruments collateralized by sub-prime mortgage assets. Dumb execution of perhaps flawed strategies resulted in magnifying losses beyond those incurred by simply holding these loss-making instruments. The assets managed under these strategies on September 30, 2007 amounted to $8.3 billion. State Street is offering investors restitution for the excess loss resulting from its managers shifting portfolio weightings into more highly rated sub-prime instruments after incurring losses in August on securities backed by sub-prime mortgages. This charge to repay investors for faulty execution of an agreed upon risky strategy costs 71¢ per share after tax. The decision to pay the money is honorable and the dismissal of all the managers from the top down at SSGA involved in this fiasco is smart.

The CME Group

For the second consecutive year, each of CME’s four major futures and options product lines rose 20% or more. Interest rates, equity indexes, foreign exchange and commodities volumes rose 23%, 47%, 26% and 20% respectively during 2007. Total contract volume was up 23% during the fourth quarter and 28% for the full year. Revenues at CME Group rose 23% during the fourth quarter and 30% for the year on a pro-forma basis which includes the results of the Chicago Board of Trade for each period. Earnings of $3.75 and $14.93 during the fourth quarter and full year each rose 29%.

During the month of January CME transferred all of the CBOT’s electronically traded futures and options contracts to Globex, its electronic trade matching system. The company is implementing significant technology based speed improvements to Globex which will result in a 50% reduction in response time to 16.5 milliseconds. In the past, these speed improvements have resulted in higher transaction volumes. Increased market volatility also provides a boost to CME’s volumes. We think the liquidity, anonymity, capital efficiency and reduction in counterparty risk which the CME provides will result in more transactions flowing through Globex and the CME’s integrated clearing house.

After rising 35% last year CME shares have fallen 32% since January 1. On January 28, CME announced that they were engaged in preliminary discussions regarding a potential acquisition of NYMEX. Under terms which were recently finalized, CME would issue 0.1323 of its shares and $36 in cash for each NYMEX share outstanding, valuing the deal at $9.3 billion. These are good terms for CME shareholders. On January 31 the staff of the Department of Justice sent a letter to the Department of Treasury who last year requested by November 21 comments about the international competitiveness of U.S. markets. The staff of the DOJ stated that ownership of clearinghouses by futures exchanges inhibits competition. CME shares abruptly declined 20% after the letter was made public. The DOJ has no regulatory authority over futures exchanges. The Commodities Futures Trading Commission, created by Congress in 1974, is the regulator. A policy shift, such as that suggested in the DOJ letter, could weaken the current market structure and the U.S. competitive position within global markets. This view was expressed by a CFTC Commissioner as well as by members of Congress who have questioned the DOJ’s motives underlying the timing and substance of its comments. There have also been recent press reports about the formation of a new futures exchange by several financial institutions and certain hedge funds. We don’t think that this venture poses any threat.

Automatic Data Processing

ADP’s fiscal second quarter revenues of $2.15 billion rose 15% while earnings from continuing operations of 55¢ per share increased 22%. Client fund balances rose 8.9% to $14.3 billion while the yield of 4.5% earned by ADP rose 20 basis points from a year ago resulting in interest earnings of $162 million, up 14%. The portfolio yield declined 10 basis points from the previous quarter.

Fears about the consequences of weakening employment and lower short-term interest rates have driven ADP’s stock price down 9% since the start of the year. During the quarter ending December 31, the number of employees on clients’ payrolls increased 1.7%, similar to the 1.6% gain in the previous quarter. In a meeting last month with ADP’s CEO Gary Butler at their corporate headquarters, Butler indicated that ADP is not yet experiencing a significant slow-down in job growth at their customers or in additional sales made to existing and new customers. ADP monitors sales activity of its 5,000 person sales force on a weekly basis. ADP’s profit growth will be reduced somewhat as a result of lower interest rates. For each 25 basis point reduction in rates across the yield curve, ADP’s revenue and pre-tax income is reduced by $9 million or about 1¢ per share during the following year. ADP’s strength is its ability to introduce new innovative products that save customers’ HR and benefit managers time and cost while improving employee benefits.

EnCana Corp.

A 14% rise in EnCana’s stock price since the start of the year atop its 48% advance last year makes it the best performing stock in your portfolio. Its recent upswing is propelled by a 27% leap in natural gas prices to $9.70 per Mcf (thousand cubic feet) since February 4. At year-end, half of EnCana’s expected 2008 production of 3.8 billion cubic feet a day, a 6% increase over 2007 volumes, is hedged at $8.21 per Mcf. Last year, hedges allowed the company to realize an average price of $7.22 per Mcf, 5% higher than the average market NYMEX price. We think EnCana is prudent to use hedges to secure good price realizations for its output and expect that the figures at the end of the current quarter will show an increase in the percentage of 2008 production hedged. EnCana’s earnings were strong, rising 33% for the fourth quarter to $1.12 per share and 47% for the year to $5.29. EnCana’s share of the annual operating pre-tax cash flow from its integrated oilsands and refinery joint venture with Conoco exceeded $1 billion. The company during the year spent $2 billion buying 39 million shares at an average price of $52 thereby reducing the shares outstanding by 4% after accounting for options. EnCana has doubled its quarterly dividend to 40¢ per share with the first payment scheduled for March 31, 2008.

C.H. Robinson Worldwide Inc.

An acceleration in volume growth to 16.4% in C.H. Robinson’s North American truck business along with a 3% increase in rates (inclusive of fuel) led to a 19% increase in gross revenues to $1.95 billion during the fourth quarter. For 2007, gross revenues of $7.3 billion rose 11.6%. Earnings of $0.49 and $1.86 per share during the quarter and full year rose 20% and 22% respectively. Profit from the company’s freight forwarding business rose 30% and 27% during the quarter and for the full year while profits from sourcing fruits and vegetables for retailers and food service providers rose 6% during these same periods. Consistently good execution explains why the stock has provided its long term owners with excellent returns. During 2007 Robinson’s share price rose 32%. It remains unchanged this year.

Express Scripts, Inc.

Express Scripts reported fourth quarter and 2007 earnings per share of 68¢ and $2.35, increases of 33% and 42% over the same periods last year. These results do not include one-time charges. The generic fill rate for the fourth quarter was 63.7%, an increase of 4% over last year. The company achieves a generic fill rate that is at least 2% higher than its competitors by working with each member and their doctors to minimize negative reactions to their health plan’s cost saving programs that encourage the use of generics and low-cost branded drugs. The commitment to deliver better health and value one consumer at a time has raised member satisfaction and client retention rates to new highs. The company announced that the infusion business acquired with the Priority Health acquisition was not a strategic fit and would be sold. This decision allows senior management to focus on improving usage of the very profitable specialty pharmacy and home delivery service. Express Scripts stock price has fallen 17% since the beginning of the year, giving up some of the 104% gain in 2007.

Stryker Corporation

Stryker delivered double-digit sales growth for the seventh consecutive year with 2007 revenues of $6.0 billion, an increase of 14% in local currencies over 2006. Revenues for the fourth quarter rose 14.4% to $1.7 billion. Earnings per share for the quarter and the year increased 20% to 66¢ and $2.40 over the same periods last year. Worldwide Orthopaedic Implant sales rose 11.8% during the quarter and the year, and the MedSurg businesses delivered another strong performance with sales increases of 18.2% and 17.4% for the quarter and the year respectively. Stryker maintained its commitment to new product development with a 16% increase in R&D spending in 2007. The company generated $1 billion in cash flow from operations after its investment in R&D.

Stryker’s share price is down 16% since January 1 following a 36% rise in 2007. On January 22nd, the company announced that it had received two FDA warning letters regarding manufacturing issues with hip replacement cups in the Cork, Ireland and Mahwah, New Jersey plants. The company has not found any evidence that these products are unsafe for patients, but it will take three to five months to get both plants re-inspected by the FDA. Stryker expects growth in other businesses to offset any weakness in hip implant sales in 2008.

Varian Medical Systems, Inc.

Varian Medical Systems’ fiscal first quarter revenues rose 18% to $459 million and earnings per share rose 16% to 43¢ over the same period last year. Net orders rose 21% to $493 million with a 3% contribution from foreign exchange, Net orders for Oncology Systems rose 13% in local currencies over the first quarter of 2007. Orders in North America rose 7% while major wins in Scandinavia, the U.K., Switzerland, Turkey and India lifted international orders 20%. Uptake of image-guided radiation therapy (IGRT), Varian’s most advanced radiation therapy technology, remained strong with over 80% of orders for the quarter equipped to perform it. All of the orders for new systems in North America are equipped to perform IGRT. Sales of treatment planning and information management software grew more than 10% during the quarter. With a larger installed base of radiation systems that perform IGRT and more software service agreements, Varian expects its service business to deliver more than $350 million in recurring revenue this fiscal year. The company received FDA approval for its RapidArc capability in December and remains on schedule to deliver it to customers this spring. Varian’s stock price has dropped 9% since the beginning of the year. It fell 5% on March 10 when fund managers sold stock after an analyst lowered his rating.


Genentech’s stock price has gyrated based on news surrounding the approval of the use of Avastin, its “tumor-starving” drug in untreated metastatic breast cancer. The stock price plunged 9% on December 5, 2007 when an FDA advisory committee unexpectedly voted against approval. Genentech’s stock traded at levels not seen since April 2005 until February 28, 2008 when the stock price jumped 9% on the news that the FDA had ignored the advice of the committee and approved Avastin for this very difficult to treat cancer. Genentech’s stock is up 17% since January 1.

The company’s U.S. product sales rose 7% to $2.2 billion in the fourth quarter and 19% to $8.5 billion in 2007. Total revenues, which also include royalty payments for overseas product sales to Roche and Novartis, were $11.7 billion for the year, a 26% increase over 2006. Genentech reported Non-GAAP earnings per share of 69¢ and $2.94 for the quarter and the year, increases of 13% and 31% respectively. We report Non-GAAP earnings results because they drive the stock price. Sales of Avastin rose 32% during the year to $2.3 billion. Rituxan sales rose 10% to $2.3 billion with about 11% of revenues coming from increased use by rheumatoid arthritis patients who do not respond to other biologic therapies. The company’s research program in rheumatoid arthritis and other auto-immune diseases continues to progress.

Merck & Company, Inc.

Merck reported fourth quarter and 2007 earnings per share of 80¢ and $3.20. Revenues for 2007 rose 7% to $24.2 billion despite a $2.0 billion loss of Zocor sales because of its patent expiration in June 2006. 2007 sales of Merck’s vaccines rose 130% to $4.3 billion with Gardasil, Merck’s HPV vaccine, contributing revenues of $1.5 billion in its first full year in the market. Merck expects to receive FDA approval to market the vaccine to women 26 to 45 years old this year, which will more than double the patient population. Merck has two drugs awaiting FDA approval and six drugs in Phase III trials this year.

Merck’s stock price is down 28% since the beginning of the year, returning to price levels seen last March. The stock price plunged 16% in January when fund managers over-interpreted results from a small trial comparing the efficacy of Vytorin, the Zetia/simvistatin (Zocor) combination drug, to simvistatin alone. While Vytorin delivered superior LDL-cholesterol reduction, there was no significant difference in the amount of atherosclerotic plaque in the carotid arteries of the two patient groups. This result was unexpected, but it provides no new information about the efficacy of Vytorin in reducing the risk of heart attacks or strokes. The stock price has continued to drift down because of recent reports that Merck’s anti-obesity drug in Phase III trials may not be as efficacious or as safe as expected.


Amdocs reported fiscal first quarter revenues and earnings per share of $742 million and 44¢, increases of 7.4% and 4.8% respectively. On January 10, Amdocs announced a major expansion of its managed services contract with AT&T. Amdocs will support all of AT&T’s legacy customer care and billing systems, including those that support the old BellSouth territory. This huge managed services contract provides a constant revenue stream for its seven year life and is the largest contract Amdocs has ever won. AT&T is Amdocs’ largest customer. It accounted for $624 million or 22% of Amdocs’ 2007 revenue. The company also won a contract from Sprint to provide an end-to-end system (network management and customer care and billing) for their WiMAX initiative.

Amdocs’ stock price is down 18% since the beginning of the year because analysts’ assessments of Sprint’s commitment to its WiMAX initiative and slower rates of subscriber growth and capital spending at the large telecom and cable companies lead them to assume that Amdocs will not meet its forecasts. The company expects to begin earning revenues from the AT&T contract in the second quarter and expects revenues to accelerate during the second half of the year. Management says that business is good. The company reiterated its 2008 revenue and earnings guidance on its earnings call on January 22.

NeuStar, Inc.

NeuStar reported good fourth quarter and full year results for 2007. Revenue rose 32% during the quarter and 29% for the year. Earnings per share of 37¢ during the quarter and $1.17 for the year rose 54% and 24% respectively. Transactions under the company’s U.S. telephone number portability contracts rose 44% and 36% for the fourth quarter and full year respectively. The increase in transactions came from network management activities of telecommunications customers making changes to their networks such as technology upgrades and network optimization. Growth in revenues from transactions under these contracts generated 60% of NeuStar’s revenue growth for the year. 20% of revenue growth came from the company’s domain name services business which improves its customer’s Internet-based communications. The remaining 20% of the revenue growth was divided equally between the company’s contract with the Cellular Telephone Industry Association to manage the directory for common short codes, and NGM, the company’s Next Generation Messaging business acquired in November 2006.

The ultimate success of NeuStar’s NGM business depends upon the marketing, rollout and adoption of Internet protocol based mobile instant messaging services by European mobile service providers and their customers. NeuStar has signed 32 customers representing more than 300 million mobile devices but the timing of consumer adoption is uncertain. NeuStar spent a total of $43.4 million in 2007 and recorded just $8.1 million in revenue, generating an operating loss of $35.3 million. This reduced the company’s earnings per share by 25¢. NeuStar’s stock has declined 7% since the start of the year. We continue to evaluate whether this significant investment by NeuStar will deliver profit commensurate with the company’s core U.S. business.

Donaldson Company, Inc.

Donaldson’s fiscal second quarter sales and earnings rose 10% and 11% respectively to $512 million and $0.42 per share. These results were achieved despite a glitch in the implementation of a new warehouse management system in the U.S. which resulted in $2.1 million of additional costs during the quarter and delayed shipment of $5.5 million in filtration products. A 33% increase in sales of off-road engine filters more than offset the expected one-third decline in filters sold to new on-highway truck engine manufacturers caused by the implementation of new EPA regulations. Strong equipment utilization led to a 14% increase in engine replacement filters which generate 30% of total company revenue. Industrial filter sales rose 8% overall led by double-digit increases in Europe and Asia. During the quarter the company repurchased 1.15 million shares of stock for $46.5 million an average per share price of $40.43. Donaldson stock has declined 9% year to date after rising 34% last year.

PepsiCo, Inc.

PepsiCo reported fourth quarter earnings per share of 80¢, an increase of 8% over the fourth quarter of 2006. Earnings per share for 2007 rose 13% to $3.38. Revenues for the quarter and for the year were $12.3 billion and $39.5 billion, increases of 17% and 12% respectively. Foreign exchange contributed 2% of the revenue growth for the full year. PepsiCo International and PepsiCo Beverages North America (PBNA) delivered 22% and 15% revenue growth during the quarter. Pepsi’s international business saw strong growth in both snack and beverage volumes across all geographies. This business now accounts for 40% of the company’s revenues, up from 35% in 2005. Higher revenues for Tropicana’s products contributed to PBNA’s stong revenue growth. Pepsi has begun shipping Tropicana Pure Valencia, the most premium orange juice Tropicana has ever offered. It is made from the top 3% of their orange harvest. Pepsi’s stock price is down 8% since the beginning of the year.

Intuit Inc.

Intuit’s fiscal second quarter results once again confused analysts as they do every year at the beginning of tax season.  Although revenues of $835 million rose 11% from a year ago, non-GAAP earnings of $0.40 per share were $0.04 cents lower than a year ago.  Delays in the finalization of some tax forms and the greater share of tax returns being e-filed results in more revenue and profit being recognized during its fiscal third quarter ending April 30.  Despite this, consumer tax revenue during the quarter rose 11% to $248 million.  QuickBooks revenue growth slowed to 5% from 9% the previous quarter as few users upgraded to its Vista-compliant edition.  Payroll and Payments rose 16% and sales of internet banking and bill payment to financial institutions delivered $72 million in revenues.  The company is paid based upon its bank customer end-user adoption.  During the quarter, internet banking end-users increased 11% and bill pay end-users rose 20%.  The company repurchased 8.2 million shares during the quarter at a cost of $250 million or $30.50 per share.  Year to date the stock has fallen 14%. We think the determinative factor for the stock in the near term is how strong Turbo Tax sales are during tax season. Through March 15, total Turbo Tax unit sales rose 15% to 12.5 million, led by Web growth of 39% to 5.3 million units.

Intel Corp.

Intel’s stock price dropped 12% on January 16 when fund managers sold the stock because of fears of weak desk-top and notebook computer sales in 2008. Intel’s stock price is down 18% since the beginning of the year. The company reported excellent fourth quarter and 2007 results. Revenues for the quarter and the year were $10.7 billion and $38.3 billion, increases of 10.5% and 8% over the same periods last year. Fourth quarter earnings per share rose 46% to 38¢, and 2007 earnings per share rose 37% to $1.18. Strong sales of Intel’s most advanced microprocessors produced with the new 45 nanometer manufacturing process held average selling prices constant while reducing manufacturing costs. The company currently ships high volumes of over 30 products based on this new manufacturing process. In addition, Intel’s structure and efficiency efforts reduced the company’s spending from 34% to 29% of sales which resulted in an operating margin of 28% for 2007. The company continues to execute its plan to launch new products at prices that allow both computer manufacturers and Intel to achieve good margins.

Western Union

Western Union’s revenue and earnings growth accelerated throughout 2007. During the fourth quarter, Western Union revenues of $1.3 billion increased 12% while earnings of $0.32 per share rose 14% to 45.1 million. International transactions not involving the U.S. rose 28% generating 54% of total revenue. Revenue from India and China rose 45% and 37% respectively during the quarter. These two countries combined now generate 5% of company revenue, up from 4% in 2006 and 3% in 2005. Mexico accounts for 7% of revenue. Western Union shares have declined 11% this year after rising 8% during 2007. The company ended the year with 335,000 agent locations, up 12% from a year ago. During the fourth quarter, Western Union repurchased 6.4 million shares for $146 million or $22.73 per share and for the year repurchased 34.7 million shares for $727 million or $20.94 per share.


During 2007, SGS revenue rose 14% to CHF (Swiss Francs) 4.37 billion and earnings before exceptions of CHF 66.75 per share increased 18%. The company booked a one-time charge of CHF 21 million to reduce headcount related to the consolidation of back office activities after implementation of a new ERP system. During the year, the average number of employees rose 9.2%. The company delivered 10% or more organic revenue growth from its Minerals, Oil Gas and Chemicals, Industrial, Consumer Testing, Governments and Institutions and Automotive businesses. By geography, the strongest revenue growth rates came from Europe, Africa, China and Hong Kong, Eastern Europe and Middle East. The Board declared an ordinary dividend of CHF 25 per share representing 38% of net profit as well as an additional CHF 10 per share reflecting the company’s strong free cash flow and the build up of cash during the year. SGS continues to benefit from strong demand for all of its testing verification, inspection and certification services, especially its energy and consumer oriented activities. We bought shares of SGS for your portfolio earlier this year.


Exxon-Mobil reported fourth quarter earnings of $11.6 billion, 14% above the amount earned a year ago. Earnings for the year rose 6% to $40.6 billion. Purchases during the year of 386 million shares at an average price of $82 reduced shares outstanding 6.5% and helped lift 2007 earnings per share to $7.28, 11% above the $6.55 reported for 2006. Exxon’s good fourth quarter earnings are attributable to high oil and gas price realizations on production volumes less than 1% higher than a year ago. Higher prices reduce Exxon’s share of crude produced in West Africa under its production sharing contracts with the Angolan and Nigerian governments. The operating profits generated from Exxon’s worldwide refining and chemical businesses declined 7% and 10% during the quarter as high crude prices caused refineries to resort to different crude stocks. Exxon operates 38 refineries worldwide which process 1.5 million barrels a day. As part of its drive for efficiency, Exxon reduced the energy consumption at its refineries 6% during the past year. These plants, each of which is at least 60% larger than the industry average, can process as many as 135 different crudes. During the fourth quarter, Exxon ran 43 different crudes at specific refineries of which 5 were new to the company. The refining and chemical businesses become more difficult to manage profitably even for Exxon, the world’s best operator, whenever oil prices decline. We think this concern, coupled with the determination of governments throughout the world to take a larger share of oil production revenues, explains the 8% decline in Exxon’s stock price since the beginning of the year.

Johnson & Johnson

Johnson & Johnson reported fourth quarter earnings per share before acquisition and restructuring charges of 88¢ per share, 9% above last year’s results. This increase, however, is attributable entirely to a reduced tax rate for the quarter. The slight decline in J&J’s pre-tax earnings during the quarter attests to the company’s ability to realize operating efficiencies which it must rely upon to produce modest profit growth during the next two years when sales of its largest selling and most profitable pharmaceuticals rapidly diminish. Sales of Procrit, a treatment for anemia and once J&J’s most profitable pharmaceutical, continue to drop. U.S. sales in the fourth quarter were 32% below those of a year ago. Sales are likely to continue their decline if the constraints on cancer patient usage recommended by the FDA’s Oncologic Drugs Advisory Committee are implemented. A more daunting profit challenge is the mid-year loss of Risperdal’s patent and then Topamax’s later in this year. Risperdal, an antipsychotic medication, is J&J’s largest selling drug with sales of more than $4 billion in 2007. Topamax, a migraine treatment, has sales half as large. Meanwhile, worldwide sales of J&J’s drug eluting stents continue to fall, dropping 30% during the fourth quarter. J&J’s other profitable businesses, notably its Medical Devices and Diagnostic businesses, excluding stents, and its strong and innovative Consumer businesses, enabled J&J to increase its earnings 6% last year to $4.15 per share. Management has forecast a goal of 6% profit growth for this year to $4.46 per share. J&J stock is down 6% since the beginning of the year after rising 1% last year. We have sold all your stock with a cost basis above $50 because we believe our fear-filled market will give us opportunities to invest the funds at our valuation price in better positioned companies with comparable financial strength and proven execution skills.

Walgreen Company

Walgreen reported fiscal first quarter revenues of $10.4 billion and earnings per share of 46¢, increases of 10.4% and 7% respectively during its first conference call for investors on December 21. Store and district managers’ efforts to control costs held selling, general and administrative cost growth to 9.5% of sales during the quarter, a significant improvement over the fourth quarter of 2007. This effort brought changes in SG&A expense back in line with changes in gross profit, the company’s long-term performance metric. On March 17 Walgreen announced the acquisition of two small companies that manage on-site health clinics for large companies along with a new Health and Wellness division to manage these clinics and the Take Care Health in-store clinics. We sold your remaining Walgreen shares in January and will stay out of the stock until we see whether the company can successfully build this business while keeping a tight rein on store expenses.

Patterson Companies, Inc.

Solid sales of both basic equipment and CEREC restorative systems contributed to Patterson Companies’ 10% revenue growth during the fiscal third quarter. Earnings per share rose 3% over the same period last year to 45¢. The dental business currently accounts for 75% of revenues and 83% of operating income. Margins remain lower in the vet and medical businesses because Patterson continues to invest to improve their long-term profitability. While this quarter’s results suggest that the marketing programs put in place by the dental business’ new management are working, the company has not invested the free cash the dental business generates in value-added distribution businesses that are as profitable. We sold your remaining Patterson shares on March 7 at $34, 1% above its price on January 1. We intend to use the proceeds to buy shares in companies that are able to grow their businesses and develop managers by reinvesting earnings in operating divisions that produce higher returns than their existing core businesses.

Client portfolio holdings may change, and stocks of companies noted may or may not be held by one or more client portfolios from time to time. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such securities. Transactions in such securities may be made which seemingly contradict the references to them for a variety of reasons, including but not limited to, liquidity to meet redemptions or overall client portfolio rebalancing. Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate.