January 18, 1999

SEM is proud to have completed its first year helping its clients preserve and grow their wealth. The markets in 1998 were rewarding and at the same time very volatile. SEM's first year results were strong, as our client's accounts earned +26.14% (net of all fees). We managed to outperform two of three benchmarks, with the Dow Jones Industrial Average at +18.13%, the Lipper Growth Fund Average at +22.86% and the S&P 500 at +28.58%.

Since the markets could be as volatile in 1999, we thought it would be useful for you to know what is at the foundation of our investment process. Benjamin Graham wrote many years ago that the secret of sound investing could be distilled into three words, "margin-of-safety." He explained that the margin-of-safety concept is used to distinguish a true investment operation from a speculative one. In essence it involves putting to work a discipline that will minimize the investor's opportunity for a permanent loss of capital.

At SEM, we practice the margin-of-safety concept through three steps. First, we invest in companies with proven records of earnings, consistent cash flow and financially strong balance sheets. A meaningful amount of the activity in the sensational fourth quarter rebound of the stock market came from technology companies. Many of these technology companies, especially those associated with the Internet, earn little or no profits today but investors believe their future is very bright. Our strong aversion to potential loss leads us to invest only in those businesses that have demonstrated consistent profitability.

Second, we invest in companies with proven brands or franchises. Assessing the strength of a brand or franchise in some respects is more qualitative than quantitative and also can be more obvious in some cases than in others.

To illustrate more obvious proven brands, below on the left side of the page is a product/service description. On the right hand side, fill in the blank with the first company that comes to mind:

Now check the answers below (These answers also reveal five of our portfolio holdings).

The third step is that we seek to acquire our portion of these companies at a fair price. Over the long term these three steps will serve us well.

We practice and believe strongly in Benjamin Graham's principle of sound investing and we own and continue to search for outstanding companies that stand up to our stringent margin-of-safety criteria. Importantly, we will never stray from the margin-of-safety principle, especially during very volatile environments such as 1998 and perhaps ahead in 1999.

We look forward to 1999 and we are well prepared to continue this journey of preserving our clients' capital and making it grow into the next millennium. Please call if you would like us to help you in 1999 and beyond. Happy New Year and best wishes to you and your loved ones for a healthy and prosperous 1999.

Sincerely,

Donald R. Jowdy
President

Answers: Coca-Cola, Gillette, McDonald's, American Express, Microsoft