PERIOD FMR* Taxable RCP L.P.** S&P 500 DOW JONES Russell 2000
2nd Qtr 15.10% 8.00% 14.89% 12.43% 22.99%
3rd Qtr 2.86% 5.97% 2.20% 3.22% 8.77%
4th Qtr 10.49% 6.23% 11.64% 12.71% 14.20%;
YTD 30.81% 21.80% 26.38% 25.32% 44.97%
This is our first combined report to our investors in our hedge fund (RCP L.P.) and our separately managed accounts in Five Mile River Investment Management LLC (FMR).

These two vehicles serve very different objectives: The hedge fund is comprised of 15-20 names on the long side and 5-10 names on the short side. It can use leverage (no more than 30%) and has an investment profile of investing in companies where high rates of return are desired. FMR conversely, is tailored to the risk profile of the individual investor who may desire more or less risk, more or less income, more or less growth, etc. A typical portfolio in FMR will carry between 20 and 30 names all on the long side. FMR commenced business on April 1, 2003, and we selected in the above profile, an account that desired high growth, with minimal income, as being a comparable for RCP and the other indices. Other FMR investors may see different returns due to their asset mix being tilted to more or less growth, income, or preservation of capital. Mr. Lee C. Garcia CFA, and I manage FMR, while I take responsibility for running RCP L.P. Lee is also a partner and investor in the hedge fund.

Together we screen from over 500 companies looking for the 20-30 companies which meet our criteria for an investment. Our screening is based on; high quality business models, capital efficiency, and valuation. Being value investors we not only look for those companies that are out of favor, or are miss-priced relative to their asset value, but there also has to be a catalyst that will close the gap between current market prices and the company's intrinsic value.

Our holdings predominantly include companies that generate returns in excess of their cost of capital. These companies are best positioned to buy in their own stock, initiate dividends and grow their dividend distributions. Due to the seminal change this year in lowering the taxation of dividends and capital gains, we feel those companies that are free cash flow generators will continue to outperform and have significant representation in our portfolios.

2003 was a pleasant and surprising contrast to 2002, where it paid to invest in cash, treasuries and a few high quality stocks in what turned out to be the last year in a very difficult three year bear market. Virtually every sector and industry group was up in 2003 and probably something in the order of 90% of all companies turned in positive performance for the year. The surprise for many professional investors was not that it paid to move out on the risk curve and invest in stocks last year, but the make up of what performed the best. Low quality stocks and low price stocks along with the washed out technology sector as represented by NASDAQ (+50%) were the stars as the valuation gap between quality and junk was the widest since the mid-1980's. The low quality sector's performance made sense given an unequivocally easy monetary policy and the beginning of what we believe is a sustainable economic recovery. However, we believe this play is long in the tooth at the end of 2003. We consciously chose not to participate in the recovery of the low quality sector and were able to find quality companies at reasonable valuations that produced a very good risk adjusted rate of return relative to the broad market indices. We would be surprised to see much more than a 10-15% appreciation in the S&P in 2004, roughly matching the expected rate of earnings growth. Clearly the strengthening in manufacturing and capital spending along with employment and export gains will combine with strong corporate earnings to provide a positive backdrop for stocks. Nevertheless, excessive optimism has to be tempered somewhat by the fact that most stocks are selling for P/E's at or in excess of their growth projections, interest rates could rise moderately in the second half, even though inflation is dormant, and bullish psychology is the order of the day. Stocks will need to see visibility for continued strong profit growth in 2005 to perform well throughout the year. Important issues to unfold this year which will influence 2004 and 2005 include; the continued improvement in budget and trade deficits, a stable dollar, low inflation, and possible positive wild cards from improving geo-political events, solutions to Social Security under-funding and tort reform.

RCP L.P. maintained roughly a 70% exposure to the market (longs plus shorts) with an average Beta in the portfolio of only .84. This suggests that our return of almost 24% was achieved with very conservative market exposure and investment selection. FMR's returns were very competitive and had the benefit of being fully invested and long only. The investment selection emphasized conservatively managed companies, able to fund their own growth, and throw off cash to increase their dividends and repurchase their shares. Our objective at FMR will continue to generate attractive low double-digit returns with low volatility over the long term. Risk control will be a mainstay in portfolio composition for both RCP and FMR.

We welcome those investors who have joined us this year, and encourage all to share your thoughts and suggestions. As managers we have our investments in the same vehicles as you and watch them very carefully.

Sincerely,

Lee Garcia - Managing Member

Todd Robbins - Managing Member

*2003 results for RCP L.P. are net of management fees and are not audited

**FMR account # 118-17545, began April 1, 2003. Results are net of management fees and are not audited.

Disclaimer

This letter is not meant as a general guide to investing, or as a source of any specific investment recommendation, and makes no implied or express recommendation concerning the manner in which any client’s accounts should or would be handled as appropriate investment decisions depend upon the client’s investment objectives. Any offer to sell or the solicitation of an offer to buy any interests in any securities may be made only by means of delivery of a Five Mile River Investment Management Agreement and or other similar materials which contain a description of the material terms and various considerations and risk factors relating to such securities or fund. Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be either suitable or profitable for a client’s or prospective client’s portfolio, and there can be no assurance that investors will not incur losses.