July 19, 2010

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Dear Partners:

AltaRock’s performance during the first six months of 2010 was poor in
comparison to the broader market: we were down 15% while the S&P 500 was

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down 7%. We don’t ordinarily place much significance on short-term numbers
and this time is no different. Our strategy is to buy a select group of excellent
businesses when they are cheap, and wait patiently as they compound our
money at superior rates over the long term. This strategy tends to generate
short-term stretches of both superior and substandard returns. Over longer
periods we believe we will continue to meaningfully outperform the market and
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the vast majority of our peers.

Comparison of $1 Million Investment

(as of 6/30/10)
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$11,000,000
$10,000,000
$9,000,000
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
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Massey SP 500 LT T-Bond NASDAQ CPI

Long-term Results

Our updated long-term results are as follows:

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x Since July 1989 (my inception as a manager of other people’s money), we

have grown partner net worth 813% versus 409% for the S&P 500. This
equates to a compound annual growth rate of 11.1%, 305 basis points
better than the 8.1% generated by the S&P 500. $1 million invested with

AltaRock Partners, LLC 100 Cummings Center, Suite 435 - P, Beverly, MA 01915
Telephone: 978-922-7701 Facsimile: 978-922-7708
 us July 1, 1989 is now worth $9.13 million versus $5.09 million had one
invested in the S&P 500. 1

x Since 1999 (the final year of the great stock market bubble) we have
grown partner net worth by 54% as compared to a 15% loss for the S&P
500. This equates to a compound annual growth rate of 4.2%, 570 basis
points better than the market’s -1.5%. $1 million invested with us over this

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time is now worth $1.54 million versus $849,000 had one invested in the
S&P 500.1

x Since the inception of the AltaRock Fund on April 3, 2002 we have grown
partner net worth 47% as compared to a 7% gain for the S&P 500. This

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equates to a compound annual growth rate of 4.8%, 404 basis points
better than the market’s 0.8%. $1 million invested with us over this time is
now worth $1.47 million versus $1.07 million had one invested in the S&P
500.1

x All of the above was accomplished in spite of having approximately 30%

tf (on average) of our capital tied up in low returning cash equivalents. This
was a big mistake that we estimate cost us about 400 basis points of
annual return over the last twenty one years. We continue to slowly get
less dumb.

The Current Environment

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In addition to the high levels of government debt and even larger off balance
sheet liabilities (i.e. entitlements) resulting from decades of poor political
leadership, the developed world now must also deal with the aftermath of a large
credit induced inflation. These problems will not go away quickly. Politicians and
central bankers will continue to face tough, unpopular choices in the years
ahead.
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While we would have preferred that they did their job in the first place to prevent
the rapid and harmful creation of credit by banks/investment banks, we believe
that the central bankers and politicians have performed quite well in dealing with
the messy downside of their prior lack of prudence. They have demonstrated a
willingness and ability to coordinate and print money in order to avert a panicked
liquidation of the banking sector. We believe this removes the possibility of a
deflationary spiral like the US experienced during the Great Depression. We also
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believe that while the economy and the financial intermediary function will
survive, securities markets are likely to remain choppy for a while as large
amounts of bad debt are digested, and as people, companies and governments
get used to the idea that they are not as well off as they thought they were.

1
Past performance is not necessarily indicative of future results. All investment programs have the potential for loss and profit.
Comparisons to the S&P 500 Index are for informational purposes only. Massey returns from 7/1/89 - 7/31/95 are as co-manager of
the Eureka Fund, from 8/1/95 - 4/2/02 as sole manager of Massey Capital Management and from 4/3/02 to the present as sole manager
of the AltaRock Fund.

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This letter presented to you by MarketFolly.com
 In consideration of the above, we spend a lot of time thinking about how much, if
any, cash we should hold. While cash currently pays us nothing, it does provide
us with the potentially valuable option of snapping up bargains that may emerge
in the months and years ahead. We find ourselves equally convinced to hold
more or less cash as we focus alternatively on the potentially poor
macroeconomic environment on the one hand, and the cheap prices of the very

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high quality companies we currently own on the other hand. When the market is
declining, cash always feels great, but to the extent that we can find excellent
long-term investments in superior businesses, we don’t want to forgo them. A
bargain in a great company is our holy grail; to ignore it in the hopes of even
better deals in the future seems foolish to us. After all, we can never really know

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if a better bargain will appear in the future, but we do know with near certainty
that a great business purchased today at a bargain price will compound our
wealth at healthy rates over the long term and with very little risk of loss.

The AltaRock Conglomerate

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Warren Buffett regards these words from his former boss and mentor, Ben
Graham, as the nine most important words ever written about investing:
“Investing is most intelligent when it is most businesslike.”

Indeed! Stocks are not just quotes on a screen that randomly bounce up and
down, they are, in fact, certificates of ownership in real businesses. Successful
investing involves getting to know the true nature of a business and becoming so
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comfortable with its characteristics and valuation that you would happily buy the
entire company at today’s price with the intention of holding it for many years, if
not forever. It is in that light that we have taken to calling our portfolio The
AltaRock Conglomerate (“TAC”).

Below we provide you with some look-through information on the businesses that
we own today:
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Seven Subs: While The AltaRock Conglomerate is currently made up of

seven subsidiaries, our top five make up 84% of our invested capital and 94%
of our earnings on a look-through basis.

Sustainable Competitive Advantage: Each of our companies is not only a

leader in its field, but has fostered a truly enviable position within the
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economy through some combination of economies-of-scale, network-effects,

and strong branding.

We assign every company we are thinking about owning a 10-year and 30-
year sustainable competitive advantage (“SCA”) rating on a scale of 1-10. To
give you a feeling for our scale: a “10” is a perfect monopoly that will never be
regulated; think of the government’s ability to tax. As Dudley Moore

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 discovered in the movie “10”, the perfect woman 2 does not exist; neither does
the perfect business. A “5” is a company with no advantages over its would-
be competitors. At best, this kind of business is worth nothing more than its
net asset value since it will merely earn back its cost of capital over time.
Anything less than a “5” is unlikely to survive due to issues of obsolescence
or a weak financial position.

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We do not hand out grades light-heartedly. Understanding the durability of a
business’ competitive advantages is the most critical part of our investment
process. Endless hours of thought and study go into determining exactly
what (if any) advantages a company possesses and whether we have
overwhelming conviction that these advantages will be sustained many years

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into the future.

On a weighted average basis, The AltaRock Conglomerate possesses a 10-

year and 30-year SCA rating of 8.3 and 7.4, respectively. These are very
healthy ratings considering that on our self-imposed scale a “9” is about as
good as it gets. If you are wondering why our 30-year SCA rating is lower

tf than our 10-year, it’s because very few businesses deserve a higher 30-year
rating than their 10-year. Even monopolies, not done in by regulation, will
eventually succumb to the wheels of innovation.

It is important to note, however, that a slow or far-off deterioration of a very

strong competitive position will not hurt the investor, provided he has paid a
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reasonable price. Consider Warren Buffett’s 1973 purchase of Washington
Post, a position he still owns today. Like most major city newspapers, The
Washington Post enjoyed an almost monopolistic position for many decades.
Today, however, its competitive advantages have been destroyed by the ever
advancing Internet. Despite the loss of its former advantages and a nearly
60% decline in its stock price since 2004, Washington Post has still been one
of Warren’s best investments ever. From 1973 through June 2010, he has
earned 16% per year, or 630 basis points better than the S&P 500. That is a
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phenomenal return to earn over 37 years. It’s also a powerful illustration of

why we’ve chosen to copy the investment strategy that made Warren Buffett
and Charlie Munger so rich.

Strong Profitability: As you would expect, companies with durable

franchises tend to have above average profit margins. Taken together, The
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AltaRock Conglomerate enjoys an exceptional 33% operating margin. This

compares to the S&P 500’s long-term average of just over 6%.

Shareholder Friendly Management: Since we are minority investors, it’s

imperative that we partner with managers that we can trust to equitably share
the wealth with us when they have run out of safe, high-return projects to
invest in. We have great confidence that all of our managers will continue to
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My wife and daughter, of course, being the two exceptions to this rule!

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 act in our interests based upon their longstanding, demonstrated
performance.

We Sell Necessities: Almost all of our earnings come from the sale of
products and services that are necessities. While the purchase of some of
our products may be deferred for a time, we don’t believe they can be put off
indefinitely. A testament to this is the performance of our businesses during

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the 2007-2009 recession, the worst since the Great Depression. Only two of
our seven businesses experienced a decline in sales during this two-year
period and in both cases the decline was less than 2%. At the TAC holding
company level, our revenues were actually up 24% during the recession, or
13% if we exclude one smaller subsidiary that experienced incredible and

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unsustainably high growth. Our profit growth during the recession was even
more impressive. While we did have one subsidiary suffer a 36% decline in
profits from 2007 to 2009, taken together, TAC’s profits were up 73% over
this two-year period, or 56% if we exclude that same smaller, rapidly-growing
subsidiary.

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Global Diversity: The AltaRock Conglomerate is a truly global powerhouse
with revenues derived from almost every nation on earth. Currently 60%,
15% and 25% of our profits are earned in North America, Europe, and
emerging markets, respectively. Although we expect our North American
revenues and profits to grow at a healthy pace over time, we also expect
them to decline as a percentage of our total. This is because we should
continue to enjoy two favorable tailwinds outside of North America: 1) Three
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of our key subsidiaries should continue to gain significant market share
overseas due to significant, durable advantages they possess over their
competitors. 2) There are many populous nations in which we operate that
are still far behind the USA in GDP per capita, but they are clearly catching
up, and we see no reason why their progress will not continue.

An additional reason why we like our global diversity has to do with potential
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currency/inflation risks associated with the developed world’s high

indebtedness. It is interesting and perhaps quite relevant to note that from
1938 to 1985 the value of the British pound declined by nearly 80% relative to
the US Dollar. This means that all things being equal, British citizens who
invested in the US over this 47-year period enjoyed a 350 basis point tailwind
to their annual investment performance from currency alone! Postwar Great
Britain may prove an apt analog for the developed economies of today
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(Europe, Japan and America), while today’s developing nations are perhaps
reminiscent of the younger, pro-business, less-indebted United States of long
ago.

Strong Balance Sheet: We have a very strong balance sheet. Our debt
equates to only 2% of our current equity market capitalization. Five of our
seven subs have no debt at all, with net cash equaling 9%, 10%, 20%, 28%,
and 37% of their individual equity market capitalization. Strong balance

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 sheets provide our managers with both defensive safety, and the offensive
flexibility to make opportunistic purchases of the company’s own shares, or
strategic acquisitions that could accelerate value creation for us as owners.

Strong Free Cash Flow: Every one of our current subsidiaries is producing
free cash flow equal to its net earnings. It is the unusual, yet highly desirable
business that can grow faster than GDP without having to invest additional

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capital. We are fortunate to own four such businesses and we believe they
are meaningfully undervalued right now. Our other three subsidiaries also
produce oodles of cash, but for the more mundane reason that they are now
relatively mature.

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Good Growth: Before assessing the value of any potential subsidiary, we
study every important aspect of its business. Eventually, toward the end of
our analysis, we forecast revenues, earnings, and cash flow for the
subsequent ten and thirty-year period. Our current expectation is that TAC’s
free cash flow will grow at approximately 7.3%, and 4.7% over the next ten
and thirty years, respectively. We believe our growth rate expectations are on

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the conservative side of reasonable.

Cheap Valuation: The AltaRock Conglomerate currently sells for 13.6x and
12.5x 2010 and 2011 net earnings, respectively. Since, in our case, net
earnings equates to free cash flow, our effective cash flow yield will be 7.7%
over the next twelve months. Incidentally, our estimates are more
conservative than Wall Street’s, so our realized cash flow yield may, in fact,
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be a bit higher, if the more optimistic consensus view proves correct.

Current Long-Term Return Expectations: As with any investment, our

expected return comes down to what we paid compared to the cash flow we
will receive over time. As a simple rule of thumb, you can add together the
free cash flow yield and the expected long-term growth rate to approximate
your expected rate-of-return. In our case, if you add our 7.7% free cash flow
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yield to our expected 10-year growth rate of 7.3%, you will arrive at an
expected return of 15.0% per year over the coming decade. Our actual
expected return is 15.3%, as the rule of thumb in this case slightly
understates the true math.

Some Historical Context: To put our growth, valuation, and return

expectations for the AltaRock Conglomerate into some useful context,
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consider that from 1952 to today the S&P 500 has returned 10.1% (on a
nominal basis). This return can be dissected into its two components: cash
flow yield (dividends) of 3.4%, and growth (earnings per share growth rate) of
6.7%. Since inflation averaged 4.0% over this nearly 58 year period, the real
growth rate was 2.7%, virtually identical to real GDP growth. Real returns to
investors were 6.1% (10.1% nominal return less the 4.0% rate of inflation).
The 58 years before 1952 were not meaningfully different despite a currency
crisis, the Great Depression and two world wars.

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 As compared to the historical returns on the S&P 500, AltaRock, today, starts
out in a very strong position with a current yield that is 430 basis points
higher, 7.7% vs. 3.4%. We also expect our earnings to grow much faster
than both, GDP and the S&P 500. Importantly, our growth estimates do not
incorporate much, if any inflation, so our 15.3% return expectation is largely a
real number.

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Our businesses will be affected by the overall pace of economic growth, and
over the next ten years this is the variable in which we have the least amount
of confidence. Over twenty and thirty years, however, we have much higher
conviction that economic growth will continue to track along its historical path.

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We direct you to the chart below that shows real GDP growth per capita for
every decade since 1900. The long-term growth rate (+1.8%) is both
undeniable and seemingly unstoppable. It is driven by innovation,
investment, and the encouraging resiliency of the free market enterprise
system. The biggest outlier on the chart, of course, is the Great Depression
decade when the US experienced a negative 0.6% growth rate. (Note: real

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GDP growth is about 1% higher than the real per capita GDP growth rate due
to population growth)
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One way to think about a potential worst case scenario for AltaRock is as
follows: Let’s assume that global GDP is flat or even down over the next ten
years – an outcome similar to the Great Depression. What would that mean
for us?

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 1) All things being equal, it means we would at least earn our free cash
flow yield of about 8%. This is about 500 basis points better than the
current yield on 10-year Treasuries and about 600 basis points better
than the current dividend yield on the S&P 500. While this would be a
disappointing outcome, we still would double our net worth during a
period in which most investors will have done much worse.

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2) To the extent that our managers do what they are supposed to do and
what we expect them to do, which is to use our cash-rich balance
sheets and large, recurring cash flows to repurchase shares at
depressed prices, we might enjoy an upside bias to that 8% cash flow

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yield. Stock repurchases allow us to defer taxes, a highly valuable
attribute, and to the extent that they are done at significant discounts to
intrinsic value, they add even more value.

3) We have great conviction that our businesses will grow meaningfully

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faster than global GDP, so even if GDP is flattish, we should still enjoy
a few extra percentage points of annual return over and above our free
cash flow yields.

4) To the extent that the downside scenario is more extreme, our strong
balance sheets, durable competitive advantages, and stable
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businesses might allow our managers to purchase entire businesses at
very cheap prices, which could also add to our eventual return profile.

5) To the extent that governments continue to debase currencies as they

have done throughout history, our ownership of solid businesses will
surely protect the purchasing power of our wealth. The same cannot
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be said of today’s fixed income markets, which very much remind us of

the post World War II era. Back then the US Government kept a lid on
both short and long term rates for a long time in a highly successful
effort to inflate away the value of its large war debts. Bond investors,
who had done exceedingly well in the preceding twenty years, lost
money for the next forty, after considering the impact of inflation.
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While long-dated Treasuries may do well for a bit longer, if deflation

persists or if the Federal Reserve is successful in controlling the long
end of the yield curve, over a multi-year period we believe they are
almost certainly a loser.

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 In Conclusion

Nobody, including us, knows the short or intermediate-term direction of the

economy, interest rates, the stock market, or individual stock prices. This is a
constant. And while we share the general unease many have about the
macroeconomic environment, we really feel quite confident that AltaRock’s
excellent subsidiaries, talented and trustworthy managers, and cheap valuation

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will provide us with both enormous safety and powerful wealth generation over
the long term. In fact, barring an exceptional rally in our positions over the next
twelve days, we believe this is a good time to be adding to your long-term
investment in AltaRock.

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Thank you for the trust you’ve placed in us. We work very hard to continually
earn it. Thank you also for your long-term focus, which is a definite key to our
success. Please feel free to call us at 978-922-7701 with any questions,
comments or investment ideas. To the extent that you would like to introduce
like-minded friends or associates to us, we would be thrilled to speak with them
and/or mail them relevant materials.

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We hope you are enjoying a wonderful, relaxing summer and we look forward to
updating you on AltaRock’s progress early in the New Year.

Sincerely yours,
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Mark T. Massey, CFA

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