Welcome back to Condor Monthly, Condor Capital's monthly client newsletter. In this issue, we introduce Condor's Exchange Traded Fund (ETF) model, provide our thoughts on Danaher (DHR), found in many of our clients' accounts, and review the laws governing 'nanny tax', or the tax withholding requirements from certain household employees. Also, please note that I will be appearing on Bloomberg Radio this Monday, August 29 at 3:30 pm and on CNBC TV on Friday, September 16 at 11:20 am. You can always find my scheduled appearances on TV and radio on our website under News and Tools -> Upcoming Events.

What's New at Condor Capital
As you know, Condor Capital Management has long been a proponent of fundamental analysis for successful long-term investing. However, the recent introduction of a wide-ranging array of Exchange Traded Funds (ETFs), which act like passively-managed index funds but trade intraday like stocks, has created a unique opportunity. In an effort to better serve our clients by capitalizing on the favorable characteristics of these new investment vehicles and diversifying our product offerings, Condor Capital Management is pleased to announce the introduction of two new ETF models. The first model is an index-plus strategy that seeks to outperform the S&P 500 Index through the use of tactical sector allocations and is actively traded. Using technical indicators, this model overweights sectors that are positioned for outperformance and underweights sectors that are likely to underperform the broader market. The goal of this strategy is to maintain exposure to each sector contained within the S&P 500 Index, which ensures that the portfolio’s risk characteristics approximate those of the Index, while allowing for the ability to outperform over the long-term. The second model is intended to offer clients low-cost exposure to the broader market with the potential for outperformance through strategic asset allocation. This model relies on Condor’s traditional fundamental research as well as the forecasting resources of Ibbotson Associates, a leading authority on asset allocation strategies. The model is traded infrequently and maintains exposure to stocks of all capitalization levels in addition to international equities. Although these platforms can be used as stand-alone investment strategies, we are recommending them to our clients as supplemental strategies to our core approach. If you are interested in discussing the appropriateness of either of these investment models for your account, please call us on (732) 356-7323.

From the Portfolio Manager
If you've ever used Craftsman hand tools or bought something with a bar code on it, then odds are you've been in touch with Danaher's business. Its Professional Instrumentation group produces environmental, electronic testing, and medical technology. The Industrial Technologies unit makes motion control equipment and devices that read bar codes. Danaher's Tools and Components segment includes hand tools, automotive specialty tools, and accessories, which it markets under brand names like Sears' Craftsman, Veeder-Root (leak detection systems for fuel storage tanks), and Pacific Scientific (electric motors and safety equipment). The future re-branding of Kmart to Sears, by Sears Holdings, should be a positive for Tools (i.e. Craftsman), as they will have many more locations to sell from in the future.

Danaher has recently been very active on the acquisition front. First, in late June, the company purchased Pelton & Crane, a leading supplier of dental equipment, for approximately $85 million in cash. This move continues the buildout of DHR's medical technology division, which is generally seen as a positive move due to the healthy growth rates in this sector. In particular, the dental field seems promising, as an aging population in both the US and Asia, coupled with a declining number of dentists per capita and a heightened focus on hygiene in lesser-developed countries, paint an attractive growth picture. Then, in early July, Danaher bought Leica Microsystems, a microscope business, for $550 million in cash and debt. The initial plan here is to branch into life science applications, with a focus on semiconductor-related businesses. Danaher is not shy about its growth-by-acquisition strategy and likes to snatch up companies that have single digit margins. The successful implementation of DBS (Danaher Business System) enables the company to drive profitability into the mid-teens by maximizing efficiency upon bringing the entities under the DHR umbrella.

In addition to bar codes, the company also competes in the up-and-coming radio-frequency identification space. RFID systems can keep track of items at every step of the production and distribution processes. Wal-Mart and the Pentagon have pushed their top 100 suppliers to make their goods RFID-compliant by the beginning of this year. RFID is expected to increase productivity by cutting labor costs, shrinking inventories, and reducing out-of-stock items. The technology is expected to be a $4.6 billion market by 2007, up from $1.03 billion in 2003, representing annual growth of 45%! The push to implement RFID is similar to the widespread use of bar-code labels today, which was adopted in the 1970's, and is expected to be replaced by RFID.

Danaher also boasts a growing share of the $2.8 billion water quality business, which we feel presents great long-term opportunities, as the business is growing more than 10% per year. Their margins are nearly 20% in this business and it now commands a 20% share of a very fragmented market. Water quality and protection have received intensified attention since 9/11 and EPA proposals now require reduced levels of chlorine as a disinfectant in the water treatment process, which benefits DHR's ultraviolet disinfection technologies. The company also sees significant growth opportunities in China, where about 80% of waste water is discharged untreated into the waterways, and a shortage of clean water is becoming a significant issue. Management also plans to continue making larger acquisitions over the next few quarters and a focus on broadening global operations will likely lead them into China, India, and Eastern Europe.

Needless to say, management is committed to creating shareholder value by acquiring underperforming companies and turning them around. The company utilizes its substantial free cash flow and reinvests it into new business opportunities rather than paying out large dividends. We can't help but be impressed by management's track record of solid execution and we reiterate our positive outlook on the company's shares.


The Nanny Tax
Do you pay a household employee $1,400 or more a year? If you answered yes, you may have to deduct and pay certain taxes, and file certain returns. Failure to do so in a timely manner could lead to harsh financial penalties and, for people in the public eye, career-damaging publicity. The nanny tax rules apply to "household employees." You have household employees if you're the boss - you hire them and pay them directly, and you control the work they do (e.g., you set their duties and schedule). Nannies are a good example of household employees (hence the term "nanny tax"). Private nurses, maids, caretakers, and similar domestic workers are also household employees. Self-employed persons, contractors, and workers from agencies are generally not employees. The nanny tax also does not apply to your spouse, your children who are under age 21, your parents, and workers under age 18 (e.g., teens who baby-sit for pocket money).

When you hire a household employee, make sure the person can legally work in the United States. Get the person's Social Security number, and have him or her complete Form I-9, Employment Eligibility Verification, and keep it on file. You can get Form I-9 and instructions from the U.S. Citizenship and Immigration Services online at www.USCIS.gov or by calling (800) 870-3676. For 2005, you and your employee must pay Social Security and Medicare taxes on cash wages of $1,400 or more. You're required to pay your share (7.65% of gross wages) and to withhold and remit your employee's share (also 7.65% of gross wages). You must remit your employee's share even if you do not collect it. You (but not your employee) must also pay federal unemployment tax if: (1) you paid $1,000 or more in total to household employees in any calendar quarter in the prior tax year, or (2) you owed federal unemployment tax in the prior tax year. The tax is usually 0.8% of gross wages on the first $7,000 in wages for each employee. Withholding and remitting federal income tax is optional. If you do so, have your employee complete Form W-4, Employee's Withholding Allowance Certificate, and use the withholding tables found in Publication 15, Circular E, Employer's Tax Guide. You can get these online at www.IRS.gov or by calling (800) 829-3676. Depending on the state in which you live, you may also need to pay state unemployment tax and disability insurance. Withholding and remitting state income tax may be required as well. Contact your state taxation office and your insurance agent for more information.

When you file your personal income tax return, attach Schedule H, Household Employment Taxes. The schedule will help you calculate the nanny tax that's due. This amount is added to any income tax you owe. Generally, you must file your return and pay taxes owed no later than April 15th. To complete Schedule H, you'll need to obtain an employer identification number (EIN). You can get this from the IRS online or by calling (800) 829-4933. Note: If you don't have enough income tax withheld from your paycheck or don't make estimated tax payments to cover both your income tax liability and the nanny tax, you may incur an estimated tax penalty. For further information, refer to Publication 926, Household Employer's Tax Guide, and consult your tax professional.