2nd Quarter, 2000

During the second quarter, most of your companies’ share prices advanced, while the S&P declined nearly 3%. Alza and Express Scripts, recent portfolio additions, leapt by 45%. AIG, Concord EFS, DST Systems, First Data, Harte-Hanks and State Street all advanced 10% or more, while Intel held on to its first quarter gain of 60%. Sykes continued to decline in the second quarter, losing a third of its value, as the company attempts to extend its business beyond technical support for PC and consumer software makers to the telecom market.

Computer Associates stock fell nearly 50% after the company announced poor quarterly results. Expenses grew 60% while revenues rose less than 10%. Heretofore, CA always has excelled at containing costs as it boosted sales from the stagnating software companies it acquired. That is not happening now.

Except for CA and Sykes, all your companies have produced strong second quarter results. Solectron reported a 51% jump in sales, with net income growth of 42%. Earnings per share grew 31%. At the beginning of June, Solectron issued $2.3 billion of 2 ¾% convertible debt at $46.95 and announced a five-year, $10 billion contract with Nortel Networks.

Concord EFS continues to benefit from strong growth in credit, debit, ATM and electronic benefit transactions at supermarkets, gas stations, convenience stores and truck stops. It reported a 42% revenue gain and 40% earnings per share growth during the quarter. The company will process over 5 billion transactions this year, one-quarter more than last.

For the second quarter in a row, DST Systems reported earnings much higher than forecast. DST’s consolidated revenue rose 12%, while earnings per share advanced by one-third to 69¢. Mutual fund shareholder accounts were 34% higher than last year reaching almost 64 million. DST will add 5.5 million additional accounts to its processing system in the third quarter. Kansas City Southern’s 32% ownership stake in DST was finally spun off along with Stilwell Financial on July 13. This lifted an uncertainty that had kept the stock down for over a year.

First Data reported excellent results, exceeding management’s forecast. Total revenue rose 11%, while earnings per share expanded 24% to 52¢. Each of First Data’s three businesses achieved operating profit growth of 20% or more. Western Union money transfers rose 19% to 21.3 million as its network of agents grew to 90,000, including 48,500 outside the U.S. Credit card dollar volume processed at merchants rose 43% to $106 billion, aided by the addition of Paymentech, which accounted for two-thirds of the growth. Credit card accounts processed rose 16% to 260 million. FDC will begin converting GE Capital’s 34 million private label retail credit cards next year.

Harte-Hanks reported 20% revenue growth and 15% earnings per share growth to 30¢, driven by a strong gain in the company’s database marketing business. New and expanded customer relationships announced during the quarter include AT&T, Nextel, Toyota, and IBM.

State Street reported a 20% earnings per share gain on a similar improvement in overall revenue. Assets under custody of $6.1 trillion rose up 15% from a year ago.

AIG’s earnings rose 14% during the quarter. Its stock split 3 for 2 on July 31.

Intel’s strong results met management guidance. Revenue of $8.3 billion was 23% above the previous year and reported earnings per share leapt 92% to $1.00. Excluding the $2.1 billion in gains realized from sale of equity investments, Intel’s earnings still rose about one-third from a year ago. Intel’s stock split 2 for 1 on July 30.

UPS reported total revenue growth of 11% and earnings per share of 60¢, 15% above a year ago. International export volume climbed 23%, while Next Day Air volume and ground volume in the U.S. rose 10% and 5.4%, respectively. Global package delivery volume averaged 13.2 million pieces per day, up 7%. These in-line results were constrained by higher fuel costs and increased investment in it rapidly growing logistics business. UPS has recently signed more than $1 billion in multi-year service parts logistics contracts with Compaq, Dell and IBM.

We expect that stock prices reflect over time companies’ underlying business strength. This happens when investors bid up the shares of achievers and push down those that stumble. Today, these price adjustments occur faster and are more pronounced. We think the cause might be investor anxiety about the consequences of an impending end to our nation’s longest business expansion. Perhaps companies that are unable to sustain their growth while conditions remain robust should be shunned. If this assessment is correct, then investors are placing a greater than normal premium on good execution of managements’ plans for sustainable growth.

We think investors should prefer companies with proven abilities to grow their existing business by emphasizing execution. For example, Intel, one of the world’s premier manufacturers is in the midst of achieving immense economies from microscopic manufacturing improvements. State Street has successfully transplanted its pace-setting U.S. mutual fund service capabilities to the UK, thereby securing a profitable beachhead in Europe.

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.