EARNINGS LETTER

2nd Quarter, 2001

All of your companies reported good second quarter earnings, except Dendrite, Intel and Solectron. In assessing the prospects for the current quarter and the remainder of the year, most of your companies’ managements cited the need to vigilantly control costs. Even those managements expressing confidence in meeting previously stated growth targets spoke about measures taken to guard against expenses rising faster than sales.

We are now in a period riddled with uncertainties about the pace, breadth, depth and duration of the current economic contraction. We know that the Federal Reserve’s lowering of interest rates is intended to stimulate a purge of the ill-conceived investments made by businesses during the expansion. This gradually comes about by enabling creditworthy opportunists to use lower rate financing to acquire and creatively use the brand new boom-time mistaken investments of yesterday. This painful cleansing process highlights the competitive advantage gained from the efficient use of capital by experienced disciplined managers. These circumstances make the valuation calculations we use more useful in determining investment worth of publicly traded companies than they were in more ebullient markets. We are examining carefully all the companies you own to determine where managements’ pursuit of growth led to wasteful investments. We also know that these times bring opportunities to own financially sound, sensibly run companies at prices that, from the vantage point of the future, will look like giveaways.

Intel

Intel reported revenues 24% below last year’s quarter but, with sales only 5% lower than last quarter’s, the decline is decelerating. Earnings per share declined more than two-thirds. Intel’s microprocessor revenues during the quarter equaled the previous quarters, while operating profit fell 13% as Intel aggressively cut prices and moved into volume production of its new Pentium 4 chips. During the quarter, Compaq committed to use Intel’s new Itanium processor to power its servers. This is a major win. The stock’s rebound from its April low has strengthened in the past few days after Craig Barrett, Intel’s CEO, predicted an upturn in PC shipments during the fall.

Unlike Intel’s stock price, Solectron’s remains stuck just above its low. Solectron’s second quarter sales and earnings barely met its reduced forecast. Sales were 33% below the previous quarter and cash earnings fell 43% below a year ago’s results. During the quarter, the company extracted $680 million from component inventories held for customers. Solectron bares no obsolescence risk on this inventory, but it ties up capital and lowers financial returns. As of this writing, Cisco is the only major customer that has fully settled its account and has rid itself of the burden of outdated components, which impede the introduction of new products. Last month, we received word that Solectron’s customer orders now match shipments. This is a positive sign.

Dendrite

Dendrite reported a second quarter loss of 50¢ per share, which includes a restructuring charge to bring costs back in line with revenue growth. The former CFO, George Robson, who had relinquished the reins in anticipation of retirement, has resumed full control. His meetings with major stockholders have kept the stock from falling further. Pfizer expanded its reliance on the company’s sales force management tools during the quarter and Dendrite’s relationship with its other major pharmaceutical customers remains solid.

Concord EFS

Concord EFS reported strong quarterly results with revenues 24% above last year’s and earnings up 33%. On June 21, the company completed a public offering of 26 million shares, which included 17 million shares sold by the banks that owned Star Systems. Despite this offering, the stock has risen 33% since the beginning of April. Concord has begun to combine its Star, MAC and Cash Station ATM Networks, which reach nearly one million ATM and merchant locations. This combined national network gives Concord’s superb performance-driven sales force ample opportunity to maintain the company’s rapid revenue growth.

First Data

First Data’s stock has just pulled back from a new high. The company reported second quarter revenue and earnings gains of 11% and 17% respectively, while generating $300 million of free cash flow. More than half of First Data’s growth came from continued expansion of Western Union International. Money transfers surged 45% through Western Union’s 109,000 agent locations worldwide. During the quarter, First Data acquired operating control of the NYCE ATM Network, the dominant system in the New York metropolitan area.

DST

DST Systems reported a quarterly rise in revenues and earnings per share of 34% and 21% respectively. Revenues were augmented by the acquisition of Equiserve, the leading stock transfer agent, which maintains 24 million shareholder records for 1,400 publicly traded companies. A 17% rise to 75 million processed mutual fund shareholder accounts propelled the company’s internal growth. When management reported earnings, it forecast no further increase in mutual fund accounts from existing customers for the remainder of this year. This warning quickly wiped out the stock price gain for the year. The company is negotiating to secure an additional 10-12 million mutual fund accounts. Given its leading position in a business where size leads to economies of scale, DST should win the contracts for three quarters of these accounts.

State Street

State Street’s good quarterly results helped lift its stock 20% above its April low. Revenues and earnings advanced 11%, bettering the results turned in by other institutional custodians who, lacking the new profitable business won by State Street, could not offset the effects from declining worldwide financial markets.

AIG

AIG reported revenue growth of 10% and earnings per share growth of 15% for its second quarter. The company is benefiting from higher rates for property and casualty coverages and a flight to quality throughout Asia, and especially in Japan. AIG’s announced acquisition of American General will bring the company a sizeable US life business and strengthens its Sun America retirement savings business. Selling of AIG stock by arbitrageurs to profit from the spread on the merger kept AIG’s stock from advancing during the quarter, despite an upbeat forecast from AIG’s credible CEO Hank Greenberg.

CH Robinson

CH Robinson reported total net revenues 11% ahead of a year ago with earnings per share rising 18%. Robinson’s core truck brokering business, comprising more than three quarters of its revenues, rose 16%. In keeping with its proven recession coping practices, Robinson reacted quickly to the weakening freight market by reducing hiring plans and cutting expense growth. The volume decline experienced on contracts with existing customers was more than offset by new customers and additional services sold existing customers. Management has repeated its goal of 15% revenue and income growth, which has helped the stock resume its rise back toward its high.

Intuit

Intuit profits leapt 63% on a 29% gain in revenues as CEO Steve Bennett’s plan to raise unit pricing, boost sales of additional services and tightly control costs began paying off. TurboTax’s market share rose to 82% during this year’s tax filing season, while filings through Intuit on the Web grew by 1 million to 2.4 million. During the quarter, Intuit’s newly formed payroll and mortgage origination businesses became profitable.

Harte-Hanks

Despite a deepening decline in its direct marketing business, Harte-Hanks cost controls enabled it to report good earnings. Revenues fell 3% during the quarter, while earnings per share, helped by stock repurchases during the past year, rose 7%. The company’s shoppers continue to post solid operating results with revenues up 6% and operating profits up 10%. The stock remains locked in a narrow range between 23 and 25.

UPS

UPS stock also fluctuated little during the past four months, although management carefully apprised investors and analysts about its slowing business. The company reported a weak second quarter with earnings per share down 8% from a year ago, although revenues rose 4%. Total US package volume fell 1%, while International rose 6%. UPS generated free cash flow of $1.5 billion during the first half of this year, but nonetheless cut planned capital spending on aircraft as revenue growth slowed.

Mettler Toledo

Mettler-Toledo reported earnings per share and organic revenue growth of 16% and 8% respectively for the quarter. Sales of drug discovery products grew 35% as U.S. pharmaceutical companies continue to automate the synthesis and process development of new compounds. Heightened concern about food safety has led to increased sales of metal and contaminant detection products. After rising to a new high in May, Mettler’s stock has held onto an 8% gain for the past four months. We think that is partly attributable to management fulfilling all commitments made to shareholders despite difficult business conditions worldwide.

Merck

Merck’s sales for the quarter increased 25% over the second quarter 2000 to $11.9 billion. Merck-Medco’s sales increased 48% and sales of the five key drugs, Zocor, Vioxx, Cozaar, Fosamax and Singulair, increased 27%. Second quarter earnings grew 7% to $0.78. Merck’s stock price has declined 8% since the beginning of April as investors feared Vioxx sales growth might slow. Worldwide quarterly sales for Vioxx were $725 million, a 53% increase from last year.

Varian Medical Systems

Varian Medical Systems’ quarterly earnings increased 30% from a year ago. Reduced patient complications and improved outcomes, along with higher U.S. insurance reimbursement rates led to an 18% increase in Oncology Systems’ orders this quarter. Clinics and hospitals are buying high performance, integrated “quick start” systems so that they can offer SmartBeam® Intensity Modulated Radiation Therapy (IMRT) as soon as possible. After reaching a new high in June, Varian’s stock price has dropped back to 9% above its early April price.

Express Scripts

Aided by politicians’ proposals for a senior citizen prescription drug benefit and a 27% rise in second quarter earnings per share, Express Scripts’ stock price advanced 32% over the past four months. During the quarter, the company processed 71.3 million pharmacy claims for its 47 million members. More profitable mail order prescription processing and fulfillment rose 32% to 4.9 million during the quarter.

PepsiCo

Uncertainty about possible government intervention to stop PepsiCo’s now approved acquisition of Quaker Oats kept Pepsi’s stock price gyrating within a band 10% above and below today’s $44 price. The addition of Gatorade to Tropicana gives the company a strong lead in the fast-growing non-carbonated drinks and may add as much as 3¢ to PepsiCo’s earnings per share next year, boosting the estimate to $1.89.

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.

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2001 – 3rd Quarter EARNINGS LETTER 2001 – 1st Quarter EARNINGS LETTER