EARNINGS LETTER

4th Quarter, 2001

Enron’s December 2 bankruptcy filing and an ensuing parade of disclosures of financial deceptions by the company’s management and auditors affected the stock market’s reaction to the good fourth quarter earnings gains reported by most of your companies.

In managing your portfolio, we are patiently awaiting opportunities to acquire shares of honestly run, financially strong growth companies when these stocks are wrongly besmirched by Enron-inspired anxieties. The current annual report filing season and the SEC’s announced intention to review the 10K filings of the nation’s 1,000 largest publicly traded companies creates the conditions for heightened investor jitters. Newly proposed and already imposed financial disclosure rules will increase public companies’ financial reporting costs. These expanded disclosures will create opportunities for misinterpretation of companies’ financial transactions and should place a premium on careful and thorough analysis of the meaning of all these numbers.

AIG

AIG reported fourth quarter earnings of $1.8 billion or 70¢ per share, after fully reserving for Enron related surety and portfolio losses of $162 million. The earnings per share reported a year ago were 68¢. The company also reported that fourth quarter worldwide property and casualty premiums increased 15% during the fourth quarter, while its worldwide life insurance premiums grew 11%. Enron- inspired skepticism about the consistent earnings growth reported by AIG and other large non-bank multinational financial services companies, such as GE, has pushed AIG’s stock price down 14% since December 1. AIG has reported seventeen successive years of earnings growth. The drudgery of carefully going through the 82 pages of financial tables and notes in AIG’s 2000 annual report, and then examining the company’s SEC filings, can bring clarity and solidity to the reported numbers. Nonetheless, AIG has convened meetings to explain its accounting for insurance reserves, its aircraft leasing business debt and structured derivative transactions conducted through AIG financial service subsidiaries.

State Street

State Street reported a fourth quarter revenue and earnings advance of 13% and 16%, respectively. Earnings for the year reached $2.00 per share, as assets under custody rose 1% to $6.2 trillion, despite a decline in equity markets worldwide. This marked the first successive two-year decline in the world equity indexes since the mid-eighties. State Street’s European-based revenues grew twice as fast as those of its U.S. business, which gained two major customers, John Hancock and the State of Hawaii’s Pension Fund. State Street has no Enron exposure at all. Since December 1, State Street’s stock price has declined in line with a 3.5% drop in the S&P.

First Data

First Data reported fourth quarter revenues and earnings 13% and 15% above last year’s results. Earnings for the year 2001 reached $2.52 per share. The SEC mandated elimination of goodwill amortization in companies’ accounts this year will add 30¢ to First Data’s results. The company’s CEO, Charles Fote, has publicly forecast that earnings per share will rise at least 15% this year to $3.24. This confident forecast helped First Data’s stock hold onto the 7% gain registered since December 1. Last year the number of money transfers handled by Western Union, First Data’s fastest growing and most profitable division grew 22% to 108 million. Agent locations worldwide increased 19% to 120,000, with an additional 30,000 scheduled for opening during 2002.

Concord EFS

Concord EFS reported fourth quarter earnings 31% higher than a year ago on a 18% increase in revenues. Earnings for the year 2001 rose 34% to 59¢ per share. Total debit, credit and ATM transactions rose 14% during the year to 9.1 billion. Concord now operates the nation’s largest coast to coast pin-secured debit network, enabling it to sign contracts with 275 new financial institutions for network access. It also gained 412 new transaction processing services contracts during the year. The growth in network transactions and the efficiencies garnered from company-wide consolidation resulted in 19% growth in operating income per transaction in 2001. After a 33% rise from its post September 11 low, Concord’s stock price has held steady since December 1.

DST

DST’s fourth quarter revenues and profits were 19% and 11% above last year’s results. Earnings per share of $1.61 for 2001 were 14% higher than the previous year. The March 30 acquisition of Equiserve, the nation’s largest shareholder transfer agent with 27.7 million accounts, accelerates the company’s growth. This business, which obtained the contract to handle the demutualized Prudential’s 4.6 million new shareholder accounts, will boost this year’s results. DST’s main earnings source, processing U.S. mutual fund shareholder accounts, grew its base 5% to 75.6 million accounts. Retirement plan accounts, including 401Ks, rose 17% and comprise 37% of the total accounts processed. Despite these good results, plus new contracts to process 8.8 million mutual fund accounts on its system, DST’s stock price has dropped 13% since December 1. The poor relative performance may reflect investor worry about redemptions at the Janus Funds, one of DST’s customers, or the industry-wide slowdown in new mutual fund formations. Last year saw the fewest net new fund launches since 1981.

Intuit

Intuit reported revenue growth in its fiscal second quarter ended January 31 of 20% and operating earnings growth of 29%. Intuit’s professional tax business, software sold primarily to CPA’s and accounting firms, grew 28%. One-half of this improvement came from the acquisition of TAASC made last April. Intuit will book the bulk of its consumer tax revenues during the next quarter. Quicken Loans revenue leapt 181% as lower interest rates sparked a surge in consumer mortgage refinancing. Quickbooks sales declined slightly during the quarter while Intuit’s payroll processing business rose 32%. Intuit’s retail market share for Turbo Tax, Quickbooks and Quicken currently is 80%, 85% and 75% respectively. During the past 10 months Intuit has bought back 2 million shares at an average price of $41. It’s stock price currently is 9% below its price on December 1.

Harte-Hanks

Harte-Hanks reported a revenue decline of 9% during 2001, while its earnings per share rose 4% to $1.23. Free cash flow exceeded $100 million in 2001, a 15% gain, as capital expenditures fell $10 million below the amount spent in 2000. These good earnings are the result of management’s diligent cost control and their judicious owner inspired application of the free cash flow to share repurchases. Recognition of the strength of Harte-Hanks’ straightforward management of its business propelled the stock up by 15% since December 1.

CH Robinson

C H Robinson reported fourth quarter net revenue and earnings rose 4% and 9%, while its full year earnings grew 18% to 96¢. Robinson’s excellent cost controls, along with the flexibility and value added services provided to suppliers as well as customers produced characteristically strong earnings, even as truckload volumes declined throughout the U.S. Since December 1, Robinson’s stock has traded in a narrow range, resulting in a 4% gain over the period.

UPS

UPS’s fourth quarter and 2001 earnings were 10% below its 2000 results. Most of the profit erosion occurred in UPS’s next day air service, while the profitability of ground delivery service held up well as the economy slowed. UPS’s growing international business now accounts for 20% of revenues. A rise of 2% since December 1 in UPS’s stock price accurately reflects stock’s narrow trading range over the past three months.

Merck

Merck’s fourth quarter and full year earnings advanced 8% to $0.81 and $3.14 per share, respectively. Sales of Merck’s five key prescription drugs increased 20% for the quarter, although overall pharmaceutical sales rose only 4% to $5.6 billion. Results from two large outcome studies released for Merck’s key cardiovascular drugs Cozaar and Zocor demonstrated that both drugs significantly reduced end stage renal disease, heart attacks and strokes for a broad range of patients. Merck filed a new drug application for the new cholesterol lowering drug Zetia®, a product of the Merck – Schering Plough joint venture.

On January 29, 2002, Merck announced its decision to separate Medco, its pharmacy benefit management business, from its pharmaceutical business. Merck plans an initial public offering of part of Medco by mid-2002 with full separation following within twelve months. We applaud this decision because it unlocks shareholder value and rids Merck of an apparent conflict of interest. Merck’s stock declined 12% during the quarter as investors reacted to Merck management’s December forecast of negligible earnings growth for this year.

Express Scripts

Strong growth in Express Scripts’ mail pharmacy and specialty distribution businesses helped produce a 30% increase in the company’s fourth quarter earnings. Earnings per share for the year reached $1.56. During the fourth quarter, Express Scripts filled 5.7 million mail order prescriptions, a 41% increase over the volume mailed during the prior year’s fourth quarter. On February 6, the company announced the $515 million acquisition of National Prescription Administrators, the nation’s largest privately held full service pharmacy benefit manager. NPA serves union members and government employees in the Northeast and complements Express Scripts’ strength in the large employer and managed care markets. Since December 1, Express Scripts’ stock price has registered a 27% advance.

Mettler-Toledo

Mettler-Toledo delivered strong earnings growth in a difficult economic environment. Earnings per share were $0.69 for the quarter and $2.02 for 2001, 19% increases over 2000. Organic sales grew 4% to $1.2 billion with 20% growth in Asia. Mettler-Toledo’s Chinese factories produced 13% of the company’s total output in 2001 and should account for 20% of output in a few years. The stock price of this excellently managed company increased 15% since December 1.

Varian Medical Systems

Varian Medical Systems’ sales of oncology systems in North America drove strong earnings and backlog growth during the company’s first fiscal quarter of 2002. Earnings per share increased 36% to $0.19 over the same period last year, while backlog rose 14% to a record $622 million. Varian reported excellent acceptance of its software that designs radiation therapy treatment plans. Over 100 have been installed and 100 more have been ordered. Varian Medical’s stock price advanced 15% since December 1. The stock split 2-for-1 on January 15, 2002.

Walgreen & Co.

Walgreen & Co.’s reported first quarter revenues and earnings rose 17% and 15%, respectively, over the same year ago period. The strength of the company’s franchise is evidenced by Walgreen’s double-digit sales and profit growth during the current economic downturn and is further buttressed by its successful opening of a record 134 new stores during the past quarter. Pharmacy sales increased 21% during the quarter. These sales increases are well ahead of the company’s chain drug store and mass merchandise competitors. Walgreen’s stock price has risen 15% since the beginning of December.

Intel

After leaping 45% from its post-September 11 low, Intel’s stock price has dropped 8% since December 1. The company’s fourth quarter sales and earnings were solidly above the corresponding figures for the previous two quarters. In discussing the earnings, Intel’s management confirmed that it successfully is migrating manufacture of its latest microprocessors to even smaller than .13 micron geometries, which lowers cost and increases processing power and efficiency. We believe that the quarterly results confirm that Intel is weathering the worst of the downturn and has emerged stronger.

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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2002 – 1st Quarter EARNINGS LETTER 2001 – 3rd Quarter EARNINGS LETTER