EARNINGS LETTER

1st Quarter, 2002

Investors’ restrained response to your companies’ good first quarter earnings reports reflects widespread Enron-inspired questions about the integrity of public companies’ financial statements. The violations of trust implicit in Arthur Andersen’s unscrupulous behavior and the revelations about security analysts suborning themselves to their investment banking masters reverberates in the reaction to statements from even the best companies. This skepticism comes at a time when cost controls by the best-managed companies contribute a sizeable percentage of any reported earnings gains. Verification of the reality of these earnings requires careful analysis of all the financials, which precludes yesteryear’s instant reaction to a single reported number.

We have just come through the annual report filing and first quarter earnings period. The expanded disclosures contained in reams of footnotes issued by many of America’s largest and most prestigious companies, such as AIG, GE and IBM fell like ponderous weights upon jittery investors agitated by the publicity flowing from the Enron fraud. We, of course, have carefully examined the financials of all your companies and their principal competitors to ensure that your companies possess the strengths needed to prosper in a climate less favorable toward business than the 1990’s.

AIG

During the first quarter, AIG’s net earned property and casualty insurance premiums increased 16%, while worldwide life insurance premiums rose 15%. Importantly, highly profitable foreign life premiums rose nearly 19% after adjustment to reflect the dollar’s strength against Asian currencies. Financial service operating earnings, which have caused some analysts unease, rose 10%, while retirement savings & asset management income rose 11%. Reported earnings per share were 13% higher than last year’s results, and AIG’s management held its first ever conference call with investors and analysts to add clarity to the reported results. The company also identified the group of managers from whom a successor to Hank Greenberg might be chosen. All of this was to no avail as the stock price weakened further to a price 14% below where it began at the start of the year.

State Street

State Street’s first quarter earnings rose 13% on a 5% rise in revenues. The quiescent foreign exchange market led to a 30% drop in foreign exchange trading revenues. Assets under custody rose 9% from a year ago driven by new business from new clients. Customarily, State Street derives 70% of its revenue growth from existing clients, but during the first quarter over 50% of incremental revenues came from new customers. The company is preparing for strong growth in Europe where it earns its highest margins. On April 29, State Street laid off 375 people, 2% of its total staff, its first staff cut since the late 1970’s. The cost of this staff reduction will reduce second quarter earnings by 3¢ per share, which will be recouped at a rate of ½ cent per share monthly throughout the remainder of the year. State Street’s stock has declined 7% this year.

First Data

First Data reported quarterly revenue and earnings per share 8% and 20% above last year’s results. Western Union money transfers rose 17% driven by international money transfer growth of 33% as its global agent network reached 124,000, 20% above a year ago. Western Union’s profit jumped 35% during the quarter as tight expense control lifted operating margins. The stock, after rising 15% this year to a new high last month, has fallen back to a 5% gain for the year to date.

Concord EFS

Concord EFS reported a 33% earnings per share advance as revenues rose 23%. Transactions at its supermarket customers and PIN-secured debit transactions routed across its STAR network each rose 30%. During the quarter, Bank of America announced its return to the STAR network, bringing its 16,000 ATM’s and 20 million debit cardholders. Concord’s stock is up 4% since January 1, 2002.

DST

DST’s quarterly revenue and earnings per share were 15% and 12% higher than last year. DST’s core mutual fund account processing business grew its base 7% to 78.4 million accounts. DST will convert four prospective clients with 8.7 million accounts to its system in the next year. In addition, DST has twelve active prospects representing about 20 million potential accounts. DST’s statement and bill print mail operation reported a decline in revenues and profits as a result of the loss of a telecommunications customer and declines in brokerage related volumes. During April, DST purchased 1.3 million shares of its common stock, which is down 2% since the beginning of the year.

CH Robinson

CH Robinson reported 14% growth in earnings per share on a 1% improvement in revenues. The company’s characteristic ability to control its selling, general and administrative expenses resulted in good profit growth, even as trucking volumes declined 1% as a result of the soft economy. Robinson’s stock has risen 19% this year as investors increasingly appreciate the company’s reliable earnings growth especially in the current weak economic environment.

Harte-Hanks

Harte-Hanks reported earnings per share equal to last year’s first quarter as revenues declined 7%. Direct marketing revenues declined 13% as the company’s financial, retail and high-tech customers delay new marketing campaigns, though the rate of decline has leveled off. Shopper revenues rose 5% while operating profit gained 12%. Harte-Hanks’ stock is up 18% this year.

Varian Medica Systems

North American demand for Varian Medical System’s advanced radiation therapy systems and accessories generated earnings and revenue growth of 32% and 10% respectively over the second quarter of fiscal year 2001. Backlog increased 15% to a record $632 million as well. Varian’s stock price has increased 29% since the beginning of the year, reaching a new high.

Walgreen & Co.

Walgreen’s posted revenue and earnings gains of 16% and 15% over the comparable second quarter. Strong increases in pharmacy sales drove this quarter’s revenue growth, with total sales increasing 21% and same store sales increasing 16% over the same period last year. Market share gains in 55 of Walgreen’s top 60 product categories versus drugstore, grocery and mass merchant competitors attest to the strong acceptance of Walgreen’s convenience concept. The company’s stock price rose 16% during the first quarter of 2002, but has dropped back slightly to a gain of 13% for the year to date.

Express Scripts

Express Scripts reported that new membership, higher per member utilization and higher average drug costs per prescription produced earnings and revenue growth of 28% and 32% respectively over the first quarter of last year. The key measure of profitability, EBITDA per claim, was $0.94, an 8% increase over last quarter and a 9% increase over the first quarter of 2001. Strong first quarter performance and increased earnings guidance for 2002 and 2003 sent Express Script’s stock price to a new high of $66 on May 2.

Since then, Express Scripts’ stock price has dropped into the low 50’s because of unfounded investor fears about the implications of the Boston U.S. Attorney’s subpoenas for information about the company’s distribution of two drugs for TAP Pharmaceuticals. TAP paid $875 million in criminal and civil fines to the U.S. government last year for conspiring with doctors to bill government insurers for free samples of Lupron, a drug used to treat prostate cancer. Express Scripts is not the target of the investigation, but recent subpoenas of Caremark and Wellpoint rekindled investor fears.

Merck

Merck reported quarterly earnings per share of $0.71 and revenues of $12.2 billion. Revenues increased 7% over the first quarter of 2001 while earnings per share were flat. The company has made progress positioning its COX-2 inhibitor drugs in a fiercely competitive market. The FDA approved the use of Vioxx to treat symptoms of rheumatoid arthritis and modified its prescribing information. Vioxx is now the only drug in its class that is proven to reduce the risk of developing gastrointestinal bleeding, a common and dangerous side effect of taking aspirin and other pain relievers. On March 15, Merck announced that it plans to submit an expanded new drug application for Arcoxia, its second generation COX-2 inhibitor, to the FDA. The company believes that incorporating new efficacy data for a chronic spinal condition will position the drug more favorably for approval and eventual marketing in the U.S. Merck’s stock price has declined 3% since the beginning of the year.

Mettler-Toledo

Mettler-Toledo reported earnings per share of $0.41 and revenues of $273.0 million, increases of 11% and 2% respectively over the first quarter of 2001. Total sales in North America and Asia grew 16% and 11% respectively. Sales in Europe, which account for 43% of total revenues, however, declined 9% over the first quarter of 2001 because of early completion of the euro conversion in the retail business and poor performance in Germany. German pharmaceutical and chemical companies have delayed laboratory and drug discovery equipment purchases until the resolution of an acrimonious nationwide labor arbitration process. The company decreased its 2002 earnings target to $2.35 per share, 8% above last year’s comparable results on the assumption that its on-going cost saving programs will not offset revenue declines from weak markets. Mettler-Toledo continues to gain market share in all its product lines. The company sees no quick improvement, however, in the depressed U.S. manufacturing sector and the European retail market. It anticipates that the current pharmaceutical company laboratory equipment purchasing slowdown will extend to lower cost items such as Mettler’s balances and pipettes. The company’s stock price has declined 20% since the beginning of the year.

Intel

Intel reported quarterly revenues and earnings per share of $6.8 billion and $936 million, increases of 2% and 17% over last year on a comparable basis. The company reported gross margins of 53.6%, an increase driven by higher prices and better-than-expected factory performance. Intel’s stock price has declined 4% since January 1.

Solectron

Solectron reported a 45% sales drop from a year ago, though the decline was 6% from last quarter. Solectron lost three cents a share this quarter, excluding continuing charges to reduce employment and manufacturing capacity. Solectron has moved its high volume production to its Asian and Mexican plants. We should be near the bottom. Solectron’s stock has fallen 24% this year.

Intuit

Intuit reported another record tax season this year and lifted its outlook for operating income for its fiscal quarter ending April. TurboTax for the web, its online tax preparation and filing service, exceeded 2.1 million paid federal returns, an 80 percent jump from last year. TurboTax desktop units sold through retail and direct channels grew 6% to 5.5 million.

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 – 2nd Quarter EARNINGS LETTER 2001 – 4th Quarter EARNINGS LETTER