EARNINGS LETTER

4th Quarter, 2003

Past bear market recoveries have coincided with predatory buyouts of debt laden companies crippled by ill-conceived and poorly executed expansions that came to naught. This recovery is different. Investors’ renewed appetite for risk, after casting aside Iraqi war fears, caused them to bid up the prices of the most beaten-down stocks more than any others in the ensuing rally. Having received a reprieve from the stock market, many of these wounded survivors are eagerly seeking to sell additional stock to restore their finances. Underwriters’ new issue calendars are filled with the largest dollar volume of planned equity offerings since 2000. Many of the scheduled offerings come from technology companies. Some of these will be initial public offerings of companies financed by venture capital funds, who badly need the liquidity to provide returns to their investors.

The current resurgence of merger and acquisition activity likewise differs from that prevalent during the aftermath of previous bear markets. Buyers then sought to buy assets at bargain prices. Most acquisitions were for cash. Today the proposed payment for most acquisitions, whether friendly or hostile, is an exchange of stock. Bank of America’s negotiated merger with Fleet Boston is a stock deal offering the seller a 40% premium, whereas Comcast’s unsolicited all stock deal for Disney offered an initial 10% premium. The largest cash transaction, Cingular’s $41 billion bid to buy AT&T Wireless is at a price high enough to rival any made during the 1990’s telecommunication stock boom.

What is happening? Is this déja vu all over again? In one respect it is. We detect no inclination among institutional portfolio managers to pay a premium price for financial strength. Companies with no debt and records of sustained internally financed growth sell for no higher valuations than financially weak competitors reporting “comparable earnings” before so-called non-recurring charges are subtracted from profits. We deduce from this anomaly that few investors analyze balance sheets and those who do scorn companies possessing ample cash. This attitude is perhaps rational when real short-term interest rates are near zero and debt and equity financing is readily available. It is, however, a remarkably short term view and one wholly dismissive of recent past financial excesses.

Institutional portfolio managers’ apparent enthusiasm for stocks of companies touted as beneficiaries of a widely anticipated sustained economic upturn leads to neglect of financially sound, consistently profitable companies. Many of these companies get dumped into the “underperform” category by stockmarket strategists. We want to own these unglamorous businesses if they are run by managers with proven skills in directing the work of ordinary people. Growth in these businesses is not dependent upon recruiting geniuses, nor are their managements trying to divine the future. Instead their managers have a habit of focusing on the here and now where they know how to earn a profit and build shareholder value.

State Street

State Street’s strong fourth quarter revenue and earnings growth attests to the operational strength and focus throughout its organization. A 35% increase in fee-based revenues during the quarter raised overall revenues 23% above the year ago level despite lower net interest revenues and no realized gains from bond sales. Fourth quarter earnings of 68¢ per share were 25% above the 54¢ earned a year ago and 5% ahead of State Street’s strong third quarter results. These achievements required superb execution of its plans for retaining and integrating the custody business acquired from Deutsche Bank Global Services in January 2003. State Street has retained 88% of the revenues from the opportunistic acquisition while simultaneously increasing fees from its existing business 15% during the quarter. Instead of diluting earnings as management originally forecast, the acquisition contributed 1¢ to State Street’s 2003 per share earnings of $2.33 which were 8% higher than the $2.16 earned in 2002. Assets under custody are almost $9.4 trillion.

As the largest custodian for mutual funds with 47% of the industry’s assets, State Street is affected by the repercussions from public prosecution of trading abuses. Complying with prosecutors’ demands for trading information imposes costs State Street may not recover fully. A probable requirement for more accurate fund pricing, however, is causing more funds to turn to State Street for its expensive pricing service. It currently prices with a verified accuracy of 99.5% one-third of the funds publishing daily prices. Pension and foundation trustees’ decisions to fire fund managers caught abusing their trust has brought business to State Street’s transition management business, which serves institutions changing managers. It also is producing inflows into SSGA’s index funds. The mutual fund scandal, in our opinion has restrained investor enthusiasm for State Street’s renewed growth and kept it’s stock’s rise to 5% since December 1.

AIG

AIG’s stock price has advanced 28% since December 1 because reports about conditions within the insurance industry and AIG’s gains in specific markets dispelled apprehensions about AIG’s ability to retain its AAA rating. The company’s position as the world’s only AAA rated insurer is an immense competitive advantage. AIG reported fourth quarter earnings of $2.7 billion, equal to $1.05 per share. These after tax earnings for one quarter almost equaled the $2.8 billion pre-tax charge taken in the fourth quarter of 2002 to strengthen insurance loss reserves for the previous five years. This charge was AIG’s first extraordinary charge to replenish reserves for past losses and it shook investors’ long-standing confidence in the company’s superior underwriting skills. AIG’s combined ratio, a measure of the profit earned from insurance premiums, was 92.43 for last year, much the best performance among major insurers. AIG’s Asian life insurance business continued its rapid growth with Japan and China recording premium growth of 24% and 44% respectively. The company is poised to earn $4.50 per share this year, up 15% from 2003’s $3.89.

First Data

First Data’s fourth quarter and full year operating earnings per share of 54¢ and $1.91, represent gains of 17% and 15% respectively. Revenues rose to $2.2 billion in the quarter and to $8.4 billion for the year, increases of 11% and 12% respectively. During the year the company generated more than $1.5 billion in free cash flow. Western Union posted solid results as consumer money transfers rose 17% in the quarter and 19% for the year. Western Union locations at year-end reached 182,000, up 21%. More than 70% of these are now located outside the U.S., with 25,000 in India and China. Western Union will open an additional 28,000 to 38,000 locations in 2004, representing growth of 15 to 21%.

Credit and debit card transactions and dollar volume processed rose 20% in the fourth quarter and for the year. Processing margins for all cards, however, declined 4.4% during the year to 15% because FDC reduced prices to retain existing customers and incurred higher expenses to make ongoing system improvements. The company now processes transactions for 347.8 million cardholder accounts, up 7%. Arbitrage transactions tied to FDC’s stock-based merger with Concord EFS, the nation’s largest debit card processor, held the advance of FDC’s stock price to 8% since the beginning of December. The Concord merger was completed on February 26th with FDC exchanging 0.365 First Data shares for each Concord share. The combined business will generate revenues of more than $10 billion this year.

ADP

Although ADP’s fiscal second quarter revenues increased 9% to $1.8 billion, earnings per share declined 12% to 38¢. Art Weinbach, ADP’s CEO, caused the disparity between higher revenues and declining earnings this fiscal year by increasing investment in new product development, sales team strengthening and employee compensation. ADP’s client float rose 21.5% to $9.6 billion. The company is seeing growing interest in comprehensive outsourcing arrangements with large companies, which entail complete payroll, human resources and benefits administration. Brokerage services revenues and profits rebounded this quarter as trading volumes rose from a year earlier and mutual fund mailings surged 20%, a result of Sarbanes-Oxley regulatory compliance. ADP shares have risen 11% since the beginning of December.

The Chicago Mercantile Exchange

The Chicago Mercantile Exchange finished its fourth consecutive year of record trading volumes. Average daily volume of 2.5 million contracts during 2003 rose 13%, fueling an 18% revenue gain to $536 million and earnings per share of $3.60, up 15%. Volume executed electronically rose 39% and accounted for 42% of annual total volume. Contract volume in equity index and foreign exchange contracts rose 37% and 40% respectively. Interest rate contract volume slightly exceeded the record set during the previous year. So far this year, electronic trading constitutes 48% of total CME volume. CME generated more than $100 million in free cash flow and ended the year with $12 per share in net cash on its balance sheet. On January 2nd the CME began clearing all trades executed at the Chicago Board of Trade through a common clearing link. This relationship alone will boost CME’s per share earnings by 10% in 2004.

After months of speculative press coverage, the German-Swiss owned Eurex exchange launched it US futures business on February 8th. Its current products, futures and options on 2, 5 and 10-year Treasury futures compete directly with instruments traded on the Chicago Board of Trade. To date, Eurex has attracted scant volume, averaging just 24,000 contracts a day, compared to 1.5 million at the CBOT. CME’s shares are up by more than a third since December 1.

Merck

Merck reported fourth quarter and full-year earnings per share of 67¢ and $2.99, excluding one-time gains and expenses. Worldwide revenues for the year grew 5% to $22.5 billion. On December 30, the company filed its revised new drug application to the FDA for Arcoxia, its second generation COX-2 inhibitor, as planned. Merck’s research efforts in central nervous system diseases led to the licensing of the U.S. rights to develop and market a novel drug to treat sleep disorders that is currently in Phase III trials. This drug uses a different mechanism of action from current drugs on the market or those nearing launch. It will be the first in a new class of drugs when its application is filed with the FDA in late 2006. On February 23, Merck announced its plan to acquire Aton Pharmaceuticals, a privately-held company co-founded by the former president of the Memorial Sloan-Kettering Cancer Center. Aton has a compound in Phase II trials with demonstrated anti-tumor effects. This acquisition strengthens the company’s basic cancer research program that is run by the scientists that stayed at Merck after the purchase of Rosetta Inpharmatics in 2001. Merck’s stock price has risen 19% since its 12-month low on December 1.

Express Scripts

Mail prescription growth, increased use of generics and lower-cost branded drugs lifted Express Scripts earnings per share to 86¢ and $3.21 for the fourth quarter and full-year 2003, increases of 20% and 26% respectively. On January 30, the company completed its $335 million cash acquisition of CuraScript, one of the nation’s largest specialty pharmacy services companies. This acquisition significantly increases Express Scripts’ presence in a market that should grow 20% to 30% annually over the next 3 to 5 years as more biotech drugs enter the market. Express Scripts and the National Association of Chain Drug Stores will jointly administer a Medicare drug discount card through the Pharmacy Care Alliance. Express Scripts’ unique commitment to making drugs safer and more affordable while offering its customers and plan members choices facilitated this alliance. Express Scripts’ stock price has risen 13% since December 1.

Colgate

Colgate’s full year earnings per share of $2.46, rose 12%, its eighth consecutive year of double digit EPS growth. Good volume and profit gains across its major divisions worldwide offset weak results in North America caused by declining sales of its tooth whitening gel. Colgate’s operating profit rose 19% in Europe, 21% in Asia/Africa and 17% at Hills Pet Nutrition. Colgate’s free cash flow in 2003 rose 24% to $1.5 billion and its 38% return on invested capital set a new record. Investor worries about profit weakness in the company’s North American oral care business, which generates 12% of operating profit, provided an attractive entry point into this well managed highly profitable global franchise. Colgate shares have rebounded 14% since falling to $49 on December 19th.

Harte-Hanks

Harte-Hanks announced another quarter of uninspiring results. Though total revenue rose 6.8% to $255.7 million, operating cash flow increased only 1.2%. Earnings per share gained 7.7% to 28¢ because share repurchases reduced the amount outstanding by 4%. For the year, free cash flow declined nearly 20% as capital expenditures surged from the prior year. Management is forecasting another increase in capital expenditures this year. Harte-Hanks total revenue reached $944.6 million in 2003, a gain of 3.9%. Earnings per share increased by one penny to 97¢.

The results of Harte-Hanks Direct Marketing business remain lackluster. During the quarter, operating cash flow declined 4.7% to $29.1 million. This brings the full year decline in operating cash flow to 9.3% on revenue growth of 1.9%. In contrast, the company’s Shopper unit continues to perform well. Benefiting from an extra week in the quarter versus the prior year, sales rose 12% to $95.4 million and 7.4% to $359.8 million for the year. Operating cash flow rose 10.6% and 4.9% for the quarter and the year respectively. Harte-Hanks shares have gained 3% during the past three months.

Reed Elsevier

Reed Elsevier achieved double digit 2003 adjusted per share earnings growth, excluding the negative impact of foreign exchange. Elsevier Scientific & Medical publishing, driven by strong renewals and growth in electronic subscriptions, produced a revenue and profit gain of 8%. ScienceDirect online usage doubled, as users downloaded 175 million articles. Electronic only subscriptions rose 55% and now account for 23% of journal subscription revenue. LexisNexis reported revenue and profit growth of 3% and 10% respectively. Online revenue from US law firms rose 7%, risk management solutions gained 16% while corporate and academic usage declined. Harcourt Education’s profit rose 3% as revenue fell 2%. Management expects another difficult year because few states plan new textbook purchases. Revenue growth should rebound in 2005 when several states are scheduled to adopt new textbooks for reading, math and social studies. Reed Business experienced a 4% decline in revenue and flat profits as weak advertising and exhibition performance hurt results. Elsevier’s shares have risen 14% the past three months.

CH Robinson

CH Robinson reported fourth quarter and full year net revenue gains of 12% and 13% respectively. Earnings per share of 34¢ in the quarter and $1.33 for the year are increases of 10% and 16% respectively. Tight capacity in the trucking industry, which crimped margins, was offset by higher profitability in rail, air and sourcing fruits and vegetables. Revenues from Robinson’s T-Chek fuel and information services business rose 12%. Noting a pick up in economic activity, Robinson has hired aggressively, adding 300 employees. Robinson continues to expand its overseas freight forwarding operations, opening new offices in Hong Kong and Hamburg. During the year Robinson added 1,000 new customers bringing its total customer base to 16,000. Management reiterated its annual target of 15% growth in revenue and earnings. After rising 31% in the first eleven months of last year, Robinson’s stock price is unchanged since December 1.

Varian Medical Systems

Strong worldwide demand for Varian Medical System’s radiation oncology systems resulted in a 39% increase in earnings per share to 41¢ and a 29% increase in sales to $267 million for the first quarter of fiscal year 2004. Sales in international markets grew 22% over the same period last year as countries outside the U.S. purchased systems to address underserved medical needs. 53 clinics began treating patients with Varian’s SmartBeam™ IMRT during the quarter, bringing the total to 525, more than twice the number of clinics treating patients with this advanced therapy a year ago. Varian’s stock price has increased 21% since December 1 as investors recognize the company’s opportunity for growth and the quality of its execution.

Walgreen

Walgreen’s earnings per share for the first quarter of fiscal year 2004 grew 15.2% to 25¢ while quarterly revenues grew 16.5% to $8.7 billion. Pharmacy sales recovered during the quarter with 14.7% growth in comparable stores over the same period last year. Improving service levels in the stores and new digital photography services led to 7.5% growth in non-pharmacy sales, the best year-over-year growth in nine years. The company now offers 4 x 6 photo-quality prints from digital cameras at 4,300 stores for the same price as prints from traditional film, and less than half the price of home printing. Walgreen’s stock price has declined 3% since December 1 when it was 40¢ shy of its 12-month high.

Patterson Dental

Patterson Dental reported revenues and earnings per share of $521.8 million and 58¢ for the third quarter of fiscal year 2004, increases of 24% and 33% from the same period last year. Sales of dental supplies and printed office products grew 6% as Patterson executed its plan to strengthen its market focus on consumables by adding 40 territorial sales representatives during the last three quarters. Equipment sales grew 19% during the quarter. Dentists continue to purchase CEREC®3D dental restorative systems and digital radiography equipment to improve the productivity, clinical outcomes and revenues of their practices. The company renegotiated its agreement with Sirona, the manufacturer of the CEREC systems to remain the sole North American distributor through 2006. The company’s stock price has declined 6% from its all-time high of $69.80 set on November 13, 2003.

Johnson & Johnson

Johnson & Johnson reported record fourth quarter sales of $11.3 billion and full-year 2003 sales of $41.9 billion, increases of 19.7% and 15.3% respectively. Foreign currency contributed 5.6% and 4.6% to growth for the quarter and the year. Quarter and full-year earnings per share without one-time expenses and gains increased 19.3% and 16% to 57¢ and $2.65. The company experienced double-digit revenue growth in all three business segments, but highlighted the 13% fourth quarter revenue growth of the consumer division, its best performance in 10 years. Splenda® has benefited from the low-carbohydrate diet craze to become the #1 table-top sweetener with 42.5% share, an increase of 17.5% over a year ago. Pharmaceutical division revenues reported operational growth of 11% for the quarter and 9.7% for the year. Hormonal contraceptive revenues grew 35% during the quarter as OrthoEvra, a transdermal patch developed with ALZA and new low-dose formulations offset sales declines resulting from generic versions of older brands. Johnson & Johnson demonstrated its commitment to fight for its share of the drug-eluting stent market with the February 24 announcement that Guidant, a leading provider cardiac stents, will co-promote Johnson & Johnson’s CYPHER® stent in the U.S. Guidant also will help Johnson & Johnson develop a next-generation stent using Guidant’s advanced delivery system. Johnson & Johnson’s stock price has increased 10% since December 1.

Beckman Coulter

Beckman Coulter’s fourth quarter and 2003 earnings per share both grew 15% to 90¢ and $2.80 respectively. The introduction of new equipment systems that automate and simplify patient testing and repetitive biomedical research tasks increased quarterly and annual revenues 7.2% and 6.5% to $639 million and $2.2 billion respectively. Since the June launch of its new high throughput immunoassay system, the company has placed all the systems that it could produce. Each of the 100 machines placed in U.S. clinical labs will generate annual reagent and consumables revenues of more than $200,000. Biosite received FDA clearance for a new cardiac test manufactured by Beckman Coulter for its immunoassay systems. This test measures the damage to the heart muscle after a heart attack and complements Beckman Coulter’s sought-after panel of cardiac assays. The company’s stock price has increased 3% since December 1.

Microsoft

Strong consumer and corporate demand for PCs and Windows-based servers pushed Microsoft’s second fiscal quarter revenues above $10 billion for the first time, a 19% increase over the same period last year. Earnings per share for the quarter were 14¢, which includes a cost of 14¢ per share related to the completion of the employee Stock Option Transfer program. Employees tendered 345 million options with strike prices above $33, 22% of the outstanding options in the stock-based compensation plans. JP Morgan Chase paid $382 million to purchase these options from Microsoft. MSN® reported operating earnings of $112 million, its second quarter of operating profits, on revenues of $596 million. Microsoft’s stock price has risen 3.2% since December 1, 2003, an indication of investor disdain for strong results from companies possessing extra cash.

Amdocs

Amdocs reported first quarter fiscal year revenues of $428.3 million and earnings per share of 24¢, increases of 26% and 33% over the same period last year. Revenues grew in billing, customer relationship management and order management in both the wireline and wireless markets. Management continues to see a slow improvement in the market for its services as carriers show a greater willingness to commit to new projects. The company announced the acquisition of XACCT Technologies for $29.5 million, $13.5 million in cash and the rest in stock. XACCT’s software strengthens Amdocs’ end-to-end event processing system for voice, data, content and commerce transactions. Amdocs’ stock price has risen 11% since December 1.

Intel

Record unit sales of microprocessors, especially higher-priced server microprocessors, contributed to Intel’s record fourth quarter revenues of $8.75 billion, the company’s highest quarterly revenue since the third quarter of 2000. 2003 revenues grew 12.6% to $30.1 billion. Sales outside the U.S. grew 28% over the fourth quarter of 2002 and accounted for 73% of sales. Increased revenues, improved capacity utilization and increased production on 300 mm wafers pushed the company’s gross margin to an incredible 63.6%, leading to fourth quarter and 2003 earnings per share growth of 106% and 22% respectively over the same periods last year. Intel’s stock price has declined 15% from its 24-month high of $34.35 on January 8.

PepsiCo

Pepsico’s fourth quarter and 2003 earnings both grew 18% to 52¢ and $2.08 respectively, including stock compensation costs of 4¢ and 16¢. These results do not include non-recurring gains and expenses. New Quaker Oats convenience foods, diet carbonated soft drinks and strong international sales contributed to fourth quarter and annual division revenues of $8.1 billion and $26.9 billion, increases of 10% and 8% over the same periods last year. Volume increases, favorable product mix and effective promotional spending lifted division operating profit by 13% for the quarter and 10% for the year. Pepsico’s stock price has increased 8% to a 12-month high since December 1. All of this increase occurred in early February in response to upward earnings per share revisions that resulted from the correction of an overstatement of stock compensation expense.

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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2004 – 1st Quarter EARNINGS LETTER 2003 – 3rd Quarter EARNINGS LETTER