EARNINGS LETTER

1st Quarter, 2005

The good first quarter results reported by most of your companies helped lift the stock prices of a few by 20% or more although the overwhelming majority fluctuated narrowly up or down by less than 10%.

State Street Corporation

State Street reported good first quarter earnings of 67¢ per share, 6% higher than last year’s first quarter results and 22% higher than its disappointing fourth quarter earnings. Importantly management showed it could deliver positive operating leverage as it contained expense growth to 6% while it achieved an 8% increase in service fee revenues. A higher tax rate kept State Street from bringing all of its 9% year to year gain in operating earnings to the bottom line.

State Street’s CEO Ron Logue, at the company’s annual investors meeting in June, led his key financial and operating executives in fact filled presentations focused on clearly explaining how State Street would deliver improved operating results. The information provided ranged from specific numbers on new servicing contracts signed on $1.2 billion of assets from US, European and Asian institutions, to a status report on its outsourcing business with an emphasis on Europe and hedge funds, its two most profitable markets. State Street provides administrative services for 10% of hedge fund assets worldwide. Europe provides 23% of State Street’s revenues and more than a third of its profits. Management was unified in conveying its commitment to delivering sustained earnings growth and stated unequivocally that its newly signed outsourcing agreement with AXA Investment Managers, the largest asset manager in France and Europe’s second largest, gives State Street all the geographic reach it needs to achieve its goal of deriving 50% of its fees from services provided outside the U.S. Henceforth, profit will be the only reason for signing outsourcing agreements. State Street’s stock price has risen 20% since its earnings report in April bringing it back up to its price at the start of the year.

Chicago Mercantile Exchange

Revenues and earnings per share at the Chicago Mercantile Exchange gained 29% and 51% respectively during the first quarter. Average daily contract volume was 3.9 million contracts, a 39% increase from a year ago. Volume executed on the company’s Globex electronic trading platform rose 95% and accounted for 66% of total volume. The first quarter sources of growth at the CME were interest rate and foreign exchange contracts which rose 58% and 56% respectively. CME’s average rate per contract was 67¢, 3¢ lower than during the first quarter of 2004. On June 2, the CME announced price increases, effective August 1, on its most heavily traded products and extended certain incentive programs designed to attract additional trading volumes from hedge funds and overseas customers. CME stock declined 25% from the start of the year through April 22nd but has since rebounded 50% to $255 per share.

Express Scripts, Inc.

Express Scripts’ stock price has risen 30% since January 1 and reached a new high of $104 on June 17. Express Scripts reported earnings per share of $1.14, a 28% increase over the first quarter of 2004. Specialty pharmacy revenues continue to grow with CuraScript’s revenues doubling since its acquisition in January 2004. Generic drugs accounted for about 54% of total prescriptions during the quarter up from 49% for the same period last year. At its annual Outcomes meeting on June 8, Express Scripts reported to clients that those who used at least two of their cost management tools saw no increase in their drug costs in 2004. The stock will split two-for-one on June 24.

First Data Corporation

First Data’s $2.5 billion in first quarter revenues were 10% higher than the level reached in the first quarter last year. Operating earnings per share, which exclude realized gains, losses and integration expenses, rose 14%. FDC reported solid gains in all its important business metrics. Western Union consumer to consumer money transfers rose 18% and agent locations reached 225,000 worldwide, up 20%. FDC processed 5.3 billion merchant transactions, up 38% from a year earlier. Two-thirds of transaction growth came from the acquisition of Concord EFS. Credit card accounts processed reached 440 million, up 11%. FDC’s stock price is down 5% year-to-date.

At First Data’s May 12 Analyst Meeting in Omaha, Charlie Fote laid out business unit goals for the year. Based on continued expansion plans for the Western Union agent network, money transfers are forecast to grow 18 to 20%, though operating profit growth will be lower due to less investment income from the Official Check portfolio. The agreement to acquire VIGO, the leading money transfer agent to Latin America announced the same day as the meeting, will further propel Western Union’s growth. Last year, VIGO’s 3,700 agent locations processed eight million money transfers whereas Western Union processed 97 million.

FDC’s merchant processing business, a beneficiary of the continued shift to electronic payments, is forecast to grow more than 10% this year. During the first quarter the company’s salesforce signed 150,000 new merchants. Management continues to reduce operating costs and is on track to meet its goal of a 13% annual reduction in expense per transaction. The company continues to make progress toward replacing the loss of JP Morgan Chase’s card issuing business. New customer signings include processing, cards and statement generation for Wal-Mart’s new co-branded Discover Card, issued by GE and Home Depot’s co-branded MasterCard, issued by CitiGroup.

Automatic Data Processing

ADP’s fiscal third quarter revenues and earnings per share rose 11% and 14% respectively. All the company’s key growth indicators increased during the quarter. New sales in the payroll segment accelerated 16% year over year and client retention improved 1% from last year’s record level. ADP pays one of every six non-government workers in the US. Its pays-per-control, the number of people employed by each of the company’s payroll customers, rose 1.8% during the quarter. The average tax filing float increased 11% from a year ago to $14.8 billion. The yield realized on float was 3.4%, up 0.5% from last year’s low. The combination of higher yield and the increase in float resulted in a 29% jump in interest earned. The continuation of this trend will accelerate the realization of operating leverage in the quarters ahead. ADP stock is down 3% this year.

American International Group

On May 31, AIG filed its 2004 annual report which restated results for each of the past five years, for every one of AIG’s business lines. This comprehensive report was prepared by the company’s independent public accounting firm which conducted a thorough examination of all revenue and expense recognition within each of the company’s diverse businesses. The numerous restatements were scrutinized carefully by attorneys from two eminent New York law firms, one representing the company and the other, the independent directors. Examination of the accounting treatment for all these transactions occurred after AIG admitted to the New York State Attorney General and the Enforcement Division of the SEC that it misrepresented several insurance transactions. The possibility that the company might face criminal prosecution for fraud, which would put AIG out of business, necessitated the attorneys’ careful scrutiny of the interpretation of FASB rules applied by the accountants to every transaction category.

These multiple restatements, which in many instances accelerate the booking of expense and often defer revenue recognition, increase the variability of AIG’s results over the past five years. The cumulative effect reduces earnings over the period by 10%. Remarkably the restatements, including the infamous reinsurance transactions with General Re and AIG’s own secretly controlled offshore creations, reduced the company’s retained earnings by only 2.7%. The changes, however, decimate AIG’s carefully constructed reputation for skillfully underwriting property and casualty risk to produce consistent underwriting profits except in times of catastrophic loss such as 2001. After restating 2004, AIG now reports an underwriting loss. The cause of Hank Greenberg’s humiliation and AIG’s predicament are decisions to preserve and protect AIG’s underwriting reputation at all costs. The meticulously detailed revelation of the deceptions in AIG’s accounts will, in our opinion, prevent the company from regaining its premium valuation and AAA credit rating, and accordingly, we intend to sell all AIG bought at a cost above $45 a share. Although the stock price has rebounded almost 10% from its April low, it is down 16% from the beginning of the year.

C.H. Robinson Worldwide Inc.

CH Robinson continues to deliver excellent financial results as customer demand for its flexible transportation network remains strong. Robinson’s first quarter net revenues and earnings per share rose 33% and 41% respectively. Revenues for the core trucking and freight forwarding businesses, which together account for 84% of profit, expanded by 36%. The company continues to profit from the shift of freight from intermodal/rail to trucks as a result of service costs and reliability issues with the major railroads. Produce sourcing revenues rose 41% while information services revenues gained 12%. The majority of the gain in produce sourcing came from the first full quarter of results from the acquisition of FoodSource, based in California. Robinson ended the first quarter with 5,029 employees, up 19% from a year ago. Profit per employee continues to expand. Robinson’s share price, which swung 20% between its low in April and its May high, is up 3% from the beginning of the year.

Donaldson Company, Inc.

Donaldson’s sales increased 11% to $412 million in their fiscal third quarter. Net income was a record $.36 a share versus $.33 last year. Both the Engine Products business and the Industrial Products segment contributed to a strong quarterly performance. While 90 day order backlog growth of 8% is lower than last year, it remains healthy at $414 million. The engine segment grew 11% to $243 million, supported by strong truck build rates in the United States and Europe, and growth in the off-road vehicle sector. Engine aftermarket sales were up 10% to $118 million, including a 68% jump in PowerCore filter sales. The Industrial Products segment also increased 11% in the quarter. During the quarter DCI repurchased 763,700 shares for $24.3 million. Donaldson’s share price has declined 2% since the beginning of the year.

Caterpillar Inc.

Caterpillar posted first quarter revenues of $8 billion and record profit of $581 million, representing a 29% increase in revenues and a 38% rise in profit compared to the first quarter of 2004. Strong sales volume growth was registered by all business segments in all regions and was augmented by price increases and foreign exchange gains. Machinery sales were $5.4 billion, a 30% increase, made up of a 24% increase in sales volume, 4% through price increases and the remainder from currency. Engine sales also registered significant growth with sales of $2.4 billion, 29% higher than the same period last year. The company announced a 2 for 1 stock split payable on July 22 and a 22% dividend increase to 25¢ quarterly on the split shares. Caterpillar’s share price is up 4% since January 1.

Varian Medical Systems, Inc.

Varian Medical Systems reported second quarter earnings of 39¢, an increase of 24% over the same period last year. Revenues increased 9% and net orders increased 13%. Oncology Systems’ global order growth for the last twelve months was 15%, at the high end of the company’s long-term growth expectation for this business. Net orders for this business grew 1% in North America and 32% in international markets.

Varian’s stock price has declined 12% since the beginning of the year. Portfolio managers may be selling the stock because they interpret the low North American net order growth of the last two quarters as a precursor of the end of Varian’s record of strong long-term growth. Net order data going back to March 1993 show the cyclical response of North American and international markets to the introduction of new technologies. Dick Levy, Varian’s CEO, often explicitly states that North American clinics adopt new technologies early, while their international counterparts follow one to three years later once the treatment technology has been proven clinically effective. There have been six cycles of low North American net order growth offset by strong international order growth since March 1993. The installation of more than 50 next generation Image Guided Radiation Therapy systems as of April 1 indicate that the initial uptake of this new technology is moving faster than that of Intensity Modulated Radiation Therapy, Varian’s previous improvement in conforming the radiation beam to cancerous tumors. This trend bodes well for the future.

Walgreen Company

Walgreen reported second quarter earnings per share of 48¢, a 15% increase over the same period last year. Revenues grew 12.3% to a record $11.0 billion. The company has opened 178 new stores during the first half of the fiscal year, 38 more stores than last year, and is still seeing customer visits increase in stores open two or more years. Gross margins increased by almost 1% during the quarter from growth in generic drug sales, better purchasing terms and digital photofinishing while more aggressive advertising reduced margins in other front-end categories. The move to in-store digital photofinishing has increased operating costs, but provides a better service to customers and improves net operating profit. Walgreen’s strong operating performance this quarter pushed its stock price up 20% since the beginning of the year.

Patterson Companies

Patterson Companies reported fiscal fourth quarter earnings of 33¢, 9% above last year’s results but below the company’s plan. Revenues during the quarter advanced 17%. Excluding acquisitions, however sales rose only 10%, which constitutes a shortfall.

Patterson’s core, its dental distribution business which produces 80% of operating profit and all its free cash flow, continued its exemplary performance during the quarter and for the year. As a result, Patterson’s earnings for the fiscal year ending April 30th were $1.32, 22% higher than the previous year. The execution problems impinging on profit growth during the quarter exist in the company’s veterinary and rehabilitation distribution businesses which are managed to replicate the company’s dental distribution success. The veterinary business began to use price competition to expand into California while the rehabilitation business was late in curbing costs, as sales growth slowed to 15%. The company has set a goal of 16% overall revenue and earnings growth for the current fiscal year. We expect at least one more sub-par quarter before Patterson regains its consistent 15% revenue and earnings growth. The stock has risen 7% this year.

Beckman Coulter, Inc.

Strong sales growth for immunoassay and biomedical research products pushed Beckman Coulter’s earnings per share to 62¢, a 15% increase over the first quarter of 2004. Revenues grew 7.3% to $576 million with foreign currency contributing 2.6% of the growth. The company’s high throughput immunoassay instrument continues to gain market share, especially in Europe. The success of this instrument and related reagent sales increased immunoassay revenues 24%. On April 27 the company announced the acquisition of Agencourt Bioscience Corp. for $100 million. This privately held company is a leading provider of genomics services. Its patented separation technology provides state-of-the-art results for the isolation of DNA and RNA. Agencourt will lead the development of the company’s instruments and assays for the rapidly growing market for molecular diagnostics. After rising and falling, Beckman Coulter’s stock is selling at $67, almost the same as it was at the beginning of the year.

Johnson & Johnson

Strong demand for Johnson & Johnson’s Medical Devices and Diagnostics products pushed the quarter’s earnings per share up 16.9% to 97¢. Revenues for the quarter grew 11% to $12.8 billion with currency contributing 2.2% of the growth. With the exception of Cordis all of the companies in Medical Devices and Diagnostics reported double digit revenue growth with Depuy’s orthopedic reconstruction joints and Lifescan’s blood glucose monitoring products reporting sales growth of 16% and 23% respectively. Tylenol sales and continued customer demand for SPLENDA plus J&J’s rejuvenated skin care products delivered Consumer division revenues of $2.3 billion, an increase of 11.4% with currency contributing 2.5%. Pharmaceutical sales grew 7% to $5.8 billion as generic competition reduced demand for Duragesic, a transdermal patch for chronic pain. Johnson & Johnson’s stock price has risen 6% since the beginning of the year.

Merck & Company, Inc.

Merck reported quarterly earnings per share of 62¢ and worldwide revenues of $5.4 billion. Vytorin, the Zetia – Zocor combination drug, continues to gain share of the lipid lowering market, accounting for 5% of all new prescriptions written in March. During the quarter, the company submitted biological license applications to the FDA for Rotateq®, its Rotavirus vaccine, and for Zostavax®, its vaccine to prevent shingles in adults. Merck published the results from the Phase II trial of Gardasil®, its HPV vaccine, in the April 7 online issue of The Lancet Oncology. The vaccine prevented the development of precancerous cervical lesions in all of the women who received the vaccine. Richard Clark, the president of Merck’s manufacturing division and former CEO of Merck-Medco, became CEO on May 5. In an unusual move, the Board did not appoint a chairman. The Executive Committee chaired by former Honeywell CEO Lawrence Bossidy will advise Clark for the first year or two of his tenure. Merck’s stock price has hardly moved since the beginning of the year.

Pepsico

Revenue growth in all of Pepsico’s divisions contributed to the 15% increase in the quarter’s earnings per share and 7% revenue growth over the same period last year. Pepsi International’s revenue grew 12% with double-digit volume growth of snacks and beverages in its major emerging markets (India, China, Russia and Brazil). Salty snack revenues grew 6% with high single-digit revenue growth from other snacks such as Grandma’s Cookies, nuts and Quaker rice crackers. Noncarbonated drink volume rose 8% during the quarter, but was offset by a 1% decline in carbonated beverage volumes. Double-digit volume growth of Quaker Oats and Cap’n Crunch cereals led to 10% revenue growth for the Quaker Foods division. PepsiCo’s stock price has risen 7% since January 1.

Harte-Hanks, Inc.

Harte-Hanks first quarter revenues and earnings per share were up 14% and 38% respectively. The company reported free cash flow of nearly $24 million, up 45% from the year ago quarter, as capital expenditures declined 9%. Direct marketing was very strong during the quarter with revenues up 17% and operating cash flow up 43%. One-third of the revenue growth in direct marketing came from a large one-time project for a high tech/telecom customer. Shopper revenues and operating cash flow rose 8% and 13% respectively, above the last year’s quarterly results. On April 20, Harte-Hanks acquired the Tampa Bay Flyer Shopper which has weekly circulation of 900,000 households in the Tampa/St. Petersburg metropolitan area and $33 million in revenues. The acquisition will not add to EPS this year. Harte-Hanks stock is up 17% this year.

Kronos, Inc.

Kronos’ second quarter earnings per share rose 17% to 34¢ during the second quarter of fiscal year 2005. Revenues for the quarter grew 12% to $120.7 million in response to strong demand for Kronos’ time and attendance and scheduling software from enterprise customers, which are firms with more than 2,500 employees. The Sisters of Mercy Health System, the ninth largest Catholic healthcare organization in the U.S. signed a contract to implement the scheduling software for its 26,000 employees in 18 acute care hospitals. While Kronos’ enterprise business remains on track with a growing pipeline, disruption caused by the reorganization of its mid-market sales force and fewer orders from ADP resulted in lower than expected revenues during the quarter. Management has scaled back its profit forecast to 8-13% growth for this fiscal year ending September 2005.

Kronos’ stock price has dropped 20% since the beginning of the year and 27% below its high of $56 on February 25 because investors are unnerved by its failure to meet mid-market sales goals. On October 1, 2004 Kronos redefined its mid-market segment to include companies with as many as 2,500 employees, up from 1,000 employees. The redefinition meant that many prospects initially contacted by Kronos’ effective enterprise sales reps were scheduled for transfer to the new mid-market sales force at the end of December. Sales to many of these prospects accordingly were closed before the transfer date emptying the pipeline of matured sales prospects for the newly constituted mid-market sales force. In addition, Kronos found that it had to upgrade and align the skill sets of its new mid-market sales representatives to emphasize the more consultative, strategic selling process expected by the larger organizations. At Kronos’ annual analyst meeting on June 14, Ed Thorsden, the Vice President in charge of mid-market sales, stated that the sales force reorganization is progressing well. He has replaced order takers in the sales force with new hires who possess the needed selling and communication skills and is putting them through a rigorous new training program. He expects to have 90% of the representatives the group needs by year end.

Amdocs

Amdocs reported second quarter earnings per share of 34¢, an increase of 21.4% over the second quarter of fiscal 2004. Revenues grew to $488 million, an increase of 4% over the previous quarter and 10.3% over the same period last year. During the quarter, Amdocs launched Amdocs 6, an integrated modular suite of its key billing, customer relationship management and order management software. This software suite allows Amdocs’ customers to reduce the cost and time to deliver new services to their customers. The company also began offering consulting services to facilitate each client’s move to integrated customer management. Amdocs also announced a new project deploying the full scope of its new offerings for Elisa Corporation, a Finnish company, which is installing for its service reps the Amdocs 6 suite to provide a single customer view of wireline, wireless and internet services, for its Finnish and Estonian subscribers. Amdocs will provide consulting services to help Elisa reengineer its business processes as well as serve as the systems integrator for the project.

Amdocs’ stock price has declined 13% after reaching $30 on April 7 and is up 4% since the beginning of the year. Portfolio managers become accustomed to selling the stock whenever they hear negative rumors about large projects involving Amdocs along with many consultants and other vendors. Participants in large complex telecom contract negotiations and project implementations invariably, disseminate their views to the trade and financial press to advance their own interests. Amdocs stock price will continue to fluctuate as the result of this sort of noise because it is involved in almost all the large projects undertaken by Tier 1 telecom customers.

Intel Corporation

Intel’s stock price has risen 16% since the beginning of the year on news of the strong demand for its high-margin mobile products. The company reported quarterly sales of $9.4 billion, a 17% year-over-year increase, while earnings per share grew 31% to 34¢. The company increased its 2005 capital budget by $500 million because of strong product demand and increased confidence in its 65 nanometer manufacturing process. Intel introduced its first next generation microprocessors and wireless technology components during the quarter.

Microsoft Corporation

Microsoft reported third quarter fiscal year 2005 earnings per share of 28¢ and revenues of $9.6 billion. Revenue for the Server and Tools business rose 12% to $2.4 billion, its eleventh consecutive quarter of double-digit revenue growth. The company also reported double digit revenue growth for its Home and Entertainment and Mobile and Embedded Devices businesses. The Home and Entertainment business has benefited from 250 million hours of Halo 2 played online and online sales of 500,000 additional game levels at a cost of about $15 each. Microsoft has repurchased 141 million shares for $3.7 billion during the fiscal year. The company’s stock price has fallen 6.3% since January 1.

Dolby Laboratories

On February 16, Dolby Laboratories completed its initial public offering when it sold 30% of its fully diluted shares at $18 per share. On its first day of trading, the stock price rose above $25. Dolby’s stock is currently about 25% below its high, and sells below our valuation of its business. On May 5, Dolby reported its fiscal second quarter results, its first as a public company. Revenues for the quarter rose 8% to $85 million. Pro-forma earnings per share of 14¢ included a 5¢ charge for stock-based compensation expense. For the first time, management provided specific guidance for fiscal 2005, calling for revenue growth of between 16% and 21% and pro-forma earnings per share of $0.55 to $0.62, which includes a $0.14 charge for stock-based compensation expense related to stock grants issued to employees in preparation for the IPO.

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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2005 – 2nd Quarter EARNINGS LETTER 2004 – 4th Quarter EARNINGS LETTER