Stock Price Sensitivity to Quarterly Earnings is Target of New U.S. Bancorp Piper Jaffray Report.

Business Editors

MINNEAPOLIS--(BUSINESS WIRE)--Dec. 21, 1999

Why do stock prices swing wildly over pennies of quarterly earnings per share? A new report published by the Mergers & Acquisitions group at U.S. Bancorp Piper Jaffray addresses fundamental reasons for the stock market's hypersensitivity to earnings announcements.

The report, entitled "Make Your Cash Flow Sing, Your Stock Will Dance" specifically looks at the problems associated with current methods of accounting for corporate earnings and identifies five action steps companies can take to uncouple their stock prices from earnings per share (EPS).

According to the report's author, Daniel J. Donoghue, managing director at U.S. Bancorp Piper Jaffray, "Cash flow provides the best measure of a company's financial performance, and stock valuations should reflect that. Unfortunately, analysts and investors are prisoners of the established accrual accounting conventions that focus exclusively on reported earnings and are not cash specific." Donoghue adds, "In order to escape the EPS trap, companies must provide better cash flow disclosures."

Among the steps advocated by Donoghue are identifying non-recurring cash flows; distinguishing between maintenance and discretionary capital expenditures; and using the direct method of presentation, which provides numbers for cash revenue, cash expenses and cash profitability.

The U.S. Bancorp Piper Jaffray report is particularly timely given the Securities and Exchange Commission's (SEC) recent initiatives on earnings management. As discussed in the report, the SEC is aggressively closing many accounting loopholes that provide companies with opportunities to manipulate reported earnings.

"The inherent transparency of cash flow would help the SEC by reducing the incentive for earnings management," Donoghue notes. "At the same time, corporate managers could focus on optimal, long-term business strategy rather than worrying about near-term earnings expectations."

The problems and limitations posed by the current fixation on EPS are illustrated in the report's discussion about the Financial Accounting Standards Board's (FASB) proposed changes to merger accounting which will eliminate the pooling method. Unlike pooling, the purchase method of accounting for an acquisition requires a company to amortize goodwill against reported earnings. As a result, a transaction that may have no effect on cash flow can have a significant negative effect on reported earnings.

Should the pooling-of-interest method by eliminated, many companies have stated that they will be forced to abandon strategic acquisitions based entirely on accounting considerations, Donoghue says. "Strategic decisions should be driven by business fundamentals, not accounting fictions," the U.S. Bancorp Piper Jaffray managing director concludes.

"Make Your Cash Flow Sing, Your Stock Will Dance" can be accessed via U.S. Bancorp Piper Jaffray's website at http://www.piperjaffray.com/ec/ec_ib01.asp. You may receive a printed report by calling Joy Walter, 312 920-2131.

U.S. Bancorp Piper Jaffray, a subsidiary of Minneapolis-based U.S. Bancorp, provides a full range of investment products and services to businesses, institutions and individuals. The company's investment banking business has grown exponentially in the last several years by focusing on the needs of growth companies in the consumer, financial institutions, health care, industrial growth and technology sectors. U.S. Bancorp Piper Jaffray has a national reputation for its expertise in fundamental research and equity and debt financing. U.S. Bancorp offers a comprehensive range of financial solutions through U.S. Bank, First American Asset Management, U.S. Bancorp Libra Investments and U.S. Bancorp Piper Jaffray. For more information, visit our Web site at www.piperjaffray.com.

Nondeposit investment products are not insured by the FDIC, are not deposits or other obligations of or guaranteed by U.S. Bank National Association or its affiliates, and involve investment risks, including possible loss of the principal amount invested. Securities products and services are offered through U.S. Bancorp Piper Jaffray Inc., member SIPC and NYSE, Inc., a subsidiary of U.S. Bancorp.