1. Timeline of Quarterly News “earnings” announced in press release 10Q filed with SEC press releases, analyst meetings blackout period, no insider trading 1 week sometimes a “pre- announcement” fiscal qtr end 1 week 3-8 weeks Rare Earth - Get Ready

3. What are ‘Earnings’?

4. Known as ‘pro forma’ or ‘street’ earnings

5. Pros and Cons of Pro Forma Pro forma earnings “give a better insight into the fundamental operations of our business than does the bottom line.” AMZN Pro forma earnings “give a better insight into the fundamental operations of our business than does the bottom line.” AMZN Pro forma earnings is “earnings before the bad stuff.” Lynn Turner, SEC Pro forma earnings is “earnings before the bad stuff.” Lynn Turner, SEC

6. What gets excluded from pro forma? Restructuring charges Restructuring charges Asset write-downs Asset write-downs Losses on the sale of assets Losses on the sale of assets In-process R&D from an acquisition In-process R&D from an acquisition Goodwill amortization Goodwill amortization Stock compensation expense Stock compensation expense Equity Method Gains/Losses Equity Method Gains/Losses Legal settlement costs Legal settlement costs Operations from stores scheduled to be closed in the future Operations from stores scheduled to be closed in the future Special items Other exclusions

7. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. ANNOUNCES FOURTH QUARTER AND YEAR END RESULTS Strong Sales Trend Continues With 4.8% Comparable Store Sales Gains Strategic Initiatives Program on Track MONTVALE, NJ--MARCH 16, 1999--The Great Atlantic & Pacific Tea Company, Inc. (NYSE: GAP) ("A&P") announced today fourth quarter and year end results for fiscal 1998 ended February 27, 1999. Sales for the twelve-week quarter were $2.43 billion versus $2.50 billion for the corresponding thirteen-week quarter last year. Comparable store sales increased by 4.8%. For the quarter, the Company posted a net loss of $88.6 million or $2.31 per share, versus the prior year's net income of $13.4 million, or $.35 per share. Excluding the impact of charges related to strategic initiatives under the previously announced "Project Great Renewal" and operating losses of the stores identified for closure, the Company would have earned $7.3 million or $.19 per share.

9. Project Great Renewal Charge

10. if SI follows cash flow (e.g. asset write-off) if SI follows cash flow (e.g. asset write-off) lowers the book value of the firm (which lowers future cash flows to equityholders) lowers the book value of the firm (which lowers future cash flows to equityholders) artificially inflated past results (so don’t use past to predict future) artificially inflated past results (so don’t use past to predict future) if over-accrue can artificially inflate future results (so don’t be surprised by improved future results) if over-accrue can artificially inflate future results (so don’t be surprised by improved future results) Anatomy of a Special Item reported results true results special item pro forma results time performance

11. if SI precedes cash flow (e.g. severance pay) if SI precedes cash flow (e.g. severance pay) if over-accrue can inflate future results (so don’t be fooled by improved future performance) if over-accrue can inflate future results (so don’t be fooled by improved future performance) even if SI and cash flow are in same period even if SI and cash flow are in same period can misclassify normal operating expenses into the SI (so the “core operating margin” looks better). can misclassify normal operating expenses into the SI (so the “core operating margin” looks better). 7% of SI are misclassified core expenses in a sample from 1989- 2000 (McVay 2004) (so expect operating margin to decline in future). 7% of SI are misclassified core expenses in a sample from 1989- 2000 (McVay 2004) (so expect operating margin to decline in future). Anatomy of a Special Item operating margin special item time reported operating margin

12. A&P operating margin through time pro forma operating margin

13. Intel Third Quarter Revenue $7.3 Billion, Up 9% Earnings excluding acquisition-related costs* $0.55 per share, up 22% EPS $0.42, down 5% SANTA CLARA, Calif., October 12, 1999 - Intel Corporation announced third quarter revenue of $7.3 billion, up 9 percent from third quarter 1998 revenue of $6.7 billion. Third quarter revenue includes post-acquisition revenue of companies acquired in the third quarter. Third quarter revenue was up 9 percent from second quarter 1999 revenue which was also $6.7 billion. The company said that shipments of microprocessors, chipsets, and flash memory all grew substantially to new records during the quarter. Net income excluding acquisition-related costs was $1.9 billion in the third quarter, up 21 percent from the third quarter of 1998 and up 7 percent sequentially. Third quarter earnings excluding acquisition-related costs were $0.55 per share, an increase of 22 percent from $0.45 in the third quarter of 1998, and up 6 percent sequentially. Including acquisition-related costs in accordance with generally accepted accounting principles, net income was $1.5 billion, down 6 percent from third quarter 1998 and down 17 percent sequentially. Earnings per share were $0.42, down 5 percent from $0.44 in the third quarter of 1998 and down 18 percent sequentially.

15. What were GAAP earnings? $30M or $0.07/share What were pro forma earnings? $50M or $0.12/share What was consensus forecast? $0.13/share http://www.zacks.com/research/report.php?type=estimates&t=AMZN http://0-research.thomsonib.com.lib.bus.umich.edu/gaportal/ga.asp 3 rd Quarter 2005 ? ? ?

16. Consensus Earnings Forecast Q3 2005 (Thompson Research and Zacks)

17. Amazon.com Historical GAAP and proforma quarterly EPS

18. In Q2 2001, 300 of S&P 500 had exclusions, accounting for 60 cents of every dollar of pro forma earnings. (WSJ) Trends in EPS: GAAP versus The Street

19. Skinner and Sloan “Don’t let an earnings torpedo sink your portfolio” Why do managers care?

20. Future cash flow implications of Other Exclusions is almost as large as for Pro Forma Earnings! Doyle, Lundholm and Soliman (2002 Review of Accounting Studies) Are Excluded Expenses Unimportant? A dollar of pro forma earnings predicts 8.184 dollars of future CFO over next 3 years. BUT a dollar of Other Exclusions predicts -6.422 dollars of future CFO.

21. Is the Market Fooled by Exclusions from Pro Forma Earnings? There is a small reaction to excluded expenses, but it is not nearly large enough. Future returns vary systematically with exclusions. The coefficient is the return on a portfolio that is long in the highest decile of the variable and short in the smallest decile.

24. Rare Earth - I just want to celebrate