BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-4663Ann Marie Larson larsonam@bernstein.com +1-212-756-4235Wally Cheung cheungwk@bernstein.com +1-212-756-4020Matthew 8. Rothman, Ph.D. rothmanms@bernstein.com +1-212-823-2893Doreen Hughes hughesdm@bernstein.com +1-212-756-4187Christine D. Hanson, Product 8pecialist hansoncd@bernstein.com +1-212-756-1902See last page of this report for analyst certifications and important disclosures.Quantitative ResearchOuantitative Research Update: October, 2003Measuring Earnings Ouality: A Comprehensive Balance 8heetApproachHighlightsThis month we take the important step of moving beyond the narrow definition of accruals based on non-cash working capital. In particular, we extend our analyses of the net accruals measures byincorporating changes in the net non-current operating assets (NNCO) and changes in the net financialassets (FIN). Inclusion of these items provides a better picture of earnings quality, and serves as a morepowerful signal of relative stock performance.Addition of NNCO captures excessive capital spending and growth in intangible assets. Its incorporationimproves the Q1 minus Q5 spread by 480bp per year, versus use of the traditional net accrual measure.Roughly 3/4th of the improvement in efficacy came from a better identification of the underperformers(i.e. Q5).Efficacy of the new accrual measures remained robust under the sector-neutral constraint.The signalsperformance was consistent over different time periods and did not deteriorate through the bubble.Improvement in the new accrual metric performance (vs. the traditional definition) was evident at thesector level, with greatest improvement for transports and telecom services. This largely reflects the highcapital spending and acquisition activity by companies in those sectors during the recent years.During September, greatest outperformance accrued to attractively valued stocks with rising revisionsand/or improving balance sheets; while momentum stocks, with deteriorating balance sheets had thegreatest underperformance.nvestment ConclusionTelecom, technology, and commodities industries dominate list of stocks with favorable accruals.Unfavorable accruals are primarily in energy, medical products and services. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46632Quantitative ResearchDetailsIn this months feature, we extend our work on earnings quality to include additional balance sheet itemsover which management has considerable discretion. Specifically, where our previous measure of accrualsonly included changes in non-cash working capital, our new measure also includes changes in net non-current operating assets and changes in net financial assets. We believe that by including these additionalitems we are able to obtain a fuller picture of discretionary revenue and expense items and ultimately abetter metric of the quality of a firms earnings.We find that the magnitude and the persistence of mispricing related to earnings accruals are far greaterthan we had previously believed. By using the information contained within non-cash working capital andthe non-current operating assets accrual components we can achieve significantly superior returns overusing the non-cash working capital component alone. On the other hand, the accrual component of changesin net financial assets behaves quite differently and consequently detracts from our ability to predict futurestock returns (see Exhibit 1). Our new measure of accruals works well in large cap stocks (Exhibit 2), smalland mid cap stocks (Exhibit 3), and in growth as well as value stocks (Exhibit 4). The measure is effectivewhether it is constructed on a sector-by-sector basis or across the entire market universe. Moreover, we findit to be remarkably stable across time-periods.We believe this line of research should be of interest to analysts, portfolio managers and all investors whoare concerned with understanding the persistence and reliability of earnings, as well as the markets reactionto the various components of earnings.Exhibit 1Market Relative Summary TableLargest 1500 CompaniesRelative Returns1978 - 2003Comprehensive AccrualsComprehensive Accruals Excluding Changes In Financial AssetsChanges in Working CapitalChanges in Non-current Operating AssetsChanges in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 1.60% 2.32% 1.33% 1.64% -2.01% 1.34%Q2 0.42% 1.31% 0.49% 1.65% 0.37% 0.93%Q3 -0.23% 0.94% 0.23% 0.30% 0.62% -0.28%Q4 -0.65% -0.31% -0.11% -0.35% 1.52% 0.09%Highest Accruals Q5 -3.12% -6.47% -3.12% -5.46% 0.35% -2.68%Q1 - Q5 4.72% 8.79% 4.45% 7.10% -2.36% 4.01%Sector Relative Summary TableLargest 1500 CompaniesRelative Returns1978 - 2003Comprehensive AccrualsComprehensive Accruals Excluding Changes In Financial AssetsChanges in Working CapitalChanges in Non-current Operating AssetsChanges in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 1.45% 2.55% 1.54% 1.54% -1.54% 1.84%Q2 1.12% 1.80% 0.44% 0.44% -0.05% 0.29%Q3 0.31% 0.79% 1.04% 1.04% 0.71% 0.86%Q4 -0.19% -0.74% 0.11% 0.11% 0.95% 0.20%Highest Accruals Q5 -3.02% -4.71% -2.66% -2.66% 0.49% -2.45%Q1 - Q5 4.47% 7.26% 4.20% 4.20% -2.02% 4.28% BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46633Quantitative ResearchExhibit 2Summary TableLargest 500 CompaniesMarket Relative Returns1978 - 2003Comprehensive AccrualsComprehensive Accruals Excluding Changes In Financial AssetsChanges in Working CapitalChanges in Non-current Operating AssetsChanges in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 1.99% 1.18% 1.37% 0.68% -0.20% 1.32%Q2 0.41% 0.80% 0.75% 0.78% -0.58% 1.19%Q3 -0.72% -0.71% -0.42% 0.39% 0.37% -0.68%Q4 -1.40% -0.45% -1.09% -1.75% -0.05% -0.45%Highest Accruals Q5 -2.70% -3.18% -1.69% -2.45% 0.38% -1.23%Q1 -Q5 4.69% 4.36% 3.05% 3.13% -0.58% 2.55%Exhibit 3Summary TableLargest 501 - 1500 CompaniesRelative Returns1978 - 2003Comprehensive AccrualsComprehensive Accruals Excluding Changes In Financial AssetsChanges in Working CapitalChanges in Non-current Operating AssetsChanges in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 1.00% 2.57% 1.53% 1.15% -2.20% 1.47%Q2 0.36% 1.55% 0.90% 2.12% 0.72% 0.83%Q3 0.02% 0.92% 0.16% 0.81% 0.77% -0.17%Q4 0.23% -0.17% 0.63% 0.17% 1.84% 0.66%Highest Accruals Q5 -2.98% -6.31% -3.80% -5.73% 0.27% -3.47%Q1 -Q5 3.97% 8.88% 5.33% 6.87% -2.47% 4.93%Exhibit 4Summary TableGrowth UniverseMarket Relative Returns1978 - 2003Comprehensive AccrualsComprehensive Accruals Excluding Changes In Financial AssetsChanges in Working CapitalChanges in Non-current Operating AssetsChanges in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 3.59% 2.57% 1.93% 2.01% -1.30% 2.43%Q2 -0.32% 1.76% 2.26% 0.83% -1.01% 1.27%Q3 -0.09% 1.65% -1.13% 1.63% -0.21% -0.72%Q4 0.63% -1.54% -0.08% -0.01% 1.92% 0.45%Highest Accruals Q5 -4.25% -4.93% -2.66% -4.93% -0.12% -2.89%Q1 -Q5 7.84% 7.50% 4.58% 6.94% -1.18% 5.32% BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46634Quantitative ResearchThe mportance of 8tudying AccrualsThe rationale for a detailed study of the accruals component of earnings stems from our belief that in orderpredict earnings accurately investors need to understand both the cash flow and accrual components ofcurrent earnings. Accrual based accounting attempts to record all the financial effects of a transaction in theperiod the transaction occurs rather than piecemealing the transaction into the many periods in which thecash is received or paid. This allows for revenues to be matched with their associated expenses. Under theaccrual basis of accounting, firm management must then decide when to recognize revenues and expenses(timing questions) and how much to recognize (measurement questions).Accrual accounting may also provide superior measurement of future performance since the activities of thefirm in future periods will bear their share of the costs and services the firm consumes.Consequently,accrual accounting can be thought of as a tradeoff between increasing the relevance of the informationprovided to investors and decreasing the reliability through greater management subjectivity.We believe this difference in subjectivity is the driving force between the properties of the accrual and cashcomponents of earnings.Studies have documented that the persistence of current earnings is decreasing inthe magnitude of the accrual component and increasing in the magnitude of the cash flow component.1Since cash flow from operations involves much less subjectivity than does accruals, analysts believe thatcompanies with high levels of cash flow to net income have a higher quality of income and that thesecompanies are more likely to repeat their performance. In contrast, companies whose majority of incomecomes from the accruals components and is not attributable to the cash flow component frequently have ahard time duplicating their performance in future periods; their earnings are not persistent.For portfolio managers the critical question is whether stock prices fully reflect the differences inpersistence among the different components of earnings. Do investors fully distinguish between the accrualcomponents and cash components of earnings when setting prices? The answer coming from a series ofacademic papers and our own research is a resounding No. Stock prices act as if investors fixate on thereported earnings and do not distinguish between the properties of the accrual and cash flow components ofearnings. Firms with relatively high levels of accruals experience negative future abnormal returns, andconversely firms low levels of accruals experience positive future abnormal returns.In our research feature this month, we take the important step of moving beyond the narrow definition ofaccruals based on current operating accruals to a comprehensive definition of accruals based on the entirebalance sheet of a firm. We find that this improves the abnormal return prediction of accrual basedcomponents and enhances the consistency and reliability of the measure.

1 See: Richard Sloan, 1996, Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About FutureEarnings, The Accounting Review, Volume 71, Number 3, pp. 289-315; Paul Healy, 1985, The Effect of BonusSchemes on Accounting Decisions, Journal of Accounting and Economics, Volume 7, pp. 85-107; K.R.Subramanyam, 1996, The Pricing of Discretionary Accruals, Journal of Accounting and Economics, Volume 22,pp.249-281. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46635Quantitative ResearchMeasuring and Defining Comprehensive AccrualsThe convention both in academia and in practitioner based research is to define accruals as the change inworking capital excluding cash and depreciation expense. This definition, however, excludes both non-current operating assets and non-current operating liabilities and financial assets and financial liabilities.Following the lead of two recent academic working papers by Richardson, Sloan, Soliman and Tuna, weexpand our definition of accounting accruals to include these measures.2Specifically, as these two papersshow, total accruals represent the difference between accrual earnings and cash earnings, or, equivalently,the change in non-cash earnings minus the change in liabilities. The intuition behind this definition is that ifthere were no accruals then by construction the only asset or liability would be cash. So it must follow thataccruals are equal to the change in all non-cash assets less the change in all liabilities.The important point to recognize is that unlike earlier definitions of accruals, our new definition includesaccruals from non-current operating assets and non-current operating liabilities. This includes assets such asproperty, plant, and equipment and internally generated intangibles and liabilities such as long-termpayables, deferred taxes, and post-retirement benefit obligations. It also includes accruals from investingsuch as financial assets and financial liabilities. These would include, for example, investments in long-termmarketable securities and long-term debt.In mathematical terms, we can express this as,FIN NNCO WC Accruals + + =where AWC represents the change in non-cash working capital; ANNCO represents the change in net non-current operating assets; and AFIN represent the change in net Iinancial assets.We can then take the balance decomposition a step further by decomposing each one of these componentsinto their component parts. Specifically, the change in working capital (AWC) is equal to the change incurrent operating assets (ACOA) less the change in current operating liabilities (ACOL). The change incurrent operating assets is simply the change in current assets minus the change in cash and short-terminvestments; the change in current operating liabilities is simply the change in current liabilities minus thechange in debt in current liabilities. Mathematically, we express this as:( ) ( ) . . Liab Cur in Debt s Liabilitie Current STI and Cash Assets CurrentCOL COA WC = =

2 See Scott Ricardson, Richard Sloan, Mark Soliman, and Irem Tuna, 2003, Accrual Reliability, Earnings Persistenceand Stock Prices, working paper, University of Pennsylvania, Wharton School; and Scott Richardson and RichardSloan, 2003, External Financing and Future Stock Returns, working paper, University of Pennsylvania, WhartonSchool. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46636Quantitative ResearchSimilarly, we decompose the change in net non-current operating assets (ANNCO) as the change in non-current operating assets (ANCOA) and the change in non-current operating liabilities (ANCOL). Thechange in non-current operating assets is change in total assets minus the change in current assets and thechange in investments and advances. The change in non-current operating liabilities is simply the change intotal liabilities minus the change in current liabilities and the change in long-term debt. Mathematically, weexpress this as:( )( ) Debt Term Long s Liabilitie Current s Liabilitie Totals Investment Assets Current Assets TotalNCOL NCOA NNCO = = Finally we can decompose the change in net financial assets (AFIN) into the change in Iinancial assets(AFINA) less the change in Iinancial liabilities (AFINL). The change in Iinancial assets can be broken downinto the change in short-term investments plus the change in long-term investments. The change in financialliabilities can be broken down into the change in long term debt plus the change in debt in current liabilitiesplus the change in preferred stock. Again, we can express this in mathematical terms as,( )( ) Stock Preferred s Liabilitie Current in Debt Debt Term Longs Investment Term Long s Investment Term ShortFINL FINA FIN + + + = = All of the accounting items are scaled by the total assets of the firm and each of the items is winsorized ateither +1 or -1 to correct for outliers and data errors.All of the accounting data in this study comes fromCOMPUSTAT. Finally, we are using only the annual data items since several of the accounting items arenot reported on a quarterly basis. Consequently, all of the variables are measured as year-over-year changes.This is one of the major drawbacks to this current measure relative to the conventional accruals measurebased upon quarterly data changes in non-cash working capital. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46637Quantitative ResearchThe Empirical Relationship among the Components of AccrualsTo help us understand the behavior of the different components of earnings accruals, we calculated a seriesof correlations on each part of the balance sheet decomposition. As seen in Exhibit 5, each of thecomponents is capturing diIIerent inIormation. The change in non-cash working capital ( WC) and thechange in net non-current operating assets ( NNCO) are positively correlated, highlighting that Iirms tendto grow their current and non-current operating accruals in conjunction with each other. On the other hand,bothWC andNNCO are very negatively correlated with the change in net Iinancial assets ( FIN). Thiswould suggest that firms tend to finance growth in the current and non-current operating assets throughexpending financial assets and issuing financial liabilities. The main point should be clear: changes in netfinancial assets behave very differently from changes in non-cash working capital and changes in net non-current operating assets.Exhibit 5Average Pairwise Correlation of ComponentsLargest 1500 StocksComprehensive Accrual MeasureComprehensive Accruals Excluding Change in Fin. AssetsChange in Working CapitalChange in Net Non-current Operating AssetsChange in Financial AssetsExisting Net Accruals MeasureComprehensive Accrual Measure 1 - - - -Comprehensive Accruals Excluding Change in Fin. Assets 0.48 1 - - - -Change in Working Capital 0.30 0.56 1 - - -Change in Net Non-current Operating Assets 0.40 0.88 0.11 1 - -Change in Financial Assets 0.55 -0.45 -0.23 -0.41 1 -Existing Net Accruals Measure 0.31 0.53 0.93 0.12 0.21 1It is also important to notice that the comprehensive accrual measure (CAM) and the comprehensive accrualmeasure excluding changes in financial assets (CAMXCFA) both have relatively low correlation with ourexisting net accruals measure. On the other hand, the change in non-cash working capital and our existingnet accruals measure are almost perfectly correlated. Consequently, we have several indications that bothCAM and CAMXCFA are capturing different information then what is in our existing measure. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46638Quantitative ResearchRelationship Between 8tock Returns and AccrualsThe most important question for us to investigate is if investors understand the different properties ofaccrual measures and accordingly price stocks in a way that reflects this understanding. If investors dounderstand the properties of accruals, then there should be no relationship between the level of a firmsaccruals and its future stock returns. However, if investors do not appreciate the lower persistence of theaccruals components of earnings, then there will be a negative relation between accruals and future stockreturns that is, firms with high current period accruals will have negative future stock returns.As shown in Exhibit 6, this negative relationship between accruals and future stock returns is exactly therelationship that exists. Among the largest 1500 stocks, stocks with current period high levels ofcomprehensive accruals tend to dramatically underperform over the subsequent year while stocks withcurrent period low levels of comprehensive accruals tend to outperform over the same timeframe. It makeslittle difference if the measure is constructed on an overall market basis that is, ranking all stockstogether regardless of their sector or ranking stocks on a sector relative basis. Both methodologies workwell. Additionally, the comprehensive accruals measure has been a remarkably consistent predictor ofreturns, regardless of the broad time period. Additionally, in Exhibit 7, we show that if the holding period isincreased from one-year to two-years, the measure still proves to be efficacious.Exhibit 6Comprehensive Accruals MeasureLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.60% 0.88% 0.57% 3.39% 1.45% 0.98% 0.48% 2.92%Q2 0.42% 1.91% -0.92% 0.48% 1.12% 1.92% 0.40% 1.15%Q3 -0.23% 1.69% -0.81% -1.40% 0.31% 1.17% -0.39% 0.25%Q4 -0.65% -0.54% -1.25% -0.13% -0.19% -0.89% 0.00% 0.25%Highest Accruals Q5 -3.12% -5.71% -1.34% -3.21% -3.02% -3.19% -0.98% -5.07%Q1-Q5 4.72% 6.59% 1.91% 6.61% 4.47% 4.16% 1.46% 7.98%Market Relative Measure Sector Relative MeasureExhibit 7Comprehensive Accruals MeasureLargest 1500 CompaniesRelative ReturnsTwo Year Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.08% 1.43% -0.50% 2.85% 1.40% 1.03% 1.42% 1.87%Q2 -1.14% 2.75% -3.92% -1.97% 0.91% 3.44% -0.59% -0.05%Q3 -1.70% 2.52% -2.33% -5.79% 0.36% 2.45% -1.49% 0.36%Q4 -1.69% -2.38% -3.93% 1.99% -1.56% -2.20% -0.51% -2.25%Highest Accruals Q5 -2.85% -9.45% 0.26% 1.11% -2.36% -4.22% -1.38% -1.43%Q1-Q5 3.93% 10.88% -0.76% 1.75% 3.76% 5.25% 2.80% 3.29%Market Relative Measure Sector Relative Measure BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-46639Quantitative ResearchArguably our most important exhibit of this piece is Exhibit 8 which shows the performance of thecomprehensive accrual measures excluding changes in financial assets (CAMXCFA). The predictive powerof this factor is truly remarkable, generating on average, over the prior 25 years, a spread of 8.60% net ofthe market. The returns for this factor are uniformly increasing as the levels of accruals decrease. It hasbeen remarkably stable over a variety of time periods. And again, it does not seem to matter whether themeasure is constructed on a market relative basis or a sector relative basis. While slightly more of thereturns are due to the short side of the signal then the long side (Q5 vs. Q1), there is still considerableoutperformance being generated from the long side. The holding period for these reported results is one-year, so we do not believe that these excess returns will be completely eaten up by transactions costs.Exhibit 8Comprehensive Accruals Measure Excluding Changes In Financial AssetsLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 2.14% 1.69% 2.16% 3.06% 2.55% 2.25% 2.37% 3.00%Q2 1.31% 2.25% 0.07% 1.74% 1.80% 2.42% 0.81% 2.28%Q3 0.94% 1.53% -0.25% 1.65% 0.79% 1.61% 0.23% 0.62%Q4 -0.31% 1.14% -2.06% 0.20% -0.75% -0.67% -1.14% -0.41%Highest Accruals Q5 -6.47% -8.34% -3.77% -7.55% -4.71% -5.47% -2.82% -5.99%Q1-Q5 8.60% 10.03% 5.93% 10.61% 7.26% 7.72% 5.19% 8.99%Market Relative Measure Sector Relative MeasureOf course, it is interesting to compare the performance of CAMXCFA reported above with the performanceof our existing current accruals measure (see Exhibit 9). Clearly our existing signal is a strong performingsignal; and, indeed, during the recent period of market turbulence regarding the efficacy of quantitativemetrics (please see our August and September research features), our net accruals measure has been anespecially reliable signal. However, CAMXCFA appears to provide superior returns.Exhibit 9Exisitng Net Accruals MeasureLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.34% 1.01% 2.49% 0.44% 1.84% 2.11% 2.23% 1.19%Q2 0.93% 2.19% 0.37% 0.39% 0.29% 0.56% 0.63% -0.30%Q3 -0.28% 0.64% -0.90% -0.47% 0.86% 1.56% 0.33% 0.79%Q4 0.09% 0.79% -1.01% 0.62% 0.20% -0.17% -0.14% 0.88%Highest Accruals Q5 -2.68% -5.69% -1.75% -0.96% -2.45% -3.67% -1.69% -2.14%Q1-Q5 4.01% 6.69% 4.24% 1.40% 4.28% 5.78% 3.93% 3.33%Market Relative Measure Sector Relative Measure BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466310Quantitative ResearchExamining the ndividual Components of Accruals Return Prediction AbilityWe also examined the relationship between each of the component parts of the comprehensive accrualsmeasure and future stocks returns. This will allow us to understand how important each component is in theoverall metric. Exhibit 10 - Exhibit 12 show the relationship between changes in non-cash working capital( WC) and Iuture returns, changes in net non-current operating assets ( NNCO) and Iuture returns, andchanges in net Iinancial assets ( FIN) and Iuture returns, respectively. As is apparent Irom the correlationsreported in Exhibit 5,WC andNNCO both behave in the same manner, having an expected negativerelationship with returns. On the other hand,FIN has the opposite relationship, with high level oI netfinancial asset accruals being associated with positive future stock returns. In general, the predictabilityassociated withFIN appears to be weaker than with the other components. BothWC andNNCOappear to be strong predictors of future returns.Exhibit 10Changes in Net Working Capital Excluding CashLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.33% 1.25% 2.51% 0.10% 1.54% 1.65% 2.43% 0.42%Q2 0.49% 1.15% -0.32% 0.77% 0.44% 1.13% 0.36% -0.12%Q3 0.23% 1.81% -0.62% -0.36% 1.04% 1.69% 0.56% 0.96%Q4 -0.11% 0.14% -0.92% 0.55% 0.11% -0.39% -0.42% 1.19%Highest Accruals Q5 -3.12% -5.36% -2.72% -1.31% -2.66% -3.57% -2.08% -2.40%Q1-Q5 4.45% 6.60% 5.23% 1.41% 4.20% 5.22% 4.51% 2.82%Market Relative Measure Sector Relative MeasureExhibit 11Changes in Non Current Operating AssetsLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.64% 2.03% 0.40% 2.61% 1.54% 1.90% 1.02% 3.20%Q2 1.65% 1.65% 0.98% 2.37% 0.44% 1.97% 1.14% 1.66%Q3 0.30% 0.76% -0.85% 1.08% 1.04% 1.06% -0.16% 1.38%Q4 -0.35% -0.59% -1.10% 0.66% 0.11% -1.05% -0.33% -0.97%Highest Accruals Q5 -5.46% -5.56% -3.30% -7.62% -2.66% -3.79% -2.22% -5.81%Q1-Q5 7.10% 7.60% 3.70% 10.23% 4.20% 5.68% 3.24% 9.02%Market Relative Measure Sector Relative Measure BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466311Quantitative ResearchExhibit 12Changes in Financial AssetsLargest 1500 CompaniesRelative ReturnsAnnual Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 -2.01% -2.02% -3.01% -0.93% -1.54% -2.57% -1.49% -0.64%Q2 0.37% -0.37% -0.25% 1.72% -0.05% -0.62% -0.64% 1.13%Q3 0.62% 1.42% 0.84% -0.34% 0.71% 1.15% 0.41% 0.62%Q4 1.52% 2.06% 0.96% 1.60% 0.95% 1.96% 0.49% 0.52%Highest Accruals Q5 0.35% -0.25% 2.21% -1.10% 0.49% 0.98% 1.69% -1.25%Q1-Q5 -2.36% -1.77% -5.22% 0.17% -2.02% -3.55% -3.18% 0.61%Market Relative Measure Sector Relative MeasureExhibit 13 - Exhibit 15 show similar results but now for a two-year holding period. At this time-horizonbothWC andNNCO still have strong predictive ability Ior stock returns.FIN, however, loses some oIits negative predictive power on a market relative basis while maintaining its negative ability on a sectorrelative basis.Exhibit 13Changes in Net Working Capital Excluding CashLargest 1500 CompaniesRelative ReturnsTwo Year Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 1.09% -0.48% 2.74% 0.72% 1.75% 0.79% 3.07% 1.16%Q2 -1.21% 1.41% -3.04% -1.94% 0.59% 2.76% -0.52% -0.58%Q3 -0.91% 2.70% -3.02% -2.46% -0.12% 1.10% -0.57% -1.02%Q4 -0.46% -0.89% -1.34% 1.30% 0.35% 0.11% -0.25% 1.44%Highest Accruals Q5 -2.96% -6.71% -2.18% 0.52% -2.31% -3.89% -0.96% -2.22%Q1-Q5 4.04% 6.23% 4.92% 0.20% 4.07% 4.68% 4.03% 3.38%Market Relative Measure Sector Relative MeasureExhibit 14Changes in Non Current Operating AssetsLargest 1500 CompaniesRelative ReturnsTwo Year Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 0.37% 1.42% -2.10% 2.45% 1.75% 1.13% -0.07% 4.61%Q2 -0.09% 1.86% -1.63% -0.34% 0.59% 3.05% 0.17% 0.46%Q3 -0.29% 0.21% -1.80% 3.10% -0.12% 1.90% -0.91% 1.38%Q4 -1.01% -2.40% -2.00% 1.94% -0.35% -1.41% -0.21% -0.44%Highest Accruals Q5 -6.03% -5.72% -3.10% -10.20% -2.31% -3.99% -1.43% -8.15%Q1-Q5 6.40% 7.14% 1.00% 12.65% 4.07% 5.12% 1.36% 12.76%Market Relative Measure Sector Relative Measure BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466312Quantitative ResearchExhibit 15Changes in Financial AssetsLargest 1500 CompaniesRelative ReturnsTwo Year Holding Period1978 - 2003 1978 - 1986 1987 - 1995 1996 - 2003 1978 to 2003 1978 - 1986 1987 - 1995 1996 - 2003Lowest Accruals Q1 -1.97% -0.55% -3.60% -1.46% -1.74% -2.04% -1.76% -1.37%Q2 -0.35% 0.01% -1.24% 0.40% -0.65% -0.58% -1.43% 0.29%Q3 -0.35% 1.19% -0.47% -1.87% 0.62% 1.60% -0.08% 0.44%Q4 1.44% 2.97% 0.86% 0.50% 0.61% 1.57% 0.28% -0.03%Highest Accruals Q5 2.63% -1.31% 5.44% 3.44% 1.81% 1.90% 2.71% 0.54%Q1-Q5 -4.60% 0.76% -9.03% -4.90% -3.55% -3.94% -4.48% -1.91%Market Relative Measure Sector Relative Measure8ector 8pecific Performance of the Comprehensive Accruals MeasureWe also examined the performance of the comprehensive accrual measures excluding changes in financialassets (CAMXCFA) on a sector specific basis. As shown in Exhibit 16, CAMXCFA performs remarkablywell across almost all sectors. Its performance is most notable in the growth sectors, but performs quite wellin almost all of the cyclical sectors with really only two exceptions. It is quite strong in consumer staples,health care products, health care services, telcomms, transports, commodities, and capital equipment. Ourexisting accruals measure also performs well in a number of sectors, CAMXCFA appears to have superiorperformance in a number of sectors, such as transports, telcomms and commodities. We believe that thisuniform performance across sectors once again highlights that we are truly capturing an importantphenomena about investor behavior that is, these results are not just the product of a big data miningexpedition. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466313Quantitative ResearchExhibit 16Largest 1500 CompaniesRelative Returns1978 - 2003Highest (Worst) Accruals QuintileMiddle Accruals QuintileLowest (Best) Accruals Quintile Highest (Worst) Accruals QuintileMiddle Accruals QuintileLowest (Best) Accruals Quintile CyclicalsAutos and Housing -2.79% 1.39% 0.32% -1.06% -1.05% 0.39%Capital Equipment -7.81% 0.16% 2.86% -4.89% 1.75% 2.72%Commodities -3.32% 0.10% 4.00% -2.09% 1.36% 1.82%Consumer Cyclicals -3.56% 1.47% -0.28% -2.16% 2.42% -0.67%Transports -2.88% -1.34% 2.70% -0.01% 5.69% -2.89%GrowthConsumer Staples -3.88% 0.74% 2.85% -2.84% -0.48% 1.54%Health Care Products -6.58% 0.74% 2.71% -0.97% -1.67% 1.91%Health Care Services -6.93% -6.20% 11.94% -11.54% 0.30% 11.86%Technology -6.03% 2.38% 3.25% -5.04% -0.72% 3.15%Telecommunications -7.25% 1.66% 3.36% -2.63% 3.13% -2.85%OtherDefense -9.76% -0.03% 1.12% -3.93% 0.39% 6.13%Energy -4.59% 1.97% -2.10% -2.40% -0.90% -1.14%Utilities -0.91% -0.03% 0.49% -0.07% 0.45% -0.34%Comprehensive Accruals Excluding Changes In Financial Assets Existing Net Accruals MeasureHit Rates of the Accruals MeasurePerhaps our most disappointing result concerns the hit rate associated with the accrual based factors. Asshown in Exhibit 17, none of the hit rates for these factors exceeds 50% on the long side. However, on theshort side, we are able to generate consistent and dramatic underperformance. Thus, while strong, consistentand stable performance has been generated on the long end by our accrual measures, we believe somecaution is in order given these results. On the short end, these results give us even more confidence in thisphenomena. Importantly, these hit-rates are not unique to our new balance sheet decomposition metric.They are also present in our existing accruals measure. Indeed, the hit-rates for our new accruals measuresrepresent an improvement over the hit-rates of our existing signal. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466314Quantitative ResearchExhibit 17Hit RatesLargest 1500 CompaniesBased on Sector relative ReturnsAnnual Holding Period1978 - 2003Comprehensive Accruals Excluding Change in Financial AssetsExisting Net Accruals MeasureLowest Accruals Q1 49.4% 47.5%Q2 49.1% 47.9%Q3 47.1% 47.0%Q4 44.1% 46.5%Highest Accruals Q5 40.1% 42.8%8ector and 8tock 8pecific RecommendationFinally, we include two lists of stocks highlighting those firms having the highest levels of comprehensiveaccruals excluding changes in net financial assets. Exhibit 18 details those stocks with abnormally largeaccruals and thus are candidates to underperform over the next twelve months, while Exhibit 19 detailsthose stocks with abnormally small accruals and consequently are candidates to outperform. In Exhibit 20 -Exhibit 21, we show individual sectors exposure to companies with both abnormally high and abnormallylow accruals. Technology and Telecomm have exposure on the long end while Energy has exposure on theshort end. BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466315Quantitative ResearchExhibit 18Companies with the Lowest (Best) Comprehensive Accruals Excluding Fin. AssetsAs of October 22, 2003Largest 1500 CompaniesMarket RelativeSymbol Name Sector Name Price CapitalizationValueModel RankGMST GEMSTAR TV GUIDE INTL INC Consumer Cyclicals $4.84 $1,976 5UST U S T INC Consumer Staples 33.61 5,5953UCOMA UNITEDGLOBALCOM INC Consumer Cyclicals 6.74 2,8061AMLN AMYLIN PHARMACEUTICALS INC Medical Products 27.62 2,5695LU LUCENT TECHNOLOGIES INC Technology 2.45 10,1495ARBA ARIBA INC Technology 3.60 972 3TWX TIME WARNER INC Consumer Cyclicals 15.55 70,1184NTIQ NETIQ CORP Technology 11.79 667 1ADCT A D C TELECOMMUNICATION Technology 2.75 2,2114T A T & T CORP Telcom 20.00 15,7841BRCM BROADCOM CORP Technology 31.50 9,4504CWP CABLE & WIRELESS PLC Telcom 6.77 5,3781CCU CLEAR CHANNEL COMMUNICATIONS INC Consumer Cyclicals 39.25 24,1354ISCA INTERNATIONAL SPEEDWAY CORP Consumer Cyclicals 43.30 2,3045AMCC APPLIED MICRO CIRCUITS CORP Technology 5.74 1,7475V VIVENDI UNIVERSAL Consumer Cyclicals 21.14 22,5892PCH POTLATCH CORP Commodities 31.30 898 2TER TERADYNE IN Technology 20.37 3,8112AMKR AMKOR TECHNOLOGY INC Technology 17.34 2,8831RIG TRANSOCEAN INC Energy 19.54 6,2502CIEN CIENA CORP Technology 6.51 3,0525TOM TOMMY HILFIGER CORP Consumer Cyclicals 13.90 1,2591VFC V F CORP Consumer Cyclicals 42.33 4,5362ATI ALLEGHENY TECHNOLOGIES Commodities 7.57 613 3COMS 3COM CORP Technology 6.65 2,4635PTV PACTIV CORP Capital Equipment 20.76 3,2674UIS UNISYS CORP Technology 15.30 5,0362AES A E S CORP Utilities 8.04 4,9832AV AVAYA INC Technology 13.45 5,1401TXU T X U CORP Utilities 23.24 7,4812ATML ATMEL CORP Technology 5.28 2,4751ARW ARROW ELECTRONICS INC Technology 20.12 2,0292YELL YELLOW CORP Transports 32.22 952 3NT NORTEL NETWORKS CORP NEW Technology 4.55 17,9511AMT AMERICAN TOWER CORP Telcom 11.11 2,2731CZN CITIZENS COMMUNICATIONS CO Telcom 11.75 3,3403CLS CELESTICA INC Technology 16.94 3,6131IN INFONET SERVICES CORP Technology 2.48 1,1503SNDK SANDISK CORP Technology 77.81 5,4321MLHR MILLER HERMAN INC Capital Equipment 23.44 1,7112MNST MONSTER WORLDWIDE INC Consumer Cyclicals 25.26 2,8292CNP CENTERPOINT ENERGY INC Utilities 9.95 3,0311PHS PACIFICARE HEALTH SYS INC DEL Medical Services 54.91 2,0591HAS HASBRO INC Consumer Cyclicals 21.95 3,8121IDTI INTEGRATED DEVICE TECHNOLOGY Technology 15.70 1,6354SY SYBASE INC Technology 18.47 1,7331BCE B C E INC Telcom 22.11 20,3473HAL HALLIBURTON COMPANY Energy 24.33 10,6575GT GOODYEAR TIRE & RUBR CO Autos & Housing 6.81 1,1943CK CROMPTON CORP Commodities 5.70 634 1 BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466316Quantitative ResearchExhibit 19Companies with the Highest (Worst) Comprehensive Accruals Excluding Fin. AssetsAs of October 22, 2003Largest 1500 CompaniesMarket RelativeSymbol Name Sector Name Price CapitalizationValueModel RankSWKS SKYWORKS SOLUTIONS INC Technology $11.21 $1,556 4AMGN AMGEN INC Medical Products 63.65 82,0264FCN F T I CONSULTING INC Capital Equipment 17.96 750 5ECA ENCANA CORP Energy 37.02 17,7665KROL KROLL INC Capital Equipment 19.80 805 5FIC FAIR ISAAC CORP Capital Equipment 61.68 2,9731SJM SMUCKER J M CO Consumer Staples 42.81 2,1394MATK MARTEK BIOSCIENCES CORP Medical Products 46.74 1,2814FNIS FIDELITY NATIONAL INFO SOLNS INC Capital Equipment 24.85 992 5KPP KANEB PIPELINE PARTNRS -LP Energy 47.74 1,3522MDG MERIDIAN GOLD INC Commodities 12.20 1,2085ISIL INTERSIL CORP Technology 28.96 3,9703LEE LEE ENTERPRISES INC Consumer Cyclicals 41.61 1,8552POM PEPCO HOLDINGS INC Utilities 17.65 3,0172MHK MOHAWK INDUSTRIES INC Consumer Cyclicals 70.00 4,6173MLNM MILLENNIUM PHARMACEUTICALS INC Medical Products 17.25 5,1445RKY COORS ADOLPH CO Consumer Staples 54.26 1,9723RGC REGAL ENTERTAINMENT GROUP Consumer Cyclicals 19.66 2,7871SANM SANMINA SCI CORP Technology 10.58 5,3971EBAY EBAY INC Consumer Cyclicals 56.43 36,1575CMX CAREMARK RX INC Medical Services 23.33 6,0385MKSI M K S INSTRUMENTS INC Technology 22.46 1,1571GLG GLAMIS GOLD LTD Commodities 14.22 1,8345EPD ENTERPRISE PRODUCTS PARTNERS LP Energy 21.35 4,2795CSGS C S G SYSTEMS INTERNATIONAL INC Technology 9.24 483 1APPX AMERICAN PHARMACEUTICAL PARTNERS Medical Products 27.60 1,9161DV DEVRY INC DEL Consumer Cyclicals 24.04 1,6834SNPS SYNOPSYS INC Technology 31.40 4,8391ABER ABER DIAMOND CORP Commodities 30.90 1,6975CMCSA COMCAST CORP Consumer Cyclicals 32.57 73,2975COP CONOCOPHILLIPS Energy 57.44 39,0515BVF BIOVAIL CORP Medical Products 28.36 4,5004UCO UNIVERSAL COMPRESSION HLDGS INC Energy 23.33 723 4JBLU JETBLUE AIRWAYS CORP Transports 69.56 4,4763CDIS CAL DIVE INTERNATIONAL INC Energy 20.89 786 5LLL L 3 COMMUNICATIONS HLDGS INC Defense 45.49 4,3594EEP ENBRIDGE ENERGY PARTNERS LP Energy 50.83 2,2794KKD KRISPY KREME DOUGHNUTS INC Consumer Cyclicals 41.81 2,4625IGT INTERNATIONAL GAME TECHNOLOGY Consumer Cyclicals 31.42 10,8072HPQ HEWLETT PACKARD CO Technology 21.71 66,1941PRX PHARMACEUTICAL RESOURCES INC Medical Products 71.56 2,3941COO COOPER COMPANIES INC Medical Products 41.49 1,3052CW CURTISS WRIGHT CORP Defense 74.13 765 4LPNT LIFEPOINT HOSPITALS INC Medical Services 23.80 922 5JNPR JUNIPER NETWORKS INC Technology 17.03 6,5321KMR KINDER MORGAN MANAGEMENT LLC Energy 39.89 1,8904SKE SPINNAKER EXPLORATION CO Energy 24.68 819 5GRP GRANT PRIDECO INC Energy 10.53 1,2785 BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466317Quantitative ResearchExhibit 20Percentage of Names in Lowest (Best) Decile ofComprehensive Accruals Excluding Fin. Assets MeasureFrom A Given SectorLargest 1500 StocksAs of October 22, 2003Sector NamePercentof Names Within SectorPercent of Total NamesCapital Equipment 12% 14%Consumer Cyclicals 19% 9%Consumer Staples 3% 4%Utilities 5% 8%Autos & Housing 5% 16%Energy 8% 9%Transports 3% 9%Technology 29% 16%Commodities 8% 14%Defense 2% 15%Medical Products 1% 1%Telecomm 5% 21%Medical Services 1% 2%Exhibit 21Percentage of Names in Lowest (Best) Decile of Comprehensive Accruals Excluding Fin. Assets MeasureFrom A Given SectorLargest 1500 StocksAs of October 22, 2003Sector NamePercentof Names Within SectorPercent of Total NamesCapital Equipment 8% 9%Consumer Cyclicals 15% 7%Consumer Staples 5% 7%Utilities 3% 5%Autos & Housing 3% 10%Energy 17% 20%Transports 2% 6%Technology 18% 10%Commodities 5% 9%Defense 2% 15%Medical Products 12% 14%Telecomm 3% 13%Medical Services 7% 15% BERNSTEIN RESEARCH CALL October 22, 2003Vadim Zlotnikov zvadim@bernstein.com +1-212-756-466318Quantitative ResearchPerformance 8ummaryDuring September, greatest outperfomance accrued to attractively valued stocks with rising revisionsand/or improving balance sheets; while momentum stocks, with deteriorating balance sheets had thegreatest underperformance (see Exhibit 22).Exhibit 22Performance Summary As of September 30, 2003Total ReturnThis Last 3 Last 12 YearMonth Months Months to DateS&P 500 -- Capitalization Weighted (1.1) % +2.6 % +24.4 % +14.7 %Large Capitalization Stocks -- Capitalization Weighted (0.8) 3.0 24.9 15.0Large Capitalization Stocks -- Equally Weighted (1.5) 5.7 40.9 24.3Growth Stocks -- Capitalization Weighted (0.8) 3.2 24.0 16.2Growth Stocks -- Equally Weighted (1.5) 5.8 49.7 30.1Model PortfoliosBernstein Quantitatively Derived Optimal Multifactor-Value Portfolio (0.8) 2.0 22.4 15.7Bernstein Quantitatively Derived Optimal Multifactor Pure Growth-Stock Portfolio (1.2) 0.6 18.6 15.6Large-Capitalization Quantitative Screens -- Equally WeightedValue with a CatalystUndervalued Stocks Reporting a Positive Earnings Surprise (0.5) 4.1 32.3 14.6Low Price-to-Sales Stocks with Upward Earnings Revisions (1.9) 3.3 18.8 20.8Low Price-to-Free Cash Flow Stocks with Upward Earnings Revisions (0.6) 4.0 28.1 34.2Turnaround Candidates (1.7) 3.0 35.5 20.2Stocks Discounting Low-to-Moderate Earnings Growth, with Improving Price Trends (2.0) 2.6 12.3 12.9Earnings and Momentum TrendsTriple Momentum (2.1) 7.3 24.1 26.8Stocks with Easy Earnings Compares and Rising Estimates (0.6) 4.9 17.8 15.4Stocks with Improving Margins and Rising Earnings Estimates (1.7) 6.4 27.1 22.7Stocks with Favorable Residual Reversal Signals (0.6) 18.3 45.4 35.3Stocks with Strong Short-term Momentum (0.8) 6.1 39.8 31.4Capital UseLow Capital Spenders (0.8) 8.0 24.4 24.3Large Share Repurchases (0.1) 6.2 24.7 20.3Attractive Value Stocks with Improving Balance Sheets (1.9) 8.6 40.7 29.1Unattractive Value Stocks with Deteriorating Balance Sheets (3.0) 5.6 35.6 24.7Merger and Acquisition Activity (1.7) 1.9 23.6 14.9Dividend Increases and Initiations (0.3) 8.3 30.2 24.5Growth-Stock Quantitative Screens -- Equally WeightedValue with a CatalystUndervalued Growth Stocks Reporting a Positive Earnings Surprise (1.7) 7.0 32.4 16.6Low Price-to-Sales with Upward Earnings Revisions +1.0 9.2 25.7 37.7Low Price-to-Free Cash Flow with Upward Earnings Revisions 0.0 6.5 62.2 31.1Turnaround Candidates (1.4) 7.6 71.2 46.4Growth Stocks With Low Enterprise Value-to-EBITDA and Favorable Momentum (3.1) 6.9 24.4 35.8Capital Use and SustainabilityAttractive Growth Stocks with Improvng Balance Sheets (0.1) 4.7 33.7 24.8Unattractive Growth Stocks with Deteriorating Balance Sheets (1.1) 6.4 40.1 32.0Earnings and Momentum TrendsGrowth Stocks with Easy Earnings Compares and Rising Estimates (3.6) 2.5 114.8 41.5Growth Stocks with Improving Margins and Rising Earnings Estimates (2.5) 6.3 18.6 18.4Triple Momentum (9.8) 6.2 27.3 24.6Growth Stock PurgatoryWatch List 0.9 15.2 82.7 48.8Valuation MethodologyRisksCERTIFICATIONS AND DISCLOSURESBernstein analysts are compensated based on aggregate contributions to the research franchise as measured by accountpenetration, productivity and proactivity of investment ideas.No analysts are compensated based on performance in, orcontributions to, generating investment banking revenues.Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for U.S.listed stocks and versus the MSCI Pan Europe Index for stocks listed on the European exchanges unless otherwisespecified.We have three categories of ratings:Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.Bernstein currently makes or plans to make a market in every NASDAQ security contained within our coverage universe.CERTIFICATION: I, Vadim Zlotnikov, certify that all of the views expressed in my report accurately reflect my personal viewsabout any and all of the subject securities or issuers and that no part of my compensation was, is, or will be, directly orindirectly, related to the specific recommendations or views in this report.One or more of the officers, directors, members or employees of Sanford C. 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