HP 2007 Annual Report Download - page 103

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
forfeiture rates in fiscal 2007 and 2006 based on its historical experience for fiscal grant years where the majority of the
vesting terms have been satisfied.
As a result of adopting SFAS 123R, earnings before income taxes and net earnings in fiscal 2007 were lower by
$494 million and $353 million, respectively, than if we had continued to account for stock-based compensation under
APB 25. The unfavorable impact on both basic and diluted earnings per share in fiscal 2007 was $0.13 per share. Earnings
before income taxes and net earnings in fiscal 2006 were lower by $448 million and $318 million, respectively, as a result of
adopting SFAS 123R. The unfavorable impact on both basic and diluted earnings per share in fiscal 2006 was $0.11 per
share. In addition, prior to the adoption of SFAS 123R, HP presented the tax benefit of stock option exercises as operating
cash flows. Upon the adoption of SFAS 123R, the tax benefit resulting from tax deductions in excess of the tax benefit
related to compensation cost recognized for those options is classified as financing cash flows.
The pro forma table below reflects net earnings and basic and diluted net earnings per share for the following fiscal year
ended October 31, 2005, if HP had applied the fair value recognition provisions of SFAS 123:
2005
In millions,
except per
share
amounts
Net earnings, as reported .................................................................................................................................. $2,398
Add: stock-based compensation included in reported net earnings, net of related tax effects.......................... 144
Less: stock-based compensation expense determined under the fair-value based method for all awards, net
of related tax effects..........................................................................................................................................
(621)
Pro forma net earnings...................................................................................................................................... $1,921
Basic net earnings per share:
As reported..................................................................................................................................................... $0.83
Pro forma ....................................................................................................................................................... $0.67
Diluted net earnings per share:
As reported..................................................................................................................................................... $0.82
Pro forma ....................................................................................................................................................... $0.66
Employee Stock Purchase Plan
HP sponsors the Hewlett-Packard Company 2000 Employee Stock Purchase Plan, also known as the Share Ownership
Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain
income limits, to purchase shares of HP’ s common stock. Prior to November 1, 2005, employees were able to purchase stock
semi-annually at a price equal to 85% of the fair market value at certain plan-defined dates. As of November 1, 2005, HP
changed the ESPP so that employees will purchase stock semi-annually at a price equal to 85% of the fair market value on
the purchase date. Since the price of the shares is now determined at the purchase date and there is no longer a look-back
period, HP recognizes the expense based on the 15% discount at
89