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Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2006
on reported net income and earnings per share if we had accounted for our stock option and stock purchase plans under the fair value method of accounting:
Year Ended May 31,
(in millions, except per share data) 2006 2005 2004
Net income, as reported $ 3,381 $ 2,886 $ 2,681
Add: Employee compensation expense included in net income, net of related tax effects 39 70 —
Deduct: Stock-based employee compensation expense determined under the fair value method, net of
forfeitures and related tax effects(1) (158) (205) (203)
Pro forma net income $ 3,262 $ 2,751 $ 2,478
Earnings per share:
Basic—as reported $ 0.65 $ 0.56 $ 0.51
Basic—pro forma $ 0.63 $ 0.54 $ 0.48
Diluted—as reported $ 0.64 $ 0.55 $ 0.50
Diluted—pro forma $ 0.62 $ 0.52 $ 0.46
(1) Includes reversal of unearned stock compensation expense for forfeitures arising from our use of the accelerated expense attribution method, net of
related tax effects, of $37 million, $28 million and $59 million in fiscal 2006, 2005 and 2004.
We estimate the fair value of our options using a Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. Option valuation models require the input of assumptions, including the expected stock price
volatility. Our options have characteristics significantly different from those of traded options, and changes in the input assumptions can materially affect the fair
value estimates. We estimated the fair values of employee and director stock options granted, including options issued or assumed from acquisitions, at the date
of grant using the following weighted-average assumptions:
Year Ended May 31,
2006 2005 2004
Employee and Director Stock Options
Expected life (in years) 0.25-7.50 0.25-6.56 1.26-7.00
Risk-free interest rate 3.38-5.11% 2.40-4.05% 1.65-4.09%
Expected volatility 24-28% 27-36% 35-44%
Dividend yield — — —
Weighted average fair value of grants $ 3.89 $ 4.72 $ 4.76
We modified the terms of our employee stock purchase plan in April 2005 to eliminate the option component associated with the plan and to reduce the discount
from 15% to 5%. The fair value of the option component of the employee purchase plan shares purchased prior to April 2005 was estimated at the date of grant
using a Black-Scholes-Merton option-pricing model. The following weighted-average assumptions were used in fiscal 2005: expected life of 0.50 years, risk-free
interest rate of 1.69-2.92%, volatility of 32-37% and dividend yield of 0%. The weighted average fair value of employee purchase plan grants was $2.93 for
fiscal 2005. The following weighted-average assumptions were used in fiscal 2004: expected life of 0.50 years, risk-free interest rate of 1.02-1.10%, volatility of
40-48% and dividend yield of 0%. The weighted average fair value of employee purchase plan grants was $3.04 for fiscal 2004.
73
Source: ORACLE CORP, 10-K, July 21, 2006 Powered by Morningstar® Document Research℠