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Arista NetworksWhat does the future require of us today? the everyday acts of many We can’t forget that technology is ultimately about people. 89,000 hp people around the globe So far, the Net has been about inventing new ways of doing old things. Now, we have to invent things that have never existed before. 2 15,700 people joined hp this year Standards-based approaches will help this world evolve to its fullest. founded in 1939 3 We can unleash the inventiveness and economic power of 4 billion more people. 4 more than 50 percent of hp people have joined hp in the past five years There’s power in aligning toward the same goal. hp conducts business in more than 120 countries 5 It starts with me. 6 began reinventing in 2000 While advancements are often made possible by technology, they are made profound by people and their decidedly human aspirations. That’s because vir- tually all meaningful advancements in business, society and life are not achieved through the bold acts of a few, but the everyday acts of many. 7 8 carly fiorina, chairman, president and ceo Dear fellow shareowners, Systemic, sustainable advances in business and society are seldom defined by a single bold act. Instead, they are realized through the everyday acts of many. This past year shows what is possible when the 89,000 people of Hewlett-Packard put their minds to some- thing and contribute in their own creative ways to a unified effort. FY00 will go down as a pivotal year in our history, a year in which hp’s reinvention gained sufficient velocity and direction to begin driving meaningful, sustainable progress. As we enter the 21st century, we stand at the edge of a new era, an era in which technology will become even more deeply woven into the fabric of business, society and our daily lives. As we enter this era, a new technology landscape is emerging. A landscape that’s defined by truly simple personal devices that run useful Web services— e-services—across an Internet infrastructure that’s always on, always available. We’re heading toward a world where everything will be connected by way of a new generation of technology linked to the Net. We believe that hp has a unique opportunity to transform markets at the intersection of information appliances, useful e-services and an always-on Internet infrastructure. Capitalizing on these opportunities requires us to rein- vent this great company, restructuring and revitalizing ourselves to once again capture the spirit of invention and apply it to solving customer problems and meeting customer needs. Our collective goal in this reinvention is to preserve the best of hp and reinvent the rest. By this I mean that we are maintaining the best attributes we have developed over our 61 years in business—our inventive capability, our focus on the customer, our respect for our employees—while thoroughly reinventing every major component of the organization around these core strengths. A year of improving performance From the day I arrived at hp, I have said that the world has yet to see the performance that hp is truly capable of achieving. With a more consistent strategy that pulls together the many attributes of this company—and with a renewed inventive spirit—I believe the people of hp can deliver greater and greater value to our customers, our shareowners and our communities. One of the very first commitments I made to hp’s shareowners was to improve hp’s ability to deliver consistent, predictable top- and bottom-line results. Because of the actions we took this year, hp revitalized top-line growth and achieved balanced revenue and earnings growth of 15 percent for the first time in four years. You are starting to see what hp can accomplish when we focus our energy and our resources on a set of shared objectives: - Our total revenues grew to $48.8 billion this year—reflecting the new relevance we are gaining with our customers. - Our return on assets and our return on equity,10.5 percent and 25.1 percent respectively, are strong. - The business continues to generate significant cash, and our balance sheet is exceptional. Overall, the numbers reflect the progress we are making, along with the areas where we need to work harder. While we posted four quarters of improving top-line performance for FY00, we failed to meet our profitability targets in the fourth quarter. And while there were a number of factors at play, many unique to the quarter, the leadership team and I are resolved to meet our commitment to deliver consistent, predictable financial results. Heading into fiscal year 2001, our goal is to accelerate the reinvention of hp. We are confident that our strategy is on track and our executional abilities are improving. And as we enter increasingly difficult and uncertain eco- nomic times, our portfolio breadth and depth, our reputation for quality and reliability, our financial strength and our deeply rooted global presence will serve as important assets. letter printed on hp LaserJet paper 9 If you read no further, you should take away this: The reinvention of hp is on track, we are once again capable of delivering balanced revenue and profit growth, and we are back as a competitive force in the industry. But I hope you will read further, because the lessons we’re learning within hp are applicable not only to our business, but to many businesses in an Internet Age. Fueling reinvention: putting the components in harmony Our belief is that sustainable reinvention requires a holistic approach. By this I mean we’re working to ensure that the four essential components of a healthy business system are synchronized and in full support of our reinvention goals: Strategy. HP has traditionally excelled at developing product strategies and marshaling resources to pursue them. Our highly decentralized structure has enabled us to move quickly. In an Internet Age, it’s clear that we must maintain this speed. At the same time, our value to customers lies not only in individual products—but in delivering total solutions. To achieve this, we are focusing on strategic opportunities that fall between our tradi- tional businesses, or cross the lines of one or more of our businesses. Structure and e-processes. To deliver on our strategy, we need to continually raise our performance to higher levels in terms of how we serve customers and how quickly we turn inventive ideas into world-class technology solutions. This year, we began the work of radically restructuring hp into four organizations—two customer-facing (our Business Customer Organization and our Consumer Business Organization) and two focused on product generation (Computing Systems, and Imaging and Printing Systems). The IT Services segment is a component of the Business Customer Organization. This organizational structure aligns us to create superior customer experiences, while committing focused resources to developing superior technology solutions. For speed, our customer-facing and product-generation organizations have clear roles and responsibilities for execution. For leverage, they collaborate closely on key areas of product planning, solutions creation and share important operational and financial goals. In addition, in FY00, we began consolidating 83 independent product lines into 17 product categories—allowing us to reduce redundant overhead and channel the savings into R&D and sales. At the same time, we began introducing e-services initiatives within the company to streamline processes, make employees more productive and take cost out of our infrastructure. The goal is to allow us to invest in important growth opportunities for the company as well as in more customer-facing resources. Performance metrics and rewards. What gets measured is what gets done. To help incent the right actions and behaviors within hp—and to reinforce new ways of collaborating—we’ve reengineered our performance management, compensation and rewards programs. Many elements of these programs went into effect this year, with expansion planned for FY01. For example, our top 200 leaders are now rewarded through a pay-for-results program that requires achieving specific goals in both revenue and profit growth to receive their bonuses. This “double-barrel” approach means that if the company does not meet its threshold performance goals for both revenue and profit growth in a given half, leaders receive no company-wide bonus—which is exactly what hap- pened for the second half of FY00. On the other hand, there is considerable upside potential if targeted aspira- tional goals are met. In fiscal year 2001, we will be expanding this pay-for-results program significantly. Indeed, all hp employees will have a portion of their compensation tied to the company’s results. As part of our reinvention of rewards, we have created a Company Performance Bonus to replace hp’s Profit-Sharing Plan. With the new program, employ- ees will receive a bonus—targeted at between 6 and 9 percent of their pay—only if we meet or exceed thresh- old revenue and profit goals. As with the pay-for-results program, there will be considerable upside potential when hp meets its aspirational goals. letter printed on hp LaserJet paper 11 Culture. HP has long been admired for our culture—a performance meritocracy with an informal environment and a firm belief that every community in which we live and work should benefit by our presence. For decades, the hp Way served as a guiding set of principles in this regard, shaping our actions and differentiating hp as a place to build a meaningful career. In recent years, the intent of the hp Way became clouded and it was used to justify behavior such as conflict avoidance, weak performance management and an excessive focus on consensus. Clearly, this was not what our founders Bill Hewlett and Dave Packard had in mind. We’ve spent a significant amount of energy this year defining what will be required of each of us going forward—what traits, what actions, what new ways of working together. We’ve captured these requirements in something we call The Rules of the Garage, which preserves and builds on the beliefs and core values inherent in the hp Way. These values include: respect for the individual, contribution to customers and the community, uncompromising integrity, teamwork and innovation. We like to think of The Rules of the Garage as the hp Way, recast for the 21st century. We believe quite strongly that our culture, our principles and our way of treating each other create unique advantages for hp—both in serving our customers and in allowing us to recruit and retain the best and brightest employees. These advantages set us apart from the pack—and we intend to cultivate and nurture them. How reinvention is fueling business performance Reinvention is a process—a journey, if you will. And along the way there are signposts that represent tangible evidence of progress. Here are some of the most significant signposts from fiscal year 2000: Heavy lifting in the computer systems business results in improved performance. Our computer systems business is focused on delivering the next-generation infrastructure—an always-on Internet infrastructure that will help businesses provide services to their customers and employees. During FY00, we did the heavy lifting re- quired to refresh our server product line from low-end to high-end and everywhere in between. While in the midst of one of the more impressive product rollovers in our history, we still managed to deliver 18 percent growth in this critical arena. We nearly doubled our performance in our low-end server business, which is an important indicator of our progress against our competition in this market. Our mid-range server revenue was up 17 per- cent, and we also launched Superdome—our much-anticipated high-end UNIX system that offers not only superi- or performance, but also a truly exceptional customer experience. We also redoubled our efforts in serving our enterprise customers by restructuring and reenergizing our sales force. The combination of our best server line-up ever and a more focused approach to key account coverage paid off with 28 percent revenue growth in our cor- porate accounts business during the second half of the year. - Storage offers another tremendous growth opportunity for hp. Although we took a short-term hit in storage revenue when we ended our relationship with EMC, our storage business is now healthy again and growing. As just one example, our storage area network business grew 70 percent year-over-year. - We revamped our software strategy and made significant investments in components of the software stack that will position hp for leadership in services-based computing. In particular, by entering into an agreement to buy Bluestone Software and add its highly acclaimed XML-based Web application server and tools to our portfolio, we are working to enable customers to develop and deploy applications and services that capitalize on the XML standard. - Thanks to this heavy lifting in FY00, we entered FY01 with the strongest and broadest line of servers, storage and software solutions in our history. - While we are pleased with the momentum across many segments of our Computing Systems business, we are not yet satisfied with our progress in the Netserver and commercial PC segments, and we have more work to do to improve profitability overall. letter printed on hp LaserJet paper 13 Achieved significant, organic growth in our services business. Another promising aspect of hp’s diversified approach is our IT Services business. Here we achieved 14 percent revenue growth—fueled by consulting rev- enues that were up 28 percent, and orders that topped $1 billion. We believe this growth reflects a fundamental shift in the way customers want to be served. More and more, our enterprise customers are telling us they want to talk to one company about linking their business transformation needs with their IT implementations. We invest- ed substantially in people during the year to meet this increasing need, hiring more than 1,700 consultants—an impressive achievement, considering the especially tight talent pool in the industry. We intend to continue grow- ing our consulting business organically through hiring, and will analyze other possibilities for capitalizing on this important arena. - Another highlight from our IT Services business included growing revenue 12 percent this year. Despite our pro- gress in delivering solid revenue growth in core components of our IT Services business, we are not satisfied with our profitability and will make profitable growth a key focus during FY01. Capitalized on our market clout in imaging and printing to fuel solid growth. This year, our unparalleled imaging and printing businesses achieved several notable milestones. This shows that hp is not content to rest on its laurels, but is committed to increasing our lead in the markets that we create. Total revenues surpassed $20 billion—up 10 percent compared with the year-ago period. We gained market share in laser printing, upping our share to 61 percent of the total market. To give you an appreciation of hp’s position in this core business, we shipped more laser printers in our fourth quarter than our nearest competitor shipped in its entire year. - Our share of the inkjet market is 41 percent, and our market share is twice that of our nearest competitor.We enter FY01 with a reengineered product line—bottom to top—across all categories, placing us in an excellent competitive position. - FY00 was an outstanding year for other important imaging product categories, too. For example, revenue in our image capture business grew 40 percent, including growth in digital cameras and photo printers, up 302 per- cent for the year. Became the world’s largest consumer technology supplier. Our consumer business, which includes home PCs, notebooks, PDAs, personal storage devices, inkjet printers and supplies, scanners, digital cameras and photo printers, grew 30 percent during the year. In addition to capitalizing on favorable market dynamics, our momentum in this business can be attributed to a revitalized hp brand, world-class manufacturing and distribution opera- tions, a leading retail and online presence, a rich set of product configurations and innovative partnership mod- els. In 2001, we plan to extend our reach into key markets in Europe, Asia and Latin America and continue to differentiate hp through innovative offerings that enrich people’s lives. Began to use hp’s strengths to deliver exceptional customer experiences. In reinventing hp, our primary focus has been on customers. We are carefully examining how to improve every aspect of the customer experi- ence lifecycle: how to better deliver on customer needs; how to develop deeper, more strategic relationships; how to engender unmatched loyalty. This year, we launched our first total customer experience (TCE) initiatives—includ- ing everything from better customer support programs to new and innovative go-to-market strategies. In the spirit of “what gets measured gets done,” we developed a comprehensive set of analytics to measure our progress along key customer relationship metrics and, going forward, the compensation of our senior leaders will be tied to delivering on our TCE goals. Changing the world: It’s aspiration that drives us While we learned a number of important lessons in FY00, the one that stands out the most is the sheer power of aspiration. As a company, we aspire to become a winning e-company with a shining soul: a company that leads in our core businesses; a company that uses the Internet and new technology to run our company and inter- face with customers; a company that displays uncompromising integrity, a passion for good citizenship and serves as a model of inclusion in the workplace and the marketplace; a company that uses its inventive capabilities to letter printed on hp LaserJet paper 15 transform markets, even industries. Central to our aspirations is a vision of computing developed more than a decade ago in hp Labs. At that time, a team of researchers began envisioning an interconnected world. It was a world where computing was not limited by proprietary technology, closed computing architectures or even the need for electrical power. Our researchers envisioned a world based on open standards, a world in which virtu- ally every person, place and thing on the planet could be connected. This vision has become our company’s shared vision, a vision in which e-services of all types are made available on personal, friendly information appliances that are powered by an always-on Internet infrastructure. It’s at the intersection of these three major forces of technology—information appliances, useful e-services and an always-on Internet infrastructure—that the most inventive solutions will be created: vehicles that serve as platforms for myriad e-services, connected to the Net via wireless networks. Mobile phones that offer an array of nimble e-services that will become essential for people on the go. Entire buildings—and virtually every entity in them— acting as platforms for e-services that serve tomorrow’s workforce. This is a wholly different view of how the Net works—it’s a world where the Web works for you, rather than the other way around. All the hard work we are currently investing in the reinvention of hp will put us in position to deliver the benefits of this vision—a Net that serves everyone. It will allow us to extend the power of technology far beyond the halls of business and deep into society, including the four billion people in the developing world who currently don’t have access to technology and the benefits it provides. The journey We have made solid progress over the past year and a half. And we know we have more work to do in FY01 to meet our commitments to shareowners. The 89,000 people of hp are reenergized and working with a common sense of purpose. We have a new bounce in our step because we realize as a team that we are on the verge of living up to our promise—to our customers, our shareowners and ourselves. We have reinvented and revitalized ourselves before in our 61 years of superior business performance. This time, our renewal will place us at the forefront of the Internet Age, where we will use our unique inventive capability to fundamentally transform how people live, learn, work and play. This is something worth doing—something that is worthy of Hewlett-Packard. Carly Fiorina Chairman, President and Chief Executive Officer letter printed on hp LaserJet paper 17 financial highlights printed by hp PhotoSmart 1218 printer 19 ”How do we build technology for life lived in motion?“ mobile e-services bazaars Human beings are inherently nomadic—which is why a worldwide hp team is master- minding ways to harness mobile technologies for life lived in motion. Peter Vesterbacka, Nectari Charitakis, Kelvin Tan and Louis Judice are stationed on the frontlines of the mobile revolution, overseeing hp’s mobile e-services bazaars in Helsinki, Singapore and the Silicon Valley. Here, hp and bazaar members meet to discuss the latest break- throughs, build relationships, and collaborate in creating new mobile technologies, e-services, and even whole new business models—through virtual and face-to-face inter- actions. A cross between a buzzing business hub and a living lab, the bazaars are becoming ground zero for the inventors and entrepreneurs fueling the mobile Net. Ideas born here are enabling people to redefine and, in essence, reinvent the concept of com- munity in our mobile cultures—widening social connections, making interactions and transactions more convenient, providing a greater sense of freedom and control, and offering new avenues for self-expression. 20 peter vesterbacka 21 Channels On Tap When Lynn Sauder, Kyle Neal and their group heard Carly Fiorina say that hp should “make the Internet work for our customers” they decided to brainstorm about an obstacle facing the emerging e-services industry: The ASP marketplace has the potential to reach $22.7 billion by 2003. But the expense and complexity of building a full-service sales and marketing channel keep many businesses from pursuing this market. Lynn’s team dreamed up a “B2B2B ecosystem,” a new way for service providers and other channel partners to reach customers in a more cost-effective way by dynamically connecting them with agents and customers online. Their creation, Channels On Tap (a combination of hp e-services portals AgentDepot and AsktheDepot), now offers a trusted mar- ketplace for all—and a new, annuity-based revenue stream (plus a patent in the works) for hp. 22 image of kyle neal taken with hp PhotoSmart 912 digital camera embedded computing In the buildings that once housed hp headquarters, Bob Rau, Stan Williams, Chuck Morehouse and others spend a lot of energy in their labs working on making computers, custom chips and storage technologies as small as atoms, and affordable to produce. Why the obsession with nanotechnology? Because these breakthroughs will form the foundation of a much more interactive environment—a world in which any information appliance (a PDA, a cell phone), network infrastructure, or object with an embedded microchip (an alarm clock, a dashboard) can perform tasks by operating on its own, or by teaming up and linking to e-services over the Net, in order to get things done. image of chuck morehouse taken with hp PhotoSmart 912 digital camera 23 Develops revolutionary hp digital camera technology to foster the inventive- ness of people around the world. (www.hp.com/100cameras) mary peery Reinvented the process of recycling hp parts and entire products in a way that salvages precious metals and pro- tects the environment. joe kraynik fred kitson Developing streaming media technology to provide mobile users with media-rich content and communication capabilities through information appliances. 24 portraits taken with hp PhotoSmart 618 and hp PhotoSmart 912 digital cameras Pioneered an alliance to form an industry-standard security platform for e-com- merce, based on an hp trust model that lets people and devices test a computing environment before conduct- ing transactions with it. Creating an ASP-model e-service that simplifies and automates the sales tax collection process. tse hwonk choo dan kostenbauder Contributing hardware, software and significant time to support ARKive, a database of images and recordings of the world’s endangered and extinct species. andrew nelson betty sproule Partners with communi- ties to develop and run education and training programs, virtual and physical community cen- ters, and home-based Internet tools. portraits taken with hp PhotoSmart 618 and hp PhotoSmart 912 digital cameras 25 26 “Technology is not about bits and bytes—it’s about the celebration of people’s hearts and minds.” 27 28 sachin sawant is a software engineer in hp’s e-Marketing Automation group oksana vishnevskaya is a software engineer in hp’s human resources IT department 29 “What happens when product design goes way beyond the box?” Superdome The hp Superdome product team knew they had built something special in their new top- of-the-line UNIX server. But in addition to record-beating performance capabilities, the other breakthroughs they delivered went far beyond the box. By harnessing the collective know-how of far-flung, interdisciplinary hp teams, they learned they could make the whole experience of planning, purchasing, integrating and maintaining high-end server systems painless—and therefore priceless—for customers. The team held monthly Superdome council meetings, inviting representatives from R&D and marketing, manufacturing and sales, and financing and support to cover everything from bug fixes to how to maneuver the refrigerator-size server onto loading docks. In those meetings, the team realized through their conversations, and by listening to customers, that they had the opportunity to deliver something truly groundbreaking: an unprecedented customer experience. Together, they conceived of a dedicated solutions manager and sup- port team for each and every customer. They introduced a utility pricing model and sys- tem pre-integration for faster time-to-revenue (for example, hp OpenView management software, hp SureStore XP512 disk arrays, and other leading hp and partner capabilities can all be pre-integrated into Superdome). In the end, the success of hp Superdome is a tribute to the inventiveness of the team as a whole—but also to every individual who con- tributed in his or her own way to bring it to market. 30 loreum ipsum ryan houdek brad klein mary cooley doyle shipman rob harris bruce roberts mark shaw tammy heiserman jill quan harish babu paul perez d’ann chorak 31 supply chain management How does someone apply their rather obscure interests in real options theory and perfect market dynamics, to solving a basic business challenge at hp? Corey Billington did it. He wanted to help hp figure out a better way to manage the supply chain risks inherent with volatile technology markets, so he assembled a team and built TradingHubs.com, a prototype online exchange that enables hp and its partners to buy and sell excess parts and inventory in an auction environment. (Today, TradingHubs.com is at the heart of hp’s contribution to eHITEX (now Converge.com), the Internet marketplace founded in June 1999 to serve the supply chain needs of the high-tech community.) Corey’s team is on a roll. Through their pioneering work, they’ve created a way for hp to save up to 30 percent in inventory costs. They also reinvented the hp product distribution packaging process, sav- ing the company $35 million this year. 32 image of corey billington taken with hp PhotoSmart 912 digital camera hp garage program Lang-Anh Pham and Adrian Ott wanted to infuse hp with some of its original inventive spir- it and bolster the company’s relevance in today’s Internet economy. So they garnered support to start a virtual team to build and sell solutions to start-ups. Every day, they spoke to at least one Internet company, VC or incubator, immersing themselves in the complexities of those businesses. Their team spanned 13 divisions and ran like a start-up— without an official budget, holding meetings at any hour. In just over 60 days they launched the hp Garage Program, which now provides the tools to help qualified start-ups build their new ventures. In seven months the program added more than 275 companies to hp’s base, infusing hp with new revenue streams and technology and business models. images of lang-anh pham and adrian ott taken with hp PhotoSmart 912 digital camera 33 34 “It all started in a garage 61 years ago, and every day hp people work hard to return there.” 35 “Shouldn’t companies pay just for what they use?” e-Utilica Utility computing—a model in which information and computing power are made avail- able like electricity or water—has been a mantra and a vision at hp for decades. The thinking behind it is simple: In the future, individuals and businesses won’t always buy hardware or software, they’ll rent it—paying only for what they use. With utility computing as their design strategy, Matt Oberdorfer and his team in Fort Collins, Colorado, invented e-Utilica, the world’s first plug-and-play Internet data center solution that makes it possible for service providers, carriers and enterprises to deliver appli- cations and computing services “on tap.” In the intense, hothouse environment of a start-up, they built concepts and prototypes; invented new manufacturing, customer support, service, and training processes; won patents—and created a whole new product category. Thanks to the doggedness and creativity of an inspired team, utility computing is more than just a timely concept. It’s now a whole new revenue stream based on hp’s unique intellectual property—and uniquely inventive spirit. 36 team members: harry baeverstad darlene letey richard searles team members: brad saunders kerri diamant 37 “What’s possible when every person, place and thing can be connected?” CoolTown Back in 1994, before the Internet went mainstream, a team in hp labs began experiment- ing with the concept—and very real probability—that the Net could significantly change the way we interact. What if, they wondered, every person, place and thing had a pres- ence on the Web? What’s possible in a world where literally everything can be connect- ed to the Internet? Where e-services are accessible no matter where you are, and can be delivered on the spot to appropriately fit the context you’re in? This year, thousands of people got a glimpse of this world in CoolTown—hp’s vision of a world where the physical and digital worlds are intertwined in ways that simplify how we live, learn, work and play. Gene Becker, Gary Herman, Jeff Morgan and Gita Gopal are part of a larger team behind CoolTown and the technologies that make it possible for peo- ple, environments and things to effortlessly exchange information and services using the open standards of the Web. This year, the team began working with customers to explore ways to extend CoolTown technologies to the real world in cars, watches, cell phones, PDAs, hospitals and theme parks. Now, that’s cool. 38 gary herman gita gopal gene becker 39 hp patents Steve Fox thought long and hard about what it would take to raise hp into a top-10 ranking among U.S. patenting companies—and came up with a plan. He and his staff developed a systematic approach to align IP protection with hp business strategy, with a set of procedures that requires ongoing communication among both engineers and hp strategists. Through a series of worldwide “innovation workshops,” he is also able to plumb hp inventors for promising IP they’re developing, helping them identify market-leading technology and ideas that might require protection. His efforts are paying off: This year, more than 3,000 hp patent applications were filed worldwide, which is more than 12 inventions protected each working day of the year—an increase of 30 percent over last year. 40 image of steve fox taken with hp PhotoSmart 912 digital camera world e-inclusion Three years ago, Grameen Bank founder Dr. Muhammad Yunus spoke to the World Economic Forum about microlending to the poor of Bangladesh. Yunus’ successful business model for “putting poverty in the museum of history” inspired a small, passionate core of people at hp. They resolved to leverage hp inventiveness to reach out to the four billion poor people living in developing countries, and to broaden access to social and eco- nomic opportunities through technology. Recognizing that markets, talent and customers will come from this under- served population in coming years—and that barriers to technology access (cost, electricity, literacy) continue to be lowered—this team developed a unique World e-Inclusion business strategy that relies on working with partners to invent sustainable solutions that benefit the poor, and create new markets in developing countries. image of lyle hurst taken with hp PhotoSmart 912 digital camera 41 luis rodriguez HP thermal inkjet cartridge manufacturing sites owe their success to effective worldwide collaboration. david and sharon gross Flexible work options let them job-share–both parenting their son, and their position as an hp OmniBook Product Manager. Designed the hp “Next- Generation Workplace” which includes wireless,high- speed remote Net access and a modular environ- ment that balances tech- nology with human needs. jeremy yu 42 portraits taken with hp PhotoSmart 618 digital camera chris feduniw danny prince Helped build the @hp employee portal, giving all employees access to e-services to support the company’s reinvention efforts. Invented a tool to more accurately monitor hp U.K. revenues and invest- ments in consumer accounts and channels. Launched the first new packaging based on the “hp invent” brand in just 45 days, proving that the system could be implemented quickly and within budget. shirley bunger Provides internships, men- toring and technology as part of the hp Scholars Program to encourage women and minorities to pursue careers in engine- ering, math and science. bess stephens portraits taken with hp PhotoSmart 618 digital camera 43 44 joan bodway is a member of the Superdome team alan driscoll is a member of the Superdome team 45 summary financial information 46 Condensed Consolidated Statement of Earnings Hewlett-Packard Company and Subsidiaries For the years ended October 31 In millions, except per share amounts 2000 1999 1998 Net revenue: Products Services Total net revenue Costs and expenses: Cost of products sold Cost of services Research and development Selling, general and administrative Total costs and expenses Earnings from operations Interest income and other, net Interest expense Earnings from continuing operations before taxes Provision for taxes Net earnings from continuing operations Net earnings from discontinued operations Net earnings Net earnings per share–Continuing operations: Basic Diluted Net earnings per share–Discontinued operations: Basic Diluted Net earnings per share–Total: Basic Diluted Average number of shares and share equivalents: Basic Diluted $ 41,446 7,336 48,782 29,727 5,137 2,646 7,383 44,893 3,889 993 257 4,625 1,064 3,561 136 $ 3,697 $ $ $ $ $ $ 1.80 1.73 0.07 0.07 1.87 1.80 1,979 2,077 $ 36,015 6,355 42,370 25,305 4,415 2,440 6,522 38,682 3,688 708 202 4,194 1,090 3,104 387 3,491 1.54 1.49 0.19 0.18 1.73 1.67 2,018 2,105 $ $ $ $ $ $ $ $ 33,585 5,834 39,419 24,044 3,746 2,380 5,850 36,020 3,399 530 235 3,694 1,016 2,678 267 $ 2,945 $ $ $ $ $ $ 1.29 1.26 0.13 0.13 1.42 1.39 2,068 2,144 All share and per-share amounts reflect the retroactive effects of all stock splits including the two-for-one stock split in the form of a stock dividend effective October 27, 2000. See accompanying Notes to Condensed Consolidated Financial Statements. 47 Condensed Consolidated Balance Sheet Hewlett-Packard Company and Subsidiaries October 31 In millions, except par value and number of shares Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable Financing receivables Inventory Other current assets Total current assets Property, plant and equipment, net Long-term investments and other assets Net assets of discontinued operations Total assets Liabilities and Stockholders’ Equity Current liabilities: Notes payable and short-term borrowings Accounts payable Employee compensation and benefits Taxes on earnings Deferred revenues Other accrued liabilities Total current liabilities Long-term debt Other liabilities Commitments and contingencies Stockholders’ equity: Preferred stock, $0.01 par value 2000 1999 $ 3,415 592 6,394 2,174 5,699 4,970 23,244 4,500 6,265 – $ 34,009 $ 1,555 5,049 1,584 2,046 1,759 3,204 15,197 3,402 1,201 $ 5,411 179 5,958 1,889 4,863 3,342 21,642 4,333 5,789 3,533 $ 35,297 $ 3,105 3,517 1,287 2,152 1,437 2,823 14,321 1,764 917 (300,000,000 shares authorized; none issued) – – Common stock, $0.01 par value (4,800,000,000 shares authorized; 1,947,312,000 shares issued and outstanding at October 31, 2000, and 2,009,138,000 shares issued and outstanding at October 31, 1999) Additional paid-in capital Retained earnings Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity 19 – 14,097 93 14,209 $ 34,009 20 – 18,275 – 18,295 $ 35,297 All share and per-share amounts reflect the retroactive effects of all stock splits including the two-for-one stock split in the form of a stock dividend effective October 27, 2000. See accompanying Notes to Condensed Consolidated Financial Statements. 48 Condensed Consolidated Statement of Cash Flows Hewlett-Packard Company and Subsidiaries For the years ended October 31 In millions Cash flows from operating activities: Net earnings from continuing operations Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization Gains from divestitures Deferred taxes on earnings Tax benefit on employee stock options Changes in assets and liabilities: Accounts and financing receivables Inventory Accounts payable Taxes on earnings Other current assets and liabilities Other, net Net cash provided by operating activities Cash flows from investing activities: Investment in property, plant and equipment Disposition of property, plant and equipment Purchases of investments Maturities and sales of investments Net proceeds from divestitures Other, net Net cash used in investing activities Cash flows from financing activities: (Decrease) increase in notes payable and short-term borrowings Issuance of long-term debt Payment of long-term debt Issuance of common stock under employee stock plans Repurchase of common stock Dividends Net cash used in financing activities Net cash provided by (used in) discontinued operations (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See accompanying Notes to Condensed Consolidated Financial Statements. 2000 1999 1998 $ 3,561 $ 3,104 $ 2,678 1,368 (212) (689) 495 (1,312) (845) 1,544 175 (282) (343) 3,460 (1,737) 420 (1,131) 1,004 448 (130) (1,126) (1,297) 1,936 (474) 748 (5,570) (638) (5,295) 965 (1,996) 5,411 $ 3,415 1,316 – (171) 289 (1,637) (171) 751 (639) 330 (76) 3,096 (1,134) 542 (1,015) 1,063 35 (119) (628) 1,377 (27) (1,101) 157 (1,100) 630 61 1,200 731 154 4,760 (1,584) 260 (4,059) 4,834 89 (148) (608) 2,399 240 (1,047) 660 (2,643) (650) (1,041) (62) 1,365 4,046 $ 5,411 (734) 223 (573) 467 (2,424) (625) (3,666) 488 974 3,072 $ 4,046 49 Notes to Condensed Consolidated Financial Statements Hewlett-Packard Company and Subsidiaries Basis of Presentation Hewlett-Packard Company (HP or hp) is a leading global provider of computing and imaging solutions and services for business and home, and is focused on capitalizing on the opportunities of the Internet and the emergence of next-generation appliances, e-services and infrastructure. These condensed consolidated financial statements do not constitute a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States. The condensed consolidated financial statements should be read in conjunction with the complete 2000 Consolidated Financial Statements and Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations includ- ed in hp’s Annual Report on Form 10-K for fiscal year 2000 accompanying the Notice of Annual Meeting and Proxy Statement for hp’s 2001 Annual Meeting of Shareowners. Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of hp and its wholly-owned and controlled majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in hp’s financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition. Revenue from product sales is generally recognized at the time the product is shipped, with pro- visions established for price protection programs and for estimated product returns. Upon shipment, hp also provides for the estimated cost that may be incurred for product warranties and post-sales support. Coupons, rebates and other cash sales incentives offered by hp to its customers are recorded as a reduction of revenue at the time of sale. Service revenue is recognized over the contractual period or as services are rendered and accepted by the customer. Advertising. Advertising costs are expensed as incurred. Taxes on Earnings. Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Net Earnings Per Share. HP’s basic earnings per share (EPS) is calculated based on net earnings and the weighted- average number of shares outstanding during the reporting period. Diluted EPS includes additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options outstanding and the conversion of debt. All share and per-share amounts reflect the retroactive effects of all stock splits, including the two-for-one stock split in the form of a stock dividend effective October 27, 2000. Cash Equivalents and Short-Term Investments. HP classifies investments as cash equivalents if the original maturi- ty of an investment is three months or less from the purchase date. Short-term investments principally consist of time deposits and money-market instruments. Cash equivalents and short-term investments are stated at cost, which approximates market value. Inventory. Inventory is valued at standard cost which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. 50 Property, Plant and Equipment. Property, plant and equipment is stated at cost. Additions, improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is provided using accelerated methods, principally over 15 to 40 years for buildings and improvements and 3 to 10 years for machinery and equipment. Depreciation of leasehold improvements is provided using the straight-line method over the life of the lease or the asset, whichever is shorter. Capitalized Software. In fiscal 2000, hp adopted Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. ”Historically, internal use software costs were not material. With the adoption of SOP 98-1, hp began capitalizing certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system inter- faces, installation and testing of the software. Capitalized costs are amortized over three years. Long-Term Investments. HP’s long-term investments, which are included in long-term investments and other assets in the accompanying Condensed Consolidated Balance Sheet, consist of U.S. government, corporate and other debt securities as well as public and nonpublic corporate equity securities. HP’s equity securities totaled $1.9 bil- lion at October 31, 2000 and $1.4 billion at October 31, 1999. Investments in equity securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income as a separate component of stockholders’ equity. Minority equity invest- ments in nonpublic companies are generally carried at cost. Investments accounted for using the equity method are not material. HP monitors these investments for impairment and records appropriate reductions in carrying val- ues when necessary. Investments in debt securities are classified as held-to-maturity and carried at amortized cost. Foreign Currency Translation. HP uses the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for inventory, property, plant and equipment, other assets and deferred revenues, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to balance sheet amounts which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in net earnings. Comprehensive Income. Comprehensive income includes net earnings as well as other comprehensive income. HP’s other comprehensive income consists of unrealized gains and losses on available-for-sale securities. Reclassifications. Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Recent Pronouncements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. HP adopted the standard on November 1, 2000, and the adoption did not materially impact its consolidated financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” This bulletin summarizes certain of the SEC’s views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. Based on the SEC’s latest timeline for implementing SAB 101, hp would be required to comply with the guidelines in the fourth quarter of fiscal year 2001. Accordingly, hp is continuing to evaluate the potential impact that adoption will have on its consolidated financial statements. 51 Net Earnings Per Share The following table includes a reconciliation of the numerators and denominators of the basic and diluted EPS calculations. All share and per-share amounts reflect the retroactive effects of all stock splits including the two-for- one stock split in the form of a stock dividend effective October 27, 2000. For the years ended October 31 In millions, except per share data Numerator: 2000 1999 1998 Net earnings from continuing operations Adjustment for interest expense, net of income tax effect Net earnings from continuing operations, adjusted Net earnings from discontinued operations Net earnings, adjusted $ 3,561 31 3,592 136 $ 3,728 $ 3,104 22 3,126 387 $ 3,513 $ $ 2,678 26 2,704 267 2,971 Denominator: Weighted-average shares outstanding Effect of dilutive securities: Dilutive options and other stock-based awards Zero-coupon subordinated convertible notes due 2017 Dilutive potential common shares Weighted-average shares and dilutive potential common shares Net earnings per share–Continuing operations: Basic Diluted Net earnings per share–Discontinued operations: Basic Diluted Net earnings per share–Total: Basic Diluted Average number of shares and share equivalents: Basic Diluted 1,979 2,018 2,068 72 26 98 65 22 87 56 20 76 2,077 2,105 2,144 $ $ $ $ $ $ 1.80 1.73 0.07 0.07 1.87 1.80 1,979 2,077 $ $ $ $ $ $ 1.54 1.49 0.19 0.18 1.73 1.67 2,018 2,105 $ $ $ $ $ $ 1.29 1.26 0.13 0.13 1.42 1.39 2,068 2,144 52 Discontinued Operations On March 2, 1999, hp announced its intention to launch a new company, subsequently named Agilent Technologies, Inc. (Agilent Technologies), through a distribution of Agilent Technologies common stock to hp’s stockholders in the form of a tax-free spin-off. Agilent Technologies is composed of hp’s former Measurement Organization, which included the test-and-measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, hp’s management and Board of Directors completed the plan of disposition for Agilent Technologies. HP’s condensed consolidated financial statements for all periods present Agilent Technologies as a dis- continued business segment in accordance with Accounting Principles Board Opinion No. 30. In November 1999, Agilent Technologies completed an initial public offering of approximately 16% of its com- mon stock and distributed the net proceeds of approximately $2.1 billion to hp. HP provided initial funding in November 1999 to Agilent Technologies and retained certain assets and liabilities of Agilent Technologies as of November 1, 1999, which were subsequently liquidated. The aggregate impact of these transactions resulted in cash flows from discontinued operations of approximately $1.0 billion and an increase in additional paid-in capital of approximately $1.3 billion. HP distributed substantially all of its remaining interest in Agilent Technologies through a stock dividend to hp stockholders on June 2, 2000, resulting in the elimination of the net assets of discontinued operations and a $4.2 billion reduction of retained earnings. The decrease in the intrinsic value of hp’s employee stock plans attributable to the distribution of Agilent Technologies was restored in accordance with the methodology set forth in the FASB Emerging Issues Task Force Issue 90-9, “Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring.” In the second quarter of fiscal 2000, the cumulative net earnings of Agilent Technologies since the July 31, 1999 measurement date began to exceed the total estimated net costs to effect the spin-off. Net earnings from discontinued operations for fiscal 2000 were $136 million. Of this $136 million, net earnings of Agilent Technologies for the period from July 31, 1999 through the June 2, 2000 spin-off date totaled $287 million (net of related tax expense of $174 million), and the net costs to effect the spin-off were $151 million (net of related tax benefit of $23 mil- lion). Net earnings from discontinued operations for fiscal years 1999 and 1998 consisted only of the net earnings of Agilent Technologies. Contingencies and Factors That Could Affect Future Results Contingencies. HP is involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters, which arise in the ordinary course of business. There are no such matters pending that hp expects to be material in relation to its business, financial condition or results of operations. Factors That Could Affect Future Results. A substantial portion of hp’s revenues each year is generated from the development, manufacture and rapid release to market of high technology products newly introduced during the year. In the extremely competitive industry in which hp operates, product development, manufacturing and marketing are complex and uncertain processes requiring hp to accurately predict emerging technological trends and cus- tomers’ changing needs. Additionally, hp’s production strategy relies on its suppliers’ ability to deliver quality components and products in time to meet critical manufacturing and distribution schedules, and its sales strategy relies on the ability of third-party distributors to sell hp products to accommodate changing customer preferences. In light of these dependencies, failure to successfully manage a significant product introduction or the transition from existing products to new products, failure of suppliers to deliver as needed, or failure of resellers to remain cus- tomers and channel partners could have a severe near-term impact on hp’s revenue growth or results of operations. HP sells a significant portion of its products through third-party resellers and, as a result, maintains individually sig- nificant receivable balances with major distributors. If the financial condition or operations of these distributors deteriorate substantially, hp’s operating results could be adversely affected. Future results could also be affected by problems encountered with respect to intellectual property; international sales and operations; and acquisition, strategic alliance, joint venture and divestiture activities. This summary of factors that could affect future results should be read in conjunction with the section entitled “Factors That Could Affect Future Results” contained in hp’s Annual Report on Form 10-K for fiscal year 2000 accompanying the Notice of Annual Meeting and Proxy Statement for hp’s 2001 Annual Meeting of Shareowners. 53 Segment Information HP is a leading global provider of computing and imaging solutions and services for business and home, and is focused on capitalizing on the opportunities of the Internet and the emergence of next-generation appliances, e-services and infrastructure. As of October 31, 2000, hp organized its operations into three major businesses: Imaging and Printing Systems, Computing Systems and IT Services. The segments were determined primarily on how management views and evaluates hp’s businesses. The factors that management uses to identify hp’s separate businesses include customer base, homogeneity of products, technology and delivery channels. A description of the types of products and serv- ices provided by each reportable segment is as follows: Imaging and Printing Systems provides laser and inkjet printers (both monochrome and color), mopiers, scanners, all-in-one devices, personal color copiers and faxes, digital senders, wide- and large-format printers, print servers, network-management software, networking solutions, digital photography products, imaging and printing supplies, imaging and software solutions, and related professional and consulting services. Computing Systems provides a broad range of computing systems for the enterprise, commercial and consumer markets. The products and solutions range from mission-critical systems and software to personal computers for busi- ness and home. Major product lines include UNIX® and PC servers, desktop and mobile personal computers, workstations, software solutions and storage solutions. IT Services provides consulting, education, design and installation services, ongoing support and maintenance, and proactive services like mission-critical support, outsourcing and utility-computing capabilities. Financing capa- bilities include leasing, automatic technology-refreshment services, solution financing and venture financing. HP’s immaterial operating segments were aggregated to form an “All Other” category. In the second and third quarters of fiscal 2000, hp made certain strategic changes to its organizational structure. These changes included the movement of its appliances business from the Computing Systems segment to a separate operating segment, and the movement of the majority of its services business related to imaging and printing from the Imaging and Printing Systems segment to its IT Services segment. The appliances operating segment is now included in “All Other” as it does not meet the materiality threshold for a reportable segment. Segment financial data for the fiscal years ended October 31, 1999 and 1998 has been restated to reflect these organizational changes. The results of the reportable segments are derived directly from hp’s management reporting system. As described above, these results are based on hp’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including earnings from operations. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. 54 The table below presents segment information as of and for the years ended October 31: In millions 2000 Imaging and Printing Systems Computing Systems IT Services All Other Total Segments Net revenue from external customers Intersegment net revenue Total net revenue $ 20,471 5 $ 20,476 $ 20,694 401 $ 21,095 $ 7,086 43 $ 7,129 $ 1,230 69 $ 1,299 $ 49,481 518 $ 49,999 Earnings (loss) from operations Depreciation and amortization expense Assets Capital expenditures 19 9 9 $ 2,746 $ 960 $ 634 $ (103) $ 4,237 $ 344 $ 7,571 309 $ $ 93 $ 6,686 99 $ $ 450 $ 8,455 779 $ $ 11 $ 446 3 $ $ 898 $ 23,158 $ 1,190 Net revenue from external customers Intersegment net revenue Total net revenue $ 18,512 38 $ 18,550 $ 17,256 558 $ 17,814 $ 6,191 64 $ 6,255 $ 880 6 886 $ $ 42,839 666 $ 43,505 Earnings (loss) from operations Depreciation and amortization expense Assets Capital expenditures 19 9 8 $ 2,335 $ 850 $ 575 $ 494 $ 7,150 140 $ $ 96 $ 5,846 96 $ $ 415 $ 7,100 $ 544 Net revenue from external customers Intersegment net revenue Total net revenue $ 16,661 48 $ 16,709 $ 16,851 464 $ 17,315 $ 5,613 72 $ 5,685 Earnings (loss) from operations Depreciation and amortization expense Assets Capital expenditures $ 2,043 $ 480 $ 748 $ 425 $ 6,831 452 $ $ 189 $ 5,372 88 $ $ 404 $ 5,834 493 $ $ $ $ $ $ $ $ $ $ $ (71) $ 3,689 4 250 1 766 7 773 $ 1,009 $ 20,346 781 $ $ 39,891 591 $ 40,482 (5) $ 3,266 12 275 10 $ 1,030 $ 18,312 $ 1,043 55 The following is a reconciliation of segment information to hp consolidated totals as of and for the years ended October 31: In millions Net revenue: Total segments Financing interest income reclassification Elimination of intersegment net revenue and other Total hp consolidated Earnings from continuing operations before taxes: Total segment earnings from operations Net financing interest reclassification Interest income and other, net Interest expense Corporate and unallocated costs, and eliminations Total hp consolidated Assets: 2000 1999 1998 $ 49,999 (368) (849) $ 48,782 $ 4,237 (162) 993 (257) (186) $ 4,625 $ 43,505 (298) (837) $ 42,370 $ $ 3,689 (139) 708 (202) 138 4,194 $ 40,482 (221) (842) $ 39,419 $ 3,266 (84) 530 (235) 217 $ 3,694 Total segments Assets not allocated to segments: Cash and cash equivalents Short-term investments and long-term investments in debt securities Other corporate Total assets from continuing operations Net assets of discontinued operations Total hp consolidated $ 23,158 $ 20,346 $ 18,312 3,415 5,411 4,046 1,106 6,330 34,009 – $ 34,009 1,192 4,815 31,764 3,533 $ 35,297 1,241 5,025 28,624 3,084 $ 31,708 56 Statement of Management Responsibility Hewlett-Packard Company and Subsidiaries HP’s management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information accompanying the company’s Notice of Annual Meeting and Proxy Statement for the 2001 Annual Meeting of Shareowners. The consolidated financial statements have been pre- pared in conformity with accounting principles generally accepted in the United States, and reflect the effects of certain estimates and judgments made by management. The condensed consolidated financial statements and related financial information presented herein are consistent with those presented in the consolidated financial statements. HP’s management maintains an effective system of internal control that is designed to provide reasonable assur- ance that assets are safeguarded and transactions are properly recorded and executed in accordance with man- agement’s authorization. The system is continuously monitored by direct management review and by internal auditors who conduct an extensive program of audits throughout hp. HP selects and trains qualified people who are provided with and expected to adhere to hp’s Standards of Business Conduct. These standards, which set forth the highest principles of business ethics and conduct, are a key element of hp’s control system. HP’s consolidated financial statements as of and for the year ended October 31, 2000 have been audited by Ernst & Young LLP, independent auditors. HP’s consolidated financial statements as of and for each of the two years in the period ended October 31, 1999 have been audited by PricewaterhouseCoopers LLP, independent account- ants. Their respective audits were conducted in accordance with auditing standards generally accepted in the United States, and included a review of financial controls and tests of accounting records and procedures as they respectively considered necessary in the circumstances. The Audit Committee of the Board of Directors, which consists of outside directors, meets regularly with manage- ment, the internal auditors and the independent auditors to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to both internal and external auditors. Carleton S. Fiorina Chairman, President and Chief Executive Officer Robert P. Wayman Executive Vice President, Finance and Administration and Chief Financial Officer 57 Report of Independent Auditors Hewlett-Packard Company and Subsidiaries To the Board of Directors and Stockholders of Hewlett-Packard Company We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Hewlett-Packard Company and subsidiaries as of October 31, 2000, and the related consolidat- ed statements of earnings, stockholders’ equity and cash flows for the year then ended (not presented separately herein); and in our report dated November 15, 2000, we expressed an unqualified opinion on those consolidat- ed financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. San Jose, California November 15, 2000 Report of Independent Accountants Hewlett-Packard Company and Subsidiaries To the Board of Directors and Stockholders of Hewlett-Packard Company We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of Hewlett-Packard Company as of October 31, 1999 and for each of the two years in the period ended October 31, 1999 accompanying the Notice of Annual Meeting and Proxy Statement for the 2001 Annual Meeting of Shareowners of Hewlett-Packard Company (which statements are not presented herein); and in our report dated November 23, 1999 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated bal- ance sheet as of October 31, 1999 and the related condensed consolidated statements of earnings and cash flows for each of the two years in the period ended October 31,1999 is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. We have not audited the consoli- dated financial statements of Hewlett-Packard Company for any period subsequent to October 31, 1999. San Jose, California November 23,1999, except for the stock split disclosed in Note 12 of the consolidated financial statements, as to which the date is October 27, 2000. 58 Selected Financial Data (1) Hewlett-Packard Company and Subsidiaries For the years ended October 31 In millions, except per share amounts Net revenue Earnings from operations (2) Net earnings from continuing operations Net earnings per share, continuing operations (3) Basic Diluted Cash dividends declared per share (3) At year-end: Assets–Continuing operations Assets–Total (4) Long-term debt 2000 1999 1998 1997 1996 $ 48,782 3,889 $ 42,370 3,688 $ 39,419 3,399 $ 35,465 3,405 $ 31,613 2,926 3,561 3,104 2,678 2,515 2,085 $ 1.80 1.73 .32 $ 34,009 34,009 3,402 $ 1.54 1.49 .32 $ 31,764 35,297 1,764 $ 1.29 1.26 .30 $ 28,624 31,708 2,063 $ 1.23 1.19 .26 $ 1.02 .99 .22 $ 26,681 29,852 3,158 $ 22,934 25,977 2,579 (1) HP’s condensed consolidated financial statements and notes for all periods present Agilent Technologies’ businesses as a discontinued operation through the spin-off date of June 2, 2000. See further discussion in Notes to Condensed Consolidated Financial Statements. (2) Earnings from operations represent earnings before net interest income and other, interest expense, provision for taxes and net earnings from discontinued operations. (3) All per-share amounts reflect the retroactive effects of all stock splits including the two-for-one stock split in the form of a stock dividend effective October 27, 2000. (4) Total Assets includes assets from continuing operations and the net assets of discontinued operations through the Agilent Technologies’ spin-off date of June 2, 2000. 59 Dr. Richard A. DeMillo* Vice President and Chief Technology Officer Debra L. Dunn* Vice President and General Manager Strategy and Corporate Operations Bernard Guidon Vice President and General Manager hp Consulting Pradeep Jotwani* President and General Manager Consumer Business Organization Richard H. Lampman Vice President, Research Director, hp Laboratories Ann M. Livermore* President Business Customer Organization Michael J. Rose Vice President and Chief Information Officer Controller (effective January 31, 2001) William V. Russell Vice President and General Manager Software and Solutions Organization Alex Sozonoff Vice President Customer Advocacy Dr. Stephen L. Squires Vice President and Chief Science Officer Lawrence J. Tomlinson Vice President and Treasurer Carolyn M. Ticknor* President Imaging and Printing Systems Duane E. Zitzner* President Computing Systems DIRECTORS Philip M. Condit Chairman of the Board and Chief Executive Officer The Boeing Company An aerospace manufacturer Patricia C. Dunn Co-Chairman and Global Chief Executive Barclays Global Investors A global investment firm Carleton S. Fiorina Chairman, President and Chief Executive Officer Hewlett-Packard Company Sam Ginn Retired Chairman Vodafone AirTouch Plc Richard A. Hackborn Former Chairman and Retired Executive Vice President, Computer Products Organization Hewlett-Packard Company Walter B. Hewlett Independent software developer and Chairman of Vermont Telephone Company George A. Keyworth II Chairman and Senior Fellow The Progress & Freedom Foundation A public policy research institute Robert E. Knowling, Jr. Former President and Chief Executive Officer Covad Communications Company A DSL provider Susan Packard Orr President Technology Resource Assistance Center A software development company (retiring February 2001) Robert P. Wayman Executive Vice President and Chief Financial Officer Hewlett-Packard Company EMERITUS DIRECTOR William R. Hewlett Co-founder Hewlett-Packard Company COMMITTEES OF THE BOARD Executive Committee Fiorina (Chair), Wayman Audit Committee Keyworth (Chair), Dunn, Hackborn, Knowling Compensation Committee Condit (Chair), Ginn, Hewlett Finance and Investment Committee Dunn (Chair), Hackborn, Keyworth, Knowling, Wayman Nominating and Governance Committee Ginn (Chair), Condit, Hewlett, Orr, Fiorina EXECUTIVE OFFICERS Carleton S. Fiorina* Chairman, President and Chief Executive Officer Robert P. Wayman* Executive Vice President, Finance and Administration and Chief Financial Officer Ann O. Baskins Vice President, General Counsel and Secretary Susan D. Bowick* Vice President and Director Corporate Human Resources Charles N. Charnas Assistant Secretary and Senior Managing Counsel Raymond W. Cookingham* Vice President and Controller (retiring January 31, 2001) * Executive officer of hp under Section 16 of the Securities and Exchange Act of 1934. 60 STOCKHOLDER INFORMATION The annual meeting will be held on Tuesday, February 27, 2001 at the Flint Center for the Performing Arts. The address is 21250 Stevens Creek Boulevard, Cupertino, California, 95015-1897. Common Stock and Dividends Hewlett-Packard is listed on the New York and Pacific stock exchanges, with the ticker symbol HWP. We’ve paid cash dividends each year since 1965. The current rate is $0.08 per share per quarter. As of November 30, 2000, there were 122,409 shareholders of record. CORPORATE INFORMATION Headquarters 3000 Hanover Street Palo Alto, CA 94304-1185 (650) 857-1501 Dividend Reinvestment/ Stock Purchase Dividend reinvestment and stock purchase are available through Computershare, hp’s transfer agent. For information on this program, please contact Computershare at the following address and phone number: Computershare Trust Company Dividend Reinvestment Services P.O. Box A3309 Chicago, IL 60690 (800) 286-5977 (from the U.S.) or (312) 360-5138 (outside the U.S.) Investor Information Current and prospective hp investors can receive the Annual Report, Proxy Statement, 10-K, earnings announcements, 10-Q and other publications at no cost by calling 800- TALK-HWP (825-5497). As a service to people with impaired vision, the 2000 Annual Report is available on audio cassette. HP’s home page on the World Wide Web is at http://www.hp.com The Annual Report and related financial infor- mation are also available on the Web, and they can be accessed either from our home page or directly at http://www.hp.com/ hpinfo/investor/main.htm Transfer Agent and Registrar Please contact hp’s transfer agent, at the phone number or address listed below, with questions concerning stock certificates, dividend checks, transfer of ownership or other matters pertain- ing to your stock account. Computershare Investor Services Shareholder Services P.O. Box A3504 Chicago, Illinois 60690 (800) 286-5977 (from the United States) (312) 360-5138 (outside the United States) Regional Headquarters Latin America Waterford Building, 9th floor 5200 Blue Lagoon Drive Miami, FL 33126 Telephone: (305) 267-4220 Europe, Africa, Middle East Route du Nant-d’Avril 150 CH-1217 Meyrin 2 Geneva, Switzerland Telephone: (41/22) 780-8111 Asia Pacific 19/F Cityplaza One 1111 King’s Road Taikoo Shing, Hong Kong Telephone: (852) 2 599-7777 Printed on recycled paper and on hp LaserJet paper. UNIX is a registered trademark of The Open Group. eHITEX and Converge.com are trademarks of Converge, Inc. The Grameen Bank is a member of the non-governmental organization Grameen Family of Organizations. ©2001 Hewlett-Packard Company. All rights reserved. All trademarks and registered trademarks are the property of their respective owners. Forward-Looking Statements This annual report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of hp and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the ability of hp to retain and moti- vate key employees; the timely development, production and acceptance of products and services and their feature sets; the challenge of managing asset levels, including inventory; the flow of products into third-party distri- bution channels; the difficulty of keeping expense growth at modest levels while increasing revenues; and other risks that are described from time to time in hp’s Securities and Exchange Commission reports, including but not limited to the Annual Report on Form 10-K for the years ended October 31, 2000 and 1999, and subsequently filed reports. HP assumes no obligation to update these forward-looking statements. 61 o c s i c n a r F n a S , a t i h s a m a Y e n o S t : g n i t i r W t n a y W a e g n A l , r o n e v a r G a h s i M , r e l i e F m o T : s r e h p a r g o o h P t h p a r g o h t i L n o s r e d n A : g n i t n i r P t a n a l t A / A E I : n g i s e D & t p e c n o C Go invent. 62 ® 5980-3654EN
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