Proctor and Gamble 2005 Annual Report Download - page 52

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
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considerable฀judgment฀in฀interpreting฀market฀data฀and฀changes฀in฀
assumptions฀or฀estimation฀methods฀could฀significantly฀affect฀the฀
fair฀value฀estimates.฀However,฀we฀do฀not฀believe฀any฀such฀changes฀
would฀have฀a฀material฀impact฀on฀our฀financial฀condition฀or฀results฀of฀
operations.฀Other฀financial฀instruments,฀including฀cash฀equivalents,฀
other฀investments฀and฀short-term฀debt,฀are฀recorded฀at฀cost,฀which฀
approximates฀fair฀value.฀The฀fair฀values฀of฀long-term฀debt฀and฀derivative฀
instruments฀are฀disclosed฀in฀Note฀5฀and฀Note฀6,฀respectively.฀
Stock-Based฀Compensation
The฀Company฀has฀employee฀stock฀option฀plans,฀which฀are฀described฀
more฀fully฀in฀Note฀7.฀We฀account฀for฀employee฀stock฀option฀plans฀
under฀the฀intrinsic฀value฀recognition฀and฀measurement฀provisions฀
of฀Accounting฀Principles฀Board฀(APB)฀Opinion฀No.฀25,฀“Accounting฀
for฀Stock฀Issued฀to฀Employees,”฀and฀related฀interpretations.฀As฀stock฀
options฀have฀been฀issued฀with฀exercise฀prices฀equal฀to฀the฀market฀
value฀of฀the฀underlying฀shares฀on฀the฀grant฀date,฀no฀compensation฀cost฀฀
was฀recognized.฀
Had฀compensation฀expense฀for฀the฀plans฀been฀determined฀based฀on฀
the฀fair฀value฀of฀the฀options฀on฀the฀grant฀date,฀consistent฀with฀SFAS฀
No.฀123,฀“Accounting฀for฀Stock-Based฀Compensation,”฀our฀net฀earnings฀
and฀earnings฀per฀common฀share฀would฀have฀been฀as฀follows:
New฀Pronouncements฀and฀Reclassifications฀
In฀December฀2004,฀the฀Financial฀Accounting฀Standards฀Board฀(FASB)฀
issued฀SFAS฀No.฀123฀(Revised฀2004),฀“Share-Based฀Payment”฀(SFAS฀
123(R)).฀This฀Statement฀revises฀SFAS฀No.฀123฀by฀eliminating฀the฀option฀
to฀account฀for฀employee฀stock฀options฀under฀APB฀No.฀25฀and฀generally฀
requires฀companies฀to฀recognize฀the฀cost฀of฀employee฀services฀received฀in฀
exchange฀for฀awards฀of฀equity฀instruments฀based฀on฀the฀grant-date฀fair฀
value฀of฀those฀awards฀(the฀“fair-value-based”฀method).฀We฀are฀adopting฀
SFAS฀123(R)฀effective฀July฀1,฀2005฀using฀the฀modified฀retrospective฀
method.฀All฀prior฀periods฀will฀be฀adjusted฀to฀give฀effect฀to฀the฀฀
fair-value-based฀method฀of฀accounting฀for฀awards฀granted฀in฀fiscal฀
years฀beginning฀on฀or฀after฀July฀1,฀1995.฀The฀impact฀of฀adopting฀SFAS฀
123(R)฀will฀be฀consistent฀with฀the฀impact฀in฀the฀pro฀forma฀disclosure฀
presented฀above.
No฀other฀new฀accounting฀pronouncement฀issued฀or฀effective฀during฀
the฀fiscal฀year฀has฀had฀or฀is฀expected฀to฀have฀a฀material฀impact฀on฀
the฀consolidated฀financial฀statements.฀Certain฀reclassifications฀฀
of฀prior฀years’฀amounts฀have฀been฀made฀to฀conform฀to฀the฀current฀฀
year฀presentation.
Note฀2฀Acquisitions฀
Gillette฀Acquisition
On฀January฀27,฀2005,฀we฀entered฀into฀an฀agreement฀to฀acquire฀The฀฀
Gillette฀Company.฀The฀agreement,฀which฀has฀been฀approved฀by฀the฀
boards฀of฀directors฀and฀the฀shareholders฀of฀both฀companies,฀provides฀
for฀a฀stock-for-stock฀exchange฀in฀which฀0.975฀shares฀of฀The฀Procter฀
&฀Gamble฀Company฀common฀stock฀would฀be฀issued฀and฀exchanged,฀฀
on฀a฀tax-free฀basis,฀for฀each฀share฀of฀The฀Gillette฀Company.฀Under฀
the฀purchase฀method฀of฀accounting,฀the฀total฀consideration฀would฀be฀฀
approximately฀$54฀billion,฀determined฀using฀the฀average฀Company฀
stock฀prices฀beginning฀two฀days฀before฀and฀ending฀two฀days฀after฀฀
January฀28,฀2005,฀the฀date฀the฀acquisition฀was฀announced.฀
The฀Gillette฀Company฀is฀a฀leader฀in฀several฀global฀product฀categories฀
including฀blades฀and฀razors,฀oral฀care฀and฀batteries.฀Total฀sales฀for฀฀
Gillette฀during฀its฀most฀recent฀year฀ended฀December฀31,฀2004฀were฀
$10.5฀billion.
The฀acquisition฀is฀subject฀to฀approval฀by฀certain฀regulatory฀authorities.฀
We฀believe฀that฀the฀transaction฀will฀close฀in฀Fall฀2005.
In฀connection฀with฀this฀acquisition,฀we฀also฀announced฀a฀share฀buyback฀
plan฀under฀which฀we฀will฀acquire฀up฀to฀$22฀billion฀of฀Company฀common฀
shares.฀Through฀June฀30,฀2005,฀we฀repurchased฀$3.00฀billion฀under฀
this฀plan,฀financed฀by฀a฀bridge฀credit฀facility.฀On฀July฀27,฀2005,฀we฀
entered฀into฀a฀$24฀billion฀three-year฀credit฀facility฀with฀a฀syndicate฀
of฀banks.฀This฀facility฀replaced฀the฀bridge฀credit฀facility.฀Proceeds฀will฀
be฀used฀for฀general฀corporate฀purposes฀with฀the฀expectation฀that฀the฀฀
majority฀of฀the฀funds฀will฀be฀used฀as฀part฀of฀the฀share฀repurchase฀฀
program.฀As฀part฀of฀the฀share฀repurchase฀program,฀we฀may฀also฀฀
purchase฀shares฀of฀The฀Gillette฀Company฀prior฀to฀close฀to฀facilitate฀฀
completion฀of฀the฀transaction฀(dependent฀on฀market฀conditions฀and฀฀
regulatory฀approval).฀This฀facility฀is฀initially฀secured฀by฀a฀pledge฀of฀certain฀
of฀the฀Company฀shares฀acquired฀under฀the฀share฀buyback฀plan.฀This฀credit฀฀
Notes฀to฀Consolidated฀Financial฀StatementsThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
Millions฀of฀dollars฀except฀per฀share฀amounts฀or฀otherwise฀specified.
฀ Years฀ended฀June฀30฀
฀ ฀ ฀  20041฀ 2003
Net฀Earnings฀ ฀ ฀
฀ As฀reported฀ ฀ $6,481฀ $5,186
฀ Pro฀forma฀adjustments฀ ฀ (325)฀ (398)
฀  6,156฀ 4,788
Net฀Earnings฀Per฀Common฀Share฀ ฀ ฀
Basic฀ ฀ ฀
฀ As฀reported฀ ฀ $2.46฀ $1.95
฀ Pro฀forma฀adjustments฀ ฀ (0.12)฀ (0.15)
   2.34฀ 1.80
Diluted฀ ฀ ฀
฀ As฀reported฀ ฀ 2.32฀ 1.85
฀ Pro฀forma฀adjustments฀ ฀ (0.12)฀ (0.15)
   2.20฀ 1.70
1฀During฀2004,฀the฀timing฀of฀the฀annual฀grant฀was฀moved฀from฀September฀to฀February฀result-
ing฀in฀lower฀expense,฀as฀the฀associated฀pro฀forma฀expense฀is฀amortized฀over฀the฀three-year฀
vesting฀period.฀ ฀ ฀