Proctor and Gamble 2005 Annual Report Download - page 57

Management’s฀Discussion฀and฀Analysis The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries 53
Diluted฀net฀earnings฀per฀common฀share฀are฀calculated฀to฀give฀effect฀to฀
stock฀options฀and฀assuming฀conversion฀of฀preferred฀stock฀(see฀Note฀8).฀
Net฀earnings฀and฀common฀shares฀balances฀used฀to฀calculate฀basic฀and฀
diluted฀net฀earnings฀per฀share฀were฀as฀follows:
Stock-Based฀Compensation
We฀have฀a฀primary฀stock-based฀compensation฀plan฀under฀which฀stock฀
options฀are฀granted฀annually฀to฀key฀managers฀and฀directors฀with฀
exercise฀prices฀equal฀to฀the฀market฀price฀of฀the฀underlying฀shares฀on฀the฀
date฀of฀grant.฀Grants฀were฀made฀under฀plans฀approved฀by฀shareholders฀
in฀1992,฀2001฀and฀2003.฀Grants฀issued฀since฀September฀2002฀are฀
vested฀after฀three฀years฀and฀have฀a฀ten-year฀life.฀Grants฀issued฀from฀
July฀1998฀through฀August฀2002฀are฀vested฀after฀three฀years฀and฀have฀
a฀fifteen-year฀life,฀while฀grants฀issued฀prior฀to฀July฀1998฀are฀vested฀
after฀one฀year฀and฀have฀a฀ten-year฀life.฀We฀also฀make฀other฀minor฀
grants฀to฀employees,฀for฀which฀vesting฀terms฀and฀option฀lives฀are฀not฀
substantially฀different.฀
Had฀the฀provision฀of฀SFAS฀No.฀123฀expensing฀been฀applied,฀our฀net฀
earnings฀and฀earnings฀per฀common฀share฀would฀have฀been฀impacted฀
as฀summarized฀in฀the฀discussion฀of฀our฀stock-based฀compensation฀
accounting฀policy฀in฀Note฀1.฀In฀calculating฀the฀impact฀for฀options฀
granted,฀we฀have฀estimated฀the฀fair฀value฀of฀each฀grant฀using฀the฀
Black-Scholes฀option-pricing฀model฀for฀grants฀issued฀through฀December฀
31,฀2004.฀Effective฀January฀1,฀2005,฀we฀utilize฀a฀binomial฀lattice-based฀
model฀for฀the฀valuation฀of฀stock฀option฀grants.฀The฀utilization฀of฀the฀
binomial฀lattice-based฀model฀did฀not฀have฀a฀significant฀impact฀on฀the฀
valuation฀of฀stock฀options฀as฀compared฀to฀the฀Black-Scholes฀model.฀
Assumptions฀utilized฀in฀the฀model,฀which฀are฀evaluated฀and฀revised,฀as฀
necessary,฀to฀reflect฀market฀conditions฀and฀experience,฀were฀as฀follows:
The฀following฀table฀summarizes฀stock฀option฀activity฀during฀2005,฀2004฀
and฀2003:฀
Notes฀to฀Consolidated฀Financial฀Statements The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
฀ Millions฀of฀dollars฀except฀per฀share฀amounts฀or฀otherwise฀specified.
฀฀ ฀ Years฀ended฀June฀30฀
  2004฀ 2003
Net฀Earnings฀฀ $6,481฀ $5,186
Preferred฀dividends,฀
฀ net฀of฀tax฀benefit฀ ฀ (131)฀ (125)

   6,3505,061
Preferred฀dividends,฀
฀ net฀of฀tax฀benefit฀ ฀ 131฀ 125
Preferred฀dividend฀impact฀
฀ on฀funding฀of฀ESOP฀ ฀ (4)฀ (9)
  6,477฀ 5,177฀
฀ ฀ ฀
฀฀ ฀ Years฀ended฀June฀30฀
Shares฀in฀millions  2004฀ 2003
Basic฀weighted฀average฀
฀ common฀shares฀outstanding฀ ฀ 2,580.1฀ 2,593.2
Effect฀of฀dilutive฀securities฀ ฀ ฀
฀ Conversion฀of฀preferred฀shares1฀฀ ฀ 164.0฀ 170.2
฀ Exercise฀of฀stock฀options฀and฀
฀ other฀unvested฀equity฀awards2฀฀฀ 46.0฀ 39.2

 
 ฀฀ 2,790.1฀ 2,802.6
1฀ Despite฀ being฀ included฀ currently฀ in฀ diluted฀ net฀ earnings฀ per฀ common฀ share,฀ the฀ actual฀
conversion฀to฀common฀stock฀occurs฀pursuant฀to฀the฀repayment฀of฀the฀ESOP฀debt฀through฀
2021.
2฀Approximately฀ 1฀ million฀ in฀ 2005,฀ 38฀ million฀ in฀ 2004฀ and฀ 66฀ million฀ in฀ 2003฀ of฀ the฀
Company’s฀outstanding฀stock฀options฀were฀not฀included฀in฀the฀diluted฀ net฀ earnings฀per฀
share฀calculation฀ because฀to฀do฀so฀would฀have฀ been฀antidilutive฀(i.e.,฀the฀exercise฀price฀
exceeded฀market฀value).
฀฀ ฀ June฀30฀
Options฀in฀Thousands  2004฀ 2003
Outstanding,฀beginning฀of฀year฀ ฀ 259,598฀ 240,326
Granted฀ ฀ ฀ 40,866฀ 35,759
Exercised฀ ฀ ฀ (22,307)฀ (13,904)
Canceled฀ ฀ ฀ (1,864)฀ (2,583)
฀฀ 276,293฀฀ 259,598฀
Exercisable฀ ฀ 151,828฀ 118,202
Available฀for฀grant฀ ฀ 165,399฀ 203,593
Average฀price฀ ฀ ฀
฀ Outstanding,฀beginning฀of฀yea r฀ ฀ $35.75฀ $33.34
฀ Granted฀ ฀ 51.06฀ 45.68
฀ Exercised฀ ฀ 24.88฀ 19.35
฀ Outstanding,฀end฀of฀year฀ ฀ 38.85฀ 35.75
฀ Exercisable,฀end฀of฀year฀ ฀ 35.39฀ 35.44
Weighted฀average฀fair฀value
฀ of฀options฀granted
฀ during฀the฀year฀ ฀ 12.50฀ 10.99฀
฀฀ ฀ Years฀ended฀June฀30฀
Options฀Granted  2004฀ 2003
Interest฀rate฀ ฀ 3.8%฀ 3.9%
Dividend฀yield฀ ฀ 1.8%฀ 1.8%
Expected฀volatility฀ ฀ 20%฀ 20%
Expected฀life฀in฀years฀ ฀ 8฀ 8