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Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
58
In฀1991,฀the฀ESOP฀borrowed฀an฀additional฀$1.00฀billion.฀The฀proceeds฀
were฀used฀to฀purchase฀Series฀B฀ESOP฀Convertible฀Class฀A฀Preferred฀
Stock฀to฀fund฀a฀portion฀of฀retiree฀health฀care฀benefits.฀These฀shares฀are฀
considered฀plan฀assets,฀net฀of฀the฀associated฀debt,฀of฀the฀Other฀Retiree฀
Benefits฀plan฀discussed฀above.฀Debt฀service฀requirements฀are฀funded฀
by฀preferred฀stock฀dividends฀and฀cash฀contributions฀and฀advances฀from฀
the฀Company.฀Each฀share฀is฀convertible฀at฀the฀option฀of฀the฀holder฀
into฀one฀share฀of฀the฀Company’s฀common฀stock.฀The฀dividend฀for฀the฀
current฀year฀was฀$1.05฀per฀share.฀The฀liquidation฀value฀is฀$12.96฀฀
per฀share.
As฀permitted฀by฀Statement฀of฀Position฀(SOP)฀93-6,฀“Employers฀
Accounting฀for฀Employee฀Stock฀Ownership฀Plans,”฀we฀have฀elected,฀
where฀applicable,฀to฀continue฀our฀practices,฀which฀are฀based฀on฀SOP฀
76-3,฀“Accounting฀Practices฀for฀Certain฀Employee฀Stock฀Ownership฀
Plans.”฀ESOP฀debt,฀which฀is฀guaranteed฀by฀the฀Company,฀is฀recorded฀as฀
debt฀(see฀Note฀5).฀Preferred฀shares฀issued฀to฀the฀ESOP฀are฀offset฀by฀the฀
Reserve฀for฀ESOP฀Debt฀Retirement฀in฀the฀Consolidated฀Balance฀Sheets฀
and฀the฀Consolidated฀Statements฀of฀Shareholders’฀Equity.฀Advances฀
to฀the฀ESOP฀are฀recorded฀as฀an฀increase฀in฀the฀Reserve฀for฀ESOP฀Debt฀
Retirement.฀Interest฀incurred฀on฀the฀ESOP฀debt฀is฀recorded฀as฀interest฀
expense.฀Dividends฀on฀all฀preferred฀shares,฀net฀of฀related฀tax฀benefits,฀
are฀charged฀to฀retained฀earnings.฀
As฀required฀by฀SOP฀76-3,฀the฀preferred฀shares฀of฀the฀ESOP฀are฀allocated฀
based฀on฀debt฀service฀requirements,฀net฀of฀advances฀made฀by฀the฀
Company฀to฀the฀Trust.฀The฀number฀of฀preferred฀shares฀outstanding฀at฀
June฀30,฀was฀as฀follows:฀
For฀purposes฀of฀calculating฀diluted฀net฀earnings฀per฀common฀share,฀
the฀preferred฀shares฀held฀by฀the฀ESOP฀are฀considered฀converted฀
from฀inception.฀Diluted฀net฀earnings฀are฀calculated฀assuming฀that฀all฀
preferred฀shares฀are฀converted฀to฀common,฀and฀therefore฀are฀adjusted฀
to฀reflect฀the฀incremental฀ESOP฀funding฀that฀would฀be฀required฀due฀to฀
the฀difference฀in฀dividend฀rate฀between฀preferred฀and฀common฀shares฀
(see฀Note฀7).฀
Note฀9฀Income฀Taxes
Under฀SFAS฀No.฀109,฀“Accounting฀for฀Income฀Taxes,”฀income฀taxes฀are฀
recognized฀for฀the฀amount฀of฀taxes฀payable฀for฀the฀current฀year฀and฀for฀
the฀impact฀of฀deferred฀tax฀liabilities฀and฀assets,฀which฀represent฀future฀
tax฀consequences฀of฀events฀that฀have฀been฀recognized฀differently฀in฀
the฀financial฀statements฀than฀for฀tax฀purposes.฀Deferred฀tax฀assets฀and฀฀
liabilities฀are฀established฀using฀the฀enacted฀statutory฀tax฀rates฀and฀are฀
adjusted฀for฀changes฀in฀such฀rates฀in฀the฀period฀of฀change.฀
Earnings฀before฀income฀taxes฀consisted฀of฀the฀following:฀
Management฀judgment฀is฀required฀in฀determining฀tax฀provisions฀and฀
evaluating฀tax฀positions.฀Management฀believes฀its฀tax฀positions฀and฀
related฀provisions฀reflected฀in฀the฀consolidated฀financial฀statements฀
are฀fully฀supportable.฀We฀establish฀reserves฀for฀additional฀income฀taxes฀
that฀may฀be฀challenged฀by฀local฀authorities฀and฀may฀not฀be฀fully฀฀
sustained,฀despite฀our฀belief฀that฀the฀underlying฀tax฀positions฀are฀
fully฀supportable.฀In฀such฀cases,฀the฀reserves฀for฀additional฀taxes฀are฀
based฀on฀management’s฀best฀estimate฀of฀the฀ultimate฀outcome.฀These฀฀
reserves฀are฀reviewed฀on฀an฀ongoing฀basis฀and฀are฀adjusted฀in฀light฀
of฀changing฀facts฀and฀circumstances,฀including฀progress฀on฀tax฀audits,฀
changes฀in฀interpretations฀of฀tax฀laws,฀developments฀in฀case฀law฀and฀
closing฀of฀statutes฀of฀limitations.฀Our฀tax฀provision฀includes฀the฀impact฀
of฀recording฀reserves฀and฀any฀changes฀thereto.฀We฀have฀a฀number฀of฀
tax฀audits฀in฀process฀and฀have฀open฀tax฀years฀with฀various฀significant฀
taxing฀jurisdictions฀that฀range฀primarily฀from฀1993฀to฀2005.฀Although฀
the฀results฀of฀current฀tax฀audits฀and฀adjustments฀from฀other฀tax฀฀
positions฀related฀to฀open฀tax฀years฀have฀not฀been฀finalized,฀we฀believe฀
based฀on฀currently฀available฀information฀that฀the฀ultimate฀outcomes฀
will฀not฀have฀a฀material฀adverse฀effect฀on฀our฀financial฀position,฀results฀
of฀operations฀or฀cash฀flows.
Notes฀to฀Consolidated฀Financial฀Statements58 The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
Millions฀of฀dollars฀except฀per฀share฀amounts฀or฀otherwise฀specified.
฀ June฀30
Shares฀in฀Thousands฀  2004฀ 2003
Allocated฀ ฀ 62,511฀฀ 64,492฀
Unallocated฀ ฀ 28,296฀ 31,534
฀฀ 90,807฀฀ 96,026
฀ ฀ ฀
Allocated฀ ฀ 21,399฀ 20,648
Unallocated฀ ฀ 48,528฀ 50,718
฀฀ 69,927฀ 71,366
฀ Years฀ended฀June฀30
฀ 2004฀ 2003
United฀States฀ ฀ $6,023฀฀ $4,920฀
International฀ ฀ 3,327฀฀ 2,610฀
฀฀ 9,350฀฀ 7,530฀
฀ ฀ ฀