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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGE 49
9. INTERNATIONAL CURRENCY TRANSLATION
For translation of its subsidiaries operating in non-U.S. dollar
currencies, the Company has determined that the local cur-
rencies of its international subsidiaries are the functional curren-
cies except those in highly inflationary economies, which are
defined as those which have had compound cumulative rates of
inflation of 100% or more during the past three years, or where a
substantial portion of its cash flows are not in the local currency.
In consolidating international subsidiaries, balance sheet
currency effects are recorded as a component of accumulated
other comprehensive income. This equity account includes the
results of translating all balance sheet assets and liabilities at
current exchange rates, except for those located in highly infla-
tionary economies that are reflected in operating results.
An analysis of the changes during 2005 and 2004 for for-
eign currency translation adjustments is included in Note 12.
Net currency transaction and translation gains and losses
included in other (income) expense were losses of $32 million,
$38 million, and $22 million in 2005, 2004 and 2003,
respectively.
10. COMMON STOCK, STOCK OPTION PLANS AND
STOCK COMPENSATION AGREEMENTS
At January 1, 2006, the Company had 17 stock-based compen-
sation plans. The shares outstanding are for contracts under the
Company’s 1995 and 2000 Stock Option Plans, the 2005 Long
Term Incentive Plan, the 1997 Non-Employee Director’s Plan
and the Biosense, Centocor, Innovasive Devices, ALZA, Inver-
ness and Scios Stock Option Plans. During 2005, no options
were granted under any of these plans except the 2000 Stock
Option Plan and 2005 Long Term Incentive Plan. The 2000
Stock Option Plan expired April 19, 2005. All options granted
subsequent to that date were under the 2005 Long Term
Incentive Plan.
Stock options expire 10 years from the date they are granted
and vest over service periods that range from one to five years.
All options are granted at current market price on the date of
grant. Under the 2005 Long Term Incentive Plan, the Company
may issue up to 260 million shares of common stock. Shares
available for future grants under the 2005 Long Term Incentive
Plan were 259.2 million at the end of 2005.
A summary of the status of the Company’s stock option
plans as of January 1, 2006, January 2, 2005, and December
28, 2003, and changes during the years ending on those dates
are presented below:
Weighted
Options Average
(Shares in Thousands) Outstanding Exercise Price
Balance at December 29, 2002 189,741 $41.42
Options granted 50,880 49.15
Options exercised (21,242) 17.22
Options canceled/forfeited (5,430) 52.68
Balance at December 28, 2003 213,949 45.37
Options granted 47,815 53.94
Options exercised (24,066) 28.50
Options canceled/forfeited (8,694) 53.77
Balance at January 2, 2005 229,004 48.62
Options granted 47,556 66.16
Options exercised (21,733) 34.19
Options canceled/forfeited (6,285) 55.84
Balance at January 1, 2006 248,542 $53.05
The average fair value of options granted was $15.48 in 2005,
$13.11 in 2004, and $13.58 in 2003. The fair value was esti-
mated using the Black-Scholes option pricing model based on
the weighted average assumptions of:
2005 2004 2003
Risk-free rate 3.72% 3.15% 3.09%
Volatility 25.0% 27.0% 28.0%
Expected life 5.0 yrs 5.0 yrs 5.0 yrs
Dividend yield 1.93% 1.76% 1.35%
The following table summarizes stock options outstanding and
exercisable at January 1, 2006:
(Shares in Thousands) Outstanding Exercisable
Average Average
Exercise Average Exercise Exercise
Price Range Options Life(1) Price Options Price
$ 3.62-$27.00 6,735 1.8 $23.27 6,733 $23.27
$27.06-$40.16 24,997 2.6 35.82 24,912 35.81
$40.53-$50.08 20,470 4.1 49.18 20,239 49.18
$50.11-$52.11 29,394 4.8 50.70 29,174 50.69
$52.20-$53.89 37,709 7.1 52.22 177 52.79
$53.93-$54.89 43,789 8.1 53.94 672 54.54
$55.01-$66.08 40,180 6.1 57.46 37,473 57.35
$66.18-$91.89 45,268 9.1 66.20 10 87.08
248,542 6.4 $53.05 119,390 $47.90
(1) Average contractual life remaining in years.
Stock options exercisable at January 2, 2005 and December
28, 2003 were 100,488 options at an average price of $41.26
and 119,663 options at an average price of $38.51, respectively.