Note 15 - Share-Based Compensation Plans

The Company has stock incentive plans to encourage employees and nonemployee directors to remain with the Company and to more closely align their interests with those of the Company's shareholders.

Stock Option Plans

In May 2005, the shareholders of the Company approved the 2005 Equity Incentive Plan (the "2005 Plan") as the successor plan to the 1988 Stock Option Plan (the "1988 Plan"). As a result, options will no longer be granted under the 1988 Plan. The 2005 Plan permits grants of options and also allows for grants of restricted stock and restricted stock units as well as performance units and other share-based awards. No share-based awards other than stock options have been granted under the 2005 Plan. The Company also has a Non-Employee Directors' Stock Option Plan (the "Directors' Plan").

Options are granted at a price not less than the average quoted market price on the date of grant. All grants to employees in the last three years under the 2005 Plan and the 1988 Plan have a maximum term of six years and generally either vest over three years from the date of grant or vest 100% at the end of the third year. Options granted under the 2005 Plan and the 1988 Plan generally provide for continued vesting if the participant were to elect retirement under one of the Company's pension plans. Directors' Plan options are granted with a maximum term of ten years and vest in full at the end of six months. There are 4.1 million shares underlying options that are authorized, but not yet granted. The Company uses shares from the Employee Benefits Trust for stock option exercises. Although it has not expressed any intent to do so, the Company has the right to amend, suspend, or terminate the 1988 Plan or 2005 Plan at any time by action of the Company's board of directors. If a change in control were to occur (as defined in the plan documents), certain options may become immediately vested.

As discussed in note 1, the Company adopted SFAS 123(R) on January 1, 2006. The effect of adopting SFAS 123(R) on the consolidated statements of operations for the year ended December 31, 2006, is as follows:

		Year Ended
(In millions, except per share amounts)		December 31, 2006
Selling, general and administrative expense	$	11.1
Income from continuing operations before income taxes and minority interest		(11.1)
Provision for income taxes		(3.9)
Income from continuing operations		(7.2)
Income from discontinued operations, net of taxes of $1.9 (a)		(4.7)
Net income	$	(11.9)
Net income per common share:
Basic	$	(0.24)
Diluted		(0.24)

(a)

In conjunction with the sale of BAX Global in the first quarter of 2006, 328,247 options held by BAX Global employees were modified to become immediately vested. This modification resulted in additional pretax compensation expense of $6.6 million ($4.7 million after tax) and is included in the calculation of the gain on sale of BAX Global. The weighted-average exercise price of these options was $25.67. All of the accelerated options have been exercised.

The following table illustrates the pro forma effect on net income and earnings per share if the fair value based method under SFAS 123 had been applied in 2005 and 2004:

The fair value of each stock option grant is estimated at the time of grant using the Black-Scholes option-pricing model. If a different option-pricing model had been used, results may have been different.

The fair value of options that vest entirely at the end of a fixed period, generally three years, is estimated using a single option approach and generally amortized on a straight-line basis over the vesting period. The fair value of options that vest ratably over three years is estimated using a multiple-option approach and generally amortized on a straight-line basis over each separate vesting period. Upon adoption of SFAS 123(R), compensation cost related to new stock option grants that continue to vest upon retirement is recognized over the period from the grant date to the retirement-eligible date. If the Company had applied this provision prior to the adoption of SFAS 123(R), compensation cost would have been $1.8 million lower in 2006. An 8% forfeiture rate has been used to estimate the number of options for which vesting is not expected to occur.

The fair value of options granted during the three years ended December 31, 2006, was calculated using the following estimated weighted average assumptions.

The expected dividend yield was calculated by annualizing the cash dividend declared by the Company for the most recent period equal to the expected term and dividing that result by the closing stock price on the date of declaration. Dividends are not paid on options.

The expected volatility was estimated after reviewing the historical volatility of the Company's stock using daily close prices.

The risk-free interest rate was based on yields on U.S. Treasury debt at the time of the grant or modification.

The expected term of the options was based on the Company's historical option exercise data, option expiration and post-vesting cancellation behavior.

The intrinsic value of a stock option is the difference between the market price of the shares underlying the option and exercise price of the option. The total intrinsic value of options exercised was $20.5 million in 2006, $33.1 million in 2005, and $16.5 million in 2004.

As of December 31, 2006, $5.5 million of total unrecognized compensation cost related to previously granted stock options is expected to be recognized over a weighted-average period of 1.4 years.

In 2006, the Company recognized compensation expense related to all options held by employees of BAX Global that were modified to accelerate vesting provisions. The fair value of options accelerated during 2006 was calculated using the following estimated weighted-average assumptions.

		Year Ended
		December 31,
Options Modified		2006
Number of shares underlying options, in thousands		328
Weighted-average exercise price per share	$	25.67
Assumptions used to estimate fair value:
Expected dividend yield:
Weighted average		0.3%
Range		0.2% - 0.3%
Expected volatility:
Weighted-average		29.1%
Range		25.7 - 32.1%
Risk-free interest rate:
Weighted-average		4.1%
Range		3.7 - 4.7%
Expected term in years:
Weighted-average		0.5
Range		0.3 - 0.7
Weighted-average fair value estimates at modification date:
In millions	$	6.6
Fair value per share	$	20.11

The table below summarizes the activity in all plans for options of the Company's common stock for 2006, 2005 and 2004.

(a)

The number of options expected to vest takes into account an estimate of expected forfeitures.

There were 0.8 million shares of exercisable options with a weighted-average exercise price of $22.77 per share at December 31, 2005, and 1.5 million shares of exercisable options with a weighted-average exercise price of $20.68 per share at December 31, 2004.

Employee Stock Purchase Plan

The 1994 Employee Stock Purchase Plan (the "ESPP"), was a noncompensatory plan that allowed eligible employees to buy the Company's common stock at below market value, subject to plan limitations on the amount an employee could purchase annually. The ESPP was terminated in June 2005. Under the ESPP, the Company sold approximately 0.1 million shares of common stock to employees in both 2005 and 2004.