Mercury Insurance 2007 Annual Report Download - page 84

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82 MERCURYNOW 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Share-Based Compensation
In May 1995, the Company adopted the 1995 Equity Participation Plan (the “1995 Plan”) which succeeded a prior plan. In May 2005, the Company
adopted the 2005 Equity Incentive Award Plan (the “2005 Plan”) which succeeds the 1995 Plan. Share-based compensation awards may only be
granted under the 2005 Plan. A combined total of 5,400,000 shares of Common Stock under the 1995 Plan and the 2005 Plan are authorized for
issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. The maximum
number of shares that may be issued under the 2005 Plan is 5,400,000. As of December 31, 2007, only options and restricted stock awards have
been granted under these plans. Options granted for which the Company has recognized share-based compensation expense generally become
exercisable 20% per year beginning one year from the date granted, are granted at the market price on the date of grant, and expire after 10 years.
During 2006, the Company granted restricted stock awards to an employee and subsequently cancelled the total shares following her resignation
in the same year. The Company has no restricted stock outstanding as of December 31, 2007.
No share-based compensation was recognized in 2005. The following table presents net income and earnings per common share in 2005 as
if the Company had recognized share-based compensation using the fair-value-based method:
2005
Net income, as reported $ 253,259,000
Deduct: Total share-based compensation determined under fair-value-based method for all awards, net of tax (599,000)
Pro forma net income $ 252,660,000
Earnings per common share:
Basic — as reported $ 4.64
Basic — pro forma $ 4.63
Diluted — as reported $ 4.63
Diluted — pro forma $ 4.62
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as cash provided
by operating activities in the consolidated statements of cash flows. SFAS No.123R requires the cash flows resulting from excess tax benefits of
tax deductions in excess of the compensation cost recognized for those options to be classified as cash provided by financing activities.
Cash received from option exercises during 2007, 2006 and 2005 was $2,173,000, $1,943,000 and $2,394,000, respectively. The excess tax
benefit realized during 2007 and 2006 and the actual tax benefit realized during 2005 for the tax deduction from option exercises of the share-
based payment awards totaled $273,000, $505,000 and $503,000, respectively.
The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the following grant-date assumptions
and weighted-average fair values:
Year ended December 31,
2007 2006 2005
Weighted-average fair value of grants $ 7.45 $ 10.62 $ 12.98
Expected volatility 17.87%-18.50% 20.56%-24.22% 26.44%-27.98%
Weighted-average expected volatility 18.14% 20.56% 26.44%
Risk-free interest rate 4.02%-4.91% 4.54%-5.00% 3.82%-4.31%
Expected dividend yield 3.77%-4.13% 3.41%-3.74% 2.87%-3.11%
Expected term in months 72 72 72
The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.
The expected volatility on the date of grant is calculated based on historical volatility over the expected term of the options. The expected term
computation is based on historical exercise patterns and post-vesting termination behavior.