Freddie Mac 2005 Annual Report Download - page 143

Our failure to meet the mandatory target capital surplus would result in an OFHEO inquiry regarding the reason for
such failure. If OFHEO were to determine that we had acted unreasonably regarding our compliance with the framework,
as set forth in OFHEO's letter, OFHEO could seek to require us to submit a remedial plan or take other remedial steps.
In addition, under this framework, we are required to obtain prior written approval from the Director of OFHEO before
engaging in certain capital transactions, including the repurchase of any shares of common stock, redemption of any
preferred stock or payment of preferred stock dividends above stated contractual rates. We must also submit a written report
to the Director of OFHEO after the declaration, but before the payment, of any dividend on our common stock. The report
must contain certain information on the amount of the dividend, the rationale for the payment and the impact on our capital
surplus.
This framework will remain in eÅect until the Director of OFHEO determines that it should be modiÑed or expire.
OFHEO's letter indicated that this determination would consider our resumption of timely Ñnancial and regulatory reporting
that complies with GAAP, among other factors.
Table 10.3 summarizes our compliance with the mandatory target capital surplus portion of OFHEO's capital
monitoring framework.
Table 10.3 Ì Mandatory Target Capital Surplus
December 31,
2005 2004
(in millions)
Minimum capital requirement plus 30% add-on(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $32,513 $31,370
Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,964 35,009
Surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,451 3,639
(1) Amounts for 2005 are based on amended reports we submitted to OFHEO on May 30, 2006.
NOTE 11: STOCK-BASED COMPENSATION
We have three stock-based compensation plans under which grants are currently being made: (i) the Employee Stock
Purchase Plan, or ESPP, as amended and restated in 2004; (ii) the 2004 Stock Compensation Plan, or 2004 Employee Plan;
and (iii) the 1995 Directors' Stock Compensation Plan, or Directors' Plan. Prior to the stockholder approval of the 2004
Employee Plan on November 4, 2004, employee stock-based compensation was awarded in accordance with the terms of the
stockholder-approved 1995 Stock Compensation Plan, or 1995 Employee Plan. We collectively refer to the 2004 Employee
Plan and 1995 Employee Plan as the Employee Plans.
Common stock delivered under these plans may be shares currently held by us as treasury stock, shares purchased by us
in the open market or authorized but previously unissued shares. At December 31, 2005, our stock-based awards consisted
of stock options, restricted stock units and restricted stock. Such awards, discussed below, are generally forfeitable for at
least one year after the grant date, with vesting provisions contingent upon service requirements.
‚ Stock options granted allow for the purchase of our common stock at an exercise price equal to the fair market value
of our common stock on the grant date. Options generally may be exercised for a period of 10 years from the grant
date, subject to a vesting schedule commencing on the grant date. Stock options granted by us include dividend
equivalent rights.
On November 30, 2005, the Compensation and Human Resources Committee of our board of directors approved a
change in the manner in which dividend equivalents are paid out on certain stock option awards. This change
aÅected all stock options outstanding at December 31, 2005 and unvested at December 31, 2004 (aÅected stock
options) and was made to bring the awards into operational and documentary compliance with Internal Revenue
Code Section 409A. In 2006, we made a lump sum payment for all previously accrued dividend equivalents to
grantees holding aÅected stock options at December 31, 2005. With the change, dividend equivalents on aÅected
stock options are paid when and as dividends on common stock are declared. In addition, dividend equivalent rights
will no longer be granted in connection with awards of stock options to grantees. For options not aÅected by the
change approved on November 30, 2005, the dividend equivalent right provides option holders with the right to
receive, at the time stock options are exercised or upon expiration, an amount equal to the accumulated dividends
declared on the stock from the grant date.
‚ A restricted stock unit entitles the grantee to receive one share of common stock at a speciÑed future date. Restricted
stock units do not have voting rights, but do have dividend equivalent rights, which are (a) paid to restricted stock
127 Freddie Mac