Fannie Mae 2001 Annual Report Download - page 62

{ 60 } Fannie Mae 2001 Annual Report
The following table summarizes the major assumptions
used in the model.
2001 2000 1999
Risk-free rate1 . . . . . . . . 3.62–4.99% 4.97–6.81% 4.56–6.02%
Volatility . . . . . . . . . . . . . 34–37 29–34 27–29
Forfeiture . . . . . . . . . . . . 15 15 15
Dividend2 . . . . . . . . . . . . $1.20 $1.12 $1.08
Expiration . . . . . . . . . . . . 1–10 yrs. 1–10 yrs. 1–10 yrs.
1The closing yield on the comparable average life U.S. Treasury on the day prior to grant.
2Dividend rate on common stock at date of grant. Dividend rate assumed to remain constant over the
option life.
Employee Stock Purchase Plan
Fannie Mae has an Employee Stock Purchase Plan that
allows issuance of up to 41 million shares of common stock
to qualified employees at a price equal to 85 percent of the
fair market value on the grant date. This plan meets the
definition of a noncompensatory plan under APB Opinion
25. Therefore, Fannie Mae does not recognize any
compensation expense for grants under the plan. Employees
have the option of either receiving cash through a Cashless
Exercise Program or purchasing shares directly. In 2001,
Fannie Mae granted each qualified employee, excluding
certain officers and other highly compensated employees,
the right to purchase up to 321 shares of common stock in
January 2002. Under the 2001 offering, 1,274,396 shares
were purchased at $66.00 per share, compared with
1,522,869 common shares purchased at $50.68 per share
under the 2000 offering. The Board of Directors approved
a 2002 offering under the plan, granting each qualified
employee the right to purchase 310 common shares at
$68.46 per share in January 2003.
Employee Stock Ownership Plan
Fannie Mae has an Employee Stock Ownership Plan (ESOP)
for qualified employees. Fannie Mae may contribute to the
ESOP an amount based on defined earnings goals, not to
exceed 4 percent of the aggregate base salary for all
participants. The contribution is made in the subsequent
year either in shares of Fannie Mae common stock or in cash
that is used to purchase such stock. Vested benefits are based
on years of service. Eligible employees are 100 percent
vested in their ESOP accounts either upon attainment of age
65 or more than five years of service. Employees who are at
least 55 years of age, and have at least 10 years of
participation in the ESOP, may qualify to diversify vested
ESOP shares into the same types of funds available under the
Retirement Savings Plan, without losing the tax deferred
status of the money in the ESOP. At December 31, 2001,
2000, and 1999, 1,397,339 common shares, 1,366,170
common shares, and 1,345,388 common shares, respectively,
were outstanding under the ESOP.
Performance Shares
Fannie Mae’s Stock Compensation Plan of 1993 authorizes
eligible employees to receive performance awards, generally
issued with an award period that can range from three to five
years. The performance awards become actual awards only if
Fannie Mae attains the goals set for the award period. At the
end of such time, the awards generally are payable in
common stock in either two or three installments over a
period not longer than three years. The outstanding
contingent grants made for the 2002-2004, 2001-2003, and
2000-2002 periods were 492,868 common shares, 447,000
common shares, and 375,910 common shares, respectively.
Nonqualified Stock Options
Stock options may be granted to eligible employees and
nonmanagement members of the Board of Directors. The
options generally do not become exercisable until at least one
year after the grant date for employees and on the grant date
for nonmanagement directors and generally expire ten years
from the grant date. The exercise price of the common stock
covered by each option is equal to the fair value of the stock
on the date the option is granted. Therefore, Fannie Mae
does not record compensation expense for grants under
this plan.
Under the Stock Compensation Plan of 1993, Fannie Mae’s
Board of Directors approved the EPS Challenge Option
Grant in January 2000 for all regular full-time and part-time
Fannie Mae employees. All employees, other than
management group employees, received an option grant
of 350 shares at a price of $62.50 per share, the fair market
value of the stock on the grant date. Management group
employees received option grants equivalent to a percentage
of their November 1999 stock grants. Vesting for options
granted is tied to achievement of an earnings per share (EPS)
goal, which is $6.46 by the end of 2003. If Fannie Mae’s EPS
for 2003 is $6.46 or greater, then 100 percent of the EPS
Challenge options will vest in January 2004. If Fannie Mae
does not reach an EPS of $6.46 by the end of 2003, vesting is
delayed one year and then begins at a rate of 25 percent per
year. The Board of Directors may choose, at its discretion, to
offset future option grants or other forms of compensation if
the goal is not reached. Options expire January 18, 2010.