Freddie Mac 2011 Annual Report Download - page 273

Common Stock Warrant
Pursuant to the Purchase Agreement described in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” on
September 7, 2008, we, through FHFA, in its capacity as Conservator, issued a warrant to purchase common stock to
Treasury. The warrant was issued to Treasury in partial consideration of Treasury’s commitment to provide funds to us
under the terms set forth in the Purchase Agreement.
The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be exercised in
whole or in part at any time on or before September 7, 2028, by delivery to us of: (a) a notice of exercise; (b) payment of
the exercise price of $0.00001 per share; and (c) the warrant. If the market price of one share of our common stock is
greater than the exercise price, then, instead of paying the exercise price, Treasury may elect to receive shares equal to the
value of the warrant (or portion thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of
the warrant, Treasury may assign the right to receive the shares of common stock issuable upon exercise to any other
person.
We account for the warrant in permanent equity. At issuance on September 7, 2008, we recognized the warrant at fair
value, and we do not recognize subsequent changes in fair value while the warrant remains classified in equity. We
recorded an aggregate fair value of $2.3 billion for the warrant as a component of additional paid-in-capital. We derived
the fair value of the warrant using a modified Black-Scholes model. If the warrant is exercised, the stated value of the
common stock issued will be reclassified to common stock in our consolidated balance sheets. The warrant was
determined to be in-substance non-voting common stock, because the warrant’s exercise price of $0.00001 per share is
considered non-substantive (compared to the market price of our common stock). As a result, the warrant is included in
the computation of basic and diluted earnings (loss) per share. The weighted average shares of common stock outstanding
for the years ended December 31, 2011, 2010, and 2009, respectively, included shares of common stock that would be
issuable upon full exercise of the warrant issued to Treasury.
Preferred Stock
The table below provides a summary of our preferred stock outstanding at December 31, 2011. We have the option
to redeem our preferred stock on specified dates, at their redemption price plus dividends accrued through the redemption
date. However, without the consent of Treasury, we are restricted from making payments to purchase or redeem preferred
stock as well as paying any preferred dividends, other than dividends on the senior preferred stock. In addition, all 24
classes of preferred stock are perpetual and non-cumulative, and carry no significant voting rights or rights to purchase
additional Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged
to additional paid-in capital.
268 Freddie Mac