SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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ANWORTH MORTGAGE ASSET CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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March 29, 201126, 2012
Dear Stockholder:
Our Annual Meeting of Stockholders (the “Annual Meeting”) will be held at the principal offices of our company located at 1299 Ocean Avenue, Second Floor, Santa Monica, California, at 10:00 a.m. on Wednesday, May 25, 2011.23, 2012. The formal meeting notice and our proxy statement for the Annual Meeting are attached.
At this year’s meeting, stockholders will be asked to consider and vote upon several proposals, including proposals to: (1) elect six directors to serve as members of our board of directors; (2) approve the execution of a management agreement (the “Management Agreement”) between our company and Anworth Management, LLC (the “Manager”) and the concurrent externalization of our management function (the “Externalization Proposal”); (3) provide an advisory vote on the approval ofto approve the compensation of our Named Executive Officers; (4) provide an advisory vote on the frequency of the advisory vote on compensation of our Named Executive Officers; and (5)(3) ratify the appointment of McGladrey and Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011.
If the Externalization Proposal is approved, our employees would become the employees of the Manager and our 2002 Incentive Compensation Plan would be terminated. The Manager will conduct our day-to-day operations through the authority delegated to it under the Management Agreement and pursuant to the policies established by our board of directors and would be responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services. In exchange for these services, the Manager would receive a management fee paid monthly in arrears in an amount equal to 1/12 of 1.20% of our Equity (as defined in the Management Agreement).
Our board of directors believes that the consummation of the Externalization Proposal would, among other things, enhance the perception of our company by investors and analysts since most recent mortgage REITs are externally managed, potentially have an accretive impact on earnings per share as a result of the elimination of our incentive compensation plan, reduce potential conflicts of interest by eliminating our payment of incentive compensation to management based upon short-term returns and eliminate employment related liabilities.
The Externalization Proposal (and certain conflicts of interest that are involved in light of the affiliations between our company and the Manager, which is owned and managed by certain of our officers), and each of the other proposals described above, are more completely described in the accompanying proxy statement. We urge you to carefully review the proxy statement and accompanying appendices, which discuss each of the proposals in more detail.2012.
Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to vote your shares of common stock by phone, via the Internet or by marking, signing, dating and promptly returning the enclosed proxy card in the enclosed postage-paid envelope. This will ensure your representation at the Annual Meeting.
We look forward to seeing you on May 25.23, 2012.
Sincerely, |
Lloyd McAdams |
Chairman and Chief Executive Officer |
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ANWORTH MORTGAGE ASSET CORPORATION
1299 Ocean Avenue, Second Floor
Santa Monica, California 90401
(310) 255-4493
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 2011INFORMATION ABOUT THE MEETING
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN thatPurpose of the Annual Meeting
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PROPOSAL 2—ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
Deadline and Procedures for Submitting Nominations to the following purposes:Board
ANWORTH MORTGAGE ASSET CORPORATION
1299 Ocean Avenue, Second Floor
Santa Monica, California 90401
(310) 255-4493
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 23, 2012
TO OUR STOCKHOLDERS: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the “Annual Meeting”) of Anworth Mortgage Asset Corporation, a Maryland corporation, will be held on Wednesday, May 23, 2012 at 10:00 a.m. at our principal offices located at 1299 Ocean Avenue, Second Floor, Santa Monica, California 90401 for the following purposes:
|
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 2011
INFORMATION ABOUT THE ANNUAL MEETING
This proxy statement is being furnished to stockholders in connection with the solicitation of proxies by and on behalf of the board of directors of Anworth Mortgage Asset Corporation, or the board, for use at our 2011 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Wednesday, May 25, 2011 at the principal offices of our company located at 1299 Ocean Avenue, Second Floor, Santa Monica, California 90401, or at any adjournment or postponement thereof.
What is the purpose of the Annual Meeting?
At the Annual Meeting, stockholders will consider and vote upon the following matters:
The election of six directors to our board of directors;
Approval of the execution by us of a management agreement between our company and Anworth Management, LLC and the concurrent externalization of our management function (the “Externalization Proposal”);
An
2. | To provide an advisory vote |
An advisory vote on the frequency of the advisory vote on compensation of our Named Executive Officers;
The ratification of
3. | To ratify the appointment of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, |
Such
Our board recommends that you voteFORthe six nominees for election to our board andFOR proposals No. 2 and 3. Stockholders of record at the close of business on March 26, 2012 are entitled to vote at the Annual Meeting or any adjournment or postponement thereof.
All stockholders are cordially invited to attend the Annual Meeting in person. To ensure your representation at the Annual Meeting, you are urged to vote your shares of common stock by phone, via the Internet or by marking, signing, dating and returning the enclosed proxy card promptly in the postage-paid envelope enclosed for that purpose. Any stockholder attending the Annual Meeting may vote in person even if he or she previously submitted a proxy. If your shares of common stock are held by a bank, broker or other agent, please follow the instructions from your bank, broker or other agent to have your shares voted.
Santa Monica, California
March 26, 2012
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be held on May 23, 2012:This proxy statement and our Annual Report on Form 10-K are available on the internet, free of charge, at http://www.RRDEZProxy.com/2012/AnworthEZProxy.On this web site, you will be able to access this proxy statement, our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and any amendments or supplements to the foregoing material that is required to be furnished to stockholders.
ANWORTH MORTGAGE ASSET CORPORATION
1299 Ocean Avenue, Second Floor
Santa Monica, California 90401
(310) 255-4493
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 23, 2012
INFORMATION ABOUT THE ANNUAL MEETING
This proxy statement is being furnished to stockholders in connection with the solicitation of proxies by and on behalf of our board of Anworth Mortgage Asset Corporation, or our board, for use at our 2012 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Wednesday, May 23, 2012 at the principal offices of our company located at 1299 Ocean Avenue, Second Floor, Santa Monica, California 90401, or at any adjournment or postponement thereof.
What is the purpose of the Annual Meeting?
At the Annual Meeting, stockholders will consider and vote upon the following matters:
The election of six directors to our board of directors;
An advisory vote to approve the compensation of our Named Executive Officers;
The ratification of the appointment of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012; and
Such other matters as may properly come before the Annual Meeting or any adjournments or postponements thereof.
We sent you these proxy materials because our board is requesting that you allow your shares to be represented at the Annual Meeting by the proxy-holders named in the enclosed proxy card. This proxy statement contains information that we are required to provide you under the rules of the U.S. Securities and Exchange Commission, or SEC, and is designed to provide you with information to assist you in voting your shares. On or about April 9, 2012, we will begin mailing these proxy materials to all stockholders of record at the close of business on March 26, 2012.
How does our board recommend that I vote on the proposals?
If no instructions are indicated on your valid proxy, the proxy-holders will vote in accordance with the recommendations of our board. Our board recommends a vote:
“FOR” each of the nominees for director listed in this proxy statement;
“FOR” the approval, on an advisory basis, of the compensation of our Named Executive Officers; and
“FOR” the ratification of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012.
With respect to any other matter that properly comes before the meeting or any adjournment or postponement thereof, the proxy-holders will vote as recommended by our board, or if no recommendation is given, in their own discretion.
Who is entitled to vote at the Annual Meeting?
Holders of record of our common stock at the close of business on March 26, 2012 are entitled to vote at the Annual Meeting. As of March 26, 2012, there were 136,072,545 shares of our common stock issued and outstanding. Stockholders are entitled to cast one vote per share on each matter presented for consideration and action at the Annual Meeting.
How can I vote my shares?
Your vote is important. Stockholders can vote in person at the Annual Meeting or by proxy. If you vote by proxy, the individuals named on the proxy card as representatives will vote your shares in the manner you indicate. You may specify whether your shares should be voted for or against all, some or none of the nominees for director, or you may abstain from voting with respect to all, some or none of the nominees for director, and whether your shares should be voted for or against, or you may abstain from voting on, the following proposals: the advisory vote to approve the compensation of our Named Executive Officers and the ratification of the appointment of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012. You may vote your shares of common stock by any of the following methods:
By Telephone or the Internet—Stockholders can vote their shares via telephone or the internet as instructed on the proxy card. The telephone and internet voting procedures are designed to authenticate a stockholder’s identity, allow stockholders to vote their shares and confirm that their instructions have been properly recorded.
By Mail—Stockholders who receive a paper proxy card or request a paper proxy card by telephone or the internet may elect to vote by mail and should complete, sign and date their proxy cards and mail them in the pre-addressed envelopes that accompany the delivery of paper proxy cards. Proxy cards submitted by mail must be mailed by the date shown on the proxy card or the deadline imposed by your bank, broker or other agent for your shares to be voted.
In Person—Shares held in your name as the stockholder of record may be voted by you in person at the Annual Meeting. Shares held in “street name” may be voted by you in person at the Annual Meeting only if you obtain a “legal” proxy from the bank, broker or other agent that holds your shares, which “legal” proxy grants you the right to vote the shares. You must present that “legal” proxy at the Annual Meeting to be entitled to vote shares held in “street name.”
If my shares are held in “street name” by my broker, will my broker vote my shares for me?
Brokers, banks and other agents who have record ownership of shares that they hold in “street name” for their clients have the discretion to vote such shares on “routine” matters, such as ratification of independent registered public accounting firms. Brokers, banks and other agents holding shares in “street name” for their clients do not have the ability to cast votes with respect to director elections or other “non-routine” matters unless they have received instructions from the beneficial owner of the shares.It is therefore important that you provide instructions to your broker, bank or other agent if your shares are held by a broker, bank or other agent so that your vote with respect to the election of directors; the approval of the Externalization Proposal; the advisory vote onto approve the approval of compensation of our Named Executive Officers; the advisory vote on the frequency of the advisory vote on compensation of our Named Executive Officers; and the ratification of the appointment of McGladrey & Pullen, LLP as our independent registered public accountaccounting firm for the fiscal year ending December 31, 20112012 is counted.
Can I change my vote after I have mailed my signed proxy card?
There are three ways in which you can change your vote before your proxy is voted at the Annual Meeting. First, you can send our secretary a written notice stating that you revoke your proxy. Second, you can complete and submit a new proxy card, dated a later date than the first proxy card. Third, you can attend the Annual
Meeting and vote in person. Your attendance at the Annual Meeting will not, however, by itself revoke your proxy. If you hold your shares in “street name” and have instructed your broker, bank or other agent to vote your shares, you must follow directions received from your broker, bank or other agent to change those instructions.
What votes are needed to hold the Annual Meeting?
The presence, in person or by proxy, of stockholders entitled to cast at least a majority of the votes entitled to be cast by all stockholders will constitute a quorum for the transaction of business at the Annual Meeting. Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspectors of election appointed for the meeting who will determine whether or not a quorum is present. For purposes of determining whether a quorum is present, abstentions and broker non-votes are counted as present.
What vote is required to approve each proposal?
In the case of any “uncontested” election (as that term is defined in our bylaws), to be elected a director, a majority of the total votes cast “for” and “against” such director nominee at which a quorum is present must be cast “for” such director nominee.
In the case of any contested election (as that term is defined in our bylaws), directors shall be elected by a plurality of votes cast at a meeting of stockholders duly called and at which a quorum is present. Each share may be voted either for or against as many individuals as there are directors to be elected and for whose election the share is entitled to be voted.
The affirmative vote of a majority of all votes cast on the matter at a meeting at which a quorum is present is necessary to: approve, the Externalization Proposal; approve theon an advisory vote onbasis, the compensation of our Named Executive Officers; ratify the appointment of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011;2012; and approve any other proposals to be brought before the Annual Meeting except that a plurality of votes cast at a meeting at which a quorum is present is necessary to approve, on an advisory basis, the frequency of the advisory vote on compensation of our Named Executive Officers.or any adjournment or postponement thereof.
Our bylaws provide that upon the failure of a director nominee to receive the affirmative vote “for” of a majority of the votes cast “for” and “against” such director nominee in an uncontested election, such director must tender his resignation following certification of such vote. Our Nominating and Corporate Governance Committee will then consider the tendered resignation offer and make a recommendation to theour board as to whether to accept the resignation. In determining whether to accept the resignation, the Nominating and Corporate Governance Committeeour board will consider, among other things, whether accepting the resignation of a director who receives a “majority against vote” (as the term is defined in our bylaws) would cause theour company to fail to meet any applicable SEC or New York Stock Exchange, or NYSE, requirement. TheOur board will take action within 90 days following certification of the vote and any director whose resignation is under consideration will abstain from participating in the decision.
What is the effect of abstentions and broker non-votes?
Abstentions and broker non-votes will not be counted as votes cast and will have no effect on the result of the vote.
Our board of directors consists of six members, four of whom are independent within our director independence standards, which are consistent with the director independence standards of the NYSE. At the Annual Meeting, a total of six directors will be elected to hold office until the next annual meeting of stockholders andor until their successors have been duly elected and qualified.
Unless otherwise instructed, the proxyholdersproxy-holders will vote the proxies received by them for the six nominees named below. If any of ourthe nominees is unable, or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee designated by the present board to fill the vacancy. It is not presently expected that any of the nominees named below will be unable or will decline to serve as a director. If additional persons are nominated for election as directors, the proxyholdersproxy-holders intend to vote all proxies received by them in a manner to assure the election of as many of the nominees listed below as possible. In such event, the specific nominees to be voted for will be determined by the proxyholders.proxy-holders.
Information Regarding Nominees for Director
Biographical summaries and ages as of the date hereof of individuals nominated by theour board of directors for election as directors are provided below:
Lloyd McAdams, age 65,66, has been our Chairman, of the Board, President and Chief Executive Officer and President since our formation in 1997. Mr. McAdams is also the Chairmanmanager and a member of Anworth Management, LLC, the Board,external Manager of our company, or the Manager. Mr. McAdams is also the Chairman, Chief Investment Officer and co-founder of Pacific Income Advisers, Inc., or PIA, an investment advisory firm organized in 1986 that manages portfolios for institutional and individual clients. Mr. McAdams is also the Chairman of Syndicated Capital, Inc., a registered broker-dealer. Mr. McAdams holds a Bachelor of Science in Statistics from Stanford University and a Masters in Business Administration from the University of Tennessee. Mr. McAdams is a Chartered Financial Analyst charterholder and a Certified Employee Benefit Specialist. TheOur board believes it is well served by Mr. McAdams’ skills and perspective that reflects his senior executive operations experience as a Chairman and Chief Executive Officer, his investment experience as a Chief Investment Officer as well as being a Chartered Financial Analyst.
*Lee A. Ault III, age 74,75, has been a director of our company since October 2002 and is also a private investor.2002. Mr. Ault alsocurrently serves as Treasurer and Chairman of the Finance Committee of Saint John’s Health Center Foundation. From 1999 to 2011, Mr. Ault served as a director of Office Depot, Inc. and a director of 38several mutual funds managed by Capital Research and Management Company.Company, a subsidiary of The Capital Group. From 1968 until 1992, he was Chief Executive Officer1998 to 2011, Mr. Ault served as a director of Telecredit,Office Depot, Inc., a payment services company. He Mr. Ault also served as President of Telecredit, Inc. from 1968 until 1983 and as Chairmana director of the Board from 1983 until 1992.following public companies: Alex Brown Incorporated, Bankers Trust Corporation, Equifax Inc., Viking Office Products and Sunrise Medical Corporation. From 1999 until 2006, Mr. Ault served as Chairman of the Board of In-Q-Tel, Inc., a technology venture company funded principally by the Central Intelligence Agency. From 1968 until 1992, Mr. Ault was Chief Executive Officer of Telecredit, Inc., a publicly traded payment services company. He also served as President of Telecredit, Inc. from 1968 until 1983 and as Chairman of the Board from 1983 until 1992. Mr. Ault holds a Bachelor of Arts degree from Yale University. TheOur board believes it is well served by Mr. Ault’s perspective from his experience as Chief Executive Officer of a successful public company for 23 years and by his service on numerous boards of public and private companies.companies and not-for-profit institutions.
*Charles H. Black, age 84,85, has been a director of our company since its formation. Since 1985, Mr. Black has been a private investor and financial consultant. Mr. Black currently serves as an advisory director of Jet Fleet International Inc. and Beverly Hills Wealth Management. From 1985 to 1987, he served as Vice Chairman and director of Pertron Controls Corporation. From 1982 to 1985, Mr. Black served as the Executive Vice President, director, Chief Financial Officer and Chairman of the Investment Committee for Kaiser Steel Corporation. From 1980 to 1982, Mr. Black served as Executive Vice President and Chief Financial Officer of
Great Western Financial Corporation. From 1957 to 1980, Mr. Black served at Litton Industries, where he ultimately held the position of Corporate Vice President and Treasurer. Mr. Black serves as an advisory director of Jet Fleet International Inc. Previously, Mr. Black also served as a member of the Board of Governors of the Pacific Stock Exchange and a director of the following companies: Investment Company of America, Fundamental Investors Inc., AMCAP Fund, Orincon Corporation, Wilshire Technologies, Monarch LineLife Insurance Company, Southwest Marine and a
Trustee of American Variable Insurance Trust. TheOur board believes it is well served by Mr. Black’s perspective from his experience as a senior executive and his service as a director with many public companies. In particular, theour board believes his experience and perspective specifically as an Executive Vice President and Chief Financial Officer and a Treasurer to be beneficial regarding financial reporting matters.
*Joe E. Davis, age 76,77, has been a director of our company since its formation. He has been a private investor since 1982. Mr. Davis currently serves as a director (since 2000) of Natural Alternatives International, Inc. as well as a member of the Audit Committee (serving as the Chairman of the Audit Committee since 2004), a member of the Human Resources Committee (since 2003) and a member of the Nominating Committee of Natural Alternatives International, Inc. (since 2004). Mr. Davis served as a director of 38several mutual funds managed by Capital Research and Management Company. Previously, Mr. Davis served as Chairman of the Board of Linear Corporation (1987-1988); President and Chief Executive Officer of BMC Industries, Inc. (1985); and President and Chief Executive Officer of National Health Enterprises, Inc. (1974-1982). Formerly, Mr. Davis was a director and a member of the Audit Committee of BMC Industries, Inc. and Wilshire Technologies, Inc., and a director of Freymiller Trucking, Inc. Mr. Davis graduated from the University of Texas with a Bachelor of Science in Chemistry. He holds a Master of Business Administration degree from Harvard Graduate School of Business Administration. TheOur board believes it is well served from Mr. Davis’ perspective from his experience as a Chairman and a Chief Executive Officer as well as his involvement as a director with investment companies. TheOur board believes it is particularly well served by Mr. Davis’ experience with various board committees including his extensive experience with the audit committee and having served as an Audit Committee Chairman.
*Robert C. Davis, age 66,67, has been a director of our company since May 2005. Mr. Davis has been the Chief Executive Officer of Optimus EMR, Inc. since 2000. Prior to that, he served as Chief Executive Officer and Chairman of the Board of Amcare, Inc. and as a director of Roger Cleveland Golf Company, Inc. Mr. Davis holds both a Master of Business Administration degree in Finance and a Bachelor of Science degree in Accounting from the University of Southern California. TheOur board believes it is well served from Mr. Robert Davis’ perspective as a Chairman and Chief Executive Officer and director at several companies. TheOur board also believes that it is well served from his executive and educational background in financial matters.
Joseph E. McAdams, age 42,43, has been a director and Executive Vice President of our company since June 2002 and Chief Investment Officer of our company since January 2003. Mr. McAdams is also a member of the Manager. Mr. McAdams joined our company as a Vice President in June 1998. Mr. McAdams joined PIA in 1998 and holds the position of Senior Vice President with a specialty in mortgage-backed securities and is also responsible for PIA’s fixed income trading.securities. Prior to joining PIA, from 1993 to 1998, Mr. McAdams was employed by Donaldson, Lufkin & Jenrette Securities Corp. in New York as a mortgage-backed security trader and research analyst. Mr. McAdams holds a Master of Arts degree in Economics from the University of Chicago and a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania. Mr. McAdams is also a Chartered Financial Analyst charterholder. TheOur board believes it is well served from Mr. McAdams’ professional background in portfolio management, including fixed income securities and, particularly, mortgage-backed securities.
* | Member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. |
Mr. Joe E. Davis and Mr. Robert C. Davis are not related. |
Mr. Joe E. Davis and Mr. Robert C. Davis are not related.
Vote Required
Directors receiving the affirmative vote “for” of a majority of the votes cast “for” and “against” such director nominee in an uncontested election at which a quorum is present will be elected to serve for the ensuing year or until their successors are duly elected and qualified.
TheOur board unanimously recommends that you vote FOR the election of each of the nominees listed above. Proxies received will be so voted unless stockholders specify otherwise in thetheir proxy.
Independence of Nominees for Director
TheOur board has adopted the NYSE independence tests set forth in NYSE Listed Company Manual Section 303A.02 to assist it in making determinations of independence. TheOur board has determined that all of the nominees standing for election at the Annual Meeting, other than Mr. Lloyd McAdams, our Chairman, Chief Executive Officer and President, and Mr. Joseph E. McAdams, our Chief Investment Officer and Executive Vice President, are independent of our company under the aforementioned NYSE independence standards in that such nominees have no material relationship with us either directly or as a partner, stockholder or affiliate of an organization that has a relationship with our company. TheOur board has made this determination in part based on the following:
other than Messrs. Lloyd McAdams and Joseph E. McAdams, no nominee for director has any current or prior material relationships with our company aside from his directorship that could affect his judgment;
other than Messrs. Lloyd McAdams and Joseph E. McAdams, no nominee for director is, or has been within the last three years, an employee of our company, or has an immediate family member that is or has been within the last three years, an executive officer of our company;
other than Messrs. Lloyd McAdams and Joseph E. McAdams, no nominee for director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from our company, other than director and committee fees and pension or other forms of deferred compensation for prior service (such compensation not being contingent in any way on continued service);
no nominee for director or an immediate family member of a nominee for director is a current partner of a firm that is our company’s internal or external auditor;
no nominee for director is a current employee of a firm that is our company’s internal or external auditor;
no nominee for director has an immediate family member who is a current employee of a firm that is our company’s internal or external auditor and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice;
no nominee for director or an immediate family member of a nominee for director was within the last three years a partner or employee of a firm that is our company’s internal or external auditors and personally worked on our company’s audit within that time;
no nominee for director or an immediate family member of a nominee for director is, or has been within the last three years, employed as an executive officer of another company where any of our company’s present executive officers at the same time serves or served on that company’s compensation committee; and
other than Messrs. Lloyd McAdams and Joseph E. McAdams, no nominee for director is a current employee, or has an immediate family member that is a current executive officer of a company that has made payments to, or received payments from, our company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues.
Our board of directors has determined that, as of the date of this proxy statement, it is in the best interests of theour company and its stockholders that the positions of Chairman of the Board and Chief Executive Officer are combined. TheOur board believes this provides the necessary responsiveness called for in a highly competitive sector and allows theour company to be more adaptive and responsive to changing market conditions. As our Chief Executive Officer is the individual with primary responsibility for managing theour company’s day-to-day operations, he is best positioned to chair regular board meetings as we discuss key business and strategic issues. TheOur board believes that it has in place sound counter-balancing measures to ensure that theour company maintains
high standards of corporate governance and proper oversight. These counter-balancing measures include: theour board consistsconsisting of a majority of independent directors; each of theour board’s standing committees including the Audit, Compensation and Nominating and Corporate Governance Committees arebeing comprised of and chaired solely by non-employee directors; review of the Chief Executive Officer’s compensation and the Manager’s performance will remainremaining within the purview of the Compensation Committee; the independent directors meetmeeting in executive sessionsessions without the presence of management; and the independent directors meetmeeting with and havehaving access to both our internal and external auditors and attorneys. In addition, theour board, through its independent directors, has adopted the position of a lead independent director to strengthen the independence and roles of the independent directors. The duties of the lead independent director are detailed in the following paragraph.
Our independent directors appoint a lead independent director to strengthen the independence and role of the independent directors. The duties of the lead independent director are to:
preside at board meetings in the absence of the chairmanChairman of the board,Board, or upon designation by a majority of directors;
preside at executive sessions or other meetings of the independent directors;
recommend the retention of consultants, legal, financial or other professional advisors who are to report directly to theour board;
consult with the chairmanChairman of the boardBoard as to agenda items for board and committee meetings; and
coordinate with committee chairs in the development and recommendations relative to board and committee meeting agendas.
The independent directors have decided to rotate the position of lead independent director among the independent directors. As such,directors each calendar quarter, a differentyear. Mr. Charles Black has been appointed by our independent directors as our lead independent director fulfillsfor the 2012 calendar year, after which the role of lead independent director at each meetingwill be fulfilled by another of the board.our independent directors for a one-year calendar term.
Our Board’s Role in Risk Oversight
Enterprise risk oversight consists of understanding the amount of risk, on a broad level, that our company is willing to accept in pursuit of stockholder value; understanding and assessing the existing risk management processes in place; understanding and assessing our company’s strategies and operational initiatives in connection with overall risk tolerance; and being apprised of the most significant risks and whether management is responding to such risks prudently. The person within our company who is primarily responsible for enterprise risk oversight is our Chief Executive Officer, who reports directly to theour board. TheOur board is involved in risk oversight through its regular meetings with management to review operations and strategies, risk profiles, updates on changes in our industry, economic conditions and laws and regulations, review of financial performance and key performance metrics as well as open communication with management and both our internal and external auditors and attorneys. Additionally, theour board’s role in risk oversight is enhanced through the activities and responsibilities of the committees of the board – our board—the Audit Committee (responsible for
overseeing financial risks), the Compensation Committee (responsible for overseeing risks associated with compensation plansour equity plan arrangements and arrangements)the performance of the Manager), and the Nominating and Corporate Governance Committee (responsible for overseeing risks associated with director independence and conflicts of interest). The descriptiondescriptions of these committees isare detailed below and further details of the responsibilities of each committee may be found in theour committee charters which are contained in the “Governance Documents” section of our website.
Our board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. Other committees may be established by our board from time to time. The following is a description of each of the committees and their composition.
Audit Committee
Our Audit Committee consists of four members: Mr. Joe Davis (chairman), Mr. Charles Black, Mr. Lee Ault, and Mr. Robert Davis, each of whom qualifies as “independent” under the rulesindependence standards of the NYSE. TheOur board has determined that:
Mr. Black qualifies as an “audit committee financial expert,” as defined by the SEC, and
all members of the Audit Committee are “financially literate,” within the meaning of NYSE rules, and “independent,” under the strict audit committee independence standards of the SEC and the NYSE.
Our Audit Committee operates pursuant to a written charter adopted by theour board. Among other things, the Audit Committee Charter calls upon the Audit Committee to:
review the financial information that will be provided to our stockholders and others;
review the adequacy of our systems of internal controls that management and theour board have established;
review our audit and financial reporting process; and
maintain free and open lines of communication among the committee,Audit Committee, our independent auditorsregistered public accounting firm and management.
It is not the duty of the Audit Committee to determine that our financial statements are complete and accurate and are in accordance with generally accepted accounting principles. Management is responsible for preparing our financial statements, and our independent auditors areregistered public accounting firm is responsible for auditing those financial statements. Our Audit Committee does, however, consult with management and our independent auditorsregistered public accounting firm prior to the presentation of financial statements to our stockholders and, as appropriate, initiatesinitiate inquiries into various aspects of our financial affairs. In addition, the committeeAudit Committee is responsible for retaining, evaluating and, if appropriate, recommending the termination of our independent certifiedregistered public accountantsaccounting firm and approving professional services provided by our independent registered public accountants.accounting firm.
The Audit Committee held four meetings during 2010.2011.
Compensation Committee
Our Compensation Committee consists of four members: Mr. Charles Black (chairman), Mr. Joe Davis, Mr. Lee Ault and Mr. Robert Davis. TheOur board has determined that all of the Compensation Committee members qualify as:
“independent directors” under the NYSE independence standards;
“non-employee directors” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, Rule 16b-3; and
“outside directors” under the Code, Section 162(m). of the Internal Revenue Code of 1986, or the Code.
OurPrior to the externalization of our management function, or the Externalization, pursuant to our entry into a management agreement, or the Management Agreement, with Anworth Management, LLC, or the Manager, effective as of December 31, 2011, and for our 2011 fiscal year, our Compensation Committee hashad been delegated authority by theour board to administer our equity incentive plans, to determine each Named Executive Officer’s salary and additional cash compensation, if any, and to ratify salary and additional cash compensation, if any, for all other executive officers following recommendation by theour Chief Executive Officer. Our Chief Executive Officer hashad been delegated the authority by the Compensation Committee to determine salary and additional cash compensation, if any, to be paid to all other
employees. The Compensation Committee did not use the services of any external consultant in determining either executive or director compensation.
OurDuring 2011, our Compensation Committee operatesoperated pursuant to a written charter that was adopted by theour board (and last amended in 2008). Among other things, as specified in the charter, calls upon the Compensation Committee to:Committee:
determinedetermined our compensation policies and all forms of compensation to be provided to our salaried employees;
reviewreviewed and approveapproved the specific salaries and additional cash compensation, if any, for the Named Executive Officers and reviewreviewed their overall job performance;
reviewreviewed and ratifyratified the specific salaries and additional cash compensation, if any, for the executive officers (other than the Named Executive Officers) and reviewreviewed their overall job performance;
reviewreviewed and approveapproved the proposed compensation and terms of employment of persons to be hired as executive officers;
reviewreviewed and approveapproved fringe benefits and perquisites of salaried employees, executive officers and directors;
reviewreviewed and approveapproved amendments to benefit plans and programs for salaried employees and executive officers;
administeradministered our 2002 Incentive Compensation Plan; our 2004 Equity Compensation Plan; our 2009 Dividend Equivalent Rights, or DERs, Plan; and our Deferred Compensation Plan; and
makemade recommendations with respect to stock, restricted stock, option and DER grants and other incentive compensation arrangements for our employees.
Following the Externalization effective as of December 31, 2011, the Compensation Committee adopted a new charter to reflect changes to its responsibilities. As specified in the new charter, among other things, the Compensation Committee shall:
evaluate the performance of the Manager;
review and approve the corporate goals and objectives relevant to the Chief Executive Officer’s compensation; evaluate the performance of the Chief Executive Officer in light of those goals and objectives; and determine and approve the Chief Executive Officer’s compensation level based on such evaluation (effective December 31, 2011, our Company became an externally-managed REIT and does not pay any compensation to any of its officers other than equity-based compensation);
make recommendations to our board with respect to non-Chief Executive Officer compensation, incentive compensation and equity-based plans that are subject to board approval (effective December 31, 2011, our Company became an externally-managed REIT and does not pay any compensation to any of its officers other than equity-based compensation);
review and make recommendations to our board with respect to compensation for independent directors;
review and approve fringe benefits and perquisites of directors and amendments to any related benefit plans or programs;
administer, and make recommendations with respect to, options, DERs and restricted stock (including price, terms and amount) to be granted by our board under the Corporation’s equity incentive plans including, with respect to our 2004 Equity Compensation Plan and 2007 Dividend Equivalent Rights Plan;
review the compensation and fees payable to the Manager under the Management Agreement; and
review and approve all compensation-related documents and disclosure required to be filed with regulatory organizations.
The Compensation Committee held two meetings during 2010.2011.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee consists of four members: Mr. Lee Ault (chairman), Mr. Charles Black, Mr. Joe Davis and Mr. Robert Davis. The committee is composed entirely of “independent directors” as required by NYSE rules. Our Nominating and Corporate Governance Committee establishes and implements our corporate governance practices and nominates individuals for election to theour board.
Our Nominating and Corporate Governance Committee operates pursuant to a written charter adopted by our board. Among other things, the charter calls upon the Nominating and Corporate Governance Committee to:
develop criteria for selecting new directors and to identify individuals qualified to become board members and members of the various committees of theour board;
select, or recommend that theour board select, the director nominees for each annual meeting of stockholders as well as the committee nominees; and
develop and recommend to theour board, and review on at least an annual basis, a set of corporate governance principles applicable to theour company.
TheOur board believes that it is necessary for each of theour company’s directors to possess many qualities and skills. When searching for new candidates, the Nominating and Corporate Governance Committee considers the evolving needs of theour board and searches for candidates that fill any current or anticipated future needs. TheOur board also believes that all directors must possess a considerable amount of business management (such as experience as a chief executive or chief financial officer) and educational experience. The Nominating and Corporate Governance Committee first considers a candidate’s management experience and then considers issues
of judgment, background, stature, conflicts of interest, integrity, ethics and commitment to the goal of maximizing stockholder value when considering director candidates. The Nominating and Corporate Governance Committee does not have a formal policy with respect to diversity; however, theour board and the Nominating and Corporate Governance Committee believe that it is essential that theour board members represent diverse viewpoints. In considering candidates for theour board, the Nominating and Corporate Governance Committee considers the entirety of each candidate’s credentials in the context of these standards. With respect to the nomination of continuing directors for re-election, the individual’s contributions to theour board are also considered. The Nominating and Corporate Governance Committee has reviewed the qualifications, skills and experience of each of the director candidates listed in Proposal No.1 (Election of Directors) and has concluded as of the date of this proxy statement that each of these individuals should serve as directors of theour company.
The Nominating and Corporate Governance Committee held two meetings during 2010.2011.
Code of Conduct
TheOur board has established the Anworth Mortgage Asset Corporation Code of Ethics and Business Conduct, or the Code of Conduct, which qualifies as a “code of ethics” as defined by Item 406 of Regulation S-K of the Exchange Act. Among other matters, the Code of Conduct is designed to deter wrongdoing and to promote:
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;
compliance with applicable governmental laws, rules and regulations;
prompt internal reporting of violations of the Code of Conduct to appropriate persons identified in the Code of Conduct; and
accountability for adherence to the Code of Conduct.
Waivers to the Code of Conduct may be granted only by our Nominating and Corporate Governance Committee. In the event that the committeeNominating and Corporate Governance Committee grants any waivers of the elements listed above to any of our directors, officers or employees, or if any amendment is made to any provision of the Code of Conduct, we will make the required filing with the SEC and announce the waiver or amendment on the “Corporate Governance”“Governance Documents” section of our website, both within four business days.
Limitation on Board Members’ Service on Other Public Company Boards
Our Nominating and Corporate Governance Committee recommended, and our board approved, a policy that limits our directorsdirectors’ ability to serviceserve on no more than three public company boards (including our board) without the prior approval of theour board. In deciding whether to grant a waiver, the Nominating and Corporate Governance Committee and theour board will take into account, among other things, the nature and time involved in the director’s service on other boards. In addition, service on boards and committees of other companies must be in compliance with our conflicts of interest policies.
Stock Ownership Guidelines for Directors and Executive Officers
Our Nominating and Corporate Governance Committee recommended, and our board approved, aan amended policy that sets out stock ownership guidelines for our directors and executive officers. Our Chief Executive Officer is required to hold shares of our common stock with a minimum value equal to five times his or her annual base salary and our other executive officers who are deemed to be “insiders” for purposes of Section 16 of the
Exchange Act are required to hold shares of our common stock with a minimum value equal to $100,000. These guidelines must be met within three years of becoming an “insider” for purposes of Section 16 or within three years following adoption of these guidelines in 2007, whichever is later.
Our directors are required to hold shares of our common stock with a minimum value equal to three times the amount of the annual retainer paid to the directors (the annual retainer is currently $50,000). These guidelines must be met within three years of joining theour board or, in the case of directors serving at the time these guidelines were adopted in 2007, within three years following adoption.
The Chief Executive Officer is required to hold shares of our common stock with a minimum value of $1,000,000. The Chief Investment Officer is required to hold shares of our common stock with a minimum value of $500,000. Other executive officers who are Section 16 “insiders” are required to hold shares of our common stock with a minimum value of $100,000. These guidelines must be met within three years of becoming an “insider” for purposes of Section 16 of the Exchange Act.
For purposes of the foregoing ownership guidelines, shares owned outright by the director or executive officer (or his or hertheir immediate family members residing in the same household), shares held in trust for the benefit of the director or executive officer (or his or hertheir immediate family members residing in the same household) and restricted shares granted to the director or executive officer under one of our employee benefit plans, may all be
counted towards reaching the minimum amounts. Deferred stock unitsawards do not, however, count towards satisfaction of these guidelines. Compliance with these guidelines may be waived by the Nominating and Corporate Governance Committee for directors joining theour board from government, academia or similar vocations, and for directors and executive officersChief Executive Officer if compliance would create severe hardship or prevent compliance with a court order.
Public Availability of Corporate Governance Documents
Our key corporate governance documents, including our Code of Conduct and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are:
• | available on our corporate website athttp://www.anworth.com(by including the foregoing Internet address link, |
available in print to any stockholder who requests them from our corporate secretary; and
filed as exhibits to our securities filings with the SEC.
Our independent directors receive an annual fee of $50,000, payable quarterly, for service on theour board, plus meeting fees of $2,000 for each formally called board meeting, which is reduced to $1,000 if the participation is telephonic, and $1,000 for each formally called committee meeting, which is reduced to $500 if the participation is telephonic, in each case that the independent directors attend at which a quorum is present. We reimburse all of our directors for the expenses they incur in connection with attending board and committee meetings.
Each independent member of theour board who is first elected or appointed as a board member at any time on or after the effective date of the 2004 Equity Compensation Plan was automatically awarded a stock grant of 2,000 shares of restricted common stock upon the date such person is initially appointed to theour board. The restricted common stock does not vest until retirement from the company.our board. In addition, on the first business day in July in each calendar year following the effective date of the 2004 Equity Compensation Plan, each independent board member then in office was automatically awarded a stock grant of 2,000 shares of restricted common stock, which does not vest until retirement from the company,our board, provided such individual has served as an independent board member for at least six months. In 2009, our board approved the issuance of phantom common stock in lieu of restricted common stock for all future equity awards to our independent directors. We may also make additional grants of equity awards to our independent board members from time to time.
The following table sets forth information regarding the various components of compensation to our independent directors during the fiscal year ended December 31, 2010:2011:
DIRECTOR COMPENSATION
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Other Compensation ($)(2) | Total ($) | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Other Compensation ($)(2) | Total ($) | ||||||||||||||||||||||||
Lee A. Ault | 71,520 | 3,752 | 3,020 | 78,292 | 70,000 | 5,043 | 4,760 | 79,803 | ||||||||||||||||||||||||
Charles H. Black | 73,020 | 3,752 | 3,020 | 79,792 | 70,500 | 5,043 | 4,760 | 80,303 | ||||||||||||||||||||||||
Joe E. Davis | 72,520 | 3,752 | 3,020 | 79,292 | 70,000 | 5,043 | 4,760 | 79,803 | ||||||||||||||||||||||||
Robert C. Davis | 70,020 | 3,752 | 3,020 | 76,792 | 70,000 | 5,043 | 4,760 | 79,803 |
(1) | Each of our independent directors receives an annual stock award of 2,000 shares of phantom common stock which do not vest until retirement from |
value on the date of the award. The fair value of the aforementioned stock awards was estimated using the Black-Scholes model with the following weighted-average assumptions: dividend yield: |
(2) | In connection with each annual stock award of 2,000 shares of phantom common stock, each of our independent directors receives a grant of 2,000 dividend equivalent rights, or DERs, awarded under the |
Director Attendance
During 2010, the2011, our board held nineeleven meetings. Each director attended more than 89% of the aggregate of the meetings of theour board and the meetings of each committee of which that director is a member.
Executive Sessions of the Board
Our independent directors meet regularly in executive sessionsessions without management, as required by our Corporate Governance Guidelines, to review the performance of management and our company and any related matters. Generally, executive sessions are held in conjunction with regularly scheduled meetings of theour board. We expect the boardour independent directors to have aat least four executive sessions each year.
Stockholder Meeting Attendance
As a general matter, all of our directors are encouraged to attend our annual meetingsAnnual Meetings of stockholders.Stockholders. All of our directors attended the 2010 annual meeting2011 Annual Meeting of stockholders.Stockholders.
Compensation Committee Interlocks and Insider Participation
No officer or employee participated in deliberations of the Compensation Committee or our board concerning their own compensation. None of our executive officers has served on theour board or on the compensation committee of any other entity which had officers who served on our board or our Compensation Committee.
Our stockholders are being asked to approve the execution by us of a Management Agreement, or the Management Agreement, between our company and Anworth Management, LLC, or the Manager, and the concurrent externalization of our management function. Such execution and externalization are collectively referred to herein as the Externalization Proposal. The proposed Management Agreement is attached as Exhibit A to this proxy statement. At a meeting of our board of directors held on February 24, 2011, our independent directors, without the participation of board members who are members of management, unanimously voted to approve the Externalization Proposal.
Recommendation of Our Board of Directors
Our board of directors has determined that the Externalization Proposal is fair to, and in the best interests of, our company and our stockholders.Accordingly, our board of directors recommends that our stockholders vote “FOR” approval of the Externalization Proposal.
The Externalization Proposal
If the Externalization Proposal is approved by our stockholders, our day-to-day operations will be conducted by the Manager through the authority delegated to it under the Management Agreement and pursuant to the policies established by our board of directors. The Manager would at all times be subject to the supervision and direction of our board of directors and would be responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services. The Manager would perform such other services and activities relating to our assets and operations as may be appropriate. In exchange for these services, the Manager would receive a management fee paid monthly in arrears in an amount equal to 1/12 of 1.20% of our Equity, as defined in the Management Agreement.
The Manager would commence performance of the management of our company on the effective date of the Management Agreement, which would be December 31, 2011, after which we would become an externally-managed REIT. Pursuant to the Externalization Proposal, the employment agreements of our executives would be terminated and we would operate as an entity with officers and directors, but without employees. In addition, our 2002 Incentive Compensation Plan, or the 2002 Incentive Plan, would be terminated. Our employees would become employees of the Manager and we would take such other actions as are reasonably necessary to implement the Externalization Proposal.
If our stockholders do not approve the Externalization Proposal, we will continue to operate as an internally-managed company and the 2002 Incentive Plan and executive employment agreements would not be terminated.
In reaching the determination that the Externalization Proposal is fair to, and in the best interests of, our company and our stockholders, our board of directors received a significant amount of information, consulted with our management as well as our legal counsel and considered our short-term and long-term interests. The factors considered by our board of directors include the following.
Our board of directors is aware that a number of our peers are externally-managed pursuant to management agreements between those companies and external managers. This is a trend that has continued during the past several years with respect to a number of recently-formed mortgage REITs based on what are perceived as benefits arising from, among other things, the elimination of performance-based incentive compensation plans, and certain other factors.
The termination of our 2002 Incentive Plan, which would eliminate the potential conflicts of interest that could cause our management to take increased risk in managing our portfolio as a result of the plan’s provisions that provide quarterly compensation bonuses based upon short-term returns.
The termination of employment agreements with our executives, which would eliminate the requirement that our Chief Executive Officer and Chief Investment Officer must approve any changes to or the termination of our 2002 Incentive Plan.
In periods when the company is generating higher ROEs, the potentially accretive effect on our current and anticipated earnings per share as compared to the continuation of the current internally-managed structure of our company.
The greater anticipated stability and predictability of annual expenses and cost savings resulting from an externally-managed structure with a fixed base management fee.
Our belief that externally-managed REITs, as compared to internally-managed REITs, have commanded a premium in the marketplace based on traditional financial measures such as the multiple of stock price to book value, and thereby may provide such REITs with a competitive advantage in financing their investment portfolios.
The possibility that we, as an externally-managed REIT, may be more attractive to certain investors and market analysts and as such may enjoy enhanced market perceptions.
The elimination of the non-deductibility, under the Internal Revenue Code Section 162(m), of compensation expense relating to certain payments made under the 2002 Incentive Plan as well as certain other incentive compensation payments.
Our ability to retain the proven expertise and substantial experience of our officers and employees who we believe are critical to our successful performance in the future.
The potential gain of certain intangible benefits from being associated with the Manager and its affiliates, including the Manager’s management expertise and capital markets presence.
The elimination of the potential liabilities associated with the employment of personnel, including workers’ disability and compensation claims, labor disputes and other employee-related grievances, as well as the costs associated with such liabilities, for which we are currently responsible.
Our board also considered certain factors which could, as a result of the Externalization Proposal, negatively affect our company and our stockholders. These factors include the following:
Low future returns from our portfolio would increase the possibility that the Externalization Proposal would negatively affect our current and future anticipated earnings per share.
If we choose not to renew the Management Agreement, we will pay the Manager a termination fee, upon expiration, equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination.
The possibility that the financial markets will not view the Externalization Proposal in a positive light and that the consummation of the externalization of our management could prove to have a negative affect on the market price of our common stock.
The potential conflicts of interest that could arise if the Manager were to take greater risk to increase our equity in order to earn a greater management fee.
The lack of resources of the Manager to defend itself in employee related litigation.
While our board of directors considered all of the above factors, it did not make specific determinations with respect to each of the factors and did not find it practical to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in making its determination. Rather, our board of directors made its judgment with respect to the Externalization Proposal based on the total mix of information available to it, and the judgments of individual directors may have been influenced to a greater or lesser degree by their individual views with respect to different factors.
In considering the recommendation of our board of directors with respect to the Externalization Proposal, our stockholders should also consider that some of our non-independent directors and officers own interests in, and are directors and officers of, the Manager and its affiliates, and may be subject to other conflicts of interest, and may therefore have interests in the Manager that are different than, or in addition to, the interests of our stockholders who have no interest in the Manager. None of our independent directors are affiliated with the Manager or any of its affiliates.
In order to attempt to ensure that these interests would not result in any actual or perceived conflicts with the duties of our independent directors, our board of directors deliberated regarding the Externalization Proposal in executive session without the participation of board members who are also members of management and who have interests in the Externalization Proposal.
If the Externalization Proposal is approved, our officers and employees will become employees of the Manager who will continue our day-to-day operations through the authority delegated to it under the Management Agreement and pursuant to the policies established by our board of directors. Lloyd McAdams, our Chairman and Chief Executive Officer, will manage the Manager.
A trust controlled by Mr. McAdams and Heather U. Baines, our Executive Vice President, beneficially owns 50% of the outstanding membership interests in the Manager; Joseph E. McAdams, our Chief Investment Officer, beneficially owns 45%; and Thad M. Brown, our Chief Financial Officer, owns 5% of the outstanding membership interests. The Manager is not paying consideration to us for entering into the Management Agreement with us.
Nothing in the Management Agreement prevents the Manager or any of its affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, other than advising other REITs that invest more than 75% of their assets in United States agency residential mortgage-backed securities. Directors, officers and employees of the Manager may serve as our directors and officers.
Our officers and employees have been granted restricted stock and other equity incentive awards, including dividend equivalent rights, in connection with their service to us, and certain of our employees have agreements under which they would receive payments if our company is subject to a change in control. In connection with the Externalization Proposal, the agreements under which our officers and employees have been granted equity awards and would be paid change in control payments will be modified so that the agreements will continue with respect to our officers and employees after they become officers and employees of the Manager. In addition, as officers of the Company and employees of the Manager, they will continue to be eligible to receive equity incentive awards under any equity incentive plans in effect now or in the future.
Our board of directors is aware that a number of our peers are externally-managed pursuant to management agreements between those companies and external managers. This is a trend that has continued during the past several years with respect to a number of recently-formed mortgage REITs based on what are perceived as benefits arising from, among other things, lower compensation expenses, including the elimination altogether of incentive compensation, and certain other factors.
We were originally externally-managed in 1998 under a management agreement wherein the Manager was paid a base fee of 1% of stockholders’ equity and an incentive fee equal to 20% of the return that exceeded the yield of the 10-Year Treasury interest rate plus 1%. The management agreement contained a provision requiring payment of a termination fee equal to three times the base and incentive management fee paid during the prior twelve months.
We internalized our management in 2002 after considering a number of factors relevant at the time. The primary factor considered was our belief that we could reduce the compensation expense by reducing the amount paid in incentive compensation to our executive officers. In the internalization process and based on our agreement with the manager: (1) we acquired the manager, which was owned by a trust controlled by Lloyd McAdams and Heather U. Baines, for 240,000 restricted shares of our common stock which was valued at the time at $3.2 million; (2) we terminated the management agreement without paying a termination fee which, on the date of the termination, would have been $8 million; (3) we created the 2002 Incentive Plan with a formula which presently pays our executives incentive compensation equal to 7.26% of our excess return wherein the prior incentive payment was 20% of our excess return; (4) we incorporated a high water-mark feature into the 2002 Incentive Plan that results in negative incentive compensation if we do not meet certain performance thresholds; and (5) our senior executives entered into employment agreements wherein they agreed to a 1-year non-compete provision if they voluntarily terminated their employment and under which their prior approval is required to terminate or amend the 2002 Incentive Plan.
In light of existing market conditions in 2011 and other factors, our investment objectives and strategy, our status as a REIT and the potential benefits of eliminating compensation, compensation-related expenses and certain conflicts of interest, our board undertook a detailed analysis of whether we should consider again externalizing our management function and terminating our 2002 Incentive Plan.
Our board carefully evaluated whether it believed externalization would be accretive to our earnings per share on a prospective basis and, in particular, if the anticipated cost of the Management Agreement might be lower than the cost of anticipated compensation, including anticipated incentive compensation pursuant to our 2002 Incentive Plan. Our board examined carefully potential anticipated compensation payable under our 2002 Incentive Plan. In addition, the board received and reviewed a substantial amount of information regarding our historical compensation expense and benefits expense that we would have incurred had we paid the proposed management fee under the Management Agreement as shown in the table below:
Year | Compensation and Benefits Paid(1) | Pro-Forma Management Fee(2) | Difference(3) | |||||||||
2008 | $ | 10,074,000 | $ | 7,916,000 | $ | 2,158,000 | ||||||
2009 | $ | 11,868,000 | $ | 9,738,000 | $ | 2,130,000 | ||||||
2010 | $ | 10,070,000 | $ | 10,628,000 | $ | (558,000 | ) |
Under the 2002 Incentive Plan, our executive officers have the opportunity to earn incentive compensation during each fiscal quarter. The 2002 Incentive Plan requires that we pay all amounts earned thereunder each quarter (subject to offset for accrued negative incentive compensation). Pursuant to their employment
agreements, Lloyd McAdams, Joseph E. McAdams and Heather U. Baines are entitled to minimum percentages of all amounts paid under the 2002 Incentive Plan. Those percentages are 45%, 25% and 5%, respectively. The total aggregate amount of compensation that may be earned quarterly by all participants under the plan equals a percentage of net income, before incentive compensation, in excess of the amount that would produce an annualized return on average net worth equal to the ten-year U.S. Treasury Rate plus 1%, or the Threshold Return. At December 31, 2010, 2009 and 2008, the Threshold Return was 3.86%, 4.44%, and 4.30%, respectively.
Our 2002 Incentive Plan contains a “high water-mark” provision requiring that in any fiscal quarter in which net income is an amount less than the amount necessary to earn the Threshold Return, we calculate negative incentive compensation for that fiscal quarter that will be carried forward and will offset future incentive compensation earned under the plan with respect to participants who were participants during the fiscal quarter(s) in which negative incentive compensation was generated. At December 31, 2010, the negative incentive compensation accrual carryforward under the plan was $6.4 million, which represents a reduction from the negative carryforward of $12.2 million under the plan at December 31, 2009.
The existing negative carry-forward under the 2002 Incentive Plan arose principally from the write-off in 2007 of the assets of our subsidiary, Belvedere Trust Mortgage Corporation and its subsidiaries, or Belvedere Trust, resulting from the extraordinary market conditions surrounding the economic crisis at that time. Our board believes that absent the one-time write-off of the Belvedere Trust assets, we would have incurred a relatively small negative carryforward and we would have incurred incentive compensation expense during the past several years under the 2002 Incentive Plan, which would have increased our compensation expense. Our board further believes that based upon the limited negative carryforward remaining, there is a substantial likelihood that we will be required to pay quarterly incentive compensation under the 2002 Incentive Plan as early as 2012, which could increase our compensation expense, and reduce our earnings per share, in the future.
As examples, when shareholder equity is $900,000,000, the value of one percent of return in excess of the Threshold Return is $9,000,000, and the amount of incentive compensation paid for each percent of excess return each year is $650,000 which is based on the factor at this equity level being calculated as 7.222% in accordance with the 2002 Incentive Plan. When shareholder equity is $1,600,000,000, the value of one percent of return in excess of the Threshold Return is $16,000,000, and the amount of incentive compensation paid for each percent of excess return each year is $1,000,000 which is based on the factor at this equity level being calculated as 6.250% in accordance with the 2002 Incentive Plan. Please see pages 33 and 34 for a detailed example of the manner in which incentive compensation is payable under the 2002 Incentive Plan.
In conducting its evaluation of the Externalization Proposal, our board examined potential alternatives to externalization. Among these alternatives was the potential termination of certain of our executives’ employment agreements as a means to terminate the 2002 Incentive Plan. Pursuant to the terms of their employment agreements, the 2002 Incentive Plan may only be terminated with the consent of Lloyd McAdams and Joseph E. McAdams. Consequently, termination of the 2002 Incentive Plan would require either those executives to consent to such termination or the termination by us of the executives’ respective employment agreements, the latter of which would require us to pay a substantial cash termination fee to the executives. In undertaking its analysis of this alternative, our board considered a number of factors relevant to the potential termination of the executives’ agreements. These factors included the potential costs of terminating the agreements, the potential interruption to our business that might follow from loss of the services of our executives without assurance of their continued employment by us and the continued compensation and compensation related expenses that we would continue to incur in the absence of externalization of our management function.
Our board also examined the reasons for providing our officers and employees with the ability to earn short-term incentive compensation and the manner in which potential conflicts of interest could arise as a result of such incentive compensation. The 2002 Incentive Plan is tied directly to our quarterly performance and is designed to incentivize key employees to maximize return on equity. In addition, under their respective employment
agreements, Lloyd McAdams and Joseph E. McAdams are eligible to participate in a performance-based bonus pool that is funded based on the company’s quarterly return on average equity. In an effort to earn greater amounts of incentive compensation under the 2002 Incentive Plan or their employment agreements, as our executive officers evaluate different mortgage-related assets for our investment, there is a risk that they could cause us to assume more risk than is prudent.
Our board engaged in discussions with our key officers and employees to determine their willingness to become employed directly by the Manager and, in the case of Lloyd McAdams, Joseph E. McAdams and Heather U. Baines, their willingness to also be employed by the Manager without participation in the 2002 Incentive Plan or any other short-term incentive compensation plan. In addition, our board reviewed and negotiated the terms of the Management Agreement with representatives of the Manager. In so doing, it examined carefully the terms of the management agreements of our peers and compared them to the terms of the Management Agreement. Our board further examined our ability to enforce the terms of the Management Agreement against the Manager and, in particular, the representations and warranties and covenants under the Management Agreement.
We believe that during the past several years, a number of changes have occurred in our business and in the market that our board believes makes it desirable for us to externalize. Potential conflicts of interest can be reduced and the anticipated cost of incentive compensation under our 2002 Incentive Plan can be eliminated through externalization, which we believe could result in a substantial savings to our company in the future. Additionally, our executive officers have agreed to terminate their existing employment agreements with us, eliminating a substantial cost that we would incur if we adopt an alternative plan to terminate the agreements without their consent. Moreover, a key difference between the Management Agreement that we are proposing to enter into and the management agreement that was terminated in 2002 is the absence of incentive compensation in the proposed Management Agreement. We believe that externalization based upon a management contract that contains only a base management fee, and no fees tied to performance thresholds, is consistent with the structure that has been adopted by many of our peers and that has found acceptance in the investment community.
After reviewing a significant amount of information available to them, at an in person meeting held on February 24, 2011, our independent directors, without the participation of board members who are members of management, determined that the Externalization Proposal is fair to, and in the best interests of, our company and our stockholders.
Under the terms of the Management Agreement, the Manager would be responsible for administering our business activities and day-to-day operations, subject to the supervision and oversight of our board of directors. The material terms of the proposed Management Agreement are described below.
Management Services
The Management Agreement requires the Manager to oversee our business affairs in conformity with the operating policies and the investment guidelines approved by our board of directors. The Manager at all times will be subject to the supervision and direction of our board of directors, the terms and conditions of the Management Agreement and such further limitations or parameters as may be imposed from time to time by our board of directors. The Manager would be responsible for (i) the selection, purchase and sale of our investment portfolio, (ii) our financing and hedging activities and (iii) providing us with investment advisory services. The Manager would also be responsible for our day-to-day operations and will perform such services and activities relating to our assets and operations as may be appropriate, including, without limitation:
serving as our consultant with respect to decisions regarding any of our financings, hedging activities or borrowings undertaken by us including (1) assisting us in developing criteria for debt and equity financing that is specifically tailored to our investment objectives, and (2) advising us with respect to obtaining appropriate financing for our investments;
purchasing and financing investments on our behalf;
investing and re-investing any of our monies and securities (including in short-term investments, payment of fees, costs and expenses, or payments of dividends or distributions to our stockholders) and advising us as to our capital structure and capital-raising activities;
serving as our consultant with respect to the selection, purchase, monitoring and disposition of our investments;
providing us with portfolio management services;
evaluating and recommending to us hedging strategies and engaging in hedging activities on our behalf, consistent with such strategies, as so modified from time to time, with our qualification as a REIT, and within the investment guidelines;
monitoring the operating performance of our investments and providing periodic reports with respect thereto to our board of directors, including comparative information with respect to such operating performance;
maintaining the Investment Committee, which may propose changes to our investment guidelines to be approved by our board of directors;
engaging and supervising, on behalf of us and at our expense, independent contractors that provide real estate, investment banking, securities brokerage, insurance, legal, settlement clearing and custodial services, accounting, transfer agent, registrar and such other services as may be required relating to our operations or investments (or potential investments);
communicating on behalf of us with the holders of any of our equity or debt securities as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading exchanges or markets and to maintain effective relations with such holders, including website maintenance, analyst presentations, investor conferences and annual meeting arrangements;
counseling us in connection with policy decisions to be made by our board of directors;
counseling us regarding the requirements to qualify as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Internal Revenue Code and Treasury regulations thereunder;
counseling us regarding the maintenance of our exemption from status as an investment company under the Investment Company Act and monitoring compliance with the requirements for maintaining such exemption;
causing us to retain qualified accountants and legal counsel, as applicable, to (i) assist in developing appropriate compliance procedures with the provisions of the Internal Revenue Code applicable to REITs and, if applicable, taxable REIT subsidiaries and (ii) conduct quarterly compliance reviews with respect thereto;
furnishing reports and other data to us regarding our activities and services performed for us by the Manager;
assisting us in complying with all regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended;
taking all necessary actions to enable us to make required tax filings and reports, including soliciting stockholders for required information to the extent necessary under the Internal Revenue Code and Treasury regulations applicable to REITs;
performing and supervising the performance of administrative functions necessary in our management as may be agreed upon by the Manager and our board of directors, including, without limitation, the services in respect of any current or future dividend equivalent rights and equity incentive plans, the collection of revenues and the payment of our debts and obligations and maintenance of appropriate information technology services to perform such administrative functions;
advising us with respect to any dividend equivalent right and equity incentive plans;
using commercially reasonable efforts to cause expenses incurred by or on behalf of us to be commercially reasonable or commercially customary and within any expense guidelines set by our board of directors from time to time;
causing us to qualify to do business in all jurisdictions in which such qualification is required and to obtain and maintain all appropriate licenses;
arranging marketing materials, advertising, industry group activities (such as conference participations and industry organization memberships) and other promotional efforts designed to promote our business;
handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which we may be involved or to which we may be subject arising out of our day-to-day operations;
performing such other services as may be required from time to time for the management and other activities relating to our assets as our board of directors reasonably requests or the Manager deems appropriate under the particular circumstances; and
using commercially reasonable efforts to cause us to comply with all applicable laws.
Pursuant to the terms of the Management Agreement, the Manager will provide us with a management team, including our chief executive officer, chief financial officer and chief investment officer or similar positions, along with appropriate support personnel to provide the management services to be provided by the Manager to us as described in the Management Agreement.
The Manager has not assumed any responsibility other than to render the services called for under the management agreement in good faith and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations, including as set forth in the investment guidelines. The Manager and its affiliates, and the directors, officers, employees, members and stockholders of the Manager and its affiliates, will not be liable to us, our board of directors or our stockholders for any acts or omissions performed in accordance with and pursuant to the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their respective duties under the management agreement. We have agreed to indemnify the Manager and its affiliates, and the directors, officers, employees, members and stockholders of the Manager and its affiliates, with respect to all expenses, losses, damages, liabilities, demands, charges and claims in respect of or arising from any acts or omissions of the Manager, its affiliates and the directors, officers, employees, members and stockholders of the Manager and its affiliates, performed in good faith under the management agreement and not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their respective duties. The Manager has agreed to indemnify us and our directors, officers and stockholders with respect to all expenses, losses, damages, liabilities, demands, charges and claims in respect of or arising from any acts or omissions of the Manager constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under the management agreement. The Manager will maintain reasonable and customary “fidelity” insurance coverage upon the effectiveness of the Management Agreement.
The Manager is required to refrain from any action that, in its sole judgment made in good faith, (i) is not in compliance with the investment guidelines, (ii) would adversely affect our qualification as a REIT under the Internal Revenue Code or our status as an entity exempted from investment company status under the Investment Company Act, or (iii) would violate any law, rule or regulation of any governmental body or agency having jurisdiction over us or of any exchange on which our securities are listed or that would otherwise not be permitted by our amended and restated certificate of incorporation or bylaws. If the Manager is ordered to take any action by our board of directors, the Manager will notify our board of directors if it is the Manager’s
judgment that such action would adversely affect such status or violate any such law, rule or regulation or our amended and restated certificate of incorporation or bylaws.
The management agreement has an initial term expiring on December 31, 2013. The management agreement will be automatically renewed for one-year terms thereafter unless terminated by either us or the Manager. The management agreement does not limit the number of renewal terms. Either we or the Manager may elect not to renew the management agreement upon the expiration of the initial term of the Management Agreement or upon the expiration of any automatic renewal terms, both upon 180 days prior written notice to the Manager or us. Any decision by us to not renew the Management Agreement must be approved by the majority of our independent directors. If we choose not to renew the Management Agreement, we will pay the Manager a termination fee, upon expiration, equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. We may only elect not to renew the Management Agreement without cause with the consent of the majority of our independent directors. If we terminate the Management Agreement without cause, we may not, without the consent of the Manager, employ any employee of the Manager or any of its affiliates, or any person who has been employed by the Manager or any of its affiliates at any time within the two year period immediately preceding the date on which the person commences employment with us for two years after such termination of the Management Agreement. In addition, following any termination of the Management Agreement, we must pay the Manager all monthly management fees accruing to the date of termination and any other amounts due. Neither we nor the Manager may assign the Management Agreement in whole or in part to a third party without the written consent of the other party, except that the Manager may assign the agreement to any of its affiliates that is its successor by reason of a restructuring or other reorganization. In order for us to assign the Management Agreement, we must obtain the approval of a majority of our independent directors. The Manager may delegate the performance of any of its responsibilities to an affiliate so long as the Manager remains liable for such affiliate’s performance.
Furthermore, if we decide not to renew the Management Agreement without cause as a result of the determination by the majority of our independent directors that the management fee is unfair, the Manager may agree to perform its management services at fees the majority of our board of directors determine to be fair, and the Management Agreement will not terminate. The Manager may give us notice that it wishes to renegotiate the fees, in which case we and the Manager must negotiate in good faith, and if we cannot agree on a revised fee structure at the end of the 60-day negotiation period following our receipt of the Manager’s intent to renegotiate, the agreement will terminate, and we must pay the termination fees described above.
We may also terminate the Management Agreement with 60 days’ prior written notice for cause, without paying the termination fee, if any of the following events occur, which will be determined by a majority of our independent directors:
the Manager’s fraud, misappropriation of funds or embezzlement against us or gross negligence (including such action or inaction by the Manager which materially impairs our ability to conduct our business);
the Manager fails to provide adequate or appropriate personnel that are reasonably necessary for the Manager to identify investment opportunities for us and to manage and develop our investment portfolio if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied;
a material breach of any provision of the Management Agreement (including the failure of the Manager to use reasonable efforts to comply with the investment guidelines) if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied;
the Manager commences any proceeding relating to its bankruptcy, insolvency, reorganization or relief of debtors or there is commenced against the Manager any such proceeding which results in an order for relief or remains undismissed for a period of 90 days; or
the dissolution of the Manager.
Management Fee and Reimbursement of Expenses
We do not intend to employ personnel. As a result, we will rely on the Manager to administer our business activities and day-to-day operations. The management fee is designed to reimburse the Manager for providing the personnel to perform certain services to us as described above in “—Management Services.” The Manager will also be entitled to certain monthly expense reimbursements described below. The management fee is payable monthly in arrears in cash.
Management Fee. We will pay the Manager a management fee monthly in arrears in an amount equal to 1/12 of 1.20% of our Equity (as defined below). The Manager will calculate each monthly installment of the management fee within 15 days after the end of each calendar month, and we will pay the monthly management fee with respect to each calendar month within 5 business days following the delivery to us of the Manager’s statement setting forth the computation of the monthly management fee for such month.
“Equity” equals our month-end stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or other comprehensive income (loss), each as computed in accordance with GAAP.
The Manager will not receive any performance-based incentive compensation pursuant to the terms of the Management Agreement.
Reimbursement of Expenses. We will pay directly, or reimburse the Manager, for all of our operating expenses and the Manager’s operating expenses, other than compensation and benefits. Pursuant to the terms of the Management Agreement, we are not responsible for the employment related expenses of our and the Manager’s officers that provide services to us under the Management Agreement. The costs and expenses required to be paid by us include, but are not limited to:
costs incurred in connection with any offering of our common stock;
transaction costs incident to the acquisition, disposition and financing of our investments;
expenses incurred in contracting with third parties;
external legal, auditing, accounting, consulting, investor relations, brokerage and administrative fees and expenses, including in connection with any offering of our common stock;
the compensation and expenses of our directors (excluding those directors who are employees of the Manager or its affiliates) and the cost of liability insurance to indemnify our directors and officers;
the Manager’s rent (including disaster recovery facility costs and expenses), telephone, utilities, office furniture, equipment, machinery and other office expenses required for our operations described herein including any related property insurance coverage and general liability coverage;
the costs associated with our establishment and maintenance of any repurchase agreement facilities and other indebtedness (including commitment fees, accounting fees, legal fees, closing costs and similar expenses);
expenses associated with other securities offerings by us;
expenses relating to the payment of dividends;
costs incurred by personnel of the Manager for travel and other related expenses on our behalf;
expenses connected with communications to holders of our securities and in complying with the continuous reporting and other requirements of the SEC and other governmental bodies;
transfer agent and exchange listing fees;
the costs of printing and mailing proxies and reports to our stockholders;
all costs of organizing, modifying or dissolving our company or any subsidiary and costs in preparation of entering into or exiting any business activity;
our pro rata portion of costs associated with any computer software, hardware or information technology services that are used by us;
our pro rata portion of the costs and expenses incurred with respect to market information systems and publications, research publications and materials used by us;
the costs of administering any dividend equivalent right and equity incentive plans;
settlement, clearing, and custodial fees and expenses relating to us and our operations; and
the costs of maintaining compliance with all federal, state and local rules and regulations or any other regulatory agency (as such costs relate to us), all taxes and license fees and all insurance costs incurred on behalf of us; and
Conflicts of Interest
Certain of our directors and officers have interests in the Externalization Proposal that are in addition to, or in conflict with, our company and our stockholders.
If the Externalization Proposal is approved by our stockholders, in exchange for a management fee, the Manager will oversee our day-to-day operations pursuant to the authority delegated to the Manager under the Management Agreement. Mr. Lloyd McAdams, our Chairman, President and Chief Executive Officer, and Ms. Baines, one of our Executive Vice Presidents, control a trust that beneficially owns 50% of the membership interests of the Manager; Mr. Joseph E. McAdams, our Chief Investment Officer, our Director and also an officer of the Manager, owns 45% of the Manager; and Thad M. Brown, our Chief Financial Officer and also an officer of the Manager, owns 5% of the Manager. Mr. Lloyd McAdams and Ms. Baines are husband and wife, and the officers of the Manager and are also our officers. Lloyd McAdams and Joseph E. McAdams are father and son.
The terms of the Management Agreement, including the management fee payable, were not negotiated on an arm’s-length basis, and its terms may not be as favorable to us as if it was negotiated with an unaffiliated party. The management fee that we will pay to the Manager is not tied to our performance. The management fee is paid regardless of our performance and it may not provide sufficient incentive to the Manager to seek to achieve attractive risk-adjusted returns for our investment portfolio.
The Management Agreement may only be terminated without cause, as defined in the agreement, after the completion of its initial term on December 31, 2013, or the expiration of each annual renewal term. We are required to provide 180-days prior notice of non-renewal of the Management Agreement and must pay a termination fee on the last day of the initial term or any automatic renewal term, equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. We may only not renew the Management Agreement with or without cause with the consent of the majority of our independent directors. These provisions make it difficult to terminate the Management Agreement and increase the effective cost to us of not renewing the Management Agreement.
As of March 25, 2011, Mr. Lloyd McAdams and Ms. Baines beneficially owned approximately 0.94% of our outstanding common stock and Mr. Joseph E. McAdams beneficially owns 0.49% of our outstanding common stock. They have indicated that they will vote in favor of the Externalization Proposal.
Time Commitments of Management
If the Externalization Proposal is approved by our stockholders, the Manager will manage all of our investments pursuant to the Management Agreement. Certain of the Manager’s officers and certain of our officers are officers or employees of Pacific Income Advisers, or PIA, where they devote a portion of their time. These officers are currently involved, and will continue to be involved, in investing both our assets and approximately $4.4 billion (at December 31, 2010) in mortgage-backed securities and other fixed income assets for institutional clients and individual investors through PIA.
These multiple responsibilities may create conflicts of interest if these officers are presented with opportunities that may benefit both us and the clients of PIA. These officers allocate investments among our portfolio and the clients of PIA by determining the entity or account for which the investment is most suitable. In making this determination, these officers consider the investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors that our officers determine appropriate. These officers, however, have no obligation to make any specific investment opportunities available to us and the above-mentioned conflicts of interest may result in decisions or allocations of securities that are not in our best interests.
Mr. McAdams is also an owner and Chairman of Syndicated Capital, Inc., a registered broker-dealer. Syndicated Capital, Inc. has been authorized by our board of directors to act as an authorized broker on buyback of our common stock. Our officers’ service to PIA and Syndicated Capital, Inc. allow them to spend only part of their time and effort managing our company, as they are required to devote a portion of their time and effort to the management of other companies.
We are not aware of any material approval or other action by any state, federal or foreign governmental agency that would be required prior to the consummation of the Externalization Proposal in order to effect the externalization or of any license or regulatory permit that is material to our business or the business of the Manager and which is likely to be adversely affected by the consummation of the Externalization Proposal.
The Management Agreement was not negotiated on an arm’s-length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party
The Management Agreement was negotiated between related parties, and we did not have the benefit of arm’s-length negotiations of the type normally conducted with an unaffiliated third party. The terms of the Management Agreement, including fees payable, may not reflect the terms we may have received if it was negotiated with an unrelated third party. In addition, as a result of this relationship, we may choose not to enforce, or to enforce less vigorously, our rights under the Management Agreement because of our desire to maintain our ongoing relationship with our Manager.
We will have no employees and the Manager will be responsible for making all of our investment decisions. Certain of our current employees who will become the Manager’s employees are not required to devote any specific amount of time to our business, which could result in conflicts of interest.
If the Externalization Proposal is approved, we will have no employees, and the Manager will be responsible for making all of our investments. Certain of our current employees who will become the Manager’s
employees are employees of PIA. or its affiliates and these persons do not devote their time exclusively to us. The Manager’s executive officers are officers of PIA and have significant responsibilities to PIA. Because certain of our and our Manager’s employees are also responsible for providing services to PIA, they may not devote sufficient time to the management of our business operations.
We will be completely dependent upon the Manager who will provide services to us through the Management Agreement and we may not find suitable replacements for our Manager if the Management Agreement is terminated or such key personnel are no longer available to us.
If the Externalization Proposal is approved, because we will have no employees, we will be completely dependent on the Manager to conduct our operations pursuant to the Management Agreement. Our Manager has its own employees, which conduct its day-to-day operations. The Management Agreement does not require the Manager to dedicate specific personnel to our operations.
If we terminate the Management Agreement without cause, we may not, without the consent of the Manager, employ any employee of the Manager or any of its affiliates, or any person who has been employed by our Manager or any of its affiliates at any time within the two year period immediately preceding the date on which the person commences employment with us for two years after such termination of the Management Agreement. We will not have retention agreements with any of our officers. We believe that the successful implementation of our investment and financing strategies will depend upon the experience of certain of the Manager’s officers and employees. None of these individuals’ continued service is guaranteed. If the Management Agreement is terminated or these individuals leave the Manager, the Manager may be unable to replace them with persons with appropriate experience, or at all, and we may not be able to execute our business plan.
If we elect to not renew the Management Agreement without cause, we would be required to pay the Manager a substantial termination fee. These and other provisions in the Management Agreement make non-renewal of the Management Agreement difficult and costly.
Electing not to renew the Management Agreement without cause would be difficult and costly for us. With the consent of the majority of our independent directors, we may elect not to renew our Management Agreement after the initial term of the Management Agreement, which would expire on December 31, 2013, or upon the expiration of any automatic renewal term, both upon 180-days prior written notice. In addition, if we elect to not renew the agreement because of a decision by our board that the management fee is unfair, the Manager has the right to renegotiate a mutually agreeable management fee. If we elect to not renew the Management Agreement without cause, we are required to pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. These provisions may increase the effective cost to us of electing to not renew the Management Agreement.
The management fee is payable regardless of our performance.
The Manager would be entitled to receive a management fee from us that is based on the amount of our Equity (as defined in our Management Agreement), regardless of the performance of our investment portfolio. For example, we would pay our Manager a management fee for a specific period even if we experienced a net loss during the same period. The Manager’s entitlement to substantial nonperformance-based compensation may reduce its incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the market price of our common stock.
The fee structure of the Management Agreement may limit the Manager’s ability to retain access to its key personnel.
Under the terms of the Management Agreement, we would be required to pay the Manager a base management fee payable monthly in arrears in amount equal to one twelfth of 1.20% of our Equity. Our Equity is defined as our month-end stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or OCI, each as computed in accordance with GAAP. The Management Agreement does not provide the Manager with an incentive management fee that would pay the Manager additional compensation as a result of meeting performance targets. Some of our externally-managed competitors pay their managers an incentive management fee, which could enable the manager to provide additional compensation to its key personnel. Thus, the lack of an incentive fee in the Management Agreement may limit the ability of the Manager to provide key personnel, with additional compensation for strong performance, which could adversely affect the Manager’s ability to retain these key personnel. If the Manager were not able to retain any of the key personnel that will be providing services to the Manager, it would have to find replacement personnel to provide those services. Those replacement key personnel may not be able to produce the same operating results as the current key personnel.
Recommendation of our Board of Directors
Our board of directors has determined that the Externalization Proposal is fair to, and in the best interests of, our company and our stockholders.Accordingly, our board of directors recommends that our stockholders vote “FOR” approval of the Externalization Proposal.
EXECUTIVE OFFICERS AND COMPENSATION
Executive Officers
All of our officers serve at the discretion of the board. The persons listed below are our executive officers:
Name | Age | Positions with our Company | ||||
Lloyd McAdams | Chairman of the Board, | |||||
Thad M. Brown | Chief Financial Officer, Treasurer and Secretary | |||||
Joseph E. McAdams | Chief Investment Officer, Executive Vice President and Director | |||||
Heather U. Baines | Executive Vice President | |||||
Charles J. Siegel | Senior Vice President—Finance and Assistant Secretary | |||||
Bistra Pashamova | Senior Vice President and Portfolio Manager | |||||
Evangelos Karagiannis | Vice President and Portfolio Manager |
Biographical information regarding each executive officer other than Messrs. Lloyd McAdams and Joseph E. McAdams is set forth below. Messrs. Lloyd McAdams’ and Joseph E. McAdams’ biographical information is set forth above under “Election of Directors.”
Thad M. Brown has been the Chief Financial Officer, Treasurer and Secretary of our company since June 2002.2002 and is also a member of the Manager. Mr. Brown has also been the Chief Operating and Compliance Officer, Secretary and Treasurer of PIA since April 2002.
Heather U. Baineshas been an Executive Vice President of our company since its formation.formation and is also a member of the Manager. Since 1987, Ms. Baines has also held the position of President and Chief Executive Officer of PIA.
Charles J. Siegel joined our company in October 2004, and has served as Senior Vice President—Finance since January 2005 and also as Assistant Secretary since May 2005.2005, and is also an employee of the Manager.
Bistra Pashamova joined our company in June 2002 as a Portfolio Manager and was appointed as Vice President in October 2002. In March 2009, Ms. Pashamova was appointed as Senior Vice President of our company. Ms. Pashamova is also an employee of the Manager. Ms. Pashamova joined PIA in 1997 and holds the positions of Vice President and Portfolio Manager.Manager at PIA. Ms. Pashamova serves as Fixed Income Portfolio Manager at PIA with a specialty in mortgage-backed securities.
Evangelos Karagiannishas been a Vice President and Portfolio Manager of our company since its formation.formation and is also an employee of the Manager. Mr. Karagiannis joined PIA in 1992 and holds the positions of Senior Vice President and Portfolio Manager.Manager at PIA. Mr. Karagiannis serves as Fixed Income Portfolio Manager at PIA with a specialty in mortgage-backed securities and is also responsible for PIA’s quantitative research.
As a result of the externalization of our management function as of December 31, 2011, the functions of our executive officers (other than our statutory officers consisting of Mr. Lloyd McAdams, as our Chief Executive Officer and President, and Mr. Thad Brown, as our Chief Financial Officer, Treasurer and Secretary) are ministerial in nature, as their primary functions are now performed by such officers in their roles as members or employees of the Manager.
Compensation Discussion and Analysis
Due to the externalization of our management function effective as of December 31, 2011, a majority of the following discussion will no longer apply in the future. Beginning on January 1, 2012, no compensation will be paid to any of our officers, other than awards under our 2004 Equity Compensation Plan and 2007 Dividend Equivalent Rights Plan and potential payments under the amended Change in Control and Arbitration Agreements we have entered into with certain of our other officers and employees. Accordingly, the following section reflects our compensation philosophies during 2011.
This discussion and analysis focuses on: (1) the objectives of our executive compensation policies and practices; (2) the actions or behaviors the compensation program is designed to reward; (3) each element of compensation; (4) the rationale for each element of compensation; (5) the methodologies utilized by us in determining the amounts to pay for each element; and (6) how the elements of compensation and our rationale for each element fit together within our overall compensation objectives.
Compensation Philosophy and Objectives
Our business objective is to produce income for distribution to our stockholders as dividends.
OurPrior to the Externalization, we maintained executive compensation programs arethat were designed to align total executive compensation with the level of income that we produce. We believe that our executive compensation programs benefitbenefited us by attracting, motivating, rewarding and retaining top quality senior executives, officers and employees who are committed to our core values of excellence and integrity.
The Compensation Committee’s objectives in developing and administering the executive compensation programs arewere to: (1) attract, retain and motivate a highly skilled senior executive team that will contribute to the successful performance of our company; (2) align the interests of the senior executive team with the interests of our stockholders by motivating our senior executives to increase long-term stockholder value; (3) provide compensation opportunities that are competitive within industry standards, thereby reflecting the value of the position in the marketplace; (4) support a culture committed to pay for performance where compensation is commensurate with the level of performance achieved; and (5) maintain flexibility and discretion to allow us to recognize the unique characteristics of our operations and strategy, and our prevailing business environment, as well as changing labor market dynamics.
The Compensation Committee believes that it iswas important to create a compensation program that appropriately balancesbalanced short-term, cash-based compensation with long-term, equity-based compensation. This includesincluded the following primary components: (1) base salaries paid in cash which recognizerecognized the unique role and responsibilities of a position as well as an individual’s level of experience in that role; (2) annual discretionary awards which can bewere paid in cash or in long-term equity awards in lieu of cash that recognizerecognized an individual’s contribution to our short-term financial and operational performance; and (3) cash and equity compensation paid to the Chief Executive Officer and Chief Investment Officer based on the return on average equity, or ROAE, earned during the year.
The Compensation Committee annually benchmarksbenchmarked the total compensation provided to our executive officers to industry-based compensation practices within the agency mortgage REIT industry. While it iswas the Compensation Committee’s goal to provide compensation opportunities that reflectreflected company and individual performance and that arewere competitive within industry standards, a specific target market positionpositions for executive officer pay levels haswere not been established.
Setting Executive Compensation
OurPrior to the Externalization, our Compensation Committee regularly conductsconducted a review of our senior executive compensation practices in order to ensure that the senior executive compensation program and policies remain aligned with the goal of enhancing stockholder value through compensation practices that attract, motivate and retain key senior executives. In conducting this review, the Compensation Committee examinesexamined all components of our compensation programs offered to senior executives including base salary, annual discretionary cash and equity compensation and payments on DERs, the dollar value to the senior executives (and the cost to us) of any perquisites and other personal benefits, the earnings and accumulated payout obligations under the Deferred Compensation Plan and the actual projected payout obligations under several potential severance and change-in-control scenarios.
Each
For each year we reviewprior to the Externalization, our Compensation Committee reviewed our executive compensation by analyzing the compensation practices of our agency mortgage REIT peers along with other relevant factors such as firm profitability and performance. We consider our peer group to be agency mortgage REITs but have narrowed this to the companies in this peer group which we believe are most similar to the important aspects of our business. This peer group consists of the following companies:
Annaly Capital Management, Inc.
Cypress Sharpridge Investments, Inc.,
American Capital Agency Corp.
Hatteras Financial
Capstead Mortgage Corporation
MFA Financial, Inc.
• American Capital Agency Corp. | • Hatteras Financial | |
• Annaly Capital Management, Inc. | • MFA Financial, Inc. | |
• Capstead Mortgage Corporation | • Two Harbors Investment Corp. | |
• CYS Investments, Inc. |
While we consider the compensation practices of our peer group, we do not attempt to set the various components of our compensation arrangements to target a particular point or benchmark along the spectrum offered by our peer group. Instead, the Compensation Committee retainsretained considerable discretion in establishing the compensation arrangements offered to the senior executives. In 2010, the base salaries and additional cash compensation paid to our Named Executive Officers were generally in the bottom half relative to the base salaries and total compensation paid to executive officers of the internally-managed companies within the peer group. Although the Compensation Committee considersconsidered peer group comparisons, they arewere not material to its determination of base salary and additional cash compensation.
The Compensation Committee believes that the use of long-term incentive compensation through the granting of restricted stock and other dividend and equity awards in lieu of cash compensation promotespromoted the long-term performance and commitment of management. The Compensation Committee hashad reviewed the use of such awards in our peer group and hashad determined that our practice of compensating our company’s senior executives, officers and employees with equity compensation in lieu of cash compensation is a practice used by the companies within the peer group.
TheBased upon the results of the advisory vote on the compensation of our Named Executive Officers at our 2011 Annual Meeting of Stockholders (over 94% in favor of), the Compensation Committee will, on an ongoing basis, continue to examine and assess our executive compensation practices relativedetermined that no changes to our compensation philosophy and objectives, as well as competitive market practices, and will make modifications to the compensation programs as deemed appropriate.structure were needed.
Relationship Between Elements and Objectives
In determining the total amount and mixture of the compensation package for each executive officer, prior to the Externalization, the Chief Executive Officer and the Compensation Committee considerconsidered individual performance including past and expected future contributions, overall performance, long-term goals and such other factors as the Chief Executive Officer and the Compensation Committee determinedetermined to be appropriate, which are summarized below under the heading “Discretionary Cash Compensation” on pages 3118 and 3219 of this proxy statement. There arewere no pre-identified annual targets for either aggregate amount or mixture of compensation. Such compensation may bewas subject to the rights of certain executives to be paid certain minimum amounts or percentages under their respective employment agreements and the 2002 Incentive Compensation Plan, or the 2002 Incentive Plan, as applicable. The use of both cash compensation and long-term compensation (equity awards) achieves the objective of attracting, motivating and retaining talented executive officers and employees. The 2002 Incentive Plan providesprovided certain senior executive officers with the incentive to maximize return on equity. Long-term compensation realized through the use of equity awards achievesachieved the objectives of aligning management’s interests with stockholders’ interests; attracting, motivating and retaining talented senior executive officers; and ensuring the long-term commitment of the management team.
Elements of Compensation
The key elements of our compensation program include:included: (1) base salary; (2) annual discretionary compensation paid in cash; (3) annual discretionary compensation paid in common stock and DERs in lieu of cash; (4) cash and equity compensation paid to the Chief Executive Officer and Chief Investment Officer based on the ROAE earned during the year; and (5) any perquisites and other benefits.
Base Salary
We viewbelieve that a competitive annual base salary aswas an important component of compensation to retain and recruit the specific executive talent needed for success in our business.
Employees (including Named Executive Officers) receivereceived base salaries as a portion of their compensation for providing us services during their employment. When setting base salaries, the Compensation Committee and the Chief Executive Officer taketook into consideration the scope of the role and responsibilities of the employee’s
position, education, experience and competitive market practices. The base salaries of our Chief Executive Officer (Lloyd(Mr. Lloyd McAdams) and our Chief Investment Officer (Joseph(Mr. Joseph E. McAdams) arewere set in accordance with their respective employment agreements.
Salaries are designed to be competitive within the marketplace as one of the elements in attracting, motivating and retaining our management team.
Equity Compensation in Lieu of Cash
The Compensation Committee believes that the commitment of the current management team to produce income over the long-term iswas an important determinant of investment returns achieved for our stockholders. One of the elements used to promote this commitment of management iswas their being paid a portion of their annual compensation in the form of equity (restricted common stock) and/or DERs in lieu of cash. The portion of each employee’s compensation that iswas paid in equity or DERs in lieu of cash iswas based on the Chief Executive Officer’s assessment which iswas presented to the Compensation Committee. Generally, the Chief Executive Officer recommendsrecommended that senior executive officers and other Named Executive Officers receive a greater portion of their compensation paid in restricted stock or DERs in lieu of cash than do other officers and employees. The Compensation Committee believes that senior executive officers receiving a significant portion of their annual compensation as restricted equity and/or DERs in lieu of cash servesserved to link senior executive management interests with stockholder interests and incentsincentivized senior executive officers to make long-term income generation decisions that are in the stockholders’ and theour company’s interests and to provideprovided an incentive to maximize stockholder value over the long-term. In granting such equity interests to management and employees, the Compensation Committee considers theconsidered our company’s stock ownership limitations that apply to all stockholders. These limitations are in our articles of incorporation.
Under the terms of their employment agreements (as more fully described on pages 4228 and 43)29) as amended, a long-term equity incentive structure was established in 2008 for Messrs. Lloyd McAdams and Joseph E. McAdams, or the Participants.McAdams. As a result, the Participants areMessrs. Lloyd McAdams and Joseph E. McAdams were eligible to participate in a performance-based bonus pool that iswas funded based on theour company’s ROAE. ROAE iswas calculated as the twelve-month GAAP net income excluding the effect of depreciation, preferred stock dividends, gains/losses on asset sales and impairment charges, divided by the average stockholder equity less goodwill and preferred stockholder equity. The Compensation Committee evaluated various measures and factors of performance in developing this structure and, in its view, ROAE was determined to be the single best indicator of our overall performance and therefore of value creation for our stockholders. This iswas in part due to the fact that ROAE iswas a metric of our performance that has been calculated and reported on a consistent basis since our inception in 1998.
Following our entry into the Management Agreement effective as of December 31, 2011 and in connection with the Externalization, the employment agreements for Messrs. Lloyd McAdams and Joseph E. McAdams and Ms. Heather U. Baines were terminated. Although they are now employees of the Manager, Mr. Lloyd McAdams still serves as Anworth’s Chairman, Chief Executive Officer and President. Mr. Joseph E. McAdams still serves as Anworth’s Chief Investment Officer and on Anworth’s board as a director. Ms. Heather U. Baines still serves as Anworth’s Executive Vice President. The functions of our executive officers (other than our statutory officers consisting of Mr. Lloyd McAdams, as our Chief Executive Officer and President, and Mr. Thad Brown, as our Chief Financial Officer, Treasurer and Secretary) are ministerial in nature, as their primary functions are now performed by such officers in their roles as members or employees of the Manager.
Discretionary Cash Compensation
EmployeesPrior to the Externalization, employees (including Named Executive Officers) maywere able to receive additional discretionary cash compensation usually paid at year-end as a portion of their compensation for providing services for us during the year. In regards to discretionary compensation amounts for employees (other than our Named Executive Officers), the Chief Executive Officer iswas responsible for determining these amounts based on various criteria and performance measures, which he deemsdeemed most relevant for the particular employee for the period under review. The Compensation Committee hashad considerable discretion when determining discretionary compensation amounts for our Named Executive Officers. When exercising this discretion, the Compensation Committee considersconsidered various criteria and performance measures, which it considersconsidered the most relevant for the period under review. Among the criteria considered are:were: (a) the Named Executive Officers’ specific responsibilities during the calendar year; (b) the Named Executive Officer’s specific accomplishments during the calendar year; (c) any exceptional contributions by the Named Executive Officer during the calendar year; (d) annualized base salary paid to the Named Executive Officer during the calendar year and the two prior calendar years; (e) the salary and total compensation paid to other mortgage REIT executives with similar responsibilities; and (f) the Named Executive Officer’s qualifications and level of experience, which includes educational and employment experience.
In determining total compensation for each Named Executive Officer in 2010,2011, the Compensation Committee reviewed the above criteria and determined for 20102011 that the key criteria were the specific responsibilities and accomplishments and any exceptional contributions during 2010. In determining discretionary cash and total compensation paid to each of the Named Executive Officers, the Compensation Committee noted that the combined base salaries and discretionary compensation paid to our Named Executive Officers for 2010 were in the bottom half relative to the base salaries and other amounts paid to executive officers within our peer group.2011. The Compensation Committee did not make any adjustments in 20102011 for base salaries and discretionary compensation based on its review of peer group data. Although there is no specific set value in compensation placed on each Named Executive Officer’s qualifications and level of experience, the Compensation Committee recognized that there is value in retaining well qualified and experienced individuals and took this into account but did not use a formula in determining total compensation. In determining total compensation for 2010,2011, the Compensation Committee reviewed other elements of compensation. The only Named Executive Officers who receive restrictedreceived common stock and cash compensation incentives arewere Messrs. Lloyd McAdams and Joseph E. McAdams through the performance-based bonus pool on the compensation plan in their employment agreements.agreements which were effective through December 31, 2011. Regarding Messrs. Lloyd McAdams and Joseph E. McAdams, the Compensation Committee considered that a substantial portion of their compensation should be derived from the performance-based bonus plan under their employment agreements in order to further align their interests with those of our stockholders. The amount of discretionary additional cash compensation paid to each of our Named Executive Officers was an important component of total compensation considered by the Compensation Committee. Set forth below are the responsibilities, accomplishments and contributions the Compensation Committee considered to be key criteria in determining both additional discretionary cash compensation and total compensation:
Mr. Lloyd McAdams servedserves as Chairman, of the Board, Chief Executive Officer and President. His specific responsibilities in 2011 included being primarily responsible for the overall direction and management of theour company, its asset acquisition, capital and leverage, risk management, asset/liability management, financing reporting, compliance, employee morale and internal controls. Mr. McAdams will continue to perform and be responsible for these functions as a member of the Manager. During 2010,2011, Mr. McAdams continued to enhance the professional development of our company’s professional staff, and under Mr. Lloyd McAdams’his direction and management, theour company remained profitable earning $110approximately $123 million; and raisingraised additional equity capital of approximately $60.58$92 million; and paid $0.97$0.94 per common share in dividends, representing a yield for stockholders of more than 13%; and continued to enhance the professional development of the company’s professional staff.14%.
Mr. Joseph E. McAdams servedserves as Chief Investment Officer. His specific responsibilities in 2011 included being primarily responsible for theour company’s day-to-day investment performance, strategy and asset/liability management. Joseph E.Mr. McAdams will continue to perform and be responsible for these functions as a member of the Manager. Mr. McAdams’ specific major accomplishments in 20102011 were: his significant contributions to theour company which resulted in our company earning $110 million and raisingapproximately $123 million; raised additional equity capital of approximately $60.58$92 million; paying $0.97and paid $0.94 per common share in dividends, representing a yield for
stockholders of more than 13%; continuing14%. Mr. McAdams also continued to enhance the professional development of theour company’s investment staff; profitably directed theour company’s purchase of $4$3.26 billion in mortgage-backed securities; managed nearly $29approximately $35 billion in borrowings and repayments under repurchase agreements; and managed $2.7$3.03 billion for theour company as counterparty to interest rate swap agreements.
Mr. Thad M. Brown servedserves as Chief Financial Officer. His specific responsibilities in 20102011 included having overall responsibility for financial reporting, financial systems and internal controls, and in managing information technology. He also assisted Mr. Lloyd McAdams with the financial direction of theour company and on capital raising efforts. Mr. Brown will continue to perform and be responsible for these functions as a member of the Manager. His specific major accomplishments in 2011 included his contributions to theour company which resulted in our company earning $110 millionapproximately $123 million; and raisingraised additional equity capital of approximately $60.58 million; continuing$92 million. Mr. Brown also continued to enhance the professional development of theour company’s financial staff; andstaff, successfully managing themanaged our company’s financial reporting process, internal controls, information technology and insurance coverage.
Mr. Charles J. Siegel servedserves as Senior Vice President–Finance and reported directly to Mr. Brown.Finance. His specific responsibilities in 2011 included direct responsibility for financial reporting, financial systems and internal controls, supervision of theour Controller, theour Director of Investor Relations and theour Financial Operations Manager, and assisting Mr. Brown and Mr. Lloyd McAdams with the financial direction of theour company and in capital raising
efforts. Mr. Siegel will continue to perform and be responsible for these functions as an employee of the Manager. His specific major accomplishments in 20102011 included his contributions to theour company which resulted in our company earning $110 millionapproximately $123 million; and raising $60.58raised approximately $92 million in additional equity capital; and in helpingcapital. Mr. Siegel also helped to successfully manage the financial reporting process, internal controls, financial operations and investor relations.
Ms. Bistra Pashamova servedserves as Senior Vice President and Portfolio Manager and reported directly to Mr. Joseph E. McAdams.Manager. Her specific responsibilities in 2011 included direct responsibility for asset acquisition, managing the financing of theour company’s portfolio, managing theour company’s interest rate swap agreements and assisting Mr. Joseph E. McAdams in asset liability management, and investment performance and strategy. Ms. Pashamova will continue to perform and be responsible for these functions as an employee of the Manager. Her specific major accomplishments in 20102011 included her contributions to theour company which resulted in our company earning $110 million, havingapproximately $123 million. Ms. Pashamova also profitably purchased $4$3.26 billion in mortgage-backed securities for our company, managed nearly $29approximately $35 billion in borrowings and repayments under repurchase agreements, and managed $2.7$3.03 billion for the company as counterparty to interest rate swap agreements.
2002 Incentive Compensation Plan
Under our 2002 Incentive Plan, various executive officers, including our Chief Executive Officer (Lloyd(Mr. Lloyd McAdams), our Chief Investment Officer (Joseph(Mr. Joseph E. McAdams), our Executive Vice President (Heather(Ms. Heather U. Baines), and other executives havehad the opportunity to earn incentive compensation during each fiscal quarter. The 2002 Incentive Plan requiresrequired that we pay all amounts earned thereunder each quarter (subject to offset for accrued negative incentive compensation)compensation, as described below). Pursuant to their employment agreements, Messrs. Lloyd McAdams and Joseph E. McAdams and Ms. Heather U. Baines arewere entitled to minimum percentages of all amounts paid under the 2002 Incentive Plan. Those percentages are 45%, 25% and 5%, respectively. The 2002 Incentive Plan iswas tied directly to our performance and iswas designed to incentivize key employees to maximize return on equity. The total aggregate amount of compensation that may behas been earned quarterly by all participants under the 2002 Incentive Plan equalsequaled a percentage of net income, before incentive compensation, in excess of the amount that would producehave produced an annualized return on average net worth equal to the ten-year U.S. Treasury Rate plus 1%, or the Threshold Return. At December 31, 2011, 2010 2009 and 2008,2009, the Threshold Return was 3.86%3.05%, 4.44%3.86% and 4.30%4.44%, respectively.
The 2002 Incentive Plan containscontained a “high water-mark” provision requiring that in any fiscal quarter in which net income is an amount less than the amount necessary to earn the Threshold Return, theour company will would
calculate negative incentive compensation for that fiscal quarter that will bewhich was carried forward and willwould offset future incentive compensation earned under the 2002 Incentive Plan with respect to participants who were participants during the fiscal quarter(s) in which negative incentive compensation was generated. At December 31, 2010,2011, the negative incentive compensation accrual carry forward under the 2002 Incentive Plan was $6.4 million,had been reduced to zero, which representsrepresented a reduction from the negative carry forward of $12.2$6.4 million under the 2002 Incentive Plan at December 31, 2009. This negative carry forward may provide an incentive to the individuals covered by the 2002 Incentive Plan to make higher risk investments in an attempt to generate returns of a magnitude necessary to overcome the negative carry forward.
The percentage of taxable net income in excess of the Threshold Return earned2010. We made no payouts under the 2002 Incentive Plan by all employees is calculated based onin 2011.
Following our quarterly average net worthentry into the Management Agreement effective as definedof December 31, 2011 and in connection with the Externalization, we terminated the 2002 Incentive Plan. The percentage rate used in this calculation is based on a blended averagePlan as of the following tiered percentage rates. Based on a hypothetical example of $1 billion average net worth, this calculation would be as follows:December 31, 2011.
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Blended %: $70 million divided by $1 billion = 7.0% (as shown in the hypothetical example).
Average net worth for any period is (i) the daily average of the cumulative net proceeds to date from all offerings of the Company’s equity securities, after deducting any underwriting discounts and commissions and other expenses and costs relating to the offerings, plus (ii) the company’s retained earnings computed by taking the average of such values at the end of each month during such period.
A hypothetical example of the operation of the company’s 2002 Compensation Incentive Plan is as follows:
Hypothetical Example | ||||
Average net worth | $ | 1,000,000,000 | ||
Threshold Return % | 5 | % | ||
$ amount of Threshold Return (average net worth x Threshold Return %) | $ | 50,000,000 | ||
Hypothetical net income for the year | $ | 110,000,000 | ||
Hypothetical Return % (hypothetical net income / average net worth) | 11.0 | % | ||
% that hypothetical return % exceeds Threshold Return % | 6.0 | % | ||
$ amount that Hypothetical Return exceeds Threshold Return | $ | 60,000,000 | ||
Blended % (based on tiers) of average net worth used to calculated incentive pool | 7.0 | % | ||
Incentive pool (excess net income x blended %)* | $ | 4,200,000 | ||
Allocation | Minimum | Hypothetical Discretionary | Total % | Hypothetical Example Allocated $ Amount | ||||||||||||
Lloyd McAdams, Chief Executive Officer | 45 | % | 5 | % | 50 | % | $ | 2,100,000 | ||||||||
Joseph E. McAdams, Chief Investment Officer | 25 | % | 10 | % | 35 | % | 1,470,000 | |||||||||
Heather U. Baines, Executive Vice President | 5 | % | 0 | % | 5 | % | 210,000 | |||||||||
Others in Plan | 0 | % | 10 | % | 10 | % | 420,000 | |||||||||
Total: | $ | 4,200,000 | ||||||||||||||
Dividend Equivalent Rights
Our 20092007 Dividend Equivalent Rights Plan, or DER Plan, is intended to provide our Compensation Committee and our board with additional compensation tools to better align the interests of theour company’s employees, officers and directors with those of its stockholders. The DER Plan is intended to provide incentives to those employees, officers, and directors who are expected to provide significant services to theour company, to encourage such employees, officers, and directors to remain in the employ of theour company, to attract new employees, officers, and directors and to provide additional incentive to increase their efforts in providing services to theour company. A DER is a right to receive amounts equal in value to the dividend distributions paid on a share of our common stock. A DER award does not involve the grant of equity or the right to acquire the same.
In awarding DERs, the Compensation Committee considersconsidered the same criteria detailed on page 3117 of this proxy statement. More specifically, the criteria were applied as follows: the Compensation Committee first decided which individuals should receive DERs; next, the Compensation Committee took into consideration each individual’s total compensation, past DER awards, if any, and their position with theour company. As a result, our Chief Executive Officer received the largest grant, our Chief Investment Officer received the second largest grant and the remainder of our Named Executive Officers, other executive officers and employees each received a lesser number of DERs.
For all years prior to 2010,2011, there have been several grants awarded under the DER Plan to various officers and employees in an aggregate of 500,000582,000 DERs. Of this, Mr. Lloyd McAdams received grants totaling 99,000121,000 DERs; Mr. Joseph E. McAdams received grants totaling 75,50092,500 DERs; andMr. Thad M. Brown Charles J. Siegel and Ms. Bistra Pashamova each received grants totaling 55,50062,500 DERs; and Mr. Charles J. Siegel received grants totaling 61,500 DERs. At December 31, 2010,2011, these grants were still outstanding.
For the year ended December 31, 2010, a grant was2011, there were no grants awarded to any of our officers and employees under the DER Plan.
Following the Externalization as of December, 31, 2011, grants of DERs under the DER Plan may only be awarded to variousour Chief Executive Officer and Chief Financial Officer. All of our other officers and employees in an aggregatemay receive grants of 82,000 DERs. Of this amount, Lloyd McAdams received a grant of 22,000 DERs; Joseph E. McAdams received a grant of 17,000 DERs; Thad M. Brown and Bistra Pashamova each received a grant of 7,000 DERs; and Charles J. Siegel received a grant of 6,000 DERs.DERs under the 2004 Equity Compensation Plan.
Fringe Benefits
TheOur company contributescontributed to a cafeteria plan for the benefit of all employees to be used for health, dental and life insurance, parking and other qualified perks. TheOur company also makesmade employer matching contributions to the 401(k) plan. Benefits arewere provided to all employees in accordance with practices within the marketplace and arewere a necessary element of compensation in attracting, motivating and retaining talented employees.
In general, it iswas the Compensation Committee’s practice to provide limited perquisites and other benefits to senior executives, officers and employees. We dodid not reimburse senior executives, officers and employees for automobiles, clubs, financial planning or items of a similar nature. The Compensation Committee periodically reviewsreviewed the levels of perquisites and other benefits provided to employees in light of market practices and within the context of the total compensation program.
Change in Control Provisions
Various executive officers and employees, including our Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, Executive Vice PresidentsPresident and other senior executives and key employees, havehad either change in control provisions in their employment agreements or have entered into Change in Control and Arbitration Agreements with theour company. These provisions or agreements grantgranted these officers and employees certain compensation and accelerated vesting of equity awards in the event a change in control occurs. The Compensation Committee considers market practices when it entersFollowing our entry into thesethe Management Agreement effective as of December 31, 2011 and in connection with the Externalization, we terminated the employment agreements with our Chief Executive Officer, Chief Investment Officer and Executive Vice President. Consequently, the change in control provisions within those agreements also terminated. For our other officers, we amended the existing Change in Control and agreements, and considers them an important elementArbitration Agreements to provide that should a Change in Control (as defined in the retentionamended Change in Control and Arbitration Agreements) occur, each of these officers will receive from us certain severance and employees.other benefits based upon their total compensation and benefits as of December 31, 2011.
Other Factors and Considerations
Timing of Grants of Restricted Stock
It is our practice to use the closing price on the NYSE on the actual grant date when determining the fair market value of the restricted stock on the grant date. The grant dates used are usually the dates when the board of directors approved the grants or when the board of directors set an effective grant date (usually within a short period of time after approval). In connection with the granting of restricted stock made in accordance with the performance-based bonus provisions of the employment agreements of Messrs. Lloyd McAdams and Joseph E. McAdams, it is our practice to use the closing price of our common stock on the actual grant date when determining the fair market value of these restricted stock grants.
Basis for Using Different Forms of Equity Awards for Long-Term Incentive Compensation
In October 2005, our board of directors decided that we would utilize restricted stock instead of stock options in the future as a means of realizing long-term incentive compensation. Prior to October 2005, we granted stock options to our senior executives, officers and employees as a means of realizing long-term incentive compensation. In December 2005, our board of directors authorized the immediate vesting of all our
then-outstanding common stock options. No other terms of the outstanding common stock options were modified. The decision to accelerate the vesting of the common stock options was based upon the conclusion that the outstanding common stock options were currently not achieving management’s employee motivation and retention goals because the strike prices of the outstanding common stock options were in excess of the fair market value of the underlying common stock.
In October 2005, our board of directors approved the grant of 200,780 shares of restricted stock to variousseveral of our employees under our 2004 Equity Compensation Plan. The closing price of our common stock on the grant date was $7.72. The restricted stock vests 10% per year on each anniversary date for a ten-year period and shall also vest immediately upon the death of the grantee or upon the grantee reaching age 65. Each grantee shall have the right to sell 40% of the restricted stock anytimeany time after such shares have vested. The remaining 60% of such vested restricted stock may not be sold until after termination of employment with us.
In October 2006, our board of directors approved a grant of an aggregate of 197,362 shares of performance-based restricted stock to several of our officers and employees under our 2004 Equity Compensation Plan. Such grant was made effective on October 18, 2006. The closing price of our common stock on the effective date of the grant was $9.12. The shares will vest in equal annual installments over three years provided that the annually compounded rate of return on our common stock, including dividends, exceeds 12%. If the annually compounded rate of return does not exceed 12%, then the shares will vest on the anniversary date thereafter when the annually compounded rate of return exceeds 12%. If the annually compounded rate of return does not exceed 12% within ten years after the effective date of the grant, then the shares will be forfeited. The shares will fully vest within the ten-year period upon the death of a grantee. Upon vesting, each grantee shall have the right to sell 40% of the restricted stock anytimeany time after such shares have vested. The remaining 60% of such vested restricted stock may not be sold, transferred or pledged until after termination of employment with us or upon the tenth anniversary of the effective date. To date, none of these shares have vested.
Timing of Grants of Common Stock
It is our practice to use the closing price on the NYSE on the actual grant date when determining the fair market value of common stock on the grant date. The grant dates used are usually the dates when our board approved the grants or when our board set an effective grant date (usually within a short period of time after approval).
Deferred Compensation Plan
ThePrior to the Externalization, the Anworth Mortgage Asset Corporation Deferred Compensation Plan, or the Deferred Compensation Plan, permitspermitted eligible officers to defer the payment of all or a portion of their cash compensation that otherwise would be in excess of the $1 million annual limitation on deductible compensation imposed by Section 162(m) of the Code. Under this limitation, compensation paid to our Named Executive Officers iswas not deductible by us for income tax purposes to the extent the amount paid to any such officer exceedsexceeded $1 million in any calendar year, unless such compensation qualifiesqualified as performance-based compensation under Section 162(m). Our board
Following our entry into the Management Agreement effective as of directors designatesDecember 31, 2011 and in connection with the eligible officers who may participate inExternalization, we terminated the Deferred Compensation Plan as of December 31, 2011 and, to date, has designated allin accordance with the terms of the executive officers as those who may participateDeferred Compensation Plan, our board approved and authorized the distribution of the amount due to Mr. Lloyd McAdams of $472,324, and such amount was paid in this plan.full on January 30, 2012.
Executive Management’s Involvement in Compensation Policies
TheDuring 2011, the Chief Executive Officer iswas responsible for all salary adjustments and additional compensation payments for all employees other than Named Executive Officers and other executive officers. Adjustments to the Chief Executive Officer’s salary and additional cash compensation other than those subject to the 2002 Incentive Plan and the Chief Executive Officer’s employment agreement, as amended, shall becomewere effective only after approval by the Compensation Committee. The Compensation Committee monitorsmonitored the total cost of the various compensation arrangements annually when it reviewsreviewed the Summary Compensation Table and other related tables as disclosed in the annual proxy statement. Following our entry into the Management Agreement effective as of December 31, 2011 and in connection with the Externalization, as our company no longer has any employees, the Chief Executive Officer is no longer responsible for any compensation arrangements. The Chief Executive Officer may submit to the Compensation Committee his recommendations for any equity grants.
Accounting and Tax Considerations of Different Forms of Compensation
Deductibility of Executive Compensation
ThePrior to the Externalization, the Compensation Committee periodically reviewsreviewed the potential implications of Section 162(m) of the Code. This section precludes a public corporation from taking a tax deduction for individual compensation in
excess of $1 million for its named executive officers unless the compensation is performance-based within the meaning of Section 162(m). Although the Compensation Committee will considerconsidered various alternatives for preserving the deductibility of compensation payments, the Compensation Committee reservesreserved the right to award compensation to the executives that may not qualify under Section 162(m) as deductible compensation.
Other Tax and Accounting Implications
Section 409A of the Code adopted under the American Jobs Creation Act of 2004 has significantly changed the tax rules applicable to nonqualified deferred compensation arrangements. We believe that we are operating in good faith compliance with the statutory provisions which were effective January 1, 2005 and the final regulations which became effective January 1, 2009.
In accordance with Financial Accounting Standards Board Accounting Standard Codification 718-10, any compensation cost relating to share-based payments is recognized in the consolidated financial statements. Restricted stock is expensed over the vesting periods.
Executive Compensation and Related Matters
The following table provides certain summary information concerning the compensation earned by our Principal Executive Officer, Principal Financial Officer and each of our three other most highly compensated executive officers, or the Named Executive Officers, who were serving as executive officers as of December 31, 20102011 and whose aggregate total compensation was in excess of $100,000 for services rendered in all capacities to us and our subsidiaries for the fiscal years ended December 31, 2011, 2010 2009 and 2008:2009:
Name and Principal Position | Year | Salary ($)(1) | Bonus ($)(2) | Stock Awards ($)(3) | Non-Equity Incentive Comp. ($)(4) | Change in Pension Value and Non- Qualified Deferred Comp. Earnings ($)(5) | All Other Comp. ($)(6)(7) | Total ($) | Year | Salary ($)(1) | Bonus ($)(2) | Stock Awards ($)(3) | Non-Equity Incentive Comp. ($)(4) | Change in Pension Value and Non- Qualified Deferred Comp. Earnings ($)(5) | All Other Comp. ($)(6)(7) | Total ($) | ||||||||||||||||||||||||||||||||||||||||||||||||
Lloyd McAdams | 2010 | 925,000 | 700,000 | 418,909 | 1,256,727 | 50,949 | 458,145 | 3,809,730 | 2011 | 944,833 | 720,000 | 482,247 | 1,446,742 | 56,501 | 516,219 | 4,166,542 | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal Executive Officer | 2009 | 925,000 | 400,000 | 788,941 | 2,366,825 | 53,296 | 418,873 | 4,952,935 | 2010 | 925,000 | 700,000 | 418,909 | 1,256,727 | 50,949 | 458,145 | 3,809,730 | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 925,000 | 400,000 | 1,200,000 | 1,300,000 | 39,809 | 147,318 | 4,012,127 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 925,000 | 400,000 | 788,941 | 2,366,825 | 53,296 | 418,873 | 4,952,935 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Thad M. Brown | 2010 | 275,000 | 113,000 | 0 | 0 | 0 | 90,176 | 478,176 | 2011 | 280,758 | 122,000 | 0 | 0 | 0 | 92,474 | 495,232 | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal Financial Officer | 2009 | 275,000 | 88,000 | 0 | 0 | 0 | 103,325 | 466,325 | 2010 | 275,000 | 113,000 | 0 | 0 | 0 | 90,176 | 478,176 | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 275,000 | 73,333 | 0 | 0 | 0 | 78,472 | 426,805 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 275,000 | 88,000 | 0 | 0 | 0 | 103,325 | 466,325 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Joseph E. McAdams | 2010 | 700,000 | 850,000 | 342,744 | 1,028,231 | 0 | 294,317 | 3,215,292 | 2011 | 715,114 | 960,000 | 394,566 | 1,183,698 | 0 | 343,595 | 3,596,973 | ||||||||||||||||||||||||||||||||||||||||||||||||
Chief Investment Officer | 2009 | 700,000 | 845,000 | 525,963 | 1,577,883 | 0 | 265,104 | 3,913,950 | 2010 | 700,000 | 850,000 | 342,744 | 1,028,231 | 0 | 294,317 | 3,215,292 | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 700,000 | 1,090,000 | 600,000 | 700,000 | 0 | 117,087 | 3,207,087 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 700,000 | 845,000 | 525,963 | 1,577,883 | 0 | 265,104 | 3,913,950 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Charles J. Siegel | 2010 | 250,000 | 103,000 | 0 | 0 | 0 | 89,956 | 442,956 | 2011 | 259,537 | 111,200 | 0 | 0 | 0 | 91,534 | 462,271 | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior VP-Finance | 2009 | 250,000 | 80,000 | 0 | 0 | 0 | 103,325 | 433,325 | 2010 | 250,000 | 103,000 | 0 | 0 | 0 | 89,956 | 442,956 | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 250,000 | 115,250 | 0 | 0 | 0 | 78,472 | 443,722 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 250,000 | 80,000 | 0 | 0 | 0 | 103,325 | 433,325 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bistra Pashamova | 2010 | 275,000 | 650,000 | 0 | 0 | 0 | 90,176 | 1,015,176 | 2011 | 280,758 | 735,000 | 0 | 0 | 0 | 92,474 | 1,108,232 | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior VP/Portfolio Manager | 2009 | 275,000 | 650,000 | 0 | 0 | 0 | 103,325 | 1,028,325 | 2010 | 275,000 | 650,000 | 0 | 0 | 0 | 90,176 | 1,015,176 | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 264,583 | 480,000 | 0 | 0 | 0 | 78,472 | 823,055 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 275,000 | 650,000 | 0 | 0 | 0 | 103,325 | 1,028,325 |
(1) | Salaries for Messrs. Lloyd McAdams and Joseph E. McAdams |
(2) | For 2011, 2010 |
(3) | At the end of our 2011 fiscal year, Messrs. Lloyd McAdams and Joseph E. McAdams received 76,791 and 62,829 shares of common stock, respectively, in accordance with the terms of their employment agreements. At the end of our 2010 fiscal year, Messrs. Lloyd McAdams and Joseph E. McAdams received 59,844 and 48,963 shares of common stock, respectively, in accordance with the terms of their employment agreements. At the end of our 2009 fiscal year, Messrs. Lloyd McAdams and Joseph E. McAdams received 112,348 and 74,899 |
(4) | There were no payments made in 2011, 2010 |
(as described on pages |
(5) |
(6) | Other compensation includes dividends paid in 2011, 2010 |
(7) | For all years prior to |
The following grants of plan-based awards were issued to our Named Executive Officers during the fiscal year ended December 31, 2010:2011:
Name | Grant Date | Non-Plan Stock Awards: Number of Shares of Stock or Units (#) | Exercise or Base Price of Stock Awards ($/Sh) | Grant Date Fair Value of Stock Awards ($)(1) | Grant Date | Non-Plan Stock Awards: Number of Shares of Stock or Units (#) | Exercise or Base Price of Stock Awards ($/Sh) | Grant Date Fair Value of Stock Awards ($)(l) | ||||||||||||||||||||||||
Lloyd McAdams | 12/29/10 | 59,844 | 7.00 | 418,909 | 12/30/11 | 76,791 | 6.28 | 482,247 | ||||||||||||||||||||||||
Chief Executive Officer | ||||||||||||||||||||||||||||||||
Thad M. Brown | N/A | 0 | 0 | 0 | N/A | 0 | 0 | 0 | ||||||||||||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||||||||||||
Joseph E. McAdams | 12/29/10 | 48,963 | 7.00 | 342,744 | 12/30/11 | 62,829 | 6.28 | 394,566 | ||||||||||||||||||||||||
Chief Investment Officer | ||||||||||||||||||||||||||||||||
Charles J. Siegel | N/A | 0 | 0 | 0 | N/A | 0 | 0 | 0 | ||||||||||||||||||||||||
Senior VP-Finance | ||||||||||||||||||||||||||||||||
Bistra Pashamova | N/A | 0 | 0 | 0 | N/A | 0 | 0 | 0 | ||||||||||||||||||||||||
VP and Portfolio Manager |
(1) | These amounts represent the shares of common stock granted to Messrs. Lloyd McAdams and Joseph E. McAdams, respectively, in accordance with the terms of their employment agreements. As the stock awards vested immediately, the grant date fair value represents the number of shares of common stock multiplied by the closing price of our common stock on the date of the grant. |
Outstanding Equity Awards at Fiscal Year-End
The following table provides information with respect to our Named Executive Officers concerning outstanding equity awards held by them at December 31, 2010:2011:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards | Stock Awards | Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#)(1) | Option Exercise Price ($) | Option Expiration Date | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That have Not Vested ($)(3) | Number of Securities Underlying Unexercised Options Exercisable (#)(1) | Option Exercise Price ($) | Option Expiration Date | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That have Not Vested ($)(3) | ||||||||||||||||||||||||||||||
Lloyd McAdams | 0 | N/A | N/A | 38,377 | 268,639 | 0 | N/A | N/A | 38,377 | 241,008 | ||||||||||||||||||||||||||||||
Thad M. Brown | 38,700 | 13.80 | 5/1/2013 | 0 | 0 | 38,700 | 13.80 | 5/1/2013 | 0 | 0 | ||||||||||||||||||||||||||||||
9,715 | 68,005 | 7,772 | 48,808 | |||||||||||||||||||||||||||||||||||||
16,447 | 115,129 | 16,447 | 103,287 | |||||||||||||||||||||||||||||||||||||
Joseph E. McAdams | 54,000 | 9.45 | 1/21/2012 | 0 | 0 | 54,000 | 9.45 | 1/21/2012 | 0 | 0 | ||||||||||||||||||||||||||||||
75,000 | 11.20 | 10/4/2012 | 0 | 0 | 75,000 | 11.20 | 10/4/2012 | 0 | 0 | |||||||||||||||||||||||||||||||
82,900 | 13.80 | 5/1/2013 | 0 | 0 | 82,900 | 13.80 | 5/1/2013 | 0 | 0 | |||||||||||||||||||||||||||||||
12,957 | 90,699 | 10,367 | 65,105 | |||||||||||||||||||||||||||||||||||||
27,412 | 191,884 | 27,412 | 172,147 | |||||||||||||||||||||||||||||||||||||
Charles J. Siegel | 5,000 | 9.72 | 7/19/2015 | 0 | 0 | 5,000 | 9.72 | 7/19/2015 | 0 | 0 | ||||||||||||||||||||||||||||||
9,715 | 68,005 | 7,772 | 48,808 | |||||||||||||||||||||||||||||||||||||
16,447 | 115,129 | 16,447 | 103,287 | |||||||||||||||||||||||||||||||||||||
Bistra Pashamova | 30,000 | 11.20 | 10/4/2012 | 0 | 0 | 30,000 | 11.20 | 10/4/2012 | 0 | 0 | ||||||||||||||||||||||||||||||
33,100 | 13.80 | 5/1/2013 | 0 | 0 | 33,100 | 13.80 | 5/1/2013 | 0 | 0 | |||||||||||||||||||||||||||||||
9,715 | 68,005 | 7,772 | 48,808 | |||||||||||||||||||||||||||||||||||||
16,447 | 115,129 | 16,447 | 103,287 |
(1) | The option awards in the above table list the number of securities underlying unexercised options that are exercisable, the option exercise price and the option exercise date. All of these options have now been vested. In December 2005, our board |
(2) | For each Named Executive Officer, the market value of the number of shares of restricted stock that have not vested is based on the closing price of our common stock as of December 31, |
(3) | The market value of the stock awards is based on the number of unvested shares multiplied by the closing price of |
Option Exercises and Stock Vested
The following table provides information with respect to our Named Executive Officers concerning option exercises and stock vested as of December 31, 2010:2011:
OPTION EXERCISES AND STOCK VESTED
2010 | 2011 | |||||||||||||||||||||||||||||||
Option Awards | Stock Awards(1) | Option Awards | Stock Awards(1) | |||||||||||||||||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||||||||||||||
Lloyd McAdams | 0 | 0 | 15,547 | 108,052 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Thad M. Brown | 0 | 0 | 1,943 | 13,504 | 0 | 0 | 1,943 | 12,688 | ||||||||||||||||||||||||
Joseph E. McAdams | 0 | 0 | 2,590 | 18,001 | 0 | 0 | 2,590 | 16,913 | ||||||||||||||||||||||||
Charles J. Siegel | 0 | 0 | 1,943 | 13,504 | 0 | 0 | 1,943 | 12,688 | ||||||||||||||||||||||||
Bistra Pashamova | 0 | 0 | 1,943 | 13,504 | 0 | 0 | 1,943 | 12,688 |
(1) | The stock awards that were vested during |
Pension Benefits
TheOur company does not provide any pension benefits to any of our officers or employees.
Non-Qualified Deferred Compensation
The following table provides information with respect to non-qualified deferred compensation paid to our Named Executive Officers during the fiscal year ended December 31, 2010:2011:
NON-QUALIFIED DEFERRED COMPENSATION
Name | Aggregate Earnings in Last FY ($) | Aggregate Balance at Last FY ($) | Aggregate Earnings in Last FY ($) | Aggregate Balance at Last FY ($) | ||||||||||||
Lloyd McAdams | 50,949 | 415,823 | 56,501 | 472,324 | ||||||||||||
Thad M. Brown | 0 | 0 | 0 | 0 | ||||||||||||
Joseph E. McAdams | 0 | 0 | 0 | 0 | ||||||||||||
Charles J. Siegel | 0 | 0 | 0 | 0 | ||||||||||||
Bistra Pashamova | 0 | 0 | 0 | 0 |
Our board designatesdesignated the eligible officers who may participatecould have participated in the Deferred Compensation Plan (which is more fully described on page 3622 of this proxy statement) and to date, hashad designated all of our executive officers as those who may participate in this plan. To date,Mr. Lloyd McAdams iswas the only officer who has elected to defer compensation. This had been done in a prior year. The amount deferred accruesaccrued interest each year at a rate equal to the amount of dividends paid to common stockholders for the year divided by the average common stock price for the year. In 2010,2011, the common stock dividends for the year totaled $0.97$0.94 per share and the average common stock price for the year was $6.95.$6.92. This resulted in an accrual for 20102011 of $50,949$56,501 (this entire amount is included in the “Summary Compensation Table”). Including this amount, the aggregate balance of the amount deferred for Mr. Lloyd McAdams at December 31, 20102011 was $415,823.$472,324.
Following our entry into the Management Agreement effective as of December 31, 2011 and in connection with the Externalization, we terminated the Deferred Compensation Plan as of December 31, 2011 and, in accordance with the terms of the Deferred Compensation Plan, our board approved and authorized the distribution of the amount due to Mr. Lloyd McAdams of $472,324, and such amount was paid in full on January 30, 2012.
Equity Compensation Plan Information
The following table provides information as of December 31, 20102011 with respect to our common stock issuable under our equity compensation plans:
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||||||||||
Equity compensation plans approved by security holders(1) | 621,100 | $ | 12.480 | 713,616 | 592,480 | $ | 12.535 | 573,996 | ||||||||||||||||
Equity compensation plans not approved by security holders(2) | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||
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Total | 621,100 | $ | 12.480 | 713,616 | 592,480 | $ | 12.535 | 573,996 | ||||||||||||||||
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(1) | In May 2004, our stockholders adopted the Anworth Mortgage Asset Corporation 2004 Equity Compensation Plan, or the Plan, which amended and restated our 1997 Stock Option and Awards Plan. The Plan authorized |
(2) |
Upon the closing in June 2002 of the merger with our external manager, we assumed the existing employment agreements of Lloyd McAdams, Joseph E. McAdams and Heather U. Baines. These agreements have been modified over time by addenda entered into between us and each of the executives. Pursuant to the terms of thetheir employment agreements:
agreements, during 2011, Mr. Lloyd McAdams serves as our President, Chairman and Chief Executive Officer,received an annual base salary of approximately $945 thousand, Mr. Joseph E. McAdams serves as our Executive Vice Presidentreceived an annual base salary of approximately $715 thousand and Chief Investment Officer andMs. Heather U. Baines serves as our Executive Vice President;
Lloyd McAdams receives a $925,000received an annual base salary Joseph E. McAdams receives a $700,000 annual base salary and Heather U. Baines receives a $60,000 annual base salary;
in the event any of the three executives is terminated without “cause” or if they terminate for “good reason” (as those terms are defined in their respective employment agreements), or in the case of Lloyd McAdams or Joseph E. McAdams, their employment agreements are not renewed, then the executives would be entitled to: (1) all base salary due under the employment agreements, (2) any additional discretionary cash compensation due under the employment agreements, (3) a lump sum payment of an amount equal to three years of the executive’s then-current base salary, (4) payment of COBRA medical coverage for 18 months, (5) immediate vesting of all pension benefits, (6) all incentive compensation to which the executives would have been entitled to under the employment agreements prorated through the termination date, and (7) all expense reimbursements and benefits due and owing the executives through the termination. In addition, under these circumstances, Lloyd McAdams and Joseph E. McAdams would each be entitled to a lump sum payment equal to 150% of the greater of (i) the highest amount paid or that could be payable (in the aggregate) under the 2002 Incentive Plan$62 thousand.
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each agreement contains an evergreen provision that permits automatic renewal for one year at the end of each term unless written notice of termination is provided by either party six months prior to the end of the current term;
the three executives are entitled to participate in the 2002 Incentive Plan and each of these individuals are provided a minimum percentage of the amounts earned under such plan as described on pages 33 and 34 under “2002 Incentive Compensation Plan” and the 2002 Incentive Plan may not be amended without the consent of the three executives;
the three executives received restricted stock grants of 20,000 shares each, which grants vest in equal, annual installments over ten years following the grant date in June 2002;
the equity awards granted to each of the three executives will immediately vest upon the termination of the executive’s employment upon a change in control; and
Lloyd McAdams and Joseph E. McAdams are each subject to a one-year non-competition provision following termination of their employment except in the event of a change in control.
Under the terms of theirthe employment agreements, a long-term equity incentive structure was established for Messrs. Lloyd McAdams and Joseph E. McAdams. As a result, they areThey were eligible to participate in a performance-based bonus pool that iswas funded based on the company’sour Company’s return on average equity, or ROAE. ROAE iswas calculated as the twelve-month GAAP net income available to common stockholders, excluding the effect of depreciation, preferred stock dividends, gains/losses on asset sales and impairment charges, divided by the average stockholder equity less goodwill and preferred stockholder equity. The Compensation Committee of our board, or the Compensation Committee, evaluated various measures and factors of performance in developing this structure and, in its view, ROAE was determined to be the single best indicator of our overall performance and therefore of value creation for our stockholders. This is in part due to the fact that ROAE is a metric of our performance that has been calculated and reported on a consistent basis since our inception in 1998.
As structured by the Compensation Committee, the aggregate amount of this performance-based bonus pool that was available for distribution can rangeranged annually based upon our ROAE in accordance with the ROAE. If thefollowing:
if our ROAE iswas 0% or less, no performance-based bonus iswas paid. If the
if our ROAE iswas greater than 0% but less than 8%, a bonus pool of up to $500,000 is$500 thousand was available in the aggregate. If the
if our ROAE iswas 8% or greater, then the bonus pool available to be paid to both executives in the aggregate isequaled $500 thousand plus 10% of the first $5 million of excess return and 6% of the amount of the excess return greater than $5 million.
As structured by the Compensation Committee, the aggregate amount of this performance-based bonus pool available for distribution could have ranged annually based upon the ROAE. If the ROAE was 0% or less, no performance-based bonus was paid. If the ROAE was greater than 0% but less than 8%, a bonus pool of up to $500,000 was available in the aggregate. If the ROAE was 8% or greater, then the bonus pool available to be paid to both executives in the aggregate was $500,000 plus 10% of the first $5 million of excess return and 6% of the amount of the excess return greater than $5 million. The Compensation Committee hashad the discretionary right to adjust downward the amount available for distribution from the bonus pool by as much as 10% in any given year, based upon its assessment of factors including our leverage, stability of book value of the common stock and price per share of our common stock relative to other industry participants. Of the aggregate amount available for distribution from the bonus pool, the Compensation Committee basesbased annual bonus allocation to each of Messrs. Lloyd McAdams and Joseph E. McAdams on its assessment of the performance of each executive. The performance-based bonus may providehave provided an incentive to these executives to make higher risk investments in an attempt to earn greater amounts of compensation.
In order to further align the performance of Messrs. Lloyd McAdams and Joseph E. McAdams with our long-term financial success and the creation of stockholder value, the Compensation Committee also determined that with respect to 2008 and each year thereafter, 25% of the annual performance-based bonus amount allocated to be distributed to an executive over $100,000 would bewas to have been paid in restricted shares of common stock. In addition, neither of the executives will bewas permitted to sell or otherwise transfer any restrictedthese shares during such person’s
employment with theour company until the value of his respective stock holdings in theour company exceedsexceeded a seven and one-half times multiple of his base compensation and, once this threshold iswas met, only to the extent that the value of such holdings exceedsexceeded that multiple.
For the year ended December 31, 2010,2011, the ROAE (as described above) was approximately 13.16%13.63%, based on the adjusted GAAP net income available to common stockholders (as described above) of approximately $113.8$124.2 million, divided by the average stockholders’ equity (as described above) of approximately $865$911.2 million. This ROAE produced an excess return of approximately $3.4$51.3 million. Based on this information, the performance-based bonus pool (as described above) was approximately $3.05$3.51 million. Of this bonus pool, approximately $1.257$1.447 million was paid to Mr. Lloyd McAdams in cash and $419$482 thousand was paid in restrictedcommon stock. Of this bonus pool, approximately $1.028$1.184 million was paid to Mr. Joseph E. McAdams in cash and $343$395 thousand was paid in restrictedcommon stock.
Prior to the end of any year, the Compensation Committee, at its discretion, may notify either of Messrs. Lloyd McAdams or Joseph E. McAdams that either or both of them will not participate in the pool during the following year. If this occurs, the sale or transfer restrictions on previously issued pool shares with respect to the executive so notified will be eliminated at that time.
The Compensation Committee, in its discretion, may providecould have provided additional compensation to each of Messrs. Lloyd McAdams and Joseph E. McAdams beyond the annual performance-based additional cash compensation earned under the incentive compensation structure in their employment agreements. This additional compensation may becould have been provided in consideration of theour company’s execution of our business and strategic plan. For the year ended December 31, 2010,2011, additional compensation of $700$720 thousand was paid to Mr. Lloyd McAdams and $850$960 thousand was paid to Mr. Joseph E. McAdams.
Following our entry into the Management Agreement effective as of December 31, 2011 and in connection with the Externalization, the employment agreements for Messrs. Lloyd McAdams and Joseph E. McAdams and Ms. Baines were terminated as of December 31, 2011.
Change in Control and Arbitration Agreements
In June 2006, we entered into Change in Control and Arbitration Agreements with our Chief Financial Officer (Thad(Mr. Thad M. Brown), Senior Vice President-Finance (Charles(Mr. Charles J. Siegel), Senior Vice President-Portfolio Manager (Bistra(Ms. Bistra Pashamova) and our Vice President-Portfolio Manager (Evangelos(Mr. Evangelos Karagiannis), as well as certain of our other officers and employees. Our board determined that, in the event of a change in control of theour company, as defined below, it would be imperative for us and theour board to be able to receive and rely upon these employees’ advice, if requested, as to the best interests of theour company and its stockholders without concern that these employees might be distracted by the personal uncertainties and risks created by any such possible transactions. Following our entry into the Management Agreement effective as of December 31, 2011 and in connection with the Externalization, we amended the existing Change in Control and Arbitration Agreements to provide that should a Change in Control (as defined in the amended Change in Control and Arbitration agreements) occur, each of these officers will receive from us certain severance and other benefits valued as of December 31, 2011.
The Change in Control and Arbitration Agreements grant these officers and employees, in the event that a change in control occurs, a lump sum payment equal to (i) 12 months annual base salary in effect on the date of the change in control,December 31, 2011, plus (ii) the average annual incentive compensation received for the two complete fiscal years prior to the date of the change in control,December 31, 2011, and plus (iii) the average annual bonus received for the two complete fiscal years prior to the date of the change in control,December 31, 2011, as well as all fringe benefits for a period of 12 months following termination of employment with us. The Change in Control and Arbitration Agreements also provide for immediate vesting of all equity awards granted to these officers and employees upon a change in control.
A Change in Control, as defined in the Change in Control and Arbitration Agreements, shall meanmeans the first to occur of any of the following: (a) any “person” or “persons” acting as a group (other than theour company or any trustee or other fiduciary holding securities under an employee benefit plan of theour company) being the beneficial owner, directly or indirectly, of securities of theour company representing more than 50% of the combined voting power of theour company’s then outstanding securities; or (b) a change in the composition of the board of directors;our board; or (c) the effective date of any merger or consolidation of theour company with any other corporation or entity other than (i) a merger or consolidation which would result in the voting securities of theour company outstanding immediately prior thereto continuing to represent in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of theour company, at least 65% of the combined voting power of the voting securities of theour company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of theour company in which no person acquires more than 35% of the combined voting power of theour company’s then outstanding securities, or (iii) a merger or consolidation of theour company with one or more persons that are related to theour company immediately prior to the consolidation or merger; or (d) the sale or disposition by theour company of all or substantially all of theour company’s assets, to one or more persons that are not related to theour company immediately prior to the sale or transfer. The foregoing summary of the terms and conditions of the Change in Control and Arbitration Agreements is qualified in its entirety by reference to the Change in Control and Arbitration Agreements, which have been filed as exhibits to theour company’s reports pursuant to the Exchange Act of 1934, as amended.Act.
The following table reflects the amounts that would be paid if a changeChange in control or other termination event occurred on December 31, 2010Control and our stock price per share was the closing market priceArbitration Agreements for Messrs. Thad M. Brown and Charles J. Siegel and Ms. Bistra Pashamova were amended as of that date.noted previously. The closing market price of our common stock at December 31, 20102011 was $7.00.$6.28. The following reflects the amounts they each would be paid if a change in control occurred on December 31, 2011:
Lloyd McAdams(1) | Thad M. Brown | Joseph E. McAdams | Charles J. Siegel | Bistra Pashamova | ||||||||||||||||
If termination without “cause,” for “good reason,” or if employment agreements are not renewed | $ | 4,167,043 | $ | 0 | $ | 2,851,220 | $ | 0 | $ | 0 | ||||||||||
Change in Control | $ | 4,435,682 | $ | 574,114 | $ | 3,133,803 | $ | 540,114 | $ | 1,118,934 |
Thad M. Brown | Charles J. Siegel | Bistra Pashamova | ||||||||||
Base salary | $ | 283,000 | $ | 258,000 | $ | 283,000 | ||||||
Average bonus | 117,500 | 107,100 | 692,500 | |||||||||
Fringe benefits | 15,480 | 15,480 | 10,800 | |||||||||
Vesting of equity awards | 152,095 | 152,095 | 152,095 | |||||||||
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Total: | $ | 568,075 | $ | 532,675 | $ | 1,138,395 | ||||||
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The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. The principal management executive involved in determining compensation and in discussing these issues with the Compensation Committee is the Chief Executive Officer. His involvement is discussed in the Compensation Discussion and Analysis section of this proxy statement (see page 36)22).
Based on this review and discussion, the Compensation Committee recommended to theour board of that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Annual Report on Form 10-K.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 26, 2012, the record date of the Annual Meeting, there were 136,072,545 shares of our common stock outstanding. The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of March 26, 2012 by (i) each of our directors, (ii) each of our Named Executive Officers, (iii) each person who is known to us to beneficially own more than 5% of our common stock and (iv) all of our directors and executive officers as a group. The number of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and any shares which the individual has the right to acquire within 60 days of March 26, 2012 through the exercise of any stock option or other right. Unless otherwise noted, we believe that each person has sole investment and voting power (or shares or controls such powers with either his or her spouse or immediate family member) with respect to the shares set forth in the following table:
Beneficial Owner | Common Stock Beneficially Owned(1) | Percent of Class | ||||||
Directors and Named Executive Officers | ||||||||
Lloyd McAdams(2) | 1,261,944 | 0.93 | % | |||||
Thad M. Brown(3) | 74,577 | * | ||||||
Joseph E. McAdams(4) | 619,399 | * | ||||||
Charles J. Siegel(5) | 47,601 | * | ||||||
Bistra Pashamova(6) | 98,977 | * | ||||||
Lee A. Ault III(7) | 64,100 | * | ||||||
Charles H. Black(8) | 44,474 | * | ||||||
Joe E. Davis(9) | 37,682 | * | ||||||
Robert C. Davis | 30,000 | * | ||||||
All Directors and Executive Officers as a Group (11 Persons)(10) | 2,439,831 | 1.79 | % | |||||
5% Stockholders | ||||||||
None | 0 | 0 | % |
* | Less than 1% |
|