<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SLM HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6199 52-2013874
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
11600 SALLIE MAE DRIVE
RESTON, VA 20193
(703) 810-3000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MARIANNE M. KELER
GENERAL COUNSEL
SLM HOLDING CORPORATION
11600 SALLIE MAE DRIVE
RESTON, VA 20193
(703) 810-5208
Copies to:
RONALD O. MUELLER
GIBSON, DUNN & CRUTCHER LLP
1050 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: FROM TIME TO TIME AFTER THIS REGISTRATION
STATEMENT BECOMES EFFECTIVE AS DETERMINED BY MARKET CONDITIONS.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Per Unit Offering Aggregate Registration
Securities to be Registered Registered(1) Price(1) Offering Price(1) Fee(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.20 per share,
issuable upon exercise of Warrants(2) 555,015 $160.875 $89,288,038 $27,056.98
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Pursuant to Rule 416, an indeterminate number of shares of the Registrant's
common stock that may become issuable pursuant to the anti-dilution
provisions of the Warrants is also being registered hereby.
(3) Pursuant to Rule 457(c), the price of the Common Stock is based on the
average of the high and low prices for the Common Stock of $160.875 as
reported by the New York Stock Exchange on October 15, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
SLM HOLDING CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
----
NO. FORM S-1 CAPTION CAPTION OR LOCATION IN PROSPECTUS
---- ---------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus . . . . . Facing Page of the Registration Statement; Cross
Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . Not Applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . Selling Stockholders
8. Plan of Distribution . . . . . . . . . . . . . . . . Outside Front Cover Page; Plan of Distribution
9. Description of Securities to be Registered . . . . . Description of the Common Stock
10. Interests of Named Experts and Counsel . . . . . . . Legal Matters; Experts
11. Information with Respect to the Registrant . . . . . Prospectus Summary; Risk Factors; Business;
Regulation; Capitalization; Selected Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Description of the Common Stock; Management;
Director Compensation; Executive Officers of the
Company; Executive Compensation; Ownership of
the Common Stock; Financial Statements
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities . . . . . . . . . . . . . Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION
October 21, 1997
SLM HOLDING CORPORATION
---------------
555,015 SHARES OF COMMON STOCK
(PAR VALUE $.20 PER SHARE)
---------------
This Prospectus relates to the public offering by certain
securityholders named herein (the "Selling Stockholders") of 555,015 shares
(the "Shares") of common stock, par value $.20 per share (the "Common Stock")
of SLM Holding Corporation (the "Company" or "SLM Holding") issued or issuable
upon the exercise of outstanding warrants (the "Warrants") to purchase from the
Company shares of Common Stock at $72.43 per share, on or before September 30,
2008. See "Selling Stockholders" and "Plan of Distribution."
The Warrants were originally issued to the District of Columbia
Financial Responsibility and Management Assistance Authority (the "Control
Board") pursuant to Section 602(a) of the Student Loan Marketing Association
Reorganization Act of 1996, Public Law 104-208 (the "Privatization Act"). The
Company is filing the Registration Statement of which this Prospectus is a part
pursuant to Section 602(a) of the Privatization Act and its contractual
obligations under the Warrant certificate. Except for the exercise price
received by the Company upon exercise of any Warrants, the Company will not
receive any proceeds from the sale of the Shares offered hereby. See "Use of
Proceeds." Prior to this offering there has been no public market for the
Warrants and the Company does not intend to register the Warrants or apply for
listing or quotation of the Warrants on any securities exchange or stock
market. The aggregate proceeds to the Selling Stockholders from the sale of
the Shares registered hereby will be the selling price less the aggregate
agent's commissions and underwriter's discounts, if any. The Company will pay
substantially all of the expenses of filing and maintaining the effectiveness
of the Registration Statement of which this Prospectus is a part.
The Selling Stockholders directly, through agents designated from time
to time or through dealers or underwriters designated from time to time, may
sell the Shares from time to time on terms to be determined at the time of such
sales. The effectiveness of the Registration Statement of which this
Prospectus is a part is expected to terminate on the date that is two years
after the last outstanding Warrant has been exercised or the date the last
outstanding Warrant has expired unexercised, or, if earlier, the date on which
all of the Shares have been sold pursuant to the Registration Statement of
which this Prospectus is a part or all of the Shares have been sold pursuant to
Rule 144(b) under the Securities Act of 1933, as amended (the "Securities Act")
or may be sold pursuant to Rule 144(k) under the Securities Act. To the extent
required, the respective purchase prices and public offering prices, the names
of any such agent, dealer or underwriter and any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement or by filing a post-effective amendment to
the Registration Statement of which this Prospectus is a part. See "Plan of
Distribution."
The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Shares offered hereby may be deemed to be "underwriters" under the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed underwriting commissions
or discounts under the Securities Act.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DESCRIPTION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
The following legend is required by the Privatization Act in
connection with the offering of securities by the Company, including the
Shares:
OBLIGATIONS OF SLM HOLDING AND ANY SUBSIDIARY OF SLM HOLDING ARE NOT GUARANTEED
BY THE FULL FAITH AND CREDIT OF THE UNITED STATES AND NEITHER SLM HOLDING NOR
ANY SUBSIDIARY OF SLM HOLDING IS A GOVERNMENT-SPONSORED ENTERPRISE (OTHER THAN
STUDENT LOAN MARKETING ASSOCIATION) OR AN INSTRUMENTALITY OF THE UNITED STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 21, 1997.
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "SEC"). Reports, proxy and information statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the SEC in Washington, D.C. located
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of these materials can be obtained from the
Public Reference Section of the SEC, Washington, D.C. 20549, at prescribed
rates. The SEC also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The Common Stock is presently listed on the New York Stock Exchange (the
"NYSE") under the symbol "SLM." Exchange Act reports, proxy and information
statements and other information concerning the Company can be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
This Prospectus is part of a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the SEC under the Securities Act with
respect to the securities offered hereby. As permitted by the rules and
regulations of the SEC, this Prospectus omits certain information contained in
the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the SEC. Each such statement shall be deemed qualified in its
entirety by such reference.
2
<PAGE> 5
PROSPECTUS SUMMARY
This Prospectus contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management and assumptions made by and information available to the
Company as of the date of this Prospectus. When used in this document, the
words "anticipate," "believe," "estimate" and "expect" and similar expressions,
as they relate to the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management with respect to future events and are subject to certain
risks, uncertainties and assumptions, described in this Prospectus. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
THE COMPANY
The Company provides a wide range of financial services, processing
capabilities and loan origination and servicing systems to meet the needs of
educational institutions, lenders and students. The Company was formed in 1997
in connection with the reorganization of Student Loan Marketing Association
(the "GSE") pursuant to the Privatization Act. The Company's principal
business is the financing and servicing of federally insured student loans,
presently conducted through two wholly owned subsidiaries: the GSE, a
government-sponsored enterprise chartered by an act of Congress, and Sallie Mae
Servicing Corporation ("SMSC"), a Delaware corporation. The Company is the
largest nongovernmental source of financing and servicing for education loans
in the United States.
The GSE was established in 1972 as a for-profit, stockholder-owned,
federally chartered corporation to support the education credit needs of
students by, among other things, promoting liquidity in the student loan
marketplace through secondary market purchases of loans originated under
federally sponsored student loan programs. The GSE principally purchases loans
originated under the Federal Family Education Loan Program (formerly the
Guaranteed Student Loan Program) (the "FFELP"), which are insured by
state-related or non-profit guarantee agencies and are reinsured by the U.S.
Department of Education (the "DOE"). The GSE also purchases student loans
originated under the Health Education Assistance Loan Program ("HEAL"), which
are insured directly by the U.S. Department of Health and Human Services. HEAL
loans are made to health professions graduate students under the Public Health
Services Act. The GSE obtains funds for its operations, including its student
loan purchases, primarily by selling debt securities in the domestic and
overseas capital markets and, increasingly, by securitizing a portion of its
student loan assets. As of June 30, 1997, the GSE's managed portfolio of
student loans totaled $41.5 billion, including $37.6 billion of FFELP loans
(including loans owned, loans securitized and loan participations) and $2.7
billion of HEAL loans.
The Company, through SMSC, is the nation's largest FFELP loan
servicer. As of June 30, 1997, the Company serviced approximately $46.6
billion of loans, including approximately $29.3 billion of loans owned by the
GSE, $10.0 billion owned by seven securitization trusts sponsored by the GSE,
$3.5 billion of loans currently owned by customers who use ExportSS(R), the
Company's loan origination and interim loan servicing product, and $3.8 billion
owned by a joint venture between the GSE and the Chase Manhattan Bank. The
Company currently has six loan servicing centers located in the states of
Florida, Kansas, Massachusetts, Pennsylvania, Texas and Washington.
The DOE and the various guarantee agencies prescribe rules and
regulations that govern the servicing of federally insured loans. The
Company's origination and servicing systems, internal procedures and highly
trained staff support compliance with these regulations, ensure asset integrity
and provide superior service to borrowers. In addition, the Company recently
introduced imaging technology to further increase servicing productivity and
capacity.
To create customer preferences and compete more effectively in the
student loan marketplace, the Company has developed a comprehensive set of loan
programs and services for borrowers, including numerous loan restructuring and
repayment options and programs that encourage and reward good repayment habits.
3
<PAGE> 6
On August 7, 1997, a reorganization (the "Reorganization") authorized
by the Privatization Act and approved by GSE shareholders was consummated.
Pursuant to the Reorganization, among other things, the GSE became a
wholly-owned subsidiary of the Company and will be liquidated and dissolved on
or before September 30, 2008 (the period between the Reorganization and the
liquidation or dissolution referred to herein as the "Wind-Down Period").
During the Wind-Down Period, all of the Company's business activities will be
conducted through the GSE and the Company's other non-GSE subsidiaries. The
GSE generally may continue to purchase student loans only through September 30,
2007. Neither the Company nor any of its non-GSE subsidiaries may purchase
FFELP loans during the Wind-Down Period for so long as the GSE continues to do
so. Subject to the foregoing, however, the Company may elect at any time to
commence FFELP student loan purchases outside of the GSE.
The GSE has engaged in a number of specialty financial services
related to higher education credit, including collateralized financing of FFELP
and other education loan portfolios (warehousing advances), credit support for
student loan revenue bonds, portfolio acquisitions of student loan revenue and
facilities bonds, underwritings of academic facilities bonds and surety bond
support for non-federally insured student loans. During the Wind-Down Period,
the GSE may only extend warehousing advances and offer student loan revenue
bond credit support pursuant to financing and guarantee commitments,
respectively, in place as of August 7, 1997. As of June 30, 1997, the GSE held
approximately $3.4 billion and $182 million of such warehousing and guarantee
commitments, respectively. In addition, management expects that the Company
will reduce its warehousing advances, investment activities in academic
facilities financing and student loan revenue bonds during the Wind-Down
Period. As of June 30, 1997, these assets totaled $2.5 billion, $1.4 billion
and $185 million, respectively.
During the Wind-Down Period, the GSE's debt obligations, including
those that were outstanding at the time of the Reorganization, will continue to
be outstanding obligations of the GSE and will not be transferred to any other
entity, except in connection with the GSE's dissolution. Also during the
Wind-Down Period, (i) the Secretary of the Treasury has extended oversight
authority to monitor the GSE and, in certain cases, the Company and its non-GSE
subsidiaries, (ii) the Company, the GSE and their affiliates are subject to
certain restrictions on intercompany relations, and (iii) the GSE is subject to
certain minimum capital requirements.
The Company's principal executive offices are located at 11600 Sallie
Mae Drive, Reston, VA 20193, and its telephone number is (703) 810-3000.
THE WARRANTS
The Privatization Act requires the Company to issue the Warrants to
the Control Board. The Company issued the Warrants to the Control Board on
August 7, 1997.
Pursuant to the Privatization Act, the Control Board is authorized to
sell or exercise the Warrants and must deposit any proceeds therefrom into an
account established for the benefit at the District of Columbia public school
system. On September 2, 1997, the Control Board sold the Warrants in a
transaction for which it claimed an exemption from the registration
requirements of the Securities Act.
4
<PAGE> 7
MARKET DATA
Before August 7, 1997, the GSE's common stock traded on the New York
Stock Exchange (the "NYSE") under the symbol "SLM." On August 7, 1997, pursuant
to the Reorganization, each outstanding share of the GSE's common stock was
converted into one share of the Company's common stock. Since August 8, 1997,
the Company's common stock has traded on the NYSE under the symbol "SLM." The
following table sets forth the high and low sales prices per share of the GSE's
common stock (from the first quarter of 1995 through August 7, 1997) and the
Company's common stock (from August 8, 1997 through October 15, 1997) as
reported on the NYSE Composite Tape, and the quarterly cash dividends declared
with respect thereto.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
-------- ------- ---------
<S> <C> <C> <C>
1995
First Quarter . . . . . . . . $ 39 $ 32 7/8 $ .37
Second Quarter . . . . . . . 48 3/8 34 1/2 .37
Third Quarter . . . . . . . . 55 3/4 47 .37
Fourth Quarter . . . . . . . 70 7/8 54 .40
1996
First Quarter . . . . . . . . 86 1/8 63 1/4 .40
Second Quarter . . . . . . . 83 1/2 66 .40
Third Quarter . . . . . . . . 77 69 1/4 .40
Fourth Quarter . . . . . . . 98 1/4 77 1/4 .44
1997
First Quarter . . . . . . . . 114 1/4 89 .44
Second Quarter . . . . . . . 137 3/4 94 5/8 .44
Third Quarter . . . . . . . . 160 1/2 127 .44
Fourth Quarter
(through October 15, 1997). 165 1/8 152 5/8 --
</TABLE>
As of September 30, 1997, there were 50,466,913 shares of Common Stock
outstanding and eligible to be voted, held by approximately 20,000
shareholders. On October 15, 1997, the last sales price of the Common Stock
was $161 3/16 per share, as reported on the NYSE Composite Tape.
5
<PAGE> 8
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth selected financial and other operating
information of SLM Holding. The selected financial data in the table is derived
from the consolidated financial statements of SLM Holding. The data should be
read in conjunction with the consolidated financial statements, related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------------
1997(2) 1996(2) 1996(2) 1995(1)(2) 1994(1)(2) 1993(1)(2) 1992(1)(2)
------- ------- ------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income.......... $ 406 $ 452 $ 866 $ 901 $ 982 $ 1,169 $ 987
Net income................... 233 201 409 356 410 432 391
Earnings per common share.... 4.36 3.53 7.32 5.27 5.13 4.98 4.30
Dividends per common share .. .88 .80 1.64 1.51 1.42 1.25 1.05
Return on common
stockholders'
equity..................... 57.26%(3) 49.29%(3) 50.13%(3) 29.17%(3) 27.85%(3) 37.68% 37.26%
Net interest margin.......... 1.78 1.96 1.90 1.84 2.14 2.74 2.32
Return on assets............. .98 .84 .86 .69 .85 .97 .87
Dividend payout ratio........ 20.16 22.66 22.40 28.64 27.66 25.10 24.41
Average equity/average
assets .................... 1.64 1.64 1.65 2.28 2.96 2.50 2.27
BALANCE SHEET DATA:
Student loans purchased...... $29,569 $33,653 $32,308 $34,336 $30,571 $26,978 $24,326
Student loan participations.. 1,919 -- 1,446 -- -- -- --
Warehousing advances......... 2,495 2,972 2,789 3,865 7,032 7,034 8,085
Academic facilities
financings................. 1,354 1,546 1,473 1,312 1,548 1,359 1,189
Total assets................. 47,899 47,363 47,630 50,002 53,161 46,682 46,775
Long-term notes.............. 19,489 25,632 22,606 30,083 34,319 30,925 30,724
Total borrowings............. 45,339 44,905 45,124 47,530 50,335 44,544 44,440
Stockholders' equity......... 843(3) 803(3) 834(3) 867(3) 1,388(3) 1,179 1,107
Book value per common share.. 16.10 14.47 15.53 15.03 18.87 14.03 12.39
OTHER DATA:
Securitized student loans
outstanding ............... $10,048 $ 3,735 $ 6,263 $ 954 $ -- $ -- $ --
Core earnings(4)............. 223 182 381 350 345 388 391
Premiums on debt
extinguished............... -- 7 7 8 14 211 141
</TABLE>
- ----------
(1) Previously reported results for the years ended December 31, 1995, 1994,
1993 and 1992 have been restated to retroactively reflect the recognition
of student loan income as earned (see Note 2 to the Consolidated Financial
Statements). This restatement resulted in the elimination of the previously
reported 1995 cumulative effect of the change in accounting method of $130
million ($1.93 per common share) and an increase to previously reported net
income of $17 million ($.22 per common share), $13 million ($.15 per common
share), and $8 million ($.09 per common share) for the years ended December
31, 1994, 1993 and 1992, respectively.
(2) As part of the GSE's privatization, SLM Holding became the
parent company of, and successor to, the GSE on August 7, 1997. As a
result, the GSE's preferred stock (totaling $214 million) is now reflected
as a minority interest in the consolidated financial statements. The
financial statements for prior periods have been restated to reflect this
change.
(3) At June 30, 1997 and 1996 and at December 31, 1996, 1995 and 1994,
stockholders' equity reflects the addition to stockholders' equity of $345
million, $336 million, $349 million, $371 million and $300 million,
respectively, net of tax, of unrealized gains on certain investments
recognized pursuant to FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
(4) Core earnings is defined as the Company's net income less the after-tax
effect of floor revenues and other one-time charges. Management believes
that these measures, which are not measures under generally accepted
accounting principles (GAAP), are important because they depict the
Company's earnings before the effects of one time events such as floor
revenues which are largely outside of the Company's control. Management
believes that core earnings as defined, while not necessarily comparable to
other companies' use of similar terminology, provide for meaningful period
to period comparisons as a basis for analyzing trends in the Company's
student loan operations.
6
<PAGE> 9
RISK FACTORS
Prospective purchasers of the securities offered hereby should consider
carefully the following factors, together with the other information contained
in this Prospectus, before purchasing the securities offered hereby.
NO HISTORICAL OPERATIONS
The Company, which was created in accordance with the terms of the
Privatization Act, does not have an operating history, although it owns the GSE
and other subsidiaries of the GSE. The operations of the Company may not
reflect the GSE's historical operations. In addition, as a general purpose
corporation, the Company has authority to originate student loans and engage in
other new lines of business (through non-GSE subsidiaries) that are not
authorized under the GSE's charter. There can be no assurance that any new
lines of business in which the Company may engage will be successful.
POLITICAL RISKS
Although the Company is a state-chartered corporation, the GSE
continues to be subject to the political risks attendant to its status as a
government-sponsored enterprise. In addition, the student loan business is
dependent upon government programs and is highly regulated, and therefore
remains subject to political risks.
INTEREST RATES FOR NEW STAFFORD LOANS BEGINNING JULY 1, 1998.
The Higher Education Act of 1965, as amended by the Omnibus Budget
Reconciliation Act of 1993 ("OBRA"), provides for a change in the borrower
interest rate and the interest rate subsidy paid to lenders (the "Special
Allowance Payment") on certain FFELP loans made on or after July 1, 1998. The
new rates are scheduled to be based on the interest rate on U.S. Treasury
securities with a "comparable maturity" plus 1.0 percent. The Secretary of
Education has not issued rules specifying the U.S. Treasury security on which
the Special Allowance Payment rate will be based or details on setting the
Special Allowance Payment rate. Management believes that if this provision of
the law is retained, the "comparable maturity" security will be the 10-year
Treasury Note. The new rate structure represents a significant change from the
current weekly reset 91-day Treasury bill-based formula and could materially
adversely impact the FFELP market and the Company's business. Given current
market conditions, the yield on loans subject to the new rate is expected to be
significantly less than the yield on loans made under the current formula and
the availability and costs of funding to support this new type of instrument are
uncertain. Representatives of the student loan industry are in discussions
with members of Congress concerning possible legislative modification of this
OBRA provision. There can be no assurance, however, that such discussions will
result in any such legislative modifications.
FEDERAL DIRECT STUDENT LOAN PROGRAM ("FDSLP")
OBRA also expanded a previously established pilot program into the
FDSLP, which is funded directly by the federal government and administered by
the DOE. The FDSLP failed to meet its legislated market share goal of
40% for academic year 1995-96 and, based upon DOE reports, management believes
that it will not meet its OBRA target of 50% of new student loan volume for
academic year 1996-97. However, the FDSLP has captured a significant portion of
the market for new student loan volume and the FDSLP may increase its market
share even if it fails to meet its legislated goal of 60%. In addition, OBRA
provides that the U.S. Secretary of Education (the "Secretary") may exceed the
legislated market share targets for academic years 1996-98 and 1998-99 if the
Secretary determines that higher targets are warranted by the number of eligible
institutions that desire to participate in the FDSLP. Any such developments
could have a materially adverse affect on the Company.
OBRA also authorized the DOE to offer existing FFELP borrowers the
opportunity to consolidate FFELP loans with FDSLP loans. There is currently no
reciprocal provision permitting the consolidation of FDSLP loans with FFELP
loans. As of June 30, 1997, approximately $592 million of FFELP loans owned by
the Company have been
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accepted for refinancing into FDSLP loans. Approximately $409 million have
been refinanced into FDSLP loans with the remainder awaiting disbursement by
the federal government. Although the DOE has temporarily suspended such
refinancings because of operational problems, there can be no assurance that a
material portion of FFELP loans owned by the Company will not be refinanced
into FDSLP loans.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Stockholders. The Company will use the net proceeds from the
exercise of the Warrants for general corporate purposes.
SELLING STOCKHOLDERS
The following table sets forth, as of October __, 1997, the number of
shares of Common Stock beneficially owned by each Selling Stockholder. The
percentage calculation for the total number of shares of Common Stock held by
each Selling Stockholder gives effect to the purchase of Shares on the exercise
of the respective Warrants held by such Selling Stockholder. The term "Selling
Stockholders" includes the holders listed below and the beneficial owners of
the Shares and their transferees, pledgees, donees or other successors. This
table has been prepared based upon information furnished to the Company by or
on behalf of the Selling Stockholders.
The Selling Stockholders named below who hold Warrants confirmed at
the time they acquired the Warrants that the Warrants were acquired for
investment purposes only and without a view toward their resale and
acknowledged the existence of restrictions on resale applicable to the
Warrants. This offering relates only to the sale of Shares held or to be held
by the Selling Stockholders named in the following table upon the exercise of
the Warrants.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
--------------------------------------------------------
SHARES
REGISTERED
SELLING STOCKHOLDERS COMMON STOCK HEREBY PERCENTAGE(1)
-------------------- ------------ ------ -------------
<S> <C> <C> <C>
</TABLE>
(1) Based on 555,015 shares of Common Stock issuable upon exercise of
the Warrants.
The Selling Stockholders identified above may sell, transfer or
otherwise dispose of, in transactions exempt from the registration requirements
of the Securities Act, all or a portion of their Warrants or Shares after the
date as of which the information in the preceding table is presented. The
information regarding the Selling Stockholders may change from time to time.
If required, such changes will be set forth in one or more Prospectus
Supplements. The per share exercise price and, therefore, the number of Shares
issuable upon exercise of the Warrants, are subject to adjustment under certain
circumstances. Accordingly, the number of Shares issuable upon exercise of the
Warrants may increase or decrease. Because the Selling Stockholders may offer
all or some portion of the Shares pursuant to this Prospectus, and because
there are no agreements, arrangements or understandings with respect to the
sale of the Warrants or the Shares, no estimate can be given as to the amount
of Warrants and/or Shares that will be held by the Selling Stockholders upon
termination of this offering.
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered and sold from time to time by the
Selling Stockholders, or by their pledgees, donees, transferees or other
successors in interest. Such offers and sales may be made from time to time on
one or more exchanges or in the over-the-counter market, or otherwise, at
prices and on terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The methods by which the Shares
may be sold may include, but are not limited to, the following: (a) a block
trade in which the broker or dealer so engaged will attempt to sell the shares
as agent but may position and resell a portion of the block as
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<PAGE> 11
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account; (c) an exchange
distribution in accordance with the rules of such exchange; (d) ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; (e) privately negotiated transactions; (f) short sales; and (g) a
combination of any such methods of sale. In effecting sales, brokers or
dealers engaged by the Selling Stockholders may arrange for other brokers or
dealers to participate. Brokers or dealers may receive commissions or
discounts from the Selling Stockholders or from the purchasers in amounts to be
negotiated immediately prior to the sale. The Selling Stockholders may also
sell the Shares in accordance with Rule 144 under the Securities Act.
From time to time the Selling Stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in
securities of the Company or derivatives thereof, and may sell and deliver the
Shares in connection therewith. From time to time Selling Stockholders may
pledge their Shares pursuant to the margin provisions of their respective
customer agreements with their respective brokers. Upon a default by a Selling
Stockholder, the broker may offer and sell the pledged Shares from time to
time.
The Company has agreed to use its best efforts to keep the
Registration Statement of which this Prospectus is a part continuously
effective under the Securities Act until the date that is two years after the
last outstanding Warrant has been exercised or the date the last outstanding
Warrant has expired unexercised or, if earlier, the date on which all of the
Shares have been sold pursuant to the Registration Statement of which this
Prospectus is a part or all of the Shares have been sold pursuant to Rule
144(b) under the Securities Act or may be sold pursuant to Rule 144(k) under
the Securities Act.
The Selling Stockholders and any brokers participating in such sales
may be deemed to be "underwriters" within the meaning of the Securities Act.
There can be no assurance that the Selling Stockholders will sell any or all of
the Shares offered hereby. The Company will not receive any proceeds from the
sale by the Selling Stockholders of the Shares offered hereby, but it will
receive proceeds from the exercise of the Warrants.
All proceeds from any such sales will be the property of the Selling
Stockholders, who will bear the expense of underwriting discounts and selling
commissions, if any, and their own legal fees.
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BUSINESS
Industry data on the FFELP and the FDSLP contained in this Prospectus
are based on sources that the Company believes to be reliable and to represent
the best available information for these purposes, including published and
unpublished DOE data and industry publications.
GENERAL
The Company provides a wide range of financial services, processing
capabilities and information technology to meet the needs of educational
institutions, lenders and students. Chartered by an act of Congress in 1972 as
a government-sponsored enterprise, the GSE's stated mission was to enhance
access to post-secondary education by providing a national secondary market and
financing for guaranteed student loans. As of June 30, 1997, the Company's
managed portfolio of student loans totaled approximately $41.5 billion
(including loans owned, loans securitized and loan participations). The
Company also had commitments to purchase $19.6 billion of additional student
loans or participations therein. While the Company continues to be the leading
purchaser of student loans, its business has expanded over its first quarter of
a century, reflecting changes in both the education sector and the financial
markets.
Primarily a wholesale provider of credit and a servicer of student
loans, the Company's clients include over 900 financial and educational
institutions and state agencies. Through its six regional loan servicing
centers, the Company processes student loans for more than five million
borrowers and is recognized as the nation's pre-eminent servicer of student
loans. The Company is also a provider and arranger of infrastructure finance
for colleges and universities. See "-- Specialized Financial Services --
Academic Facilities Financings and Student Loan Revenue Bonds."
The Company believes that it has successfully fulfilled its original
government-sponsored enterprise mandate by fostering a thriving, competitive
student loan market and has maintained its leadership position in the education
finance industry due to its focus on customer relationships, value-added
products and services, superior loan servicing capabilities and a sound
financial management strategy. In recognition of the increasingly important
role that college and university administrators play in the student loan
process, the Company has adopted a school-based growth strategy. The Company's
core marketing strategy is to provide schools and their students with simple,
flexible and cost-effective products and services so that schools will choose
to work with the Company. This strategy, combined with superior servicing and
technology capabilities, has helped the Company to build valuable partnerships
with lenders, guarantee agencies and others.
The Privatization Act was approved by Congress and signed by President
Clinton in September 1996. The Reorganization was approved by the GSE's
shareholders on July 31, 1997 and effected on August 7, 1997.
INDUSTRY OVERVIEW
The student loan industry provides affordable financing to students
and their families to fund post-secondary education. Banks and other eligible
lenders can make student loans at below-market rates due to subsidies and
guarantees provided under programs sponsored principally by the federal
government. The largest student loan program, formerly called the Guaranteed
Student Loan Program and now known as the FFELP, was created in 1965 to ensure
low-cost access by families to a full range of post-secondary educational
institutions. In 1972, to encourage further bank participation in the
Guaranteed Student Loan Program, Congress established the GSE as a for-profit,
stockholder-owned national secondary market for student loans. The FFELP
industry currently includes a network of approximately 5,300 originators and
6,300 educational institutions and is collectively guaranteed and administered
by 39 state-sponsored or non-profit guarantee agencies under contract with the
DOE. In addition to the Company, a number of non-profit entities, banks and
other financial intermediaries operate as secondary markets for student loans.
The Company believes that lender participation in the FFELP is relatively
concentrated, with an estimated 90 percent of outstanding loans held by the top
100 participants, including approximately one-third owned by the Company as of
September 30, 1994. The FFELP is reauthorized by Congress approximately
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every six years. The next reauthorization is required in 1998. The provisions
of the FFELP are also subject to revision from time to time by Congress.
Demand for student loans has risen substantially over the last several
years. Higher education tuition cost and fee increases continue to exceed the
inflation rate. Over half of all full-time college students today depend on
some form of borrowing, compared to just over 35 percent in 1985. Federal
legislation enacted in late 1992 expanded loan limits and borrower eligibility
and, in part, resulted in an increase of over 50 percent in annual federally
guaranteed student loan volume ($21 billion in 1994 from $13.3 billion in
1992). Estimated future increases in tuition costs and college enrollments are
expected to prompt further growth in the student loan market.
In 1993, Congress expanded a previously established pilot program into
the FDSLP, which is administered by the DOE. Established as an alternative to
the private sector-based FFELP, the FDSLP accounted for approximately one-third
of all new federally sponsored student loans issued in academic year 1996-97.
Under the FDSLP, the federal government contracts with third parties for loan
administration and collections services while financing its lending activity
through U.S. Treasury borrowing. See "Risk Factors -- FDSLP."
PRODUCTS AND SERVICES
Loan Purchases. The Company's student loan purchases primarily
involve two federally sponsored programs. The Company principally purchases
Stafford loans, PLUS loans and SLS loans originated under the FFELP, all of
which are insured by state-related or non-profit guarantee agencies and are
reinsured by the DOE. The Company also purchases student loans originated
under the HEAL program that are insured directly by the United States
Department of Health and Human Services. As of June 30, 1997, the Company's
managed portfolio of student loans totaled $41.5 billion, including $37.6
billion of FFELP loans (including loans owned, loans securitized and loan
participations) and $2.7 billion of HEAL loans.
In order to further meet the educational credit needs of students, the
Company in 1996 sponsored the creation of the private Signature Education
Loan(sm) program, with numerous lenders participating nationwide. Under this
program, the Company performs certain origination services on behalf of the
participating lenders. Upon sale of the loans to the Company, the Company
intends to insure the loans through its HEMAR Insurance Corporation of America
("HICA") subsidiary (if such loans not already insured by HICA before sale).
Most of the HICA-insured loans acquired by the Company are part of "bundled"
loan programs that include FFELP loans. The Company also purchases loans
originated under various other HICA-insured loan programs. As of June 30,
1997, the Company owned approximately $1.2 billion of such private education
loans, including HICA-insured Signature Education Loans(sm).
The Company purchases student loans primarily from commercial banks.
The Company also purchases student loans from other eligible FFELP lenders,
including savings and loan associations, mutual savings banks, credit unions,
certain pension funds and insurance companies, educational institutions and
state and private non-profit loan originating and secondary market agencies.
Most lenders using the secondary market hold loans while borrowers are
in school and sell loans shortly before conversion to repayment status, when
servicing costs increase significantly. Traditionally, the Company has
purchased most of its loans just before their conversion to repayment status,
although the Company also buys "in-school" loans and loans in repayment. The
Company purchases loans primarily through commitment contracts, but also makes
"spot" purchases. Approximately two-thirds of the Company's new loan purchases
were made pursuant to purchase commitment contracts in 1995 and 1996. The
Company enters into commitment contracts with lenders to purchase loans up to a
specified aggregate principal amount over the term of the contract. Under the
commitment contracts, lenders have the right, and in most cases the obligation,
to sell to the Company the loans they own over a specified period of time,
usually two to three years, at a purchase price that is based on certain loan
characteristics.
In conjunction with commitment contracts, the Company frequently
provides selling institutions with operational support in the form of
PortSS(R), an automated loan administration system for the lender's use at its
own offices before loan sale, or in the form of loan origination and interim
servicing provided through one of the
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Company's loan servicing centers (ExportSS(R)). In 1995 and 1996, more than 80
percent of the Company's purchase commitment volume came from users of
PortSS(R) and ExportSS(R). The Company also offers commitment clients the
ability to originate loans and then transfer them to the Company for servicing
(TransportSS(sm)). PortSS(R), ExportSS(R) and TransportSS(sm) provide the
Company and the lender assurance that loans will be efficiently administered by
the Company and that borrowers will have access to the Company's repayment
options and benefits.
In a spot purchase, the Company competes with other secondary market
participants to purchase a portfolio of eligible loans from a selling holder
when such holder decides to offer its loans for sale. The Company made
approximately one-third of its purchases of educational loans through spot
purchases in 1995 and 1996. In general, spot purchase volume is more
competitively priced than volume purchased under commitment contracts. The
growth in volume generated by PortSS(R), ExportSS(R) and TransportSS(sm)
demonstrates the importance of the Company's investment in these systems in
past years.
The Company also offers eligible borrowers a program for consolidation
of eligible insured loans into a single new insured loan with a term of 10 to
30 years. The Higher Education Act of 1965, as amended, provides that
borrowers may consolidate with one of their loan holders or may consolidate
with a separate lender if they cannot obtain a consolidation loan with an
income-sensitive repayment plan that they deem acceptable from their loan
holders. As of June 30, 1997, the Company owned approximately $8.4 billion of
such consolidation loans, known as SMART(sm) Loan Accounts.
Borrower Benefits and Program Technology Support. To create customer
preferences and compete more effectively in the student loan marketplace, the
Company has developed a comprehensive set of loan programs and services for
borrowers, including numerous loan restructuring and repayment options and
programs that encourage and reward good repayment habits. The Company also
provides counseling and information programs (including a world wide web site)
that help borrowers and reinforce relationships with college and university
customers and lender partners.
Under the Company's Great Rewards(R) program, certain FFELP borrowers
who make their first 48 monthly payments on-time receive a two percentage-point
interest rate reduction for the remaining term of the loan. Other programs pay
students an amount equal to part of the loan origination fees and modestly
reduce interest costs for use of automatic debit accounts. The Company also
provides financial aid administrators at colleges and universities with
innovative products and services that simplify the lending process, including
electronic funds transfer services and loan information and management software
that enables college application data to be transferred electronically between
program participants.
Joint Venture with The Chase Manhattan Bank. In the third quarter of
1996, the Company restructured its business relationship with The Chase
Manhattan Bank ("Chase"), which, with an estimated market share of 8.0 percent,
is the largest originator of student loans under the FFELP. Historically,
Chase has also been the Company's largest client, representing 11 percent of
1995 purchases. The Company and Chase Education Holdings, Inc., a wholly owned
subsidiary of Chase, are equal owners of Education First Finance LLC and
Education First Marketing LLC (collectively, the "Chase Joint Venture").
Education First Marketing LLC is responsible for marketing education loans to
be made by Chase and its affiliates to schools and borrowers. Shortly after
such loans are made by Chase and its affiliates, the loans are purchased on
behalf of Education First Finance LLC by the Chase/Sallie Mae Education Loan
Trust (the "Trust"), which presently finances these purchases through the sale
of loan participations to the Company and Chase. As of June 30, 1997, the
Trust owned approximately $3.8 billion of federally insured education loans.
Substantially all loans owned by the Trust are serviced on behalf of the Trust
by SMSC on a fee-for-service basis.
SERVICING
In 1980, the Company began servicing its own portfolios in order to
better control costs and manage risks. In late 1995, in connection with the
commencement of its securitization program, the Company transferred its
servicing operations to SMSC, a wholly owned subsidiary. The Company is now
the nation's largest FFELP loan servicer, and management believes that the
Company is recognized as the premier service quality and technology provider in
its field. The Company believes that its processing capability and service
excellence are integral to its school-based growth strategy. As of June 30,
1997, the Company serviced approximately $46.6 billion of loans, including
approximately $29.3 billion of loans owned by the GSE and $10.0 billion owned
by seven securitization
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trusts sponsored by the GSE, $3.5 billion of loans currently owned by
ExportSS(R) customers and $3.8 billion owned by the Chase Joint Venture Trust.
The Company currently has six loan servicing centers, located in the
states of Florida, Kansas, Massachusetts, Pennsylvania, Texas and Washington.
This geographic coverage, together with total systems integration among
centers, facilitates operations and customer service.
The DOE and the various guarantee agencies prescribe rules and
regulations that govern the servicing of federally insured student loans. The
Company's origination and servicing systems, internal procedures and highly
trained staff support compliance with these regulations, ensure asset integrity
and provide superior service to borrowers. The Company recently introduced
imaging technology to further increase servicing productivity and capacity.
SPECIALIZED FINANCIAL SERVICES
The Company has engaged in a number of specialty financial services
related to higher education credit, including collateralized financing of FFELP
and other education loan portfolios (warehousing advances), credit support for
student loan revenue bonds, portfolio investments in student loan revenue and
facilities bonds, underwritings of academic facilities bonds and surety bond
support for non-federally insured student loans.
Warehousing Advances. Warehousing advances are secured loans to
financial and educational institutions to fund FFELP and HEAL loans and other
forms of education-related credit. As of June 30, 1997, the Company held
approximately $2.5 billion of warehouse loans with an average term of 3.5
years. These loans remain assets of the GSE, but the GSE can extend new
warehousing advances during the Wind-Down Period only pursuant to financing
commitments in place as of August 7, 1997. As of June 30, 1997, the GSE held
approximately $3.4 billion of such commitments. The Company does not expect
that its non-GSE affiliates will continue this line of business.
Academic Facilities Financings and Student Loan Revenue Bonds. Since
1987, the GSE has provided facilities financing and commitments for future
facilities financing to approximately 250 educational institutions. Certain of
these financings are secured either by a mortgage on the underlying facility or
by other collateral. The GSE also invests in student loan revenue obligations.
In late 1995, the GSE established a broker-dealer subsidiary, Education
Securities, Inc. ("ESI"), which manages the GSE's municipal bond portfolio and
is developing an array of specialized underwriting and financial advisory
services for the education sector. The Company anticipates that it will reduce
its investment activity in academic facilities and student loan revenue bond
products during the Wind-Down Period. As of June 30, 1997, these portfolios
totaled $1.4 billion and $185 million, respectively.
Letters of Credit. In the past, the GSE has offered letters of credit
to guarantee issues of state and non-profit agency student loan revenue bonds.
Currently outstanding letters of credit have original terms of up to 17 years.
As of June 30, 1997, the GSE had approximately $4.6 billion of such commitments
outstanding. During the Wind-Down Period, letter of credit activity by the GSE
will be limited to guarantee commitments in place as of August 7, 1997.
Private Student Loan Insurance. In 1995, the GSE acquired HICA, a
South Dakota stock insurance company engaged exclusively in insuring lenders
against credit loss on their education-related, non-federally insured loans to
students attending post-secondary educational institutions. Loans owned by the
GSE are a significant portion of HICA's insured loan portfolio. See "--
Products and Services -- Loan Purchases."
FINANCING/SECURITIZATION
The GSE obtains funds for its operations primarily from the sale of
debt securities in the domestic and overseas capital markets, and through public
offerings and private placements of U.S. dollar-denominated and foreign
currency-denominated debt of varying maturities and interest rate
characteristics. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." GSE
debt securities are currently rated at the highest credit rating level by
Moody's Investors Service and Standard & Poor's. Although the Company has not
begun specific discussions with the ratings agencies as of the date of this
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Prospectus, the Company expects that the credit rating on any debt securities
of the Company will be lower than that of the GSE's debt securities.
The GSE uses interest rate and currency exchange agreements
(collateralized where appropriate), U.S. Treasury securities, interest rate
futures contracts and other hedging techniques to reduce its exposure to
interest rate and currency fluctuations arising out of its financing activities
and to match the characteristics of its assets and liabilities. The GSE has
also issued preferred stock to obtain funds, including preferred stock held by
the Company. The GSE issue debt with maturity dates through September 30, 2008
to fund student loans and other permitted asset acquisitions. Upon the GSE's
dissolution pursuant to the Privatization Act, the GSE must transfer any
remaining GSE obligations into a defeasance trust for the benefit of the
holders of such obligations with cash or full faith and credit obligations of
the United States, or an agency thereof, in amounts sufficient, as determined
by the Secretary of the Treasury, to pay the principal and interest on the
deposited obligations. If the GSE has insufficient assets to fully fund such
GSE debt, the Company must transfer sufficient assets to the trust to account
for this shortfall. The Privatization Act requires that upon the dissolution
of the GSE on or before September 30, 2008, the GSE shall repurchase or redeem
or make proper provisions for repurchase or redemption of any outstanding
preferred stock.
Since late 1995 the Company has further diversified its funding
sources, independent of its GSE borrower status, by securitizing a portion of
its student loan assets. Securitization is an off-balance sheet funding
mechanism that the Company effects through the sale of portfolios of student
loans by the GSE to SLM Funding Corporation, a bankruptcy-remote,
special-purpose, wholly owned subsidiary of the GSE, which in turn sells the
student loans to an independent owner trust that issues securities to fund the
purchase of the student loans. The securitization trusts typically issue
several classes of debt securities rated at the highest investment grade level.
The GSE has not guaranteed such debt securities and has no obligation to ensure
their repayment. Because the securities issued by the trusts through
securitization are not GSE securities, the Company has been and in the future
expects to be able to fund its student loans to term through securitization,
even for those assets with final maturities that extend beyond September 30,
2008. The Company has taken the position that the 30 basis point per annum
offset fee on loans held by the GSE does not apply to securitized loans. The
DOE has concurred with the Company's position that the 30 basis point per
annum offset fee on loans held by the GSE does not apply to securitized loans.
See "--Legal Proceedings." The Company anticipates that securitization will
remain a primary student loan funding mechanism for the Company when it begins
to conduct student loan purchase activity through a non-GSE subsidiary. In
addition to the foregoing, the Company obtains funding through a bank line of
credit.
OPERATIONS DURING THE WIND-DOWN PERIOD
Privatization enables the Company to commence new business activities
without regard to restrictions in the GSE's charter. The stock of certain GSE
subsidiaries, including SMSC, HICA and ESI, will be transferred to the Company.
Upon such transfer, the business activities of these subsidiaries will no
longer be subject to restrictions contained in the GSE's charter. In addition,
the GSE's employees have been transferred to the Sallie Mae, Inc. (the
"Management Company").
During the Wind-Down Period, the GSE generally is prohibited from
conducting new business except in connection with student loan purchases
through September 30, 2007 or with other outstanding contractual commitments,
and from issuing new debt obligations that mature beyond September 30, 2008.
The GSE has transferred and will continue to transfer personnel and certain
assets to the Company or other non-GSE affiliates. Student loans, warehousing
advances and other program-related or financial assets (such as portfolio
investments, letters of credit, swap agreements and forward purchase
commitments) are generally not expected to be transferred. Neither the Company
nor any of its non-GSE affiliates may purchase FFELP loans for so long as the
GSE remains an active purchaser in this secondary market. See "The
Privatization Act -- Limitations on Holding Company Activities." During the
Wind-Down Period, GSE operations will be managed pursuant to arm's-length
service agreements between the GSE and one or more of its non-GSE affiliates.
The Privatization Act also provides certain restrictions on intercompany
relations between the GSE and its affiliates during the Wind-Down Period. See
"The Privatization Act -- Restrictions on Intercompany Relations."
A non-GSE subsidiary of the Company provides loan servicing support for
the loans owned and securitized by the GSE.
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Management intends these opportunities to complement the Company's
underlying strategy of acquiring student loan assets and to help maintain its
student loan servicing leadership role and assist its new product offerings.
COMPETITION
The Company is the major financial intermediary for higher education
credit, but is subject to competition on a national basis from several large
commercial banks and non-profit secondary market agencies and on a state or
local basis from smaller banks and state-based secondary markets. Although
Congress establishes loan limits and interest rates on student loans,
management believes that market share in the FFELP industry is increasingly a
function of school and student desire for borrower benefits and superior
customer service. FFELP providers have been aggressively competing on the
basis of enhanced products and services in recent years, particularly to offset
legislated reductions in profitability and the impact of the FDSLP.
Because the Company's historic statutory role is confined to secondary
market activity, it has depended mainly on its network of lender partners and
its school-based strategy for new loan volume. The Company plans to heighten
its visibility with consumers to favorably position itself for future new
product offerings. In addition, the availability of securitization for student
loan assets has created new competitive pressures for traditional secondary
market purchasers. Based on the most recent information from the DOE, at the
end of fiscal year 1995, the GSE's share (in dollars) of outstanding FFELP
loans was 33 percent, while banks and other financial institutions held 47
percent and state secondary market participants held 20 percent.
The Company also faces competition for new and existing loan volume
from the FDSLP. Based on current DOE projections, the Company estimates that
total student loan origination for the academic years 1994-95, 1995-96 and
1996-97 were $22.3 billion, $24.3 billion and $26.0 billion, respectively, of
which FDSLP originations represented approximately 7 percent, 31 percent and 33
percent, respectively. The DOE projects that FDSLP originations will represent
35 percent of total student loan originations in the 1997-98 academic year.
Loans made under the FDSLP are not currently available for purchase by the
Company. The DOE has also begun to offer FFELP borrowers the opportunity to
refinance or consolidate FFELP loans into FDSLP loans upon certification that
the holder of their FFELP loans does not offer an income-sensitive payment plan
acceptable to the borrower. As of June 30, 1997, approximately $409 million of
the GSE's FFELP loans have been consolidated into the FDSLP. In early 1995,
the Company began offering an income-sensitive payment plan. The FDSLP,
however, also provides an income-contingent option not available under the
FFELP program that may be more attractive to certain borrowers, pursuant to
which the government will ultimately forgive student loan debt after 25 years.
It is not certain what action, if any, Congress will take with regard to the
FDSLP in connection with the anticipated reauthorization of the Higher
Education Act. Based on public statements by members of Congress and the
Administration, however, management believes that the FFELP and the FDSLP will
continue to coexist as competing programs for the foreseeable future.
COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION
In 1987, the Company helped create the College Construction Loan
Insurance Association ("Connie Lee"), a for-profit, stockholder-owned
corporation, authorized by Congress to insure and reinsure educational
facilities obligations. The carrying value of the Company's investment in
Connie Lee was approximately $44 million and, as of June 30, 1997, the Company
effectively controlled 42 percent of Connie Lee's outstanding voting stock
through its ownership of preferred and common stock and through agreements with
other shareholders. In February 1997, Connie Lee privatized pursuant to
statutory provisions enacted at the same time as the Privatization Act, which
required Connie Lee to repurchase shares of its stock owned by the U.S.
government at a purchase price determined by an independent appraisal. On
February 28, 1997, the Company loaned Connie Lee $18 million to repurchase the
shares. On May 27, 1997 the term of this loan was extended to June 29, 1997
and on June 26, 1997, the loan was further extended to December 29, 1997.
15
<PAGE> 18
PROPERTIES
The following table lists the principal facilities owned by the
Company:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
-------- -------- -----------
<S> <C> <C>
Reston, VA Operations/Headquarters 375,000
Wilkes Barre, PA Loan Servicing Center 135,000
Killeen, TX Loan Servicing Center 133,000
Lynn Haven, FL Loan Servicing Center 133,000
Lawrence, KS Loan Servicing Center 52,000
</TABLE>
The Company leases approximately 35,000 square feet of office space
for its loan servicing center in Waltham, Massachusetts, 37,800 square feet of
office space for its loan servicing center in Spokane, Washington and 47,000
square feet and 33,000 square feet of additional space for its loan servicing
centers in Lawrence, Kansas and Killeen, Texas, respectively. The GSE leases
approximately 165,000 square feet of office space in Washington, D.C. for its
headquarters. With the exception of the Pennsylvania loan servicing center,
none of the Company's facilities is encumbered by a mortgage. The Company
believes that its headquarters and loan servicing centers are generally
adequate to meet its long-term student loan and new business goals. The GSE's
headquarters' leases expire in 2001.
The Company's principal office is located in owned space at 11600
Sallie Mae Drive, Reston, Virginia, 20193.
EMPLOYEES
As of June 30, 1997, the Company employed 4,689 employees nationwide.
LEGAL PROCEEDINGS
OBRA applied a 30 basis point per annum "offset fee" to student loans
held by the GSE. The Secretary of Education interpreted OBRA to apply that fee
both to loans held directly by the GSE and to loans held indirectly by the GSE,
including loans sold by the GSE to securitization trusts. In April 1995, the
Company filed suit in the U.S. District Court for the District of Columbia to
challenge the constitutionality of the 30 basis point fee and the application
of the fee to loans securitized by the Company. On November 16, 1995, the
District Court ruled that the fee is constitutional, but that, contrary to the
Secretary of Education's interpretation, the fee does not apply to securitized
loans. Both the Company and the United States appealed this ruling. On
January 10, 1997, the U.S. Court of Appeals for the District of Columbia
Circuit struck down the Secretary of Education's interpretation, ruling that
the fee applies only to loans that the GSE owns and remanding the case to the
District Court with instructions to remand the matter to the Secretary of
Education. In addition, the Court of Appeals upheld the constitutionality of
the offset fee for loans owned by the GSE. The offset fee applies annually to
the principal amount of student loans that the GSE holds and that were
acquired on or after August 10, 1993.
On April 29, 1997, U.S. District Court Judge Stanley Sporkin ordered
the DOE to decide by July 31, 1997 its final position on the application of the
offset fee to loans that the GSE has securitized. On July 23, 1997, the DOE
decided that the 30 basis point annual offset fee that the GSE is required to
pay on student loans that it owns does not apply to student loans that the GSE
has securitized. Based upon this favorable determination in this matter, the
contingent gain of approximately $97 million pre-tax that had not been
recognized in income through June 30, 1997 will be released and recognized in
income in the third quarter. All future securitization gains will be
calculated without consideration of the offset fee. In addition to the initial
gain on sale, the GSE is entitled to the residual cash flows from the trust and
servicing fees for continuing to service the loans after they are sold to the
trusts. The residual amounts and the servicing fees are reflected as servicing
and securitization revenues in the Consolidated Statements of Income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Six Months ended June 30, 1997 and 1996 -- Liquidity and Capital
Resources --
16
<PAGE> 19
Securitization."
On June 11, 1996, Orange County, California filed a complaint against
the Company in the U.S. Bankruptcy Court for the Central District of
California. The case is currently pending in the U.S. District Court for the
Central District of California. The complaint alleges that the Company made
fraudulent representations and omitted material facts in offering circulars on
various bond offerings purchased by Orange County, which contributed to Orange
County's market losses and subsequent bankruptcy. The complaint seeks to hold
Sallie Mae responsible for losses resulting from Orange County's bankruptcy,
but does not specify the amount of damages claimed. The complaint against the
Company is one of numerous cases filed by Orange County that have been
coordinated for discovery purposes. Other defendants include Merrill Lynch,
Morgan Stanley, KPMG Peat Marwick, Standard & Poor's and Fannie Mae. The
complaint includes a claim of fraud under Section 10(b) of the Securities
Exchange Act and Rule 10b-5 promulgated thereunder. The complaint also
includes counts under the California Corporations Code and a count of common
law fraud. The Company believes that the complaint is without merit and
intends to defend the case vigorously. At this time, management believes the
impact of the lawsuit will not be material to the Company.
In September 1996, the Company obtained a declaratory judgment against
the Secretary of Education in the U.S. District Court for the District of
Columbia to the effect that the Secretary erred in refusing to allow the
Company to claim adjustments to Special Allowance Payments on certain FFELP
loans that were required to be converted retrospectively from a fixed rate to a
variable rate. The U.S. Court of Appeals for the District of Columbia Circuit
affirmed the District Court's opinion on September 30, 1997.
REGULATION
As a government-sponsored enterprise, the GSE is organized under
federal law and its operations are restricted by its government charter.
Although privatization permits the Company's private activities to expand
through unregulated subsidiaries, such activities will be restricted in certain
ways, and the GSE's operations continue to be subject to broad federal
regulation, during the Wind-Down Period.
THE PRIVATIZATION ACT
The Privatization Act established the basic framework for the
Reorganization and imposes certain restrictions on the operations of the
Company and its subsidiaries during the Wind-Down Period. The Privatization
Act amends the GSE's charter to require certain enhanced regulatory oversight
of the GSE to ensure its financial safety and soundness. See "Regulation --
GSE Regulation."
Reorganization. The Privatization Act required the GSE Board to
propose to shareholders a restructuring plan under which their share ownership
in the GSE would be automatically converted to an equivalent share ownership in
a state-chartered holding company that would own all of the common stock of the
GSE. The Privatization Act requires that the GSE be liquidated on or before
September 30, 2008, upon which its federal charter will be rescinded. During
the Wind-Down Period, the Company will remain a passive entity that supports
the operations of the GSE and its other non-GSE subsidiaries, and any new
business activities will be conducted through such subsidiaries.
The Privatization Act requires all personnel and certain assets to be
transferred in connection with the Reorganization, including the transfer of
the GSE's interest in certain subsidiaries. The GSE's student loans and
related contracts, warehousing advances and other program-related or financial
assets (such as portfolio investments, letters of credit, swap agreements and
forward purchase commitments) and any non-material assets that the GSE Board
determines to be necessary for or appropriate to continued GSE operations, may
be retained by the GSE. Management anticipates a total transfer in the
aggregate of $130 million of net assets during the first 12 months after the
Reorganization. Management also anticipates that certain fixed assets will be
transferred within approximately three years of the Reorganization. Employees
of the GSE were transferred to the Management Company at the effective time of
the Reorganization.
17
<PAGE> 20
Employees who were employed by non-GSE subsidiaries of the GSE before the
Reorganization continue to be employed by such subsidiaries.
During the Wind-Down Period, the GSE is restricted in the new business
activities it may undertake. The GSE may continue to purchase student loans
only through September 30, 2007, and warehousing advance, letter of credit and
standby bond purchase activity by the GSE is limited to takedowns on
contractual financing and guarantee commitments in place at the effective time
of the Reorganization. In addition, the GSE must discontinue its FFELP loan
purchase activity once the Company or its non-GSE subsidiaries commence such
activity.
The GSE will continue to serve as a lender of last resort and will
provide secondary market support for the FFELP upon the request of the
Secretary of Education. If and to the extent that the GSE performs such
functions, however, it will not be required to pay the 30 basis point offset
fee on such loans. The GSE may transfer assets and declare dividends, from
time to time, if it maintains a minimum capital ratio of at least 2 percent
until the year 2000. After that time, charter amendments effected by the
Privatization Act require that the GSE maintain a minimum capital ratio of at
least 2.25 percent. In the event that the GSE does not maintain the required
minimum capital ratio, the Company is required to supplement the GSE's capital
to achieve such minimum capital ratio.
The GSE's debt obligations, including debt obligations that were
outstanding at the time of Reorganization, continue to be outstanding
obligations of the GSE and will not be transferred to any other entity (except
in connection with the defeasance trust described below). See "-- GSE
Dissolution After Reorganization." The Privatization Act provides that the
Reorganization does not modify the attributes accorded to the debt obligations
of the GSE by the GSE's charter. During the Wind-Down Period, the GSE can
continue to issue debt in the government agency market to finance student loans
and other permissible asset acquisitions. The maturity date of such issuances,
however, may not extend beyond September 30, 2008, the GSE's final dissolution
date. This restriction does not apply to debt issued to finance any lender of
last resort or secondary market purchase activity requested by the Secretary of
Education. The Privatization Act is clear that the Reorganization (and the
subsequent transfer of any remaining GSE debt to the defeasance trust described
below) will not modify the legal status of any GSE debt obligations, whether
such obligations existed at the time of Reorganization or are subsequently
issued.
Oversight Authority. During the Wind-Down Period, the Secretary of
the Treasury has extended oversight authority to monitor the activities of the
GSE and, in certain cases, the Company and its non-GSE subsidiaries to the
extent that the activities of such entities are reasonably likely to have a
material impact on the financial condition of the GSE. During this period, the
Secretary of the Treasury may require that the GSE submit periodic reports
regarding any potentially material financial risk of its associated persons and
its procedures for monitoring and controlling such risk. The Company is
expressly prohibited from transferring ownership of the GSE or causing the GSE
to file bankruptcy without the approval of the Secretary of the Treasury and
the Secretary of Education. Each of the Secretary of Education and the
Secretary of the Treasury has express authority to request that the Attorney
General bring an action, or may bring an action under the direction and control
of the Attorney General, in the United States District Court for the District
of Columbia, for the enforcement of any provision of the GSE's safety and
soundness requirements or the requirements of the Privatization Act in general.
Restrictions on Intercompany Relations. During the Wind-Down Period,
the GSE's operations will be managed by its affiliates or independent third
parties. The Privatization Act also restricts intercompany relations between
the GSE and its affiliates during the Wind-Down Period. Specified corporate
formalities must be followed to ensure that the separate corporate identities
of the GSE and its affiliates are maintained. Specifically, the Privatization
Act provides that the GSE must not extend credit to, nor guarantee any debt
obligations of, the Company or its subsidiaries. The Privatization Act also
provides that (i) the funds and assets of the GSE must at all times be
maintained separately from the funds and assets of the Company and its
subsidiaries, (ii) the GSE must maintain books and records that clearly reflect
the assets and liabilities of the GSE, separate from the assets and liabilities
of the Company or its subsidiaries, (iii) the GSE must maintain a corporate
office that is physically separate from any office of the Company and its
subsidiaries, (iv) no director of the GSE who is appointed by the President may
serve as a director of the Company and (v) at least one officer of the GSE must
be an officer solely of the GSE.
Furthermore, the Privatization Act mandates that transactions between
the GSE and the Company, including any loan servicing arrangements, shall be on
terms no less favorable to the GSE than the GSE could
18
<PAGE> 21
obtain from an unrelated third party, and any amounts collected on behalf of
the GSE by the Company pursuant to a servicing contract or other arrangement
between the GSE and the Company shall be immediately deposited by the Company
to an account under the sole control of the GSE.
Limitations on Company Activities. During the Wind-Down Period, the
Company must remain a passive entity that holds the stock of its subsidiaries
and provides funding and management support to such subsidiaries. The
Privatization Act contemplates that until the GSE is dissolved, the Company's
business activities will be conducted through subsidiaries. The Privatization
Act extends to the Company and its subsidiaries the GSE's "eligible lender"
status for loan consolidation and secondary market purchases. See "Business."
The Company generally may begin to purchase FFELP student loans only
after the GSE discontinues such activity. Subject to the foregoing, the
Company may elect, at any time, to transfer new student loan purchase activity
from the GSE to one of its non-GSE subsidiaries. Under OBRA, loans acquired
after August 10, 1993 and held by the GSE are subject to a 30 basis point per
annum "offset fee." The offset fee does not apply to loans held or securitized
by the Company or its non-GSE subsidiaries.
Although the GSE may not finance the activities of the non-GSE
subsidiaries, it may, subject to its minimum capital requirements, dividend
retained earnings and surplus capital to the Company, which in turn may use
such amounts to support its non-GSE subsidiaries. The GSE's charter requires
that the GSE maintain a minimum capital ratio of at least 2 percent until the
year 2000, and charter amendments effected by the Privatization Act require
that the GSE maintain a minimum capital ratio of at least 2.25 percent
thereafter. In the event that the GSE's capital falls below the applicable
required level, the Company is required to supplement the GSE's capital to
achieve such required level. The Privatization Act further directs that under
no circumstances shall the assets of the GSE be available or used to pay claims
or debts of or incurred by the Company.
In exchange for the payment of $5 million to the Control Board, the
Company and its other subsidiaries may continue to use the name "Sallie Mae,"
but not the name "Student Loan Marketing Association," as part of their legal
names or as a trademark or service mark. Interim disclosure requirements in
connection with securities offerings and promotional materials are required to
avoid marketplace confusion regarding the separateness of the GSE and its
affiliated entities. During the Wind-Down Period and until one year after
repayment of all outstanding GSE debt, the "Sallie Mae" name may not be used by
any Company unit that issues debt obligations or other securities to any person
or entity other than the Company or its subsidiaries. In addition, the
Privatization Act requires the Company to issue the Warrants to the Control
Board. These provisions of the Privatization Act were part of the terms
negotiated with the Administration and Congress in conjunction with the GSE's
privatization. The Company issued the Warrants on August 7, 1997.
GSE Dissolution After Reorganization. The Privatization Act provides
that the GSE will liquidate and dissolve on September 30, 2008, unless an
earlier dissolution is requested by the GSE and the Secretary of Education
makes no finding that the GSE continues to be needed as a lender of last resort
under the GSE charter or to purchase loans under certain agreements with the
Secretary of Education. In connection with such dissolution, the GSE must
transfer any remaining GSE obligations into a defeasance trust for the benefit
of the holders of such obligations, along with cash or full faith and credit
obligations of the United States, or an agency thereof, in amounts sufficient,
as determined by the Secretary of the Treasury, to pay the principal and
interest on the deposited obligations. As of June 30, 1997, the GSE had $379
million in current carrying value of debt obligations outstanding with
maturities after September 30, 2008. If the GSE has insufficient assets to
fully fund such GSE debt obligations outstanding at the time of dissolution,
the Company must transfer sufficient assets to the trust to account for this
shortfall. The Privatization Act also requires that on the dissolution date,
the GSE shall repurchase or redeem, or make proper provisions for the
repurchase or redemption of, any outstanding shares of preferred stock, of
which the GSE has issued Series A and B Adjustable Rate Cumulative Preferred
Stock. The Series A Preferred Stock is carried at its liquidation value of
$50.00 per share for a total of $214 million and pays a variable dividend that
has been at its minimum rate of 5 percent per annum for the last several years.
The Series B Preferred Stock is carried at its liquidation value of $500,000
per share for a total of $100 million and pays a variable dividend that is
equal to 3-month London Interbank Offered Rate ("LIBOR") plus 1.00% per annum
divided by 1.377. Upon dissolution, the GSE charter will terminate, and any
assets that the GSE continues to hold after establishment of the trust or that
remain in the trust after full payment of the remaining obligations of the GSE
assumed by the trust, will be transferred to the Company or its affiliates, as
determined by the Company's Board of Directors.
19
<PAGE> 22
GSE REGULATION
The GSE's structure and the scope of its business activities are set
forth in its charter. The charter, which is subject to review and change by
Congress, sets forth certain restrictions on the GSE's business and financing
activities and charges the federal government with certain oversight
responsibilities with respect to these activities. The GSE's charter grants
the GSE certain exemptions from federal and state laws. The GSE charter's
primary regulatory restrictions and exemptions, including certain provisions
added by the Privatization Act, are summarized as follows:
1. Seven members of the GSE's 21-member Board of Directors are
appointed by the President of the United States. The other 14
members are elected by the Company as the holder of the GSE's
Common Stock. The Chairman of the Board is designated by the
President of the United States from among the Board's 21 members.
2. Debt obligations issued by the GSE are exempt from state taxation
to the same extent as United States government obligations. The
GSE is exempt from all taxation by any state or by any county,
municipality, or local taxing authority except with respect to
real property taxes. The GSE is not exempt from federal corporate
income taxes.
3. All stock and other securities of the GSE are deemed to be exempt
securities under the laws administered by the SEC to the same
extent as obligations of the United States.
4. The GSE may conduct its business without regard to any
qualification or similar statute in any state of the United
States, including the District of Columbia, the Commonwealth of
Puerto Rico and the territories and possessions of the United
States (although the scope of the GSE's business is generally
limited by its federal charter).
5. The issuance of GSE debt obligations must be approved by the
Secretary of the Treasury.
6. The GSE is required to have its financial statements examined
annually by independent certified public accountants and to submit
a report of the examination to the Secretary of the Treasury. The
Department of the Treasury is also authorized to conduct audits of
the GSE and to otherwise monitor the GSE's financial condition.
The GSE is required to submit annual reports of its operations and
activities to the President of the United States and Congress.
The GSE must pay up to $800,000 per year to the Department of the
Treasury to cover the costs of its oversight.
7. The GSE is subject to certain "safety and soundness" regulations,
including the requirement that the GSE maintain a 2.00 percent
capital adequacy ratio (increasing to 2.25 percent after January
1, 2000). The GSE may pay dividends only upon certification that,
at the time of a dividend declaration and after giving effect to
the payment of such dividend, the capital adequacy ratio is
satisfied.
8. The Secretary of Education and the Secretary of the Treasury have
certain enforcement powers under the GSE's charter.
9. A 30 basis point annual offset fee, unique to the GSE, is payable
to the Secretary of Education on student loans purchased and held
by the GSE on or after August 10, 1993. See "Business -- Legal
Proceedings."
10. At the request of the Secretary of Education, the GSE is required
to act as a lender of last resort to make FFELP loans when other
private lenders are not available. Such loans are not subject to
the 30 basis point offset fee on loans held by the GSE.
OTHER REGULATION
Under the Higher Education Act of 1965, as amended, the Company is an
"eligible lender" for purposes only of purchasing and holding loans made by
other lenders and making consolidation and lender of last resort loans. Like
other participants in insured student loan programs, the Company is subject,
from time to time, to review of its student loan operations by the General
Accounting Office, the DOE and certain guarantee agencies. The laws relating
to insured student loan programs are subject to revision from time to time and
changes to such laws are
20
<PAGE> 23
beyond the Company's control. In addition, SMSC, as a servicer of student
loans, is subject to certain DOE regulations regarding financial responsibility
and administrative capability that govern all third party servicers of insured
student loans. ESI is a broker-dealer registered with the SEC and the National
Association of Securities Dealers (the "NASD") and is licensed to do business
in 50 states. ESI is subject to regulation by the SEC and the NASD as a
municipal security broker-dealer. HICA, a South Dakota stock insurance
company, is subject to the ongoing regulatory authority of the South Dakota
Division of Insurance and that of comparable governmental agencies in six other
states.
NON-DISCRIMINATION AND LIMITATIONS ON AFFILIATION WITH DEPOSITORY INSTITUTIONS
The Privatization Act also amended the Higher Education Act to provide
that the GSE and any successor entity (including the Company) functioning as a
secondary market for federally insured student loans may not engage, directly
or indirectly, in any pattern or practice that results in a denial of a
borrower's access to insured loans because of the borrower's race, sex, color,
religion, national origin, age, disability status, income, attendance at a
particular institution, length of a borrower's educational program or the
borrower's academic year at an eligible institution.
Pub. L. No. 104-208, the federal budget legislation of which the
Privatization Act was a part, contains amendments to the Federal Deposit
Insurance Act and the Federal Credit Union Act that prohibit all
government-sponsored enterprises from directly or indirectly sponsoring or
providing non-routine financial support to certain credit unions and depository
institutions. Depository institutions are also prohibited from being
affiliates of government-sponsored enterprises. Thus, neither the Company nor
any of its subsidiaries may be affiliated with a depository institution until
the GSE is dissolved. These restrictions effectively limit the ability of the
Company and its affiliates to originate insured student loans through an
affiliated depository institution as long as the GSE remains in existence.
Most originators of insured student loans are depository institutions that
qualify as "eligible lenders" under the Higher Education Act.
21
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of SLM Holding at
June 30, 1997.
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Borrowed funds:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . $25,850,071
Long-term notes . . . . . . . . . . . . . . . . . . . . . . . 19,488,810
-----------
Total borrowed funds . . . . . . . . . . . . . . . . . . . 45,338,881
-----------
Minority Interest in Subsidiary . . . . . . . . . . . . . . . . 213,883
Stockholders' equity:
Common stock, par value $.20 per share, 250,000,000 shares
authorized, 66,158,095 shares issued . . . . . . . . . . . 13,231
Additional paid-in capital . . . . . . . . . . . . . . . . . 28,218
Unrealized gains on investment, net of tax . . . . . . . . . 344,628
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 1,194,769
-----------
Stockholders' equity before treasury stock . . . . . . . . . 1,580,846
Common stock held in treasury at cost, 13,823,562 shares . . 738,260
-----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 842,586
-----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . $46,395,350
===========
</TABLE>
22
<PAGE> 25
SELECTED FINANCIAL DATA
The following table sets forth selected financial and other operating
information of SLM Holding. The selected financial data in the table is
derived from the consolidated financial statements of SLM Holding. The data
should be read in conjunction with the consolidated financial statements,
related notes, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- ---------------------------------------------------------------
1997(2) 1996(2) 1996(2) 1995(1)(2) 1994(1)(2) 1993(1)(2) 1992(1)(2)
---------- ---------- ----------- ----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income . . . . . . . . $ 406 $ 452 $ 866 $ 901 $ 982 $ 1,169 $ 987
Net income . . . . . . . . . . . . 233 201 409 356 410 432 391
Earnings per common share . . . . 4.36 3.53 7.32 5.27 5.13 4.98 4.30
Dividends per common share . . . . .88 .80 1.64 1.51 1.42 1.25 1.05
Return on common stockholders'
equity . . . . . . . . . . . . . 57.26%(3) 49.29%(3) 50.13%(3) 29.17%(3) 27.85%(3) 37.68% 37.26%
Net interest margin . . . . . . . . 1.78 1.96 1.90 1.84 2.14 2.74 2.32
Return on assets . . . . . . . . . .98 .84 .86 .69 .85 .97 .87
Dividend payout ratio . . . . . . 20.16 22.66 22.40 28.64 27.66 25.10 24.41
Average equity/average assets . . 1.64 1.64 1.65 2.28 2.96 2.50 2.27
BALANCE SHEET DATA:
Student loans purchased . . . . . . $29,569 $33,653 $32,308 $34,336 $30,571 $26,978 $24,326
Student loan participations . . . . 1,919 -- 1,446 -- -- -- --
Warehousing advances . . . . . . . 2,495 2,972 2,789 3,865 7,032 7,034 8,085
Academic facilities financings . . 1,354 1,546 1,473 1,312 1,548 1,359 1,189
Total assets . . . . . . . . . . . 47,899 47,363 47,630 50,002 53,161 46,682 46,775
Long-term notes . . . . . . . . . . 19,489 25,632 22,606 30,083 34,319 30,925 30,724
Total borrowings . . . . . . . . . 45,339 44,905 45,124 47,530 50,335 44,544 44,440
Stockholders' equity . . . . . . . 843(3) 803(3) 834(3) 867(3) 1,388(3) 1,179 1,107
Book value per common share . . . . 16.10 14.47 15.53 15.03 18.87 14.03 39
OTHER DATA:
Securitized student loans
outstanding . . . . . . . . . . . $10,048 $ 3,735 $ 6,263 $ 954 $ -- $ -- $ --
Core earnings(4) . . . . . . . . . 223 182 381 350 345 388 391
Premiums on debt extinguished . . -- 7 7 8 14 211 141
</TABLE>
- ----------
(1) Previously reported results for the years ended December 31, 1995, 1994,
1993 and 1992 have been restated to retroactively reflect the recognition
of student loan income as earned (see Note 2 to the Consolidated
Financial Statements). This restatement resulted in the elimination of
the previously reported 1995 cumulative effect of the change in
accounting method of $130 million ($1.93 per common share) and an
increase to previously reported net income of $17 million ($.22 per
common share), $13 million ($.15 per common share), and $8 million ($.09
per common share) for the years ended December 31, 1994, 1993 and 1992,
respectively.
(2) As part of the GSE's privatization, SLM Holding became the
parent company of, and successor to, the GSE on August 7, 1997. As a
result, the GSE's preferred stock (totaling $214 million) is now
reflected as a minority interest in the consolidated financial
statements. The financial statements for prior periods have been
restated to reflect this change.
(3) At June 30, 1997 and 1996 and at December 31, 1996, 1995 and 1994,
stockholders' equity reflects the addition to stockholders' equity of
$345 million, $336 million, $349 million, $371 million and $300 million,
respectively, net of tax, of unrealized gains on certain investments
recognized pursuant to FAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
(4) Core earnings is defined as the Company's net income less the after-tax
effect of floor revenues and other one-time charges. Management believes
that these measures, which are not measures under generally accepted
accounting principles (GAAP), are important because they depict the
Company's earnings before the effects of one time events such as floor
revenues which are largely outside of the Company's control. Management
believes that core earnings as defined, while not necessarily comparable
to other companies' use of similar terminology, provide for meaningful
period to period comparisons as a basis for analyzing trends in the
Company's student loan operations.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Set forth below is the Management's Discussion and Analysis of Financial
Conditions and Results of Operations for the six months ended June 30, 1997 and
1996 and for the years ended December 31, 1994-1996. These discussions include
complementary information and are intended to be read together.
ON AUGUST 7, 1997, PURSUANT TO AN AGREEMENT AND PLAN OF REORGANIZATION,
DATED AS OF APRIL 7, 1997, THE STUDENT LOAN MARKETING ASSOCIATION (THE
"GSE") WAS REORGANIZED INTO A WHOLLY OWNED SUBSIDIARY OF SLM HOLDING
CORPORATION ("SLM HOLDING" OR THE "COMPANY"). THIS TRANSFER OF THE SUBSIDIARIES
AND ASSETS AND THE RELATED EXCHANGE OF STOCK IS BEING ACCOUNTED FOR AT
HISTORICAL COST SIMILAR TO A POOLING OF INTERESTS AND THEREFORE ALL PRIOR
PERIOD FINANCIAL STATEMENTS AND RELATED DISCLOSURES PRESENTED HAVE BEEN
RESTATED AS IF THE REORGANIZATION TOOK PLACE AT THE BEGINNING OF SUCH PERIODS.
THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 ARE PRESENTED
IN A NEW FORMAT FROM PRIOR PRESENTATIONS OF THE PUBLICLY AVAILABLE FINANCIAL
STATEMENTS OF THE COMPANY TO BETTER PORTRAY THE CHANGING NATURE OF THE
COMPANY'S REVENUE STREAMS. WHILE THE PRINCIPAL SOURCE OF EARNINGS CONTINUES TO
BE FROM STUDENT LOANS, THE NATURE OF THOSE EARNINGS IS CHANGING AS A RESULT OF
SECURITIZATION. THE MAJOR DIFFERENCES BETWEEN THE OLD AND NEW FORMATS ARE THAT
THE SECURITIZATION-RELATED INCOME, FEE INCOME AND GAINS AND LOSSES ON SALES OF
SECURITIES WERE RECLASSIFIED FROM THE INTEREST INCOME SECTION TO THE OTHER
INCOME SECTION AND SERVICING AND ACQUISITION COSTS WERE COMBINED WITH GENERAL
AND ADMINISTRATIVE EXPENSES AND PRESENTED AS OPERATING EXPENSES IN THE
CONSOLIDATED STATEMENTS OF INCOME. ALL DOLLAR AMOUNTS ARE IN MILLIONS, EXCEPT
PER SHARE AMOUNTS.
THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994 WERE RESTATED TO RETROACTIVELY REFLECT THE RECOGNITION OF STUDENT LOAN
INCOME AS EARNED. SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE> 27
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
------------- --------------
1997 1996 $ %
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net interest income ............................. $ 406 $ 452 $ (46) (10)%
Other operating income .......................... 154 50 104 210
Operating expenses .............................. 217 199 18 9
Federal income taxes ............................ 105 92 13 14
Minority interest in net earnings of subsidiary . 5 5 -- --
----- ----- ----- -----
Income before premiums on debt extinguished ..... 233 206 27 13
Premiums on debt extinguished, net of tax ....... -- (5) 5 100
----- ----- ----- -----
NET INCOME ...................................... $ 233 $ 201 $ 32 16%
===== ===== ===== =====
EARNINGS PER COMMON SHARE ....................... $4.36 $3.53 $ .83 24%
===== ===== ===== =====
Dividends per common share ...................... $ .88 $ .80 $ .08 10%
===== ===== ===== =====
CORE EARNINGS ................................... $ 224 $ 182 $ 42 23%
===== ===== ===== =====
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
JUNE 30, DECEMBER 31,
1997 1996 $ %
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS
Student loans ............................... $31,488 $33,754 $(2,266) (7)%
Warehousing advances ........................ 2,495 2,790 (295) (11)
Academic facilities financings .............. 1,353 1,473 (120) (8)
Cash and investments ........................ 10,593 7,706 2,887 37
Other assets ................................ 1,970 1,907 63 3
------- ------- ------- -------
Total assets ................................ $47,899 $47,630 $ 269 1%
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ....................... $25,850 $22,518 $ 3,332 15%
Long-term notes ............................. 19,489 22,606 (3,117) (14)
Other liabilities ........................... 1,503 1,458 45 3
------- ------- ------- -------
Total liabilities ........................... 46,842 46,582 260 1
------- ------- ------- -------
Minority interest in subsidiary ............. 214 214 -- --
Stockholders' equity before treasury
stock ....................................... 1,581 1,371 210 15
Common stock held in treasury at cost ....... 738 537 201 37
------- ------- ------- -------
Total stockholders' equity .................. 843 834 9 1
------- ------- ------- -------
Total liabilities and stockholders' equity .. $47,899 $47,630 $ 269 1%
======= ======= ======= =======
</TABLE>
25
<PAGE> 28
RESULTS OF OPERATIONS
SLM Holding's net income was $233 million ($4.36 per common share) for the
first six months of 1997 compared to $201 million ($3.53 per common share) for
the first six months of 1996.
The net income increase of $32 million (16 percent) in the first six months
of 1997 was primarily a result of, on an after-tax basis, an increase in student
loan securitization gains of $29 million, the growth in managed student loan
assets resulting in increased revenue of $22 million, and increased revenue from
amortization of student loan floor contracts of $6 million. These positive
factors were somewhat offset by the increased interest on loans subject to OBRA
fees of $7 million as discussed below, a decrease in student loan floor revenues
of $10 million, increased operating expenses of $12 million and a decrease in
interest earned on student loans as loans were securitized. Earnings per common
share were further enhanced by repurchases of 1.8 million shares (3 percent of
shares outstanding) in the first six months of 1997.
OBRA imposed legislative fees and risk-sharing on the GSE and other
participants in the FFELP including an offset fee applicable only to the GSE,
consolidation loan rebate fees, and risk-sharing on defaulted loans applicable
to all FFELP participants. The impact of these fees and reserves for
risk-sharing on the Company's on-balance sheet portfolio of student loans
reduced net income by $37 million and $30 million in the first six months of
1997 and 1996, respectively. In addition to these fees, OBRA also imposed other
yield reductions on all FFELP participants, principally loan origination fees
paid to the federal government and reduced Special Allowance Payment ("SAP,"
which is described below) during the period when a borrower is not in an active
repayment status. The Company effectively shares the impact of these costs
through the pricing of loan portfolios it purchases in the secondary market.
Management believes the spreads earned on the Company's portfolio of student
loans will continue to be adversely affected as a result of these changes to the
FFELP program for the next several years as older loans in its portfolio, which
were not affected by OBRA, amortize and are replaced by more recently originated
loans which are affected by OBRA.
Core Earnings and Core Student Loan Spread
Important measures of the Company's operating performance are core earnings
and the core student loan spread. Core earnings is defined as the Company's net
income less the after-tax effect of floor revenues and other one-time charges.
Management believes that these measures, which are not measures under generally
accepted accounting principles ("GAAP"), are important because they depict the
Company's earnings before the effects of one time events such as floor revenues
which are largely outside of the Company's control. Management believes that
core earnings as defined, while not necessarily comparable to other companies'
use of similar terminology, provide for meaningful period to period comparisons
as a basis for analyzing trends in the Company's core student loan operations.
The following table analyzes the earning spreads on student loans for the
six months ended June 30, 1997 and 1996. The line captioned "Adjusted Student
Loan Yields", reflects contractual yields adjusted for premiums paid to purchase
loan portfolios and the estimated costs of borrower benefits. The Company,
as the servicer of student loans that it securitizes, will continue to earn fee
revenues over the life of the securitized student loan portfolios. The
off-balance sheet information presented in the Student Loan Spread Analysis that
follows analyzes the on-going fee revenues associated with the securitized
portfolios of student loans.
26
<PAGE> 29
STUDENT LOAN SPREAD ANALYSIS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields ....................... 7.85% 7.96%
Amortization of floor contracts .................... .11 .05
Floor income ....................................... .09 .17
Direct OBRA Costs .................................. (.34) (.28)
---------- ----------
Student loan income ................................ 7.71 7.90
Cost of funds ...................................... (5.51) (5.47)
---------- ----------
Student loan spread ................................ 2.20% 2.43%
========== ==========
Core student loan spread ........................... 2.11% 2.26%
========== ==========
OFF-BALANCE SHEET
Servicing and securitization revenue ............... 1.59% 1.33%
========== ==========
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans, including participations ............ $ 33,298 $ 33,688
Securitized loans .................................. 7,259 2,374
---------- ----------
Managed student loans .............................. $ 40,557 $ 36,062
========== ==========
</TABLE>
The decrease in the core student loan spread in the first six months of
1997 was due principally to higher OBRA fees and the effect of student loan
participations which contractually yield a lower rate than the underlying
student loans (discussed below), offset by the revenues from the amortization of
upfront payments received from student loan floor contracts.
Student Loan Floor Revenues
The yield to holders of FFELP loans is subsidized on the borrower's behalf
by the federal government to provide a market rate of return through the payment
of the SAP. Depending on the loan's status and origination date, the SAP
increases the yield on loans to a variable 91-day Treasury bill-based rate plus
2.50 percent, 3.10 percent, 3.25 percent or 3.50 percent, if that yield exceeds
the borrower's interest rate. The interest rate paid by the borrower is either
at a fixed rate or a rate that resets annually. Thus, the yield to holders of
student loans varies with the 91-day Treasury bill rate. In low interest rate
environments, when the interest rate that the borrower is obligated to pay
exceeds the variable rate determined by the SAP formula, the borrower's interest
rate that is the minimum interest rate earned on FFELP loans becomes, in effect,
a floor rate. The floor enables the Company to earn wider spreads on these
student loans because the Company's variable cost of funds, which is indexed to
the Treasury bill rate, reflects lower market rates. The floor generally becomes
a factor when the Treasury bill rate is less than 5.90 percent. For loans that
have fixed borrower interest rates, the floor remains a factor until Treasury
bill rates rise to a level at which the yield determined by the SAP formula
exceeds the borrower's interest rate. For loans with annually reset borrower
rates, the floor is a factor until either Treasury bill rates rise similarly or
the borrower's interest rate is reset, which occurs on July 1 of each year.
Under the FFELP program, the majority of loans disbursed after July 1992 have
variable borrower interest rates that reset annually.
As of June 30, 1997, approximately $32 billion of the Company's managed
student loans were eligible to earn floors ($15 billion with fixed borrower
interest rates and $17 billion with variable borrower interest rates that reset
annually). During 1996, the Company "monetized" the value of the floors related
to $13 billion of such loans by entering into contracts with third parties under
which it agreed to pay the future floor revenues received, in exchange for
upfront payments. These upfront payments are being amortized over the life of
these contracts, which is approximately 2 years. The amortization of these
payments, which is not dependent on future interest rate levels, is included in
core earnings. In the first six months of 1997 and 1996, the amortization
contributed $18 million and $8 million, respectively, pre-tax to core earnings.
Of the remaining $19 billion of loans eligible to earn floors at June 30, 1997,
$4 billion were earning floor revenues based upon current interest rates. These
loans earned floor revenues of $14 million (net of $10 million in payments under
the floor revenue contracts) and $29 million (net of $4 million in payments
under the floor revenue contracts) in the six months ended June 30, 1997 and
1996, respectively, as the average bond equivalent 91-day Treasury bill rate was
5.21 percent in the first six months of 1997 versus 5.13 percent in the first
six months of 1996.
27
<PAGE> 30
Securitization
In each of the first six months of 1997 and 1996, the GSE completed two
securitization transactions in which a total of $4.5 billion and $3.0 billion,
respectively, of student loans were sold by the GSE to a special purpose
finance subsidiary and by that subsidiary to trusts that issued asset-backed
securities to fund the student loans to term. When loans are securitized a gain
on sale is recorded that is equal to the present value of the expected net cash
flows from the trust, taking into account principal, interest and SAP on the
student loans less principal and interest payments on the notes and certificates
financing the student loans, the cost of servicing the student loans, the
estimated cost of the Company's borrower benefit programs, losses from defaulted
loans (which include risk-sharing, claim interest penalties and reject costs),
transaction costs and the current carrying value of the loans including any
premiums paid. Accordingly, such gain effectively accelerates recognition of
earnings versus the earnings that would have been recorded had the loans
remained on the balance sheet. The gains on sales through June 30, 1997 have
been further reduced by the present value effect of the payment of future offset
fees on loans securitized. (See below for discussion of the offset fee
litigation.) The pre-tax securitization gains on the transactions recorded
totaled $65 million and $19 million in the first six months of 1997 and 1996,
respectively. The increase in the gain in the first six months of 1997 was
mainly due to the increase in the size of the portfolios securitized, the higher
average borrower indebtedness and the longer average life of the portfolio of
loans securitized. Gains on future securitizations will continue to vary
depending on the characteristics of the loan portfolios securitized.
On July 23, 1997, the DOE decided that the 30 basis point annual offset fee
that the GSE is required to pay on student loans that it owns does not apply to
student loans that the GSE has securitized. The U.S. Court of Appeals for the
District of Columbia Circuit had struck down the Secretary of Education's
previous interpretation, which applied the offset fee to loans securitized by
the GSE, but upheld the constitutionality of the offset fee for loans owned by
the GSE. Based upon the favorable final ruling in this matter, the contingent
gain of approximately $97 million pre-tax that had not been recognized in income
through June 30, 1997 was released and recognized in income in the third
quarter. All future securitization gains will be calculated without
consideration of the offset fee. In addition to the initial gain on sale, the
Company is entitled to the residual cash flows from the trust and servicing
fees for continuing to service the loans after they are sold to the trusts. The
residual amounts and the servicing fees are reflected as servicing and
securitization revenues in the Consolidated Statements of Income.
NET INTEREST INCOME
To compare nontaxable asset yields to taxable yields on a similar basis,
the amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
----------------- ------------------
1997 1996 $ %
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income
Student loans ............................ $1,274 $1,323 $ (49) (4)%
Warehousing advances ..................... 78 107 (29) (27)
Academic facilities financings ........... 48 49 (1) (2)
Investments .............................. 312 270 42 16
Taxable equivalent adjustment ............ 18 16 2 9
------ ------ ------ ------
Total taxable equivalent interest income .. 1,730 1,765 (35) (2)
Interest expense .......................... 1,305 1,296 9 1
------ ------ ------ ------
Taxable equivalent net interest income .... $ 425 $ 469 $ (44) (9)%
====== ====== ====== ======
</TABLE>
Taxable equivalent net interest income in the first six months of 1997
declined by $44 million from the first six months of 1996. This decline was due
to the increase in loans subject to OBRA fees, which reduced taxable equivalent
net income and net interest margin by $57 million and .24 percent, respectively,
for the first six months of 1997 as compared to $47 million and .20 percent,
respectively, for the first six months of 1996. Other factors contributing to
the decline were lower student loan floor revenues, decreased spreads on student
loans and a decrease in average student loan assets as loans were securitized.
The decreases were partially offset by increased revenue of $10 million from the
amortization of upfront payments received from student loan floor contracts and
increased earnings from student loan participations. As discussed above under
"Securitization," when loans are securitized a gain or loss is recorded, and
such gain or loss, along with ongoing securitization and servicing revenues from
the trusts, are reflected in "Other Income" on the Consolidated Statements of
Income. The decrease in interest income from warehousing advances is due to the
decrease in the average balance of those assets and the
28
<PAGE> 31
increase in interest income from investments is due principally to the increase
in the average balance of those assets. See "-- Rate/Volume Analysis."
Allowance for Student Loans
The provision for student loan losses is the periodic expense of
maintaining an adequate allowance at the amount estimated to be sufficient to
absorb possible future losses, net of recoveries inherent in the existing on-
balance sheet loan portfolio. In evaluating the adequacy of the allowance for
loan losses, the Company takes into consideration several factors including
trends in claims rejected for payment by guarantors, default rate trends on
privately-insured loans, and the amount of FFELP loans subject to 2 percent
risk-sharing. To recognize these potential losses on student loans, the Company
maintained a reserve of $82 million and $64 million at June 30, 1997 and 1996,
respectively. In the first six months of 1997, the Company increased this
reserve by $6 million, due mainly to an $8 million increase due to the increase
in loans subject to risk-sharing offset partially by a $4 million reduction for
improved experience in recovering unpaid guarantees on defaulted student loans.
In the first six months of 1996, the Company increased the reserve by $9 million
due mainly to increased loans subject to risk-sharing. Once a student loan is
charged off as a result of an unpaid claim, it is the Company's policy to
continue to pursue the recovery of principal and interest.
Management believes that the allowance for loan losses is adequate to cover
anticipated losses in the on-balance sheet student loan portfolio. This
evaluation is inherently subjective, however, as it requires material estimates
that may be susceptible to significant changes.
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the six months ended June 30, 1997 and 1996. Managed net
interest margin includes net interest income plus gains on securitization sales
and servicing and securitization income divided by average managed assets.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
1997 1996
---------------------- ------------------------
BALANCE RATE BALANCE RATE
-------- --------- --------- --------
<S> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans .............................. $ 33,298 7.71% $ 33,688 7.90%
Warehousing advances ....................... 2,639 5.98 3,523 6.11
Academic facilities financings ............. 1,443 8.44 1,430 8.50
Investments ................................ 10,606 6.04 9,343 5.91
-------- --------- --------- --------
Total interest earning assets ................... 47,986 7.27% 47,984 7.40%
Non-interest earning assets ..................... 1,930 ========= 1,808 ========
-------- ---------
Total assets .................................... $ 49,916 $ 49,792
======== =========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes ................. $ 2,952 5.46% $ 2,605 5.42%
Other short-term borrowings ................... 24,243 5.48 16,759 5.41
Long-term notes ............................... 20,444 5.59 28,136 5.55
-------- --------- --------- --------
Total interest bearing liabilities .............. 47,639 5.53% 47,500 5.49%
Non-interest bearing liabilities ................ 1,458 ========= 1,474 ========
Stockholders' equity ............................ 819 818
======== =========
Total liabilities and stockholders' equity ...... $ 49,916 $ 49,792
======== =========
Net interest margin ............................. 1.78% 1.96%
========= ========
Managed net interest margin ..................... 1.99% 2.01%
========= ========
</TABLE>
The decrease in net interest margin for the six months ended June 30, 1997
from the six months ended June 30, 1996 is mainly due to increased OBRA fees and
lower floor revenues, offset by the increased revenues from the amortization of
upfront payments received from student loan floor contracts. See "--Rate/Volume
Analysis." The decrease in the managed net interest margin for the six months
ended June 30, 1997 from the six months ended June 30, 1996 is due to the
factors mentioned above for the net interest margin offset by an increase in the
gain from securitization of $45 million and the increase in servicing and
securitization income of $42 million.
29
<PAGE> 32
FUNDING COSTS
The Company's borrowings are generally variable rate indexed principally to
the 91-day Treasury bill rate. The following table summarizes the average
balance of debt (by index after giving effect to the impact of interest rate
swaps) for the six months ended June 30, 1997 and 1996 (dollars in millions).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
1997 1996
--------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
- ----------------------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Treasury bill, principally 91-day . $ 33,868 5.50% $ 35,878 5.46%
LIBOR ............................. 6,363 5.42 8,412 5.38
Discount notes .................... 6,006 5.43 2,075 5.32
Fixed ............................. 673 7.04 760 6.73
Zero coupon ....................... 132 11.12 122 11.12
Other ............................. 597 5.10 253 5.29
--------- -------- --------- --------
Total ............................. $ 47,639 5.53% $ 47,500 5.49%
========= ======== ========= ========
</TABLE>
In the above table, for the six months ended June 30, 1997 and 1996,
spreads for Treasury bill indexed borrowings averaged .23 percent and .25
percent, respectively, over the weighted average Treasury bill rates for those
periods and spreads for London Interbank Offered Rate ("LIBOR") indexed
borrowings averaged .26 percent and .28 percent, respectively, under the
weighted average LIBOR rates.
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes
in interest rates and asset volumes.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE ----------------------
(DECREASE) RATE VOLUME
---------- ------ -----
<S> <C> <C> <C>
FIRST SIX MONTHS OF 1997 VS. FIRST SIX MONTHS OF 1996
Taxable equivalent interest income ................... $ (35) $ (28) $ (7)
Interest expense ..................................... 9 13 (4)
------ ------ -----
Taxable equivalent net interest income ............... $ (44) $ (41) $ (3)
====== ====== =====
</TABLE>
The $41 million decrease in taxable equivalent net interest income
attributable to the change in rates in the first six months of 1997 was
principally due to the decrease of $15 million in floor revenues (net of
payments under the floor contracts) in the first six months of 1997 versus 1996,
the impact of student loan participations on the student loan spread and
increased OBRA costs of $10 million. Offsetting the decreases in taxable
equivalent net interest income were $10 million of increased revenues from the
amortization of the upfront payments received from student loan floor contracts.
OPERATING EXPENSES
Operating expenses include general and administrative costs, costs incurred
to service the Company's managed student loan portfolio and operational costs
incurred in the process of acquiring student loan portfolios. Total operating
expenses as a percentage of average managed student loans were 108 basis points
and 111 basis points for the six months ended June 30, 1997 and 1996,
respectively. Operating expenses are summarized in the following tables:
30
<PAGE> 33
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
SERVICING SERVICING
AND AND
CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits.... $ 31 $ 72 $ 103 $ 34 $ 68 $ 102
Occupancy and equipment .......... 9 30 39 13 30 43
Professional fees ................ 12 8 20 6 4 10
Advertising and promotion ........ 5 -- 5 3 -- 3
Office operations ................ 4 13 17 4 15 19
Other ............................ 6 6 12 4 -- 4
------ ------ ------ ------ ------ ------
Total internal operating expenses. 67 129 196 64 117 181
Third party servicing costs ...... -- 21 21 -- 18 18
------ ------ ------ ------ ------ ------
Total operating expenses ......... $ 67 $ 150 $ 217 $ 64 $ 135 $ 199
====== ====== ====== ====== ====== ======
Employees at end of the period ... 686 4,003 4,689 739 3,918 4,657
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, INCREASE/(DECREASE)
------------- -------------------
1997 1996 $ %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Servicing costs ....................... $121 $102 $ 19 19%
Acquisition costs ..................... 29 33 (4) (13)
---- ---- ---- ----
Total servicing and acquisition costs . $150 $135 $ 15 11%
==== ==== ==== ====
</TABLE>
The increase of $3 million in corporate operating expenses in the first six
months of 1997 versus the first six months of 1996 was mainly due to the
increase in professional fees related to the privatization and proxy efforts and
to SEC registration fees, offset in part by a decrease in occupancy costs and a
decrease in salaries caused principally by the closing of the Company's
subsidiary, Education Finance Center, Inc ("EFCI"), in the fourth quarter of
1996.
Servicing costs include all operations and systems costs incurred to
service the Company's portfolio of managed student loans, including fees paid to
third party servicers. The 1992 legislated expansion of student eligibility and
increases in loan limits resulted in higher average student loan balances, which
generally command a higher price in the secondary market and contribute to lower
servicing costs as a percentage of the average balance of managed student loans.
When expressed as a percentage of the managed student loan portfolio, servicing
costs averaged 60 basis points and 57 basis points for the six months ended June
30, 1997 and 1996, respectively. This increase was due principally to a one-time
cost in connection with the early transfer of GSE-owned student loans from a
third party servicer to Sallie Mae Servicing Corporation ("SMSC").
Loan acquisition costs are principally costs incurred under the ExportSS(R)
loan origination and administration service, the costs of converting newly
acquired portfolios onto the Company's servicing platform or those of third
party servicers and costs of loan consolidation activities. Student loans added
to the ExportSS(R) pipeline, which represent loan volume serviced by and
committed for sale to the Company, totaled $1.7 billion during the first six
months of 1997, down slightly from $1.8 billion in the first six months of 1996.
The outstanding portfolio of loans serviced for ExportSS(R) lenders totaled $3.5
billion at June 30, 1997, down 4 percent from $3.7 billion at June 30, 1996.
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 31 percent and 30 percent in the first six
months of 1997 and 1996, respectively. The GSE is exempt from all state, local,
and District of Columbia income, franchise, sales and use, personal property and
other taxes, except for real property taxes. This tax exemption is effective
only at the GSE level, however, and does not apply to its affiliates. As a
result of the Reorganization, the Company's GSE and non-GSE activities are
separated and non-GSE activities are subject to state and local taxation. State
taxes are expected to be immaterial in 1997 as the majority of the Company's
business activities will relate to the GSE. As increasing business activities
occur outside of the GSE, the effects of state and local taxes are expected to
increase accordingly. When fully phased in, management estimates that the
Company's effective tax rate will be increased by approximately five percentage
points. In addition, state and local sales and property taxes ultimately are
31
<PAGE> 34
expected to increase operating expenses by approximately two to three percent.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 1997, student loan purchases totaled $4.1
billion, down 11 percent from $4.6 billion in the first six months of 1996.
Included in the $4.1 billion of student loan purchases was approximately $590
million of student loan participations from the Chase Joint Venture.
Approximately two-thirds of non-joint venture purchase volume in the first six
months of 1997 was derived from the Company's base of commitment clients,
particularly those who used the ExportSS(R) loan origination service. The GSE
secures financing to fund the purchase of insured student loans along with its
other operations by issuing debt securities in the domestic and overseas capital
markets, through public offerings and through private placements of U.S.
dollar-denominated and foreign currency-denominated debt of varying maturities
and interest rate characteristics and through securitizations of its student
loan assets (see "-- Years ended December 31, 1994--1996 -- Liquidity and
Capital Resources -- Securitization"). The GSE's debt securities are currently
rated at the highest credit rating level by Moody's Investors Service and
Standard & Poor's. Historically, the rating agencies' ratings of the GSE have
been largely a factor of its status as a government-sponsored enterprise.
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements designed
to restore such statutory ratio. Management anticipates being able to fund the
increase in required capital from the GSE's current and retained earnings. At
June 30, 1997, the GSE's statutory capital adequacy ratio was 2.09 percent. In
addition, the Privatization Act now requires management, before the payment of
dividends by the GSE, to certify to the Secretary of the Treasury that, after
giving effect to the payment of dividends, the statutory capital ratio test
would have been met at the time the dividend was declared. See "-- Years ended
December 31, 1994-1996 -- Liquidity and Capital Resources."
The Company uses interest rate and foreign currency swaps (collateralized
where appropriate), purchases of U.S. Treasury securities and other hedging
techniques to reduce the exposure to interest rate and currency fluctuations
that arise from its financing activities and to match the characteristics of its
variable interest rate-earning assets (See "Interest Rate Risk Management").
During the first six months of 1997, the Company issued $2.3 billion of
long-term notes to refund maturing and repurchased obligations. At June 30,
1997, the Company had $19.5 billion of outstanding long-term debt issues of
which $13.8 billion had stated maturities that could be accelerated through call
provisions. The GSE has, in the past, also issued adjustable rate cumulative
preferred stock, common stock, common stock warrants and puts, and subordinated
debentures convertible to common stock, to diversify its funding sources.
During the first six months of 1997, the Company repurchased 1.8 million
shares of its common stock, leaving 52.3 million shares outstanding at June 30,
1997. For the past few years the GSE has operated near the statutory minimum
capital ratio of 2.00 percent of risk-adjusted assets required under its
charter. Capital in excess of such amounts has been used to repurchase common
shares. During 1997, management anticipates using current earnings to repurchase
7 to 9 percent of the shares outstanding at the beginning of the year. See "--
Years ended December 31, 1994-1996 -- Liquidity and Capital Resources."
CASH FLOWS
In the first six months of 1997, operating activities provided net cash
inflows of $219 million, an increase of $64 million from the first six months of
1996. This increase was due mainly to the increase in net income of $32 million.
Investing activities provided $1.7 billion in cash in the first six months of
1997, a decrease of $19 million from the cash provided in the first six months
of 1996 as the Company increased investments by $941 million offset by a
decrease in advances of $294 million in the six months ended June 30, 1997
versus a decrease of $425 million in investments and a decrease of $893 million
in warehousing advances in the first six months of 1996. In addition, the
Company had purchases, net of repayments, claims and resales of student loans
and student loan participations of $2.3 billion in the first six months of 1997
and 1996 and securitized $4.5 billion and $3.0 billion of student loans in the
first six months of 1997 and 1996, respectively. Financing activities used
$4 million in cash in the first six months of 1997 as the Company repurchased
1.8 million shares for $201 million. The Company also repaid a
32
<PAGE> 35
net $5.2 billion in long-term notes through the issuance of net short-term
borrowings of $5.5 billion. As student loans are securitized the need for
long-term financing of these assets on balance sheet decreases.
Interest Rate Risk Management
The Company's principal objective in financing its loan assets is to
minimize its sensitivity to changing interest rates by matching the interest
rate characteristics of borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate loan assets (most of which have
weekly rate resets) with variable rate debt and fixed rate debt converted to
variable rates with interest rate swaps. To achieve a more precise match of
interest rate characteristics between loan assets and their related liabilities,
the Company has effectively converted some of its variable rate debt to a
different variable rate index with interest rate swaps. At June 30, 1997, $19.6
billion of fixed rate debt and $2.9 billion of variable rate debt were matched
with interest rate swaps and foreign currency agreements. Fixed rate debt at
June 30, 1997 also funded fixed rate warehousing advances and academic
facilities financings. Investments were funded on a "pooled" approach, i.e., the
pool of liabilities that funds the investment portfolio has an average rate and
maturity or reset date that corresponds to the average rate and maturity or
reset date of the investments which they fund.
In both its match funding activities for its loan assets and its pool
funding activities for its investments, the Company enters into various
financial instrument contracts in the normal course of business to reduce
interest rate risk and foreign currency exposure on certain of its borrowings.
These financial instrument contracts include interest rate swaps, interest rate
cap and collar agreements, foreign currency swaps, forward currency exchange
agreements, options on currency exchange agreements, options on securities, and
financial futures contracts.
In the table below the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. Nonperforming loans are
included in the analysis based on their underlying interest rate
characteristics. The following gap analysis reflects rate-sensitive positions at
June 30, 1997 and is not necessarily reflective of positions that existed
throughout the period.
33
<PAGE> 36
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
----------------------------------------------------------------------------------------------
3 MONTHS 6 MONTHS
3 MONTHS TO TO 1 TO 2 2 TO 5 OVER 5
OR LESS 6 MONTHS 1 YEAR YEARS YEARS YEARS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans .................. $ 31,488 $ -- $ -- $ -- $ -- $ --
Warehousing advances ........... 2,476 -- 2 1 -- 16
Academic facilities financings . 83 43 17 37 291 882
Cash and investments ........... 8,040 459 16 103 184 1,791
Other assets ................... -- -- -- -- -- 1,970
-------- -------- -------- -------- -------- --------
Total assets .............. 42,087 502 35 141 475 4,659
-------- -------- -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings .......... 18,274 2,617 4,958 -- -- --
Long-term notes ................ 6,919 -- -- 3,108 8,830 632
Other liabilities .............. -- -- -- -- -- 1,504
Minority interest in subsidiary -- -- -- -- -- 214
Stockholders' equity ........... -- -- -- -- -- 843
-------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity .... 25,193 2,617 4,958 3,108 8,830 3,193
-------- -------- -------- -------- -------- --------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps ............ 17,328 (2,232) (4,140) (3,020) (8,694) 758
-------- -------- -------- -------- -------- --------
Period gap ..................... $ (434) $ 117 $ (783) $ 53 $ 339 $ 708
======== ======== ======== ======== ======== ========
Cumulative gap ................. $ (434) $ (317) $ (1,100) $ (1,047) $ (708) $ --
======== ======== ======== ======== ======== ========
Ratio of cumulative gap to total
assets ....................... .9% .7% 2.3% 2.2% 1.5% --%
======== ======== ======== ======== ======== ========
Ratio of interest-sensitive
assets to interest-sensitive
liabilities .................... 167.1% 19.2% .7% 4.5% 5.4% 425.5%
======== ======== ======== ======== ======== ========
</TABLE>
In low interest rate environments, floor revenues on student loans cause
the margins on these loans to widen beyond the locked-in spreads. See "--
Results of Operations -- Student Loan Floor Revenues." Such loans continue to be
classified in the three months or less category in the table above, reflecting
the fact that as interest rates rise these assets will resume their weekly rate
reset.
The weighted average remaining terms to maturity of the Company's earning
assets and borrowings at June 30, 1997 were 5.5 years and 1.5 years,
respectively. The following table reflects the average terms to maturity for the
Company's earning assets and liabilities at June 30, 1997:
<TABLE>
<CAPTION>
AVERAGE TERMS TO MATURITY
(IN YEARS)
<S> <C>
EARNING ASSETS
Student loans....................... 6.0
Warehousing advances................ 3.5
Academic facilities financings...... 8.0
Cash and investments................ 4.0
---
Total earning assets................ 5.5
===
BORROWINGS
Short-term borrowings............... .5
Long-term borrowings................ 3.0
---
Total borrowings.................... 1.5
===
</TABLE>
In the above table, Treasury receipts and variable rate asset-backed
securities, although generally liquid in nature, extend the weighted average
remaining term to maturity of cash and investments to 4.0 years. As loans are
securitized, the need for long-term on-balance sheet financing will decrease.
MINORITY INTEREST
As part of the GSE's privatization, SLM Holding became the parent
company of, and successor to, the GSE on August 7, 1997. As a result, the GSE's
preferred stock is now reflected as a minority interest in the consolidated
financial statements. The financial statements for prior periods have been
restated to reflect this change.
Preferred stock dividends are cumulative and payable quarterly at 4.50
percentage points below the highest yield of certain long-term and short-term
United States Treasury obligations. The dividend rate for any dividend period
will not be less than 5 percent per annum nor greater than 14 percent per annum.
For each of the six month periods ended June 30, 1997 and 1996, the preferred
stock dividend rate was 5.00 percent and reduced net income by $5.3 million. The
Privatization Act requires that on the dissolution date of September 30, 2008,
the GSE shall repurchase or redeem, or make proper provisions for repurchase or
redemption
34
<PAGE> 37
of any outstanding preferred stock. The Company has the option of effecting an
earlier dissolution if certain conditions are met.
OTHER RELATED EVENTS AND INFORMATION
Status of Direct Lending
As of June 30, 1997, approximately 1,484 colleges and universities
participated in the FDSLP for the 1996-97 academic year. The FDLSP had a
legislated market share goal of 50 percent for the 1996-1997 academic year.
Based on DOE reports, management estimates that the FDSLP accounted for
approximately 33 percent of total student loan originations for the 1996-97
academic year. The FDSLP accounted for approximately 31 percent of total student
loan volume in the 1995-96 academic year, up from approximately 7 percent in the
1994-95 academic year.
In recent years as the FDSLP has grown, the volume of loans originated by
banks and other participants under the FFELP has been adversely impacted.
Historically, the GSE has purchased the majority of its student loans as they
near the repayment phase which commences after a borrower leaves school. On
average, there is a two to three year lag between the date a loan is originated
and the date it enters repayment. This lag has delayed the adverse affect of
FDSLP originations on the GSE's purchases of student loans. As the volume of
FDSLP loans reaching the repayment phase increases, the GSE's percentage share
of the overall student loan market will decline. In 1994, the DOE began to offer
existing FFELP borrowers the opportunity to refinance FFELP loans into FDSLP
loans. As of June 30, 1997, approximately $592 million of FFELP loans owned by
the GSE have been accepted for refinancing into FDSLP loans. Approximately $409
million have been refinanced into FDSLP loans with the remainder awaiting
disbursement by the federal government.
OBRA provides for a change in the borrower interest rate and the Special
Allowance Payment for certain FFELP loans made on or after July 1, 1998. The
new rates are scheduled to be based on the U.S. Treasury security with a
"comparable maturity" plus 1.0 percent. The Secretary of Education has not
adopted regulations specifying the U.S. Treasury security on which the Special
Allowance Payment rate will be based or details on setting the Special
Allowance Payment rate. Management believes that the "comparable maturity"
security will be the 10-year Treasury Note. Depending on the specifics of the
regulations, these changes could adversely impact the FFELP market and the
Company's business because the availability and costs of funding to support
this new type of instrument are uncertain. Representatives of the student loan
industry are in discussions with members of Congress concerning possible
legislative modification of this OBRA provision.
OBRA also requires the GSE to act as a lender of last resort to make FFELP
loans when other private lenders are not available. Such loans receive a 100
percent guarantee and are not subject to the 30 basis point offset fee on loans
held by the GSE. If the Secretary of Education determines that the GSE is not
adequately implementing this provision, the offset fee paid by the GSE could be
increased from 30 basis points to 100 basis points.
Legislated expansion of student eligibility as well as increases in student
and parent loan limits have increased the volume of national loan originations.
FFELP originations rose nearly 30 percent year-to-year to about $23 billion for
the 1994 federal fiscal year ended September 30, 1994. During the 1995 federal
fiscal year, FFELP originations declined to $21 billion due to FDSLP
originations totaling $5 billion. Although FFELP originations declined in the
1996 federal fiscal year to $20 billion, management expects, based on DOE
reports, FFELP originations to increase to $21 billion in the 1997 federal
fiscal year. In the meantime, however, the competition for FFELP loans has
intensified at both the originating and secondary market levels due mainly to
the reduced volume and securitization of student loans, which has developed into
a significant funding alternative for FFELP lenders.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share", which
is required to be adopted on December 15, 1997. At that time, the Company will
be required to change the method used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock
35
<PAGE> 38
options will be excluded. The adoption is expected to have no material impact on
the Company's reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", which is effective for periods after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income in a
full set of general purpose financial statements. The Company is currently
evaluating the effect of this pronouncement on its financial statement
presentation and disclosure.
RECENT DEVELOPMENTS
On October 9, 1997, SLM Holding announced that its third quarter 1997
net income was $143 million, or $2.74 per common share versus net income of $99
million, or $1.79 per share for the third quarter of 1996. The Company's
earnings benefited from the reversal of the pre-tax $97 million offset fee
reserve on securitized student loans. During the quarter the Company also
recognized charges of $85 million in aggregate related to the write-off certain
intangible assets and hedge losses, staff reductions and geographic
consolidation of offices, proxy and privatization costs, additions to reserves
and the write-down of various non-student loan assets. A condensed balance
sheet as of September 30, 1997 and income statements for the three and nine
month periods ended September 30, 1997 follow:
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
SEPTEMBER 30,
ASSETS 1997
----------------
(Unaudited)
<S> <C>
Insured student loans purchased $28,461,948
Student loan participations 1,938,984
----------------
Insured student loans 30,400,932
Warehousing advances 2,442,419
Academic facilities financings 1,416,109
Cash and investments 6,791,761
Other assets, principally accrued interest receivable 1,966,958
----------------
Total assets $43,018,179
================
LIABILITIES
Short-term borrowings $23,989,205
Long-term notes 16,541,742
Other liabilities 1,585,563
----------------
Total liabilities 42,116,510
----------------
COMMITMENTS*
MINORITY INTEREST IN SUBSIDIARY 213,883
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share, 250,000 shares
authorized: 52,378 shares issued 10,476
Additional paid-in capital 18,361
Unrealized gains on investments, net of tax 361,540
Retained earnings 572,020
----------------
Stockholders' equity before treasury stock 962,397
Common stock held in treasury at cost: 1,911 shares 274,611
----------------
Total stockholders' equity 687,786
----------------
Total liabilities and stockholders' equity $43,018,179
================
</TABLE>
* Commitments to purchase loans, lines of credit, letters of credit, and
academic facilities financing commitments and letters of credit were $18.9
billion, $3.4 billion, $4.4 billion, and $.1 billion, respectively, at
September 30, 1997.
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1997
-------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest Income:
Insured student loans purchased $574,543 $1,795,073
Student loan participation 32,586 85,630
-------------------- --------------------
Insured student loans 607,129 1,880,703
Warehousing advances 36,403 114,606
Academic facilities financings 23,596 71,414
Investments 144,674 457,140
-------------------- --------------------
Total interest income 811,802 2,523,863
Interest expense 641,460 1,947,034
-------------------- --------------------
Net interest income 170,342 576,829
-------------------- --------------------
Other income:
Gain on sale of student loans 159,959 224,589
Servicing and securitization revenue 44,449 101,640
Gains on sales of securities 6,373 13,755
Other 11,393 36,185
-------------------- --------------------
Total other income 222,174 376,169
Operating expenses 172,945 389,787
-------------------- --------------------
Income before federal income taxes, minority interest
in net earnings of subsidiary, and premiums on
debt extinguished 219,571 563,211
Federal income taxes 72,040 177,679
Minority interest in net earnings of subsidiary 2,674 8,021
-------------------- --------------------
Income before premiums on debt extinguished 144,857 377,511
Premiums on debt extinguished, net of tax (2,264) (2,264)
-------------------- --------------------
NET INCOME $142,593 $375,247
==================== ====================
Earnings per common share $2.74 $7.09
==================== ====================
Average common and common equivalent shares outstanding 52,112 52,911
==================== ====================
</TABLE>
36
<PAGE> 39
YEARS ENDED DECEMBER 31, 1994-1996
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------------------------------
YEARS ENDED DECEMBER 1996 VS. 1995 VS.
31, 1995 1994
------------------------------- ------------------ ------------------
1996 1995 1994 $ % $ %
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income ................. $ 866 $ 901 $ 981 $ (35) (4)% $ (80) (8)%
Other operating income .............. 147 50 14 97 191 36 265
Operating expenses .................. 406 439 390 (33) (8) 49 13
Federal income taxes ................ 183 141 176 42 30 (35) (20)
Minority interest in earnings of
subsidiary ........................ 11 11 11 - - - -
----- ----- ----- ----- ----- ----- -----
Income before premiums on debt
extinguished ...................... 413 360 418 53 15 (58) (14)
Premiums on debt extinguished, net of
tax ............................... (5) (5) (9) -- 2 4 47
----- ----- ----- ----- ----- ----- -----
NET INCOME .......................... $ 408 $ 355 $ 409 $ 53 15% $ (54) (13)%
===== ===== ===== ===== ===== ===== =====
EARNINGS PER COMMON SHARE ........... $7.32 $5.27 $5.13 $2.05 39% $ .14 3%
===== ===== ===== ===== ===== ===== =====
Dividends per common share .......... $1.64 $1.51 $1.42 $ .13 9% $ .09 6%
===== ===== ===== ===== ===== ===== =====
CORE EARNINGS ....................... $ 381 $ 350 $ 345 $ 31 9% $ 5 1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-----------------------------------------------------
DECEMBER 31, 1996 VS. 1995 1995 VS. 1994
--------------------- ---------------------- ----------------------
1996 1995 $ % $ %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans ....................... $33,754 $34,336 $ (582) (2)% $ 3,965 13%
Warehousing advances ................ 2,790 3,865 (1,075) (28) (3,167) (45)
Academic facilities financings ...... 1,473 1,313 160 12 (235) (15)
Cash and investments ................ 7,706 8,867 (1,161) (13) (3,830) (30)
Other assets ........................ 1,907 1,621 286 18 308 23
------- ------- ------- ------- ------- -------
Total assets ........................ $47,630 $50,002 $(2,372) (5)% $(2,959) (6)%
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ............... $22,518 $17,447 $ 5,071 29% $ 1,431 9%
Long-term notes ..................... 22,606 30,083 (7,477) (25) (4,236) (12)
Other liabilities ................... 1,458 1,391 67 5 236 20
------- ------- ------- ------- ------- -------
Total liabilities ................... 46,582 48,921 (2,339) (5) (2,569) (5)
------- ------- ------- ------- ------- -------
Minority Interest in Earnings of
Subsidiary ........................ 214 214 - - - -
Stockholders' equity before
treasury stock ...................... 1,371 3,662 (2,291) (63) 470 15
Common stock held in treasury at cost 537 2,795 (2,258) (81) 860 44
------- ------- ------- ------- ------- -------
Total stockholders' equity .......... 834 867 (33) (4) (390) (31)
------- ------- ------- ------- ------- -------
Total liabilities and stockholders'
equity ............................ $47,630 $50,002 $(2,372) (5)% $(2,959) (6)%
======= ======= ======= ======= ======= =======
</TABLE>
37
<PAGE> 40
RESULTS OF OPERATIONS
SLM Holding's net income was $408 million ($7.32 per common share) in
1996 compared to $355 million ($5.27 per common share) in 1995.
The net income increase of $53 million (15 percent) in 1996 was primarily a
result of continued growth in managed student loan assets and, on an after-tax
basis, the effect of accelerating income recognition associated with the
securitization of student loans of $14 million, lower short-term U.S. Treasury
rates which resulted in an increase of $19 million in floor revenues, lower
operating expenses of $21 million and $6 million due to the reversal of a
previously established loss reserve based on the successful outcome of a lawsuit
against the federal government regarding SAP on certain student loans. These
positive factors were somewhat offset by the increase in loans subject to OBRA
fees, as discussed below, and $9 million in additions to other student loan loss
reserves unrelated to risk-sharing on FFELP loans. Earnings per common share
were further enhanced by repurchases of 4.6 million shares (8 percent of shares
outstanding) in 1996.
The 1995 net income of $355 million decreased $54 million (13 percent) from
1994 due principally to higher short-term U.S. Treasury rates which resulted in
a decrease in after-tax floor revenues of $73 million, somewhat offset by higher
after-tax gains on sales of securities of $16 million. The 1995 earnings per
common share were $5.27, an increase of $.14 (3 percent) from 1994, largely a
result of the Company's repurchase of 16.1 million common shares (22 percent of
shares outstanding) during 1995.
OBRA imposed legislative fees and risk-sharing on the GSE and other
participants in the FFELP, including an offset fee applicable only to the GSE,
consolidation loan rebate fees, and risk-sharing on defaulted loans applicable
to all FFELP participants. The impact of these fees and reserves for
risk-sharing on the Company's on-balance sheet portfolio of student loans
reduced net income by $62 million, $37 million and $17 million in 1996, 1995 and
1994, respectively. In addition to these fees, OBRA also imposed other yield
reductions on all FFELP participants, principally loan origination fees paid to
the federal government and reduced SAP during the period when a borrower is not
in an active repayment status. The Company effectively shares the impact of
these costs through the pricing of loan portfolios it purchases in the secondary
market.
Core Earnings and Core Student Loan Spread
The following table analyzes the earning spreads on student loans for 1996,
1995 and 1994. The line captioned "Adjusted Student Loan Yields" reflects
contractual yields adjusted for premiums paid to purchase loan portfolios and
the estimated costs of borrower benefits. The Company, as the servicer of
student loans that it securitizes, will continue to earn fee revenues over the
life of the securitized student loan portfolios. The off-balance sheet
information presented in the Student Loan Spread Analysis that follows analyzes
the on-going fee revenues associated with the securitized portfolios of student
loans.
38
<PAGE> 41
STUDENT LOAN SPREAD ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields .......... 7.92% 8.40% 7.29%
Amortization of floor swap payments ... .07 -- --
Floor income .......................... .13 .04 .44
Direct OBRA costs ..................... (.29) (.17) (.09)
---------- ---------- ----------
Student loan income ................... 7.83 8.27 7.64
Cost of funds ......................... (5.49) (5.95) (4.69)
---------- ---------- ----------
Student loan spread ................... 2.34% 2.32% 2.95%
========== ========== ==========
Core student loan spread .............. 2.21% 2.28% 2.51%
========== ========== ==========
OFF-BALANCE SHEET
Servicing and securitization revenue .. 1.43% .80% --%
========== ========== ==========
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans, including participations $ 33,273 $ 32,758 $ 28,642
Securitized loans ..................... 4,020 177 --
---------- ---------- ----------
Managed student loans ................. $ 37,293 $ 32,935 $ 28,642
========== ========== ==========
</TABLE>
The decrease in the core student loan spread in 1996 was due principally to
higher OBRA fees, the effect of student loan participations which contractually
yield a lower rate than the underlying student loans (discussed below), and
increased student loan loss reserves, offset by the revenues from the
amortization of upfront payments received from student loan floor contracts and
a one-time gain from the reversal of a previously established loss reserve due
to the successful outcome of litigation related to SAP payments on certain
loans. The decrease in the core student loan spread in 1995 was due principally
to higher OBRA fees and higher student loan premium amortization on student
loans acquired in recent years due to increased competition.
Student Loan Floor Revenues
As of December 31, 1996, approximately $30 billion of the Company's managed
student loans were eligible to earn floors ($16 billion with fixed borrower
interest rates and $14 billion with variable borrower interest rates that reset
annually). During 1996, the Company "monetized" the value of the floors related
to $13 billion of such loans by entering into contracts with third parties under
which it agreed to pay the future floor revenues received, in exchange for
upfront payments. These upfront payments are being amortized over the
life of these contracts, which is approximately 2 years. The amortization of
these payments, which is not dependent on future interest rate levels, is
included in core earnings. In 1996, the amortization contributed $22 million
pre-tax to core earnings. In addition, the Company earned $43 million net of $12
million in payments under the floor revenue contracts, $14 million and $126
million in floor revenues in 1996, 1995 and 1994, respectively, as the average
bond equivalent 91-day Treasury bill rate was 5.16 percent in 1996 versus 5.68
percent in 1995 and 4.38 percent in 1994. Of the remaining $17 billion of such
loans at December 31, 1996, $9 billion were earning floor revenues based upon
current interest rates.
Securitization
During 1996 the GSE completed four securitization transactions in
which a total of $6.0 billion of student loans was sold by the GSE to a special
purpose finance subsidiary and by the subsidiary to trusts that issued
asset-backed securities to fund the student loans to term. The pre-tax
securitization gains on the transactions recorded in 1996 totaled $49 million
and were immaterial for 1995. Gains on future securitizations will vary
depending on the characteristics of the loan portfolios securitized.
NET INTEREST INCOME
To compare nontaxable asset yields to taxable yields on a similar basis,
the amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
39
<PAGE> 42
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------
1996 VS. 1995 VS.
YEARS ENDED DECEMBER 31, 1995 1994
---------------------------- ------------------ ------------------
1996 1995 1994 $ % $ %
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Student loans ................ $2,607 $2,708 $2,189 $ (101) (4)% $ 519 24%
Warehousing advances ......... 194 408 334 (214) (53) 74 22
Academic facilities financings 100 108 102 (8) (7) 6 6
Investments .................. 548 697 499 (149) (21) 198 40
Taxable equivalent adjustment. 36 52 54 (16) (30) (2) (5)
------ ------ ------ ------ ------ ------ ------
Total taxable equivalent
interest income .............. 3,485 3,973 3,178 (488) (12) 795 25
Interest expense ............... 2,583 3,020 2,143 (437) (14) 877 41
------ ------ ------ ------ ------ ------ ------
Taxable equivalent net
interest income .............. $ 902 $ 953 $1,035 $ (51) (5)% $ (82) (8)%
====== ====== ====== ====== ====== ====== ======
</TABLE>
Taxable equivalent net interest income in 1996 declined by $51 million from
1995. This decline was due to the increase in loans subject to OBRA fees such as
the offset fee and risk-sharing on claim payments (applicable to loans
originated on or after October 1, 1993) plus loan origination fees and rebates
to the DOE on consolidation loans. Other factors contributing to the decline in
taxable equivalent net interest income include an increase in the non-risk
sharing loss reserves for student loans of $14 million and lower average earning
assets of $4.4 billion. In total, the impact of OBRA on income from student
loans, including the fees paid directly by the GSE and reserves for risk-sharing
on claims payments, reduced taxable equivalent net interest income and net
interest margin by $96 million and .20 percent, respectively, in 1996 as
compared to $57 million and .11 percent, respectively, in 1995 and $26 million
and .05 percent, respectively, in 1994. These negative factors were somewhat
offset by the continued growth in managed student loan assets, lower short-term
Treasury rates which result in higher floor revenue of $29 million and the
reversal of a previously established reserve of $9 million as a result of the
successful outcome of litigation related to SAP payments on certain student
loans. The decrease in interest income from warehousing advances and
investments is due to a decline in the overall level of interest rates as well
as to the decrease in the average balance of those assets as the Company
reduced these assets and utilized the capital supporting them to purchase
shares of its common stock. Because the Company's borrowings are largely
variable rate in nature, the year over year decrease in interest expense is
reflective of the level of interest rates in general. In addition, the absolute
level of borrowings decreased as the balance sheet was reduced in size through
the securitization of student loans as well as the aforementioned reductions in
the investment and warehousing advance portfolios. See "-- Rate/ Volume
Analysis."
Taxable equivalent net interest income in 1995 declined by $82 million from
1994 due primarily to student loan floor revenues totaling $14 million in 1995
compared to $126 million in floor revenues in 1994 and the increased effects of
OBRA on student loan spreads. Also contributing to the decline in student loan
spreads were the relatively lower spreads earned on student loans acquired in
recent years due to increased competition in the secondary market for student
loan portfolios. These factors were somewhat offset by a higher percentage of
student loans relative to average earning assets.
Allowance for Student Loans
The provision for student loan losses is the periodic expense of
maintaining an adequate allowance at the amount estimated to be sufficient to
absorb possible future losses, net of recoveries inherent in the existing
on-balance sheet loan portfolio. To recognize these potential losses on student
loans, the Company maintained a reserve of $84 million, $60 million and $65
million at December 31, 1996, 1995, and 1994, respectively. In 1996, the Company
increased this reserve by $20 million due to increasing default rates on
privately-insured loans. The provision for loan losses, net of recoveries, did
not change materially in 1995 and 1994. Once a student loan is charged off as a
result of an unpaid claim, it is the Company's policy to continue to pursue the
recovery of principal and interest. Management believes that the allowance for
loan losses is adequate to cover anticipated losses in the on-balance sheet
student loan portfolio. This evaluation is inherently subjective, however, as it
requires material estimates that may be susceptible to significant changes.
40
<PAGE> 43
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the years ended December 31, 1996, 1995 and 1994. Managed net
interest margin includes net interest income plus gains on securitization sales
and servicing and securitization income divided by average managed assets.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------------------
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans ............................ $ 33,273 7.83% $ 32,758 8.27% $ 28,642 7.64%
Warehousing advances ..................... 3,206 6.04 6,342 6.43 6,981 4.82
Academic facilities financings ........... 1,500 8.43 1,527 8.92 1,489 8.62
Investments .............................. 9,444 5.91 11,154 6.46 11,283 4.65
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets .............. 47,423 7.35% 51,781 7.67% 48,395 6.57%
Non-interest earning assets ................ 1,858 ========== 1,673 ========== 1,240
---------- ---------- ----------
Total assets ............................... $ 49,281 $ 53,454 $ 49,635
========== ========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes ............ $ 2,485 5.42% $ 3,609 5.86% $ 3,410 4.52%
Other short-term borrowings .............. 18,493 5.43 11,802 5.88 13,167 4.43
Long-term notes .......................... 26,024 5.55 35,373 5.98 30,397 4.62
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities ......... 47,002 5.50% 50,784 5.95% 46,974 4.56%
Non-interest bearing liabilities ........... 1,464 ========== 1,451 ========== 1,191 ==========
Stockholders' equity ....................... 815 1,219 1,470
---------- ---------- ----------
Total liabilities and stockholders'
equity ................................... $ 49,281 $ 53,454 $ 49,635
========== ========== ==========
Net interest margin ........................ 1.90% 1.84% 2.14%
========== ========== ==========
Managed net interest margin ................ 1.96% 1.84% --%
========== ========== ==========
</TABLE>
The increase in net interest margin in 1996 from 1995 is due to the
increase in higher-yielding student loans as a percentage of overall average
assets which was offset by increased OBRA costs. The increase in managed net
interest margin in 1996 is due to the increase in securitization gains of $49
million and servicing and securitization income of $56 million as the GSE
securitized $6 billion of student loans in 1996 versus $1 billion in 1995. The
decrease in net interest margin from 1994 to 1995 is mainly attributable to the
decline in student loan floor revenues to $14 million in 1995 from $126 million
in 1994 and the increase in OBRA costs.
FUNDING COSTS
The Company's borrowings are generally variable rate indexed principally to
the 91-day Treasury bill rate. The following table summarizes the average
balance of debt (by index after giving effect to the impact of interest rate
swaps) for the years ended December 31, 1996, 1995 and 1994 (dollars in
millions).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE BALANCE RATE
- --------------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Treasury bill, principally 91-day $35,375 5.48% $34,039 5.93% $31,204 4.70%
LIBOR ........................... 7,797 5.38 14,290 5.87 11,888 4.03
Discount notes .................. 2,694 5.35 1,209 5.85 2,718 4.48
Fixed ........................... 720 6.81 811 6.68 792 6.60
Zero coupon ..................... 123 11.12 123 11.06 111 11.06
Other ........................... 293 4.87 312 6.11 261 5.71
------- ------- ------- ------- ------- -------
Total ........................... $47,002 5.50% $50,784 5.95% $46,974 4.56%
======= ======= ======= ======= ======= =======
</TABLE>
In the above table, for the years ended December 31, 1996, 1995 and 1994,
spreads for Treasury bill-indexed borrowings averaged .25 percent, .26 percent
and .29 percent, respectively, over the weighted average Treasury bill rates for
those years and spreads for LIBOR-indexed borrowings averaged .26 percent, .31
percent and .39 percent, respectively, under the weighted average LIBOR rates.
The Rate/Volume Analysis below shows the relative contribution of changes
in interest rates and asset volumes.
41
<PAGE> 44
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE ---------------
(DECREASE) RATE VOLUME
---------- ---- ------
<S> <C> <C> <C>
1996 VS. 1995
Taxable equivalent interest income ... $(488) $(235) $(253)
Interest expense ..................... (437) (223) (214)
----- ----- -----
Taxable equivalent net interest income $ (51) $ (12) $ (39)
===== ===== =====
1995 VS. 1994
Taxable equivalent interest income ... $ 795 $ 540 $ 255
Interest expense ..................... 877 650 227
----- ----- -----
Taxable equivalent net interest income $ (82) $(110) $ 28
===== ===== =====
</TABLE>
The $12 million decrease in taxable equivalent net interest income
attributable to the change in rates in 1996 was principally due to increased
OBRA costs of $39 million, an increase in student loan loss reserves (exclusive
of risk sharing) of $14 million and to increased leverage of $14 million, offset
by the increase of $29 million in floor revenues, net of payments under the
floor contracts, in 1996 versus 1995. Other items offsetting the decreases in
taxable equivalent net interest income discussed above include $22 million of
revenues from the amortization of the upfront payments received from student
loan floor contracts, the $9 million reversal of a previously established
reserve due to the successful outcome of litigation related to SAP payments on
certain student loans, and a higher percentage of student loans relative to
average earning assets. The $39 million decrease in volume is primarily due to
the decrease in the balance of warehousing advances and investments.
The $110 million decrease attributable to the change in rates in 1995 was
due to $14 million of pre-tax student loan floor revenue in 1995 versus $126
million in 1994 and declining core spreads on student loans. Core student loan
spreads declined due principally to the growth in the balance of federally
insured student loans subject to the fees and default risk-sharing provisions of
OBRA. Also contributing to the decline were the relatively lower spreads earned
on student loans acquired in recent years due to increased competition in the
secondary market for student loan portfolios. These factors were somewhat offset
by a higher percentage of student loans relative to average earning assets.
OPERATING EXPENSES
Operating expenses include general and administrative costs, costs incurred
to service the Company's managed student loan portfolio and operational costs
incurred in the process of acquiring student loan portfolios. Total operating
expenses as a percentage of average managed student loans were 109 basis points,
133 basis points and 136 basis points for the years ended December 31, 1996,
1995 and 1994, respectively. Operating expenses are summarized in the following
tables:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- -----------------------------
SERVICING SERVICING SERVICING
AND AND AND
CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL
--------- ----------- ----- --------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits ............. $ 68 $ 138 $ 206 $ 75 $ 137 $ 212 $ 68 $ 128 $ 196
Occupancy and equipment 24 60 84 25 49 74 21 37 58
Professional fees ...... 15 8 23 34 11 45 18 9 27
Advertising and
printing ............. 7 -- 7 6 -- 6 4 -- 4
Office operations ...... 8 32 40 9 35 44 9 34 43
Other .................. 9 2 11 12 2 14 10 2 12
------ ------ ------ ------ ------ ------ ------ ------ ------
Total internal operating
expenses ............. 131 240 371 161 234 395 130 210 340
Third party servicing
costs ................ -- 35 35 -- 44 44 -- 50 50
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses ............. $ 131 $ 275 $ 406 $ 161 $ 278 $ 439 $ 130 $ 260 $ 390
====== ====== ====== ====== ====== ====== ====== ====== ======
Employees at end of the
year ................. 761 4,031 4,792 856 3,885 4,741 857 4,140 4,997
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, INCREASE/(DECREASE)
---------------------- ----------------------------------
1996 VS. 1995 VS.
1996 1995 1994 1995 1994
---- ---- ---- -------------- -------------
$ % $ %
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Servicing costs ..................... $211 $205 $190 $ 6 3% $ 15 8%
Acquisition costs ................... 64 73 70 (9) (13) 3 5
---- ---- ---- ---- ---- ---- ----
Total servicing and acquisition costs $275 $278 $260 $ (3) (1)% $ 18 7%
==== ==== ==== ==== ==== ==== ====
</TABLE>
The decrease of $30 million in corporate operating expenses in 1996 versus
1995 was due principally to the divestiture of a majority interest in CyberMark,
a wholly owned subsidiary, completed during the second quarter of 1996 which
reduced 1996 operating expenses by $20 million. Reductions in corporate staffing
and professional fees reduced operating expenses by an additional $10 million.
Corporate operating expenses for the year ended December 31, 1995 increased
$31 million (23 percent) over 1994. The increase was related to the following:
(i) CyberMark expenses in 1995, which totaled $22 million versus $6 million in
1994; (ii) increased costs associated with the student loan business of $11
million, including advertising and promotion costs related to the corporate
image campaign and subsidiary operating costs; (iii) $4 million related to the
1995 Annual Meeting and a proxy contest concerning the election of directors;
and (iv) severance costs of $2 million associated with the reduction in
corporate officers and staff.
Servicing costs include all operations and systems costs incurred to
service the Company's portfolio of managed student loans, including fees paid to
third party servicers. The 1992 legislated expansion of student eligibility and
increases in loan limits resulted in higher average student loan balances, which
generally command a higher price in the secondary market and contribute to lower
servicing costs as a percentage of the average balance of managed student loans.
When expressed as a percentage of the managed student loan portfolio, servicing
costs averaged 57 basis points, 62 basis points and 66 basis points for the
years ended December 31, 1996, 1995 and 1994, respectively. These decreases were
due principally to increased average student loan balances and to servicing
efficiencies realized through the consolidation of certain servicing operations
and recent technology investments.
Loan acquisition costs are principally costs incurred under the ExportSS(R)
loan origination and administration service, the costs of converting newly
acquired portfolios onto the Company's servicing platform or those of third
party servicers and costs of loan consolidation activities. Student loans added
to the ExportSS(R) pipeline, which represents loan volume serviced by and
committed for sale to the Company, totaled $4.2 billion during 1996, compared to
$4.7 billion in the prior year. The decrease occurred as a result of the
substantial growth in direct lending by the federal government. The outstanding
portfolio of loans serviced for ExportSS(R) lenders totaled $4.0 billion at
December 31, 1996, down 11 percent from $4.5 billion at December 31, 1995.
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 30 percent, 27 percent and 29 percent in 1996,
1995 and 1994, respectively. The GSE is exempt from all state, local, and
District of Columbia income, franchise, sales and use, personal property and
other taxes, except for real property taxes.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, loan purchases totaled $9.9 billion, up 5 percent over $9.4
billion in 1995. The 1996 loan purchases include $1.5 billion of student loan
participation purchases from the Chase Joint Venture. Approximately two-thirds
of the non-joint venture purchase volume in 1996 was derived from the Company's
base of commitment clients, particularly those who used the ExportSS(R) loan
origination service. The GSE secures financing to fund the purchase of insured
student loans along with its other operations by issuing debt securities in the
domestic and overseas capital markets, through public offerings, and through
private placements of U.S. dollar-denominated and foreign currency-denominated
debt of varying maturities and interest rate characteristics. The GSE's debt
securities are currently rated at the highest credit rating level by Moody's
Investor Services and Standard & Poor's.
43
<PAGE> 46
At December 31, 1996, the GSE's statutory capital adequacy ratio was 2.11
percent. The Privatization Act requires management, before the payment of
dividends by the GSE, to certify to the Secretary of the Treasury, that after
giving effect to the payment of dividends, the statutory capital ratio test
would have been met at the time the dividend was declared.
The Company uses interest rate and foreign currency swaps
(collateralized where appropriate), purchases of U.S. Treasury securities and
other hedging techniques to reduce the exposure to interest rate and currency
fluctuations that arise from its financing activities and to match the
characteristics of its variable interest rate earning assets. See "-- Interest
Rate Risk Management." During 1996, the Company issued $8.3 billion of
long-term notes to refund maturing and repurchased obligations. At December 31,
1996, the Company had $14.1 billion of outstanding long-term debt issues with
stated maturities that could be accelerated through call provisions. The GSE
also funds its student loan assets through securitizations. The GSE has, in the
past, issued adjustable rate cumulative preferred stock, common stock, common
stock warrants and puts, and subordinated debentures convertible to common
stock, to diversify its funding sources.
During 1996, the Company repurchased 4.6 million shares of its common
stock, leaving 53.7 million shares outstanding at December 31, 1996. For the
past few years the GSE has operated near the statutory minimum capital ratio of
2.00% of risk-adjusted assets required under its charter. Capital in excess of
such amounts has been used to repurchase common shares. As of December 31, 1996,
the Company had repurchased nearly all of the 20 million shares which, in May
1995, it announced it would repurchase over a two year period. The funds
necessary to complete the repurchases came from the combination of current
earnings, increased leverage and reduced asset balances. As of December 31,
1996, the Company had authority to repurchase up to an additional 5 million
shares, pursuant to a May 1996 resolution of the Board. Management anticipates
using current earnings to repurchase 7 to 9 percent of the outstanding shares in
1997.
Cash Flows
In 1996, operating activities provided net cash inflows of $202 million, an
increase of $27 million from 1995. This increase was due mainly to the increase
in other liabilities of $172 million and to the increase in net income of $53
million. Investing activities provided $1.6 billion in cash in 1996, a decrease
of $926 million from the cash provided in 1995. In 1996, the GSE purchased $9.9
billion of student loans and student loan participations. The GSE also
securitized $6.0 billion of student loans and received $5.6 billion in student
loan and warehousing advance repayments. Financing activities used $2.8 billion
in cash in 1996 as the Company repaid a net $7.4 billion in long-term notes and
saw an increase in net short-term borrowings of $5.0 billion. As student loans
are securitized the need for long-term financing of these assets on-balance
sheet will decrease.
Securitization
The Company's unsecured borrowings typically have terms to maturity that
are of a shorter duration than the student loans. In addition, the GSE is
assessed annually a 30 basis point offset fee on student loans that it holds,
which effectively raises the cost of funding such assets on balance sheet. Since
1995, the GSE has diversified its funding sources independent of its GSE
borrower status by securitizing a portion of its student loan assets. A
securitization involves the sale of student loans by the GSE to a special
purpose finance subsidiary and by the subsidiary to a trust. The trust funds the
student loans to term through the public issuance of student loan asset-backed
securities. As student loans are securitized, the GSE's on-balance sheet funding
needs are reduced. During 1996, the GSE completed four transactions in which it
sold a total of $6.0 billion of student loans.
Although asset-backed securities generally have a higher cost of funds than
the GSE's traditional on-balance sheet financing (due principally to term
match-funding and the fact that asset-backed securities do not benefit from
GSE's government-sponsored enterprise status), management believes that
securitization represents an efficient use of capital. See "Results of
Operations -- Securitizations" for discussion of the offset fee litigation. The
GSE's securitizations have been structured to achieve a "AAA" credit rating on
over 96 percent of its financing (with an "A" credit rating on the remaining
subordinated securities). These ratings are independent of the GSE's current
status as a government-sponsored enterprise. Securitized portfolios require less
capital than would otherwise be required had the assets remained on balance
sheet.
44
<PAGE> 47
Interest Rate Risk Management
The Company's principal objective in financing its loan assets is to
minimize its sensitivity to changing interest rates by matching the interest
rate characteristics of borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate loan assets (most of which have
weekly rate resets) with variable rate debt and fixed rate debt converted to
variable rates with interest rate swaps. To achieve a more precise match of
interest rate characteristics between loan assets and their related liabilities,
the Company has effectively converted some of its variable rate debt to a
different variable rate index with interest rate swaps. At December 31, 1996,
$18.3 billion of fixed rate debt and $4.6 billion of variable rate debt were
matched with interest rate swaps and foreign currency agreements. Fixed rate
debt at December 31, 1996 also funded fixed rate warehousing advances and
academic facilities financings. Investments were funded on a "pooled" approach,
i.e., the pool of liabilities that funds the investment portfolio has an average
rate and maturity or reset date that corresponds to the average rate and
maturity or reset date of the investments which they fund.
In both its match funding activities for its loan assets and its pool
funding activities for its investments, the Company enters into various
financial instrument contracts in the normal course of business to reduce
interest rate risk and foreign currency exposure on certain of its borrowings.
These financial instrument contracts include interest rate swaps, interest rate
cap and collar agreements, foreign currency swaps, forward currency exchange
agreements, options on currency exchange agreements, options on securities, and
financial futures contracts.
In the table below the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. Nonperforming loans are
included in the analysis based on their underlying interest rate
characteristics. The following gap analysis reflects rate-sensitive positions at
December 31, 1996 and is not necessarily reflective of positions that existed
throughout the period.
45
<PAGE> 48
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
-----------------------------------------------------------------------------------
3 MONTHS 6 MONTHS
3 MONTHS TO TO 1 TO 2 2 TO 5 OVER 5
OR LESS 6 MONTHS 1 YEAR YEARS YEARS YEARS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans .................. $ 30,270 $ 3,484 $ -- $ -- $ -- $ --
Warehousing advances ........... 2,771 -- -- 1 1 17
Academic facilities financings . 157 43 20 39 221 993
Cash and investments ........... 5,641 14 27 21 174 1,829
Other assets ................... -- -- -- -- -- 1,907
-------- -------- -------- -------- -------- --------
Total assets .............. 38,839 3,541 47 61 396 4,746
-------- -------- -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings .......... 15,903 2,269 4,346 -- -- --
Long-term notes ................ 8,505 -- -- 2,951 10,242 908
Other liabilities .............. -- -- -- -- -- 1,458
Minority interest in subsidiary -- -- -- -- -- 214
Stockholders' equity ........... -- -- -- -- -- 834
-------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity .... 24,408 2,269 4,346 2,951 10,242 3,414
-------- -------- -------- -------- -------- --------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps ............ 14,522 2,410 (4,271) (2,966) (10,153) 458
-------- -------- -------- -------- -------- --------
Period gap ..................... $ (91) $ (1,138) $ (28) $ 76 $ 307 $ 874
======== ======== ======== ======== ======== ========
Cumulative gap ................. $ (91) $ (1,229) $ (1,257) $ (1,181) $ (874) $ --
======== ======== ======== ======== ======== ========
Ratio of interest-sensitive
assets to interest-sensitive
liabilities .................. 161.5% 156.1% 1.1% 2.1% 3.9% 312.7%
======== ======== ======== ======== ======== ========
Ratio of cumulative gap to total
assets ....................... .2% 2.6% 2.6% 2.5% 1.8% --%
======== ======== ======== ======== ======== ========
</TABLE>
In low interest rate environments, floor revenues on student loans cause
the margins on these loans to widen beyond the locked-in spreads. See "--
Results of Operations -- Student Loan Floor Revenues." Such loans continue to be
classified in the three months or less category in the table above, reflecting
the fact that as interest rates rise these assets will resume their weekly rate
reset.
The weighted average remaining terms to maturity of the Company's earning
assets and borrowings at December 31, 1996 were 5.5 years and 2.0 years,
respectively. The following table reflects the average terms to maturity for the
Company's earning assets and liabilities at December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE TERMS TO MATURITY
(IN YEARS)
<S> <C>
EARNING ASSETS
Student loans...................... 6.0
Warehousing advances............... 1.0
Academic facilities financings..... 8.0
Cash and investments............... 5.5
---
Total earning assets............... 5.5
===
BORROWINGS
Short-term borrowings.............. .5
Long-term borrowings............... 3.5
---
Total borrowings................... 2.0
===
</TABLE>
In the above table, Treasury receipts and variable rate asset-backed
securities, although generally liquid in nature, extend the weighted average
remaining term to maturity of cash and investments to 5.5 years. As loans are
securitized, the need for long-term on-balance sheet financing will decrease.
MINORITY INTEREST
As part of the GSE's privatization, SLM Holding became the parent company
of, and successor to, the GSE on August 7, 1997. As a result, the GSE's
preferred stock is now reflected as a minority interest in the consolidated
financial statements. The financial statements for prior periods have been
restated to reflect this change.
Preferred stock dividends are cumulative and payable quarterly at 4.50
percentage points below the highest yield of certain long-term and short-term
United States Treasury obligations. The dividend rate for any dividend period
will not be less than 5 percent per annum nor greater than 14 percent per annum.
For each of the years ended December 31, 1996, 1995 and 1994, the preferred
stock dividend rate was 5.00 percent and reduced net income by $10.7 million.
The Privatization Act requires that on the dissolution date of September 30,
2008, the GSE shall repurchase or redeem, or make proper provisions for
repurchase or
46
<PAGE> 49
redemption of, any outstanding preferred stock. The Company has the option of
effecting an earlier dissolution if certain conditions are met.
OTHER RELATED EVENTS AND INFORMATION
FDSLP and 1993 FFELP Changes
The Company's student loan business continued to be impacted by legislative
changes to the student loan program as well as increased competition. OBRA
changed the FFELP in a number of ways that lower the profitability of FFELP
loans for all participants and established the FDSLP, under which the federal
government can lend directly to students. FFELP changes include risk-sharing on
defaulted loans and yield reductions, and a 30 basis point annual "offset fee"
unique to the GSE on student loans purchased and held on or after August 10,
1993. See "-- Other Related Events."
Despite extensive consideration in 1995 and 1996, the 104th Congress did
not enact any significant changes to the federal student loan programs. No
changes have been made that would effect the yield on student loans. The Company
cannot predict whether future budget proposals or other changes will be made to
the direct student loan program.
The FDSLP is funded directly by the federal government and administered by
the DOE. OBRA establishes goals for the phase-in of direct lending expressed as
a percentage of the combined dollar amount of loans originated under the direct
loan program and the FFELP with the following targets:
<TABLE>
<CAPTION>
DIRECT LOANS
ACADEMIC YEARS AS A PERCENT OF TOTAL
-------------- ---------------------
<S> <C>
1994-1995 ..... 5%
1995-1996 ..... 40
1996-1998 ..... 50
1998-1999 ..... 60
</TABLE>
As of December 31, 1996, approximately 1,600 colleges and universities
participated in the FDSLP for the 1996-97 academic year. Based on DOE reports,
management estimates that direct loan volume did not achieve its target market
share of 40 percent of total student loan originations. Management estimates
that direct loans accounted for approximately 31 percent of total student loan
volume in the 1995-96 academic year, up from approximately 7 percent in the
1994-95 academic year. The FDLSP has a legislated market share goal of 50
percent for the 1996-1997 academic year.
In recent years as the FDSLP has grown, the volume of loans originated by
banks and other participants under the FFELP has been adversely impacted.
Historically, the GSE has purchased the majority of its student loans as they
near the repayment phase which commences after a borrower leaves school. On
average there is a two to three year lag between the date a loan is originated
and the date it enters repayment. This lag has delayed the adverse affect of
FDSLP originations on the GSE's purchases of student loans. As the volume of
FDSLP loans reaching the repayment phase increases, the GSE's percentage share
of the overall student loan market will decline. In 1994, the DOE began to offer
existing FFELP borrowers the opportunity to refinance FFELP loans into FDSLP
loans. As of December 31, 1996, approximately $325 million of FFELP loans owned
by the GSE have been accepted for refinancing into FDSLP loans. Approximately
$320 million have been refinanced into FDSLP loans with the remainder awaiting
disbursement by the federal government.
OBRA provides for a change in the borrower interest rate and the Special
Allowance Payment for certain FFELP loans made on or after July 1, 1998. The
new rates are scheduled to be based on the U.S. Treasury security with a
"comparable maturity" plus 1.0 percent. The Secretary of Education has not
adopted regulations specifying the U.S. Treasury security on which the Special
Allowance Payment rate will be based or details on setting the Special
Allowance Payment rate. Management believes that the "comparable maturity"
security will be the 10-year Treasury Note. Depending on the specifics of the
regulations, these changes could adversely impact the FFELP market and the
Company's business because the availability and costs of funding to support
this new type of instrument are uncertain. Representatives of the student loan
industry are in discussions with members of Congress concerning possible
legislative modification of this OBRA provision.
47
<PAGE> 50
OBRA also requires the GSE to act as a lender of last resort to make FFELP
loans when other private lenders are not available. Such loans receive a 100
percent guarantee and are not subject to the 30 basis point offset fee on loans
held by the GSE. If the Secretary of Education determines that the GSE is not
adequately implementing this provision, the offset fee paid by the GSE could be
increased from 30 basis points to 100 basis points.
Legislated expansion of student eligibility as well as increases in
student and parent loan limits have increased the volume of national loan
originations. FFELP originations rose nearly 30 percent year-to-year to about
$23 billion for the 1994 federal fiscal year ended September 30, 1994. During
the 1995 federal fiscal year, FFELP originations declined to about $21 billion
due to FDSLP originations totaling $5 billion. Management expects FFELP
originations to have declined a similar amount in the 1996 federal fiscal year
and to be flat in 1997. In the meantime, however, the competition for FFELP
loans has intensified at both the originating and secondary market levels due
mainly to the reduced volume and to securitization of student loans, which has
developed into a significant funding alternative for FFELP lenders.
Recently Issued Accounting Pronouncements
In June 1996, Statement of Financial Accounting Standards ("FAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued. This statement will govern the accounting for
securitization transactions entered into after December 31, 1996. Also, under
this statement in-substance defeasance transactions entered into after December
31, 1996 no longer receive off-balance sheet treatment. The Company's management
believes the application of this Statement will have no material impact on the
Company's results of operations.
Other Related Events
In 1995, the Congress declined to provide funding for HEAL loans to new
borrowers. Funds were provided in 1995 and 1996 for borrowers who have
previously received HEAL loans. As of July 1, 1996, the DOE has exercised
recently granted authority to raise the limits on Unsubsidized Stafford Loans
to amounts equal to the maximum available under the HEAL program. Loans of this
size are available only to borrowers attending programs that otherwise would
have been eligible for HEAL funding and at schools that were active
participants in the HEAL program in 1995.
On June 11, 1996, Orange County, California filed a complaint against the
Company in the U.S. Bankruptcy Court for the Central District of California. The
case is currently pending in the U.S. District Court for the Central District of
California. The complaint alleges that the Company made fraudulent
representations and omitted material facts in offering circulars on various
offerings purchased by Orange County, which contributed to Orange County's
market losses and subsequent bankruptcy. The complaint seeks to hold the
Company responsible for losses resulting from Orange County's
bankruptcy, but does not specify the amount of damages claimed. The complaint
against the Company is one of numerous cases filed by Orange County that have
been coordinated for discovery purposes. Other defendants include Merrill
Lynch, Morgan Stanley, KPMG Peat Marwick, Standard & Poor's and Fannie Mae. The
complaint includes a claim of fraud under Section 10(b) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. In
addition, the complaint includes counts under the California Corporations Code,
as well as a count for common law fraud. The Company believes that the
complaint is without merit and intends to defend the case vigorously. At this
time, Management believes the impact of the lawsuit will not be material to the
Company.
In September 1996, the Company obtained a declaratory judgment against
the Secretary of Education in the U.S. District Court for the District of
Columbia. The Court found that the Secretary erred in refusing to allow the GSE
to claim adjustments to the Special Allowance Payment on certain FFELP loans
which were required to be converted from a fixed rate to a variable rate. The
Secretary has filed a notice of appeal of the District Court's decision.
In August 1996, Huntington National Bank, Battelle Memorial Institute and
the Company entered into an agreement to form a joint venture company, CyberMark
LLC, to produce and market stored value cards and systems. Huntington and
Battelle provided funding for the new company with the Company contributing the
smart card
48
<PAGE> 51
system it developed over the past three years through its CyberMark subsidiary.
The Company also contributed the CyberMark name to the joint venture company.
In September 1996, the Company restructured its arrangement with The Chase
Manhattan Bank, the Company's largest lending client, in light of Chase's
merger with Chemical Banking Corporation. Chase and the Company established two
joint venture companies in which they hold equal interests, Education First
Finance LLC and Education First Marketing LLC. Education First Finance LLC
acquired Chase's existing $2.6 billion student loan portfolio on October 1,
1996 and will acquire all future loans originated by Chase. Education First
Marketing LLC will provide marketing services for Chase student loan products.
Chase, which is now the largest originator in the FFELP, will originate insured
student loans under the new arrangement. The Company will provide all
processing and servicing support. Although the parties intend that the new
arrangement be a long-term relationship, they have allowed for mutual rights to
acquire each other's interest in the joint venture after the first six years.
On February 6, 1997, President Clinton submitted his Fiscal Year 1998
budget proposal to Congress. In an effort to achieve a balanced federal budget
by 2002, the President has proposed a number of budget savings affecting the
FFELP. Included in these savings are proposals to reduce the yield on student
loans during the in-school, grace and deferment periods, to decrease loan
insurance from 98 percent of claim amount to 95 percent, to require lenders
rather than the government to compensate guarantors for their assistance in
default prevention, and to extend the GSE offset fee to loans sold by GSE as
part of securitized transactions. In addition, the President has proposed a
significant restructuring of guaranty agency finances and operations. None of
the proposals affecting lenders and secondary markets was included in the
agreement on the budget which the President subsequently reached with the
Congressional leadership or in the budget resolution passed by the Congress
based upon that agreement. The agreement does call for the return of $1 billion
in guarantee agency reserves in fiscal year 2002, although such provisions would
not adversely affect the Company. Legislation implementing the budget resolution
was enacted by Congress on August 5, 1997.
49
<PAGE> 52
DESCRIPTION OF THE COMMON STOCK
The statements set forth under this heading with respect to certain
provisions of the Delaware General Corporation Law (the "DGCL"), the Company's
Certificate of Incorporation (the "Certificate of Incorporation") and the
by-laws of the Company (the "By-Laws") are brief summaries thereof and do not
purport to be complete, and are qualified in their entirety by reference to the
relevant provisions of the DGCL, the Certificate of Incorporation and the
By-Laws, as appropriate.
GENERAL
This Prospectus relates to the public offering by the Selling
Stockholders of 555,015 shares of the Common Stock, par value $.20 per share,
issued or issuable upon the exercise of the Warrants. The Warrants, which are
transferable, are exercisable at any time before September 30, 2008 at $72.43
per share, subject to adjustment for certain dilutive issuances of Common Stock
or convertible securities.
The Warrants were originally issued on August 7 ,1997 to the Control
Board pursuant to Section 602(a) of the Privatization Act. Pursuant to the
Privatization Act, the Control Board is authorized to sell or exercise the
Warrants and must deposit any proceeds therefrom into an account established
for the benefit at the District of Columbia public school system. This
provision of the Privatization Act was part of the terms negotiated with the
Administration and Congress in conjunction with the GSE's privatization. On
September 2, 1997, the Control Board sold the Warrants in a transaction for
which it claimed an exemption from the registration requirements of the
Securities Act.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders except the election of directors,
on which they have cumulative voting rights.
Holders of the Common Stock: (i) have equal and ratable rights to
dividends from funds legally available therefor when, as and if declared by the
Company's Board, subject to any rights of the holders of Company's preferred
stock; (ii) subject to any rights of the holders of Company's preferred stock,
if any, are entitled to share ratably in any distribution to holders of the
Common Stock upon liquidation, after payment in full of all creditors; and
(iii) do not have preemptive rights. The Common Stock is not redeemable or
convertible. The outstanding shares of Common Stock are fully paid and
non-assessable. The registrar and transfer agent for the Common Stock is Chase
Mellon Shareholder Services.
50
<PAGE> 53
MANAGEMENT
The name, age and business experience and directorships during the
past five years of each member of the Company's Board of Directors is as
follows:
<TABLE>
<CAPTION>
====================================================================================================================================
DESCRIPTION OF BUSINESS OR
NAME AND BUSINESS ADDRESS AGE PRESENT PRINCIPAL OCCUPATION
------------------------- --- ----------------------------
====================================================================================================================================
<S> <C> <C>
James E. Brandon 70 Attorney and Certified Public Accountant. Mr. Brandon is President and director of
Amarillo, TX the following private companies: National Cattle Co., Inc., Automated Electronics
Corp., Kirby Royalties, Inc., and El Paso Venezuela Company, each an oil and gas
company; Oldham Ranches, Inc., Grain Properties, Inc., and Park-Princess, Inc., each
a real estate investment company. Mr. Brandon is a Trustee of Eureka College in
Illinois, serving a six-year term that commenced in 1993. He also served as a
Trustee of Eureka College from 1985 to 1991. Mr. Brandon served as director of the
GSE, by appointment of the President of the United States, from 1982 through 1991,
and was a shareholder-elected member of the GSE board from 1995 until August 1997.
Charles L. Daley 64 Director, Executive Vice President and Secretary of TEB Associates, Inc., a real
Voorhees, NJ estate finance company, since 1992. Mr. Daley was Executive Vice President and Chief
Operating Officer of First Peoples Financial Corporation, a bank holding company,
from 1987 to 1992 and Executive Vice President and Chief Operating Officer of First
Peoples Bank of New Jersey, a state-chartered commercial bank, from 1984 to 1992.
Mr. Daley was a member of the GSE board from 1995 until August 1997
Thomas J. Fitzpatrick 48 Founder, President and Chief Executive Officer of Equity One, Inc., a one billion
Medford, NJ dollar consumer lending company. Mr. Fitzpatrick was Vice Chairman of Commercial
Credit Co. from 1988 until 1989. From 1983 until 1988, he was President and Chief
Operating Officer of Manufacturers Hanover Consumer Services, where he had been
employed since 1979. Mr. Fitzpatrick currently serves on the board of directors of
BanPonce Financial Corporation.
Edward A. Fox 60 Mr. Fox retired from the GSE in 1990 after serving as its President and Chief
Harborside, ME Executive Officer since its inception in 1973. From 1990 until 1994, he was the Dean
of the Amos Tuck School of Business Administration at Dartmouth College. Mr. Fox is
a director of Delphi Financial Group, Construction Loan Insurance Corporation
("Connie Lee"), Greenwich Capital Management and New England Life Insurance Co., and
is Chairman of the Board of Commerce Security Bancorp. In 1997, the Governor of
Maine appointed Mr. Fox to a three-year term on the New England Board of Higher
Education.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
====================================================================================================================================
DESCRIPTION OF BUSINESS OR
NAME AND BUSINESS ADDRESS AGE PRESENT PRINCIPAL OCCUPATION
------------------------- --- ----------------------------
====================================================================================================================================
<S> <C> <C>
Diane S. Gilleland 50 Senior Fellow, American Council on Education, Washington, D.C. Previously, Dr.
Washington, D.C. Gilleland was the Director, Arkansas Department of Higher Education (1990-1997). She
currently serves on the boards of several organizations including the Boards of the
Arkansas School of Mathematics and Science, the Southern Regional Education Board's
Commission on Educational Quality and the National Advisory Group for the Ford
Foundation-sponsored project on Higher Education Costs, Pricing and Productivity.
Dr. Gilleland served as a member of the GSE board, by appointment of the President of
the United States, from 1994 until August 1997, and has been a shareholder-elected
member of the GSE board since August 1997.
Ann Torre Grant 39 Executive Vice President, Chief Financial Officer and Treasurer of NHP Incorporated,
Vienna, VA a broad-based national real estate services firm that is the nation's second largest
multi-family property manager and fourth largest commercial lender, since February
1995. Ms. Grant was Vice President and Treasurer of US Airways from 1991 until 1995,
and held other finance positions at US Airways from 1988 until 1991. She is
currently a director of the GSE and Independent Director of Franklin Mutual Series, a
$22 billion family of mutual funds.
Ronald F. Hunt 53 Attorney in New Bern, North Carolina, where he has resided since 1990. Mr. Hunt
New Bern, NC retired from the GSE in 1990 after serving in a number of executive positions there,
beginning in 1973. He was appointed General Counsel of the GSE in 1979 and Executive
Vice President in 1983. Since 1987 he has served as Corporate Secretary of the
Construction Loan Insurance Corporation ("Connie Lee") and as Director and Corporate
Secretary of Connie Lee Insurance Company, a municipal bond insurer wholly owned by
Connie Lee, and of Connie Lee Management Services Corporation. From 1993 until 1995,
Mr. Hunt was Chairman of the Board of Directors of the National Student Loan
Clearinghouse, a not-for-profit corporation that provides loan status verification
for participants in the FFELP. Mr. Hunt is also a director of the GSE.
Benjamin J. Lambert, III 60 Senator of the State of Virginia since 1987. As a Senator, Dr. Lambert has focused
Richmond, VA on education issues and is Chairman of the Senate's Higher Education Subcommittee.
Dr. Lambert has also been self-employed as an optometrist since 1962. Dr. Lambert is
a director of the GSE and the following companies: Consolidated Bank & Trust
Company; Virginia Power; and Dominion Resources. Dr. Lambert is also Secretary of
the Board of Trustees of Virginia Union University, where he has served as a Trustee
for over 15 years.
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
====================================================================================================================================
DESCRIPTION OF BUSINESS OR
NAME AND BUSINESS ADDRESS AGE PRESENT PRINCIPAL OCCUPATION
------------------------- --- ----------------------------
====================================================================================================================================
<S> <C> <C>
Albert L. Lord 51 Chief Executive Officer and Vice-Chairman of the Company, and President and principal
Washington, D.C. shareholder of LCL Ltd., a Washington D.C. firm that provides consulting services in
investment and financial services. Mr. Lord served in executive positions at the GSE
from October 1981 until January 1994. Mr. Lord served as the Executive Vice
President and Chief Operating Officer of the GSE from 1990 to 1994, and Executive
Vice President and Chief Financial Officer of the GSE from 1986 to 1990. Mr. Lord
also serves as a director of First Alliance Corporation, Irvine, CA, and Princeton
Bank, Princeton, MN. Mr. Lord was a member of the GSE board from 1995 until August
1997.
Marie V. McDemmond 51 President of Norfolk State University since June 1997. From December 1988 to June
Norfolk, VA 1997, Dr. McDemmond served Florida Atlantic University in various capacities, most
recently as Vice President for Finance and Chief Fiscal Officer. Prior to 1988, Dr.
McDemmond was an Assistant Professor of Education at the University of New Orleans,
President of McDemmond and Associates, a education finance consulting firm, and held
financial management positions at Emory University, Atlanta University and University
of Massachusetts. She is also a frequent author and lecturer on women and minority
issues and financial management of colleges and universities. Dr. McDemmond is also
a director of the GSE.
Barry A. Munitz 55 President and Chief Executive Officer of the J. Paul Getty Trust. From 1991 until
Long Beach, CA 1997, Dr. Munitz was Chancellor and Chief Executive Officer of The California State
University System. He is immediate past chair of the American Council on Education,
Chairman of the National Advisory Group for the Ford Foundation-supported Project on
Higher Education Costs, Pricing and Productivity, Chair-Elect of the California
Business -- Higher Education Forum and a member of the Executive Committee of Los
Angeles' KCET Public Television Station. Dr. Munitz has also served as a director of
SunAmerica Corp. since 1994. From 1982 until 1991, he was President and Chief
Executive Officer of Federated Development Co., Vice-Chairman, MAXXAM Inc., Chairman
and Chief Executive Officer, United Financial Group, and Director, Charter
Bancshares, Kaiser Aluminum and Specialty Patterns.
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
====================================================================================================================================
DESCRIPTION OF BUSINESS OR
NAME AND BUSINESS ADDRESS AGE PRESENT PRINCIPAL OCCUPATION
------------------------- --- ----------------------------
====================================================================================================================================
<S> <C> <C>
A. Alexander Porter 58 Lead independent director of the Company's board, co-Founder and President of Porter,
New York, NY Felleman Inc., an investment management company, since 1983, and General Partner of
Amici Associates, L.P. since 1976 and of the Collectors' Fund since 1984. Amici and
the Collectors' Fund are investment partnerships in which Mr. Porter has investment
discretion to buy and sell securities. Mr. Porter has been a trustee of Davidson
College in North Carolina since 1992. He is a governor of the New York Athletic
Club, a Founder and Director of Distribution Technology, Inc., a privately held
company, and a trustee of The John Simon Guggenheim Memorial Foundation, since 1997.
Mr. Porter has been a director of the GSE since 1995.
Wolfgang Schoellkopf 64 Vice President and Chief Financial Officer of First Financial Bancorporation from
New York, NY 1990 until 1996. After teaching economics at Cornell University and Princeton
University, Mr. Schoellkopf held various positions at Chase Manhattan Bank from 1963
until 1988, most recently as Executive Vice President and Treasurer. From 1988 until
1990, he was Executive Vice President of Shearson Lehman Hutton. Mr. Schoellkopf
currently serves on the boards of directors of Great Lakes Reinsurance Corporation
and Inner-City Scholarship Fund.
Steven L. Shapiro 56 Certified Public Accountant and Personal Financial Specialist. Mr. Shapiro is
Cherry Hill, NJ Chairman of Alloy, Silverstein, Shapiro, Adams, Mulford & Co., an accounting firm,
where he has been employed since 1960, and has served on its board of directors since
1966. Mr. Shapiro has been a member of the executive advisory council of Rutgers
University since 1992, and is a federal key person of the American Institute of
Certified Public Accountants. Mr. Shapiro also serves on the boards of the following
companies: Carnegie Bancorp, a Princeton, New Jersey bank (since 1992); the Casino
Reinvestment Development Authority (since 1992); and the West Jersey Hospital
Foundation (since 1993). He was director of First Peoples Financial Corp. from 1990
to 1992 and Vice Chairman of the Board of Jefferson Bank of New Jersey from 1988 to
1990. Mr. Shapiro was a member of the GSE board from 1995 until August 1997.
Randolph Hearst Waterfield 65 Certified public accountant and self-employed accounting consultant since 1990.
Barnegat Light, NJ Prior to 1990, Mr. Waterfield was with Ernst & Young for 40 years, during which time
he served as the audit partner with a number of major clients, including the Company,
and was the East Region Director of Accounting and auditing and managing partner of
Ernst & Young's Washington, D.C. office. Mr. Waterfield has been a Trustee of Drexel
University since 1981. Mr. Waterfield has been a member of the GSE board since 1995.
</TABLE>
54
<PAGE> 57
DIRECTOR COMPENSATION
During 1996, each GSE director, with the exception of the Chairman of the
Board, received an annual retainer of $20,000. Each standing committee
Chairman, with the exception of the Chairman of the Board, received an
additional annual retainer of $2,000. In addition, a fee of $1,500 accrued to
each director for attending each regular bi-monthly or special meeting of the
GSE Board and a fee of $1,500 accrued to each director for attending each
regularly scheduled committee meeting of the GSE Board (with only a single fee
paid for multiple committee meetings on the same day). The Chairman of the
Board, in recognition of the additional time that he was required to devote to
the GSE's affairs, received an annual retainer of $50,000 and a per diem of
$1,750 for each day spent on the GSE's affairs. The Chairman of the Board was
able to authorize additional reimbursement for directors who performed
additional services or devoted unusual amounts of time to the GSE's activities
that were not covered under the normal compensation schedules. Directors were
also provided with $50,000 of group term life insurance and are covered by a
travel insurance plan while traveling on GSE business.
Before the Reorganization, GSE directors could defer cash compensation under
the Sallie Mae Board of Directors' Deferred Compensation Plan and invest such
deferred compensation in a cash account on which interest accrued and/or in a
Sallie Mae Common Stock account, on which dividends and other capital
adjustments were made. At least 50% of each director's annual retainer was
credited to the Board of Directors' Deferred Compensation Plan -- Stock
Account. See "Ownership of the Common Stock".
Effective December 31, 1995, the Sallie Mae Board of Directors' Pension Plan,
a "nonqualified" plan that provided a benefit computed on the highest
consecutive three-year average of compensation, was eliminated. Benefits
accrued to directors serving on the GSE Board at December 31, 1995 were frozen.
Before the Reorganization, directors could participate in the Sallie Mae
Employees' Stock Purchase Plan on the same terms and conditions as GSE
employees. Directors did not receive a salary from the GSE and did not
participate in any of the other plans discussed under the heading "Executive
Compensation."
Under the terms of the GSE shareholder-approved Sallie Mae Board of
Directors' Restricted Stock Plan, each director could annually receive up to a
maximum of 500 shares of restricted GSE common stock. Shares granted under the
Directors' Restricted Stock Plan may not be transferred by a director until the
later of six months from the date of grant or the date the director separates
from service as a Board member. During 1996, each director was granted 100
shares of restricted GSE common stock. The aggregate number of shares issued
to directors during 1996 was 2,100 shares.
Pursuant to the Board of Directors Stock Option Plan, approved at the 1996
annual meeting of the GSE's shareholders, each director was awarded options to
acquire 3,000 shares of the GSE's common stock at $73.00 per share. As of
December 31, 1996, 63,000 options were outstanding and exercisable and had a
value of $1,267,875.
On September 18, 1997, the Company's Board of Directors authorized the
Company to offer to purchase all outstanding stock options held by GSE
directors who were appointed to the GSE board by the President of the United
States. The Company offered to purchase each outstanding option from such
directors at a price equal to the difference between the strike price of the
option and $158.8125 (the closing market price of the Company's stock on
September 18, 1997), plus $6.00. The Company's offer to purchase the options
at this price will remain open until October 31, 1997. Options held by such
directors will expire on January 31, 1998.
The total compensation accrued to directors in 1996 (including the value of
restricted stock grants and compensation related to participation in the Sallie
Mae Employees' Stock Purchase Plan) was $1,215,767.
55
<PAGE> 58
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, title and business experience during the past five years of
each member of the Company's executive officers is as follows:
<TABLE>
<CAPTION>
======================================================================================================================
NAME AND TITLE AGE PREVIOUS EXPERIENCE
-------------- --- -------------------
======================================================================================================================
<S> <C> <C>
Albert L. Lord 51 From 1994 until 1997, Mr. Lord was President and principal shareholder
Chief Executive Officer and of LCL, Ltd., a Washington, DC firm that provides consulting services
Vice Chairman of the Board in investment and financial services. From 1990-1994, Mr. Lord was
of Directors . . . . . . Executive Vice President and Chief Operating Officer of the GSE.
J. Paul Carey 38 From 1994 until 1997, Mr. Carey was an officer and shareholder of LCL,
Executive Vice President, Ltd., a Washington, DC firm that provides consulting services in
Finance, Marketing and investment and financial services. From 1990 to 1994, Mr. Carey was
Administration . . . . . Vice President, Marketing of the GSE. Mr. Carey also serves as
President of the GSE.
Mark G. Overend 41 From 1991 until 1997, Mr. Overend was Vice President and Controller of
Vice President and Chief the GSE. Mr. Overend also serves as Chief Financial Officer of the
Financial Officer . . . . GSE.
Robert R. Levine 41 From 1990 until 1997, Mr. Levine was the Vice President and Treasurer
Vice President, Servicing of the GSE.
Marianne M. Keler 42 From 1990 until 1997, Ms. Keler was Vice President and Associate
Vice President and General General Counsel of the GSE. Ms. Keler also serves as General Counsel
Counsel . . . . . . . . . of the GSE.
</TABLE>
EXECUTIVE COMPENSATION
This section includes: (1) a summary description in tabular form of executive
compensation; (2) a summary of 1997 stock option grants; (3) a valuation of
option exercises and remaining option holdings; (4) a summary of awards under
the Student Loan Marketing Association Incentive Performance Plan (the
"Incentive Performance Plan" or the "IPP"); and (5) a description of certain
benefit plans. The Company and the GSE do not have any termination or change
in control agreements with their executive officers.
COMPENSATION TABLES
Set forth below is historical information relating to the compensation of
executive officers of the GSE.
56
<PAGE> 59
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- -------------------------- -------
SECURITIES
RESTRICTED UNDERLYING LTIP ALL OTHER
OFFICERS(1) YEAR SALARY(2) BONUS(3) OTHER STOCK(4) OPTIONS(5) PAYOUT(6) COMPENSATION(7)
-------- ---- ------ ----- ----- ----- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence A. Hough . . 1996 $540,000 $220,036 -- $219,964 30,000 $329,656 $54,578
President and CEO 1995 525,000 210,052 -- 209,948 50,000 372,078 31,465
1994 510,000 145,025 -- 144,975 30,000 381,100 30,565
Timothy G. Greene . . 1996 304,000 184,000 -- 46,000 14,000 186,029 40,392
EVP and General Counsel 1995 295,000 192,000 -- -- 18,500 197,557 17,684
1994 288,000 155,000 -- -- 12,000 133,237 17,280
Denise B. McGlone . . 1996 295,000 0 -- 240,000 14,000 -- 17,677
EVP and CFO 1995 285,000 260,000 -- -- 15,000 -- 17,077
1994 253,846 250,000 -- -- 12,000 -- 15,231
Robert D. Friedhoff . 1996 275,000 235,000 -- -- 14,000 105,733 16,465
EVP, Systems and 1995 260,000 210,000 -- -- 18,500 96,236 15,565
Servicing 1994 245,000 165,000 -- -- 12,000 82,683 14,700
Lydia M. Marshall . . 1996 275,000 245,000 -- -- 14,000 98,984 16,454
EVP, Marketing 1995 255,000 220,000 -- -- 18,500 86,457 15,254
1994 235,000 165,000 -- -- 12,000 73,058 14,100
</TABLE>
- ----------
(1) Mr. Friedhoff resigned from his positions with Sallie Mae, effective
March 26, 1997 for personal reasons. Messrs. Hough and Greene and
Mmes. McGlone and Marshall ceased to be employed by the Company as of
August 8, 1997.
(2) "Salary" is the base salary earned in the current year including all
salary deferred to future years.
(3) "Bonus" is the amount earned for the year. The Bonus is determined and
payable in the following year.
Of Mr. Hough's 1996 Bonus of $440,000, 50% was paid in cash ($220,036)
and 50% was granted in the form of 2,263 restricted shares of Sallie
Mae Common Stock (determined at 90% of value on date of grant) with a
cash value of $244,404 on the date of grant.
Pursuant to the Stock Compensation Plan, per his election, 80% of Mr.
Greene's 1996 Bonus of $230,000 was paid in cash ($184,024) and 20%
was granted in the form of 473 restricted shares of Sallie Mae Common
Stock (determined at 90% of value on date of grant) with a cash value
of $51,084 on the date of grant.
Pursuant to the Stock Compensation Plan, per her election, 100% of Ms.
McGlone's 1996 Bonus of $240,000 was granted in the form of 2,469
restricted shares of Sallie Mae Common Stock (determined at 90% of
value on date of grant) with a cash value of $266,652 on the date of
grant.
(4) Grantees of restricted shares of Sallie Mae Common Stock are eligible
to receive dividends. Mr. Hough's 1994 and 1995 grants will both
become unrestricted as of January 27 and 26, 1997, respectively. All
other grants will become unrestricted on January 23, 1998. On the last
day of the fiscal year, the aggregate number of restricted shares of
Sallie Mae Common Stock granted equaled 6,742 shares with a value at
December 31, 1996 of $627,849.
(5) "Securities Underlying Options" includes stock options granted at
market prices in January of each year. The exercise price of the
options are as follows: January 1994: $49.00; January 1995: $37.00 and
January 1996: $73.00; except for Ms. McGlone's 1994 grant, the date
of which grant was November 17, 1993 priced at $44.50.
(6) Each year's Long-Term Incentive Plan ("LTIP") Payout is comprised of
the following payments under the Incentive Performance Plan:
1996 -- 1/3 of the total award earned in each of the IPP years 1993,
1992, and 1991, paid in January 1996;
1995 -- 1/3 of the total award earned in each of the IPP years 1992,
1991, and 1990, paid in January 1995;
1994 -- 1/3 of the total award earned in each of the IPP years 1991,
1990, and 1989, paid in January 1994;
Ms. McGlone is not eligible to receive awards earned under IPP until
the 1994 IPP payout which commences in 1997.
(7) "All Other Compensation" consists of the Employees' Thrift and Savings
Plan's and the Supplemental Employees' Thrift and Savings Plan's
employer matching contributions of up to 6% of base salary and for
Messrs. Hough and Greene, $22,213 and $22,173 resulting from purchases
of discounted stock under the Employees' Stock Purchase Plan.
57
<PAGE> 60
1996 OPTION GRANTS TABLE
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF TOTAL
SECURITIES GRANTS TO
UNDERLYING EMPLOYEES VALUE AT
OPTIONS IN EXERCISE EXPIRATION GRANT
NAME GRANTED 1996(1) PRICE DATE DATE(2)
---------------------- ---------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Lawrence A. Hough..... 30,000 9.3% $73.00 1/25/2006 $774,000
Timothy G. Greene..... 14,000 4.3 73.00 1/25/2006 361,200
Denise B. McGlone..... 14,000 4.3 73.00 1/25/2006 361,200
Robert D. Friedhoff... 14,000 4.3 73.00 1/25/2006 361,200
Lydia M. Marshall..... 14,000 4.3 73.00 1/25/2006 361,200
</TABLE>
- ----------
(1) The total number of stock options granted to employees in 1996 was
324,045.
(2) Value is determined on the basis of the Extended Binomial Options
Pricing Model, a variation of the Black-Scholes pricing model. The
following assumptions have been used in valuing the stock options as
of the grant date -- January 25, 1996: volatility -- 29.42%; risk-free
rate of return -- 5.93%; dividend growth rate -- 8.0%; vesting period
-- one year from grant and time of exercise -- expiration date.
1996 OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
OPTIONS AT OPTIONS AT
VALUE YEAR END DECEMBER 31, 1996
SHARES REALIZED ON EXERCISABLE/ EXERCISABLE/
NAME ACQUIRED EXERCISE UNEXERCISABLE UNEXERCISABLE
- --------------------- -------- ----------- ------------- --------------------
<S> <C> <C> <C> <C>
Lawrence A. Hough.... 10,000 $604,500 148,250/30,000 $6,485,468/$603,750
Timothy G. Greene.... 1,080 52,920 44,920/14,000 1,825,072/ 281,750
Denise B. McGlone.... 8,500 309,812 18,500/14,000 948,312/ 281,750
Robert D. Friedhoff.. 0 0 51,000/14,000 2,176,937/ 281,750
Lydia M. Marshall.... 18,500 832,500 24,800/14,000 927,650/ 281,750
</TABLE>
LONG-TERM INCENTIVE PLAN TABLE
INCENTIVE PERFORMANCE PLAN (IPP)
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER PERIOD
NAME AWARDS FOR 1993 IPP(1) UNTIL MATURITY OR PAYOUT(2)
--------------------- ------------------------------ ---------------------------------
<S> <C> <C>
Lawrence A. Hough...... Three installments of $89,250. Payable beginning January 1996.
Timothy G. Greene...... Three installments of $50,150 Payable beginning January 1996.
Denise B. McGlone(3)... N/A N/A
Robert D. Friedhoff.... Three installments of $38,061. Payable beginning January 1996.
Lydia M. Marshall...... Three installments of $37,329. Payable beginning January 1996.
</TABLE>
- -----------
(1) The 1993 IPP commenced January 1, 1993 and ended December 31, 1995.
Awards for that IPP were determined by the Board of Directors in
January 1996.
(2) The January 1996 payment for the 1993 IPP is included in the Summary
Compensation Table under "LTIP Payout".
(3) Denise McGlone rejoined the Corporation in February 1994. Ms. McGlone
is not eligible to receive awards until the 1994 IPP payout which
commences in 1997.
58
<PAGE> 61
DESCRIPTION OF CERTAIN PENSION PLANS
Set forth below are current defined benefit pension plans of Sallie Mae.
PENSION PLAN TABLE
ANNUAL NORMAL RETIREMENT BENEFIT(1)
<TABLE>
<CAPTION>
YEARS OF SERVICE AT NORMAL RETIREMENT DATE
FINAL -------------------------------------------------------
AVERAGE
COMPENSATION 15 20 25 30
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$400,000 $129,671 $ 172,895 $ 216,119 $259,343
450,000 146,171 194,895 243,619 292,343
500,000 162,671 216,895 271,119 325,343
550,000 179,171 238,895 298,619 358,343
600,000 195,671 260,895 326,119 391,343
650,000 212,171 282,895 353,619 424,343
700,000 228,671 304,895 381,119 457,343
750,000 245,171 326,895 408,619 490,343
800,000 261,671 348,895 436,119 523,343
850,000 278,171 370,895 463,619 556,343
900,000 294,671 392,895 491,119 589,343
</TABLE>
- ------------
(1) Payable for life to employees retiring in 1996 at age 62.
The credited years of service for the individuals named in the Summary
Compensation Table are: Mr. Hough: 21 years, 10 months; Mr. Greene: 12 years,
5 months; Ms. McGlone: 9 years, 3 months; Mr. Friedhoff: 17 years, 11 months;
and Ms. Marshall: 11 years, 6 months.
The Student Loan Marketing Association Employees' Pension Plan (the "Pension
Plan") provides monthly benefits upon retirement to employees who complete five
years of service. Benefits are calculated according to a formula which is based
on an employee's highest consecutive five-year average base salary and length of
credited service, and are integrated with social security benefits. The maximum
number of years for which a participant receives credit for service under the
Pension Plan is 30 years, and normal retirement age is 62. The Pension Plan
also provides early retirement benefits at age 55, as well as joint and
survivor benefits. The Pension Plan is funded solely by corporate
contributions. Annual contributions to the Pension Plan trust are determined on
an actuarial basis.
The Student Loan Marketing Association Supplemental Pension Plan (the
"Supplemental Pension Plan") assures that designated participants receive the
full amount of benefits to which they would have been entitled under the
Pension Plan but for limits on compensation and benefit levels imposed by the
Internal Revenue Code. The portions of compensation that are considered covered
compensation for the Supplemental Pension Plan for each named executive officer
are the salary and annual bonus amounts, up to 35% of the prior year's salary,
disclosed in the Summary Compensation Table.
Benefit amounts under both the Pension Plan and the Supplemental Pension Plan
are computed on an actuarial basis without individual allocation. The table
above shows estimated annual benefits payable under the Pension Plan and the
Supplemental Pension Plan to an employee for life upon retirement at age 62 in
specified years-of-service and remuneration classes, using assumptions about
compensation increases, under a straight life annuity option. The benefit
amounts shown in the table are not subject to any deduction for social security
or other offset amount.
59
<PAGE> 62
OWNERSHIP OF THE COMMON STOCK
BOARD AND MANAGEMENT OWNERSHIP OF THE COMPANY
The following table provides information regarding shares of the Common Stock
owned by the Company's management and Sallie Mae directors as of August 31,
1997, unless otherwise indicated. None of such persons nor such persons as a
group were the beneficial owner of more than 1 percent of the outstanding
shares of the Common Stock as of August 31, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
---------------------------------------------------------------------------
CREDITED TO MAY BE ACQUIRED WITHIN
------------ ----------------------
COMPANY DIRECTORS OWNED(1) BENEFIT PLAN 60 DAYS
----------------- ----- ------------ -------
ACCOUNT(2)
-------
<S> <C> <C> <C>
James E. Brandon............ 1,852 902 4,000
Charles L. Daley............ 5,077 264 4,000
Edward A. Fox.............. 54,000 0 0
Thomas J. Fitzpatrick....... 200 0 0
Dianne Suitt Gilleland...... 770 716 3,650
Ann Torre Grant............. 400 0 0
Ronald F. Hunt.............. 6,108 1,080 1,000
Benjamin J. Lambert, III.... 577 474 1,000
Albert L. Lord.............. 39,679 507 1,000
Marie V. McDemmond.......... 0 0 0
Barry A. Munitz............. 4,000 0 0
A. Alexander Porter......... 21,532 264 4,000
Wolfgang Schoellkopf........ 1,000 0 0
Steven L. Shapiro........... 1,577 711 4,000
Randolph Hearst Waterfield.. 550 607 4,000
COMPANY NAMED
EXECUTIVE OFFICERS
------------------
Albert L. Lord............. 39,679 507 1,000
J. Paul Carey.............. 4,568 0 0
Mark G. Overend............ 4,882 1,356 0
Robert R. Levine........... 5,295 1,074 0
Marianne M. Keler.......... 5,844 1,916 0
COMPANY DIRECTORS AND NAMED
EXECUTIVE OFFICERS AS A
GROUP
-----
157,911 9,871 26,650
================= =============== ================
</TABLE>
- --------------------
(1) Consists of shares held, directly or indirectly, by the individual or a
related party, including restricted shares.
(2) Consists of shares credited under the Company's Directors' Deferred
Compensation Plan, the Supplemental Employees' Thrift and Savings Plan, and
the Deferred Compensation Plan for Key Employees.
PRINCIPAL HOLDERS
The Company believes that the following institutions were beneficial owners
of five percent or more of the outstanding shares of the GSE's common stock at
June 30, 1997 based upon information from such institutions and the Company's
records.
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE AT
PRINCIPAL HOLDERS SHARES JUNE 30, 1997
-------------------------------- ------ ----------------------
<S> <C> <C>
The Capital Group Companies,
Inc.(1) . . . . . . . . . . 5,832,100 10.11%
FMR Corporation . . . . . . . 5,228,900 9.06%
Chancellor Capital . . . . . 4,109,001 7.12%
Scudder Stevens & Clark . . . 3,225,989 5.59%
</TABLE>
- ----------
(1) Certain operating subsidiaries of the Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held, as of June 30, 1997, 5,832,100 shares of the issue (10.11% of the
outstanding shares of the class). Capital Guardian Trust Company, a bank,
and one of such operating companies, exercised investment discretion over
2,000,100 of said shares. Capital Research and Management Company, a
registered investment adviser had investment discretion with respect to
3,832,000 shares of the above shares.
60
<PAGE> 63
LEGAL MATTERS
Certain legal matters relating to the Shares will be passed upon for the
Company by Marianne M. Keler, Esq., General Counsel of the Company.
EXPERTS
The consolidated financial statements of SLM Holding Corporation as of
December 31, 1996 and 1995, and for each of the three years in the period
ending December 31, 1996 appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority such firm as experts in
accounting and auditing.
61
<PAGE> 64
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ...................................... F-2
Consolidated Balance Sheets ......................................... F-3
Consolidated Statements of Income ................................... F-4
Consolidated Statements of Changes in Stockholders' Equity .......... F-5
Consolidated Statements of Cash Flows ............................... F-6
Notes to Consolidated Financial Statements .......................... F-7
</TABLE>
F-1
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
SLM HOLDING CORPORATION
We have audited the accompanying consolidated balance sheets of the
SLM Holding Corporation at December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the SLM Holding
Corporation at December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company's financial statements for 1995 and
1994 have been restated to reflect a change in its method of accounting for
student loan income. In addition, as discussed in Note 2, in 1994 the Company
changed its method of accounting for certain investments in debt and equity
securities.
Washington, D.C.
Ernst & Young LLP
January 13, 1997, except as to the
third and fourth paragraphs of Note 2,
which is as of April 7, 1997
F-2
<PAGE> 66
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION> DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Insured student loans purchased .................. $29,568,713 $32,307,930 $34,336,211
Student loan participations ...................... 1,918,871 1,445,596 --
----------- ----------- -----------
Insured student loans ............................ 31,487,584 33,753,526 34,336,211
Warehousing advances ............................. 2,495,178 2,789,485 3,865,093
Academic facilities financings
Bonds-- available-for-sale ..................... 827,235 934,481 710,112
Loans .......................................... 526,276 538,850 602,122
----------- ----------- -----------
Total academic facilities financings ............. 1,353,511 1,473,331 1,312,234
Investments
Available-for-sale ............................. 7,785,047 6,833,695 6,988,199
Held-to-maturity ............................... 584,576 601,887 625,856
----------- ----------- -----------
Total investments ................................ 8,369,623 7,435,582 7,614,055
Cash and cash equivalents ........................ 2,223,439 270,887 1,252,920
Other assets, principally accrued interest
receivable ..................................... 1,969,583 1,907,079 1,621,222
----------- ----------- -----------
Total assets ..................................... $47,898,918 $47,629,890 $50,001,735
=========== =========== ===========
LIABILITIES
Short-term borrowings ............................ $25,850,071 $22,517,627 $17,447,000
Long-term notes .................................. 19,488,810 22,606,226 30,082,615
Other liabilities ................................ 1,503,568 1,458,207 1,390,915
----------- ----------- -----------
Total liabilities ................................ 46,842,449 46,582,060 48,920,530
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY .................. 213,883 213,883 213,883
STOCKHOLDERS EQUITY
Common stock, par value $.20 per share, 250,000,000
shares authorized: 66,158,095; 65,695,571 and
124,121,770 shares issued, respectively ........ 13,231 13,139 24,824
Additional paid-in capital ....................... 28,218 -- 537,818
Unrealized gains on investments (net of tax of
$185,569; $188,050 and $199,686, respectively) . 344,628 349,235 370,846
Retained earnings ................................ 1,194,769 1,008,737 2,728,383
----------- ----------- -----------
Stockholders' equity before treasury stock ....... 1,580,846 1,371,111 3,661,871
Common stock held in treasury at cost:
13,823,562; 12,004,976 and 66,415,524 shares,
respectively ................................... 738,260 537,164 2,794,549
----------- ----------- -----------
Total stockholders' equity ....................... 842,586 833,947 867,322
----------- ----------- -----------
Total liabilities and stockholders' equity ....... $47,898,918 $47,629,890 $50,001,735
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Insured student loans purchased ...... $1,220,530 $1,323,266 $2,586,035 $2,708,079 $2,188,971
Student loan participations .......... 53,044 -- 20,625 -- --
---------- ---------- ---------- ---------- ----------
Insured student loans ................ 1,273,574 1,323,266 2,606,660 2,708,079 2,188,971
Warehousing advances ................. 78,203 106,920 193,654 407,866 334,012
Academic facilities financings:
Taxable ............................ 24,531 26,571 52,163 54,862 52,079
Tax-exempt ......................... 23,287 22,019 48,262 52,859 49,576
---------- ---------- ---------- ---------- ----------
Total academic facilities
financings ......................... 47,818 48,590 100,425 107,721 101,655
Investments .......................... 312,466 270,008 548,582 697,724 499,443
---------- ---------- ---------- ---------- ----------
Total interest income .................. 1,712,061 1,748,784 3,449,321 3,921,390 3,124,081
Interest expense:
Short-term debt ...................... 738,764 520,676 1,138,272 905,933 737,798
Long-term debt ....................... 566,810 775,868 1,444,613 2,114,716 1,404,697
---------- ---------- ---------- ---------- ----------
Total interest expense ................. 1,305,574 1,296,544 2,582,885 3,020,649 2,142,495
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME .................... 406,487 452,240 866,436 900,741 981,586
Other income:
Gain on sale of student loans ........ 64,630 19,403 48,981 -- --
Servicing and securitization
revenue ............................ 57,191 15,668 57,736 1,423 --
Gains/(losses) on sales of
securities ......................... 7,382 3,054 11,898 24,032 (100)
Other ................................ 24,792 11,528 28,301 24,958 13,903
---------- ---------- ---------- ---------- ----------
Total other income ..................... 153,995 49,653 146,916 50,413 13,803
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries and benefits ................ 102,781 102,096 206,347 211,787 196,022
Other ................................ 114,061 96,822 199,305 226,914 193,920
---------- ---------- ---------- ---------- ----------
Total operating expenses ............... 216,842 198,918 405,652 438,701 389,942
---------- ---------- ---------- ---------- ----------
Income before federal income taxes
and premiums on debt extinguished and
minority interest in net earnings
of subsidiary ........................ 343,640 302,975 607,700 512,453 605,447
Federal income taxes: ---------- ---------- ---------- ---------- ----------
Current .............................. 118,121 112,686 207,437 141,803 178,812
Deferred ............................. (12,482) (20,378) (23,939) (540) (2,897)
---------- ---------- ---------- ---------- ----------
Total federal income taxes ............. 105,639 92,308 183,498 141,263 175,915
Minority interest in net earnings
of subsidiary ........................ 5,347 5,347 10,694 10,694 10,694
---------- ---------- ---------- ---------- ----------
Income before premiums on debt
extinguished ......................... 232,654 205,320 413,508 360,496 418,838
Premiums on debt extinguished, net
of tax ............................... -- (4,792) (4,792) (4,911) (9,329)
---------- ---------- ---------- ---------- ----------
NET INCOME ............................. $ 232,654 $ 200,528 $ 408,716 $ 355,585 $ 409,509
========== ========== ========== ========== ==========
Earnings per common share before
premiums on debt extinguished ........ $ 4.36 $ 3.62 $ 7.41 $ 5.34 $ 5.25
========== ========== ========== ========== ==========
EARNINGS PER COMMON SHARE .............. $ 4.36 $ 3.53 $ 7.32 $ 5.27 $ 5.13
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of period .............. 13,139 24,824 24,824 24,769 24,766
Issuance of common shares ............... 92 87 115 55 3
Retirement of common shares ............. -- -- (11,800) -- --
--------- --------- --------- --------- ----------
Balance, end of period .................... 13,231 24,911 13,139 24,824 24,769
--------- --------- --------- --------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period .............. -- 537,818 537,818 524,511 523,935
Proceeds in excess of par value from
issuance of common stock .............. 28,218 17,751 22,920 11,673 514
Tax benefit related to employee stock
option and purchase plans ............. -- -- 7,393 1,634 62
Retirement of common shares ............. -- -- (568,131) -- --
--------- --------- --------- --------- ----------
Balance, end of period .................... 28,218 555,569 -- 537,818 524,511
--------- --------- --------- --------- ----------
UNREALIZED GAINS ON INVESTMENTS, NET OF
TAX:
Balance, beginning of period .............. 349,235 370,846 370,846 299,558 --
Unrealized gains as of January 1,
1994 .................................. -- -- -- -- 304,851
Change in unrealized gains .............. (4,607) (35,226) (21,611) 71,288 (5,293)
--------- --------- --------- --------- ----------
Balance, end of period .................... 344,628 335,620 349,235 370,846 299,558
--------- --------- --------- --------- ----------
RETAINED EARNINGS:
Balance, beginning of period (as
restated, see note 2) ................... 1,008,737 2,728,383 2,728,383 2,473,048 2,176,485
Net income .............................. 232,654 200,528 408,716 355,585 409,509
Retirement of common shares ............. -- -- (2,037,368) -- --
Cash dividends:
Common stock ($.88, $.80, $1.64,
$1.51 and $1.42 per share,
respectively) ...................... (46,622) (45,229) (90,994) (100,250) (112,946)
--------- --------- --------- --------- ----------
Balance, end of period .................... 1,194,769 2,883,682 1,008,737 2,728,383 2,473,048
--------- --------- --------- --------- ----------
COMMON STOCK HELD IN TREASURY AT
COST:
Balance, beginning of period .............. 537,164 2,794,549 2,794,549 1,934,377 1,546,272
Repurchase of 1,818,586; 2,638,949;
4,589,452; 16,094,701 and 10,542,791
common shares, respectively ........... 201,096 201,942 359,914 860,172 388,105
Retirement of 59,000,000 common
shares ................................ -- -- (2,617,299) -- --
--------- --------- --------- --------- ----------
Balance, end of period .................... 738,260 2,996,491 537,164 2,794,549 1,934,377
--------- --------- --------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY .................. $842,586 $803,291 $833,947 $867,322 $1,387,509
========= ========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------------- ------------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................... $ 232,654 $ 200,528 $ 408,716 $ 355,585 $ 409,509
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued interest
receivable ........................... (13,088) 10,141 (11,286) (179,505) (184,021)
Increase (decrease) in accrued interest
payable .............................. 28,526 6,560 (109,214) 112,133 114,310
(Increase) in other assets ............. (48,179) (124,146) (274,572) (128,799) (86,959)
Increase in other liabilities .......... 19,316 62,235 188,142 15,804 203,630
------------- ------------- ------------- ------------- -------------
Total adjustments ........................ (13,425) (45,210) (206,930) (180,367) 46,960
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities ........................... 219,229 155,318 201,786 175,218 456,469
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased .......... (3,553,247) (4,639,956) (8,370,836) (9,379,663) (7,955,655)
Reduction of insured
student loans purchased:
Installment payments ................... 1,131,175 1,667,232 3,094,937 3,452,985 3,220,233
Claims and resales ..................... 615,639 640,955 1,277,400 1,161,163 1,142,350
Proceeds from securitization of
student loans ........................ 4,545,650 3,015,030 6,026,780 1,000,000 --
Participations purchased ................. (590,436) -- (1,498,868) -- --
Participation repayments ................. 117,161 -- 53,272 -- --
Warehousing advances made ................ (285,857) (734,810) (1,391,590) (2,250,077) (3,377,494)
Warehousing advance repayments ........... 580,164 1,628,086 2,467,198 5,416,890 3,379,484
Academic facilities financings made ...... (53,720) (301,569) (465,596) (122,813) (292,966)
Academic facilities financings
reductions ............................ 172,570 57,366 302,557 379,283 103,314
Investments purchased .................... (9,347,820) (8,334,029) (15,966,490) (43,716,393) (87,312,581)
Proceeds from sale or maturity of
investments ............................ 8,406,424 8,758,590 16,113,659 46,627,289 86,495,100
------------- ------------- ------------- ------------- -------------
Net cash provided by (used
in) investing activities ................. 1,737,703 1,756,895 1,642,423 2,568,664 (4,598,215)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued ............. 375,929,647 101,760,944 267,525,285 163,805,115 118,724,135
Short-term borrowings repaid ............. (370,477,376) (101,656,582) (262,491,657) (166,764,320) (113,946,559)
Long-term notes issued ................... 2,260,125 3,670,249 8,304,988 12,350,217 16,317,375
Long-term notes repaid ................... (7,497,368) (6,398,878) (15,744,378) (12,196,436) (15,303,842)
Common stock issued ...................... 28,310 17,838 30,428 13,362 579
Common stock repurchased ................. (201,096) (201,942) (359,914) (860,172) (388,105)
Dividends paid ........................... (46,622) (45,229) (90,994) (100,250) (112,946)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used
in) financing activities ................. (4,380) (2,853,600) (2,826,242) (3,752,484) 5,290,637
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
cash and cash equivalents ................ 1,952,552 (941,387) (982,033) (1,008,602) 1,148,891
Cash and cash equivalents at
beginning of period ...................... 270,887 1,252,920 1,252,920 2,261,522 1,112,631
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ......................... $ 2,223,439 $ 311,533 $ 270,887 $ 1,252,920 $ 2,261,522
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
''
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 1997 and for the six months ended
June 30, 1997 and 1996 is unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND PRIVATIZATION
On September 30, 1996, President Clinton signed into law the Student Loan
Marketing Association Reorganization Act of 1996, Pub. L. 104-208 (the
"Privatization Act"), authorizing the restructuring of the Student Loan
Marketing Association, a government-sponsored enterprise (the "GSE"), as
a fully private, state-chartered corporation. On July 31, 1997, at a Special
Meeting of Shareholders convened pursuant to a combined Proxy
Statement/Prospectus registered with the Securities and Exchange Commission,
the GSE's shareholders voted to approve a reorganization (the "Reorganization")
pursuant to which the GSE became a wholly-owned subsidiary of SLM Holding
Corporation, a Delaware corporation ("SLM Holding" or the "Company"). The
Reorganization was consummated on August 7, 1997 and each outstanding share of
common stock, par value $.20 per share, of the GSE was converted into one share
of common stock, par value $.20 per share of SLM Holding.
Under the terms of the Reorganization the GSE will transfer certain assets,
including stock in certain subsidiaries, to SLM Holding or one of its non-GSE
subsidiaries. This transfer of the subsidiaries and assets and the related
exchange of stock is being accounted for at historical cost similar to a pooling
of interests and therefore all prior period financial statements and related
disclosures presented have been restated as if the Reorganization took place
at the beginning of such periods.
The GSE is a stockholder-owned corporation chartered by Congress to
provide liquidity for originators of student loans made under federally
sponsored student loan programs and otherwise to support the credit needs of
students and educational institutions. The GSE's charter is subject to
legislative change from time to time. The GSE is predominantly engaged in the
purchase of student loans insured under federally sponsored programs. The GSE
also makes secured loans (warehousing advances) to providers of education
credit, and provides financing to educational institutions for their physical
plant and equipment (academic facilities financings).
Privatization
The Privatization Act provides that the GSE will wind down its operations
and dissolve on or before September 30, 2008. During such time, the GSE may
continue to issue new debt obligations with maturities on or before September
30, 2008. Any GSE debt obligations outstanding at the date of such dissolution
will be defeased through creation of a fully collateralized trust, consisting of
U.S. government or agency obligations with cash flows matching the interest and
principal obligations of the defeased debt. The Privitzation Act further
provides that the legal status and attributes of the GSE's debt obligations,
including Securities and Exchange Commission ("SEC") and state tax exemptions,
are fully preserved until their respective maturities. Such debt obligations
will remain GSE debt obligations, whether such obligations were outstanding at
the time of, or issued subsequent to, the Reorganization. The obligations of
SLM Holding will not have GSE status. The Privatization Act also requires
that the GSE's outstanding adjustable rate cumulative preferred stock be
redeemed on September 30, 2008 or at such earlier time as the GSE is dissolved.
The Privatization Act imposes certain restrictions on intercompany
relations between the GSE and its affiliates during the wind-down period. In
particular, the GSE must not extend credit to, nor guarantee any debt
obligations, of SLM Holding or the SLM Holding's non-GSE subsidiaries.
Furthermore, the Privatization Act mandates that transactions between the GSE
and SLM Holding, including any loan servicing arrangements, shall be on
terms no less favorable to the GSE than the GSE could obtain from an
unrelated third party. While the GSE may not finance the activities of its
non-GSE affiliates, it may, subject to its minimum capital requirements,
dividend retained earnings and surplus capital to the SLM Holding, which in
turn may use such amounts to support its non-GSE subsidiaries. The GSE's charter
requires that the GSE maintain a minimum capital ratio of at least 2.0 percent
until 2000 and 2.25 percent thereafter. The Privatization Act further directs
that under no
F-7
<PAGE> 71
circumstances shall the assets of the GSE be available or used to pay claims or
debts of, or incurred by, SLM Holding.
Prior to the GSE's dissolution, the GSE will be restricted in the new
business activities it may undertake and may continue to purchase student loans
only through September 30, 2007. Warehousing advances, letters of credit and
standby bond purchase activity by the GSE will be limited to takedowns on
contractual financing and guarantee commitments in place as of the
Reorganization's effective date, and to finance these activities the GSE will
continue to issue debt in the government agency market. SLM Holding generally
may begin to purchase student loans only after the GSE discontinues such
activity. At June 30, 1997 and December 31, 1996, the GSE had $379 million
and $372 million, respectively, in carrying value of outstanding debt with
maturities after September 30, 2008. Such debt will be transferred into a
defeasance trust on the dissolution date.
After the merger, SLM Holding paid $5 million to the District of
Columbia Financial Responsibility and Management Assistance Authority (the
"Control Board") for use of the name "Sallie Mae." In addition, SLM Holding
issued to the D.C. Financial Control Board warrants to purchase 555,015
shares of SLM Holding Common Stock at $72.43 per share. The Control Board
subsequently transferred the warrants on September 2, 1997 for $37 million.
Beginning in fiscal 1997, and until the GSE is dissolved, the GSE also must
reimburse the U.S. Treasury Department up to $800,000 annually (subject to
adjustment based on the Consumer Price Index) for its reasonable costs and
expenses of carrying out its supervisory duties under the Privatization Act.
Operations performed outside the GSE after the Reorganization will be
subject to state and local taxes.
2. SIGNIFICANT ACCOUNTING POLICIES
Loans
Loans, consisting of insured student loans purchased (student loans),
student loan participations, warehousing advances, and academic facilities
financings are carried at their unpaid principal balances which, for student
loans, are adjusted for unamortized premiums and unearned purchase discounts.
Student Loan Income
The Company recognizes student loan income as earned, including adjustments
for the amortization of premiums and accretion of discounts. Interest
income earned on student loan participations is recognized in accordance with
the terms of the joint venture agreement with The Chase Manhattan Bank which
effectively reflects the underlying interest income earned on the student loans
less servicing costs and the general and administrative expenses of the joint
venture.
Restatement of Previously Issued Financial Statements
Student loan servicing costs are generally incurred in a fixed amount per
borrower and thus increase in proportion to principal balances outstanding as
loans are repaid. Prior to 1995, to achieve a level yield to maturity, interest
income was deferred during the early years of the loans, then recognized during
the later years to offset the aforementioned proportional servicing cost
increases. Changes in the estimates of future loan servicing costs were
F-8
<PAGE> 72
reflected in student loan income over the estimated remaining terms of the
loans. In the fourth quarter of 1995, the Company discontinued its accounting
method of deferring income on student loans which resulted in an increase in
1995 net income and income before premiums on debt extinguished of $21 million
($.30 per common share).
After discussions with the Securities and Exchange Commission, management
determined that the Company's method for recognizing student loan income as
discussed in the second preceding paragraph should be used for all periods
presented. Accordingly, the previously reported financial statements for the
years ended December 31, 1995 and 1994 have been restated. For 1995, the
cumulative effect of the change in accounting method of $130 million ($1.93 per
common share) has been eliminated, thereby, decreasing net income and increasing
the beginning balance of retained earnings by $130 million. For 1994, net income
and income before premiums on debt extinguished increased by $17 million ($.22
per common share) and the beginning balance of retained earnings increased by
$113 million.
Securitizations
During 1997, the Company adopted the requirements of FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which establishes the accounting for certain financial asset
transfers including securitization transactions. The effect of implementing this
standard was not material on the Company's financial statements. Management also
believes that this standard will not have a material effect on the financial
statements in the future.
The GSE securitizes student loans by selling selected portfolios of such
loans to trusts. Upon the sale of the loans to the trusts, the GSE continues
to carry the retained interests in those loans on its Balance Sheet. A gain is
recorded on a present value basis which takes into account principal, interest
and special allowance receipts on the student loans less principal and interest
payments on the notes and certificates financing the student loans, a normal
servicing fee, borrower benefit programs, losses from defaulted student loans
(which includes risk-sharing, claim interest penalties and reject costs),
transaction costs, offset fees and the current carrying value of the loans
including any premiums paid.
In addition to the initial gain on sale, the GSE is entitled to the
residual cash flows from the trusts. Also, the Company continues to
service the loans sold for a fee. These amounts are reflected as servicing and
securitization revenues in the Consolidated Statements of Income.
Student Loan Loss Reserves
The Company has established reserves for potential losses on its student
loan portfolio that can result from defective servicing, risk-sharing on claim
payments and on privately insured loans. The reserve is based on periodic
evaluations of its loan portfolios considering past experience, changes to
federally funded programs, current economic conditions and other relevant
factors. The reserve is maintained at a level that management believes is
adequate to absorb estimated potential credit losses. This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant changes.
Cash and Cash Equivalents
Cash and cash equivalents excludes term federal funds and bank deposits
with terms to maturity exceeding three months.
Investments
Investments are held to provide liquidity, to hedge certain financing
activities and to serve as a source of short-term income. Investments are
segregated into three categories as required under Statement of Financial
Accounting Standards ("FAS") No. 115. Securities that are actively traded are
accounted for at fair market value with unrealized gains and losses included in
investment income. Securities that are intended to be held to maturity are
accounted for at amortized cost. Securities that fall outside of the two
previous categories are considered as
F-9
<PAGE> 73
available-for-sale. Such securities are carried at market value, with the
after-tax unrealized gain or loss, along with after-tax unrealized gain or loss
on instruments which hedge such securities, carried as a separate component of
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for net
payments under derivative financial instruments with off-balance sheet risks,
which include interest rate swaps and foreign currency exchange agreements and
the amortization of debt issuance costs and deferred gains and losses on hedge
transactions entered into to reduce interest rate risk.
Interest Rate Swaps
The Company utilizes interest rate swap agreements ("swaps") principally
for hedging purposes to alter the interest rate characteristics of its debt in
order to manage interest rates. This enables the Company to match the interest
rate characteristics of borrowings to specific assets in order to lock-in
spreads. The Company generally does not hold or issue swaps for trading
purposes.
Amounts paid or received under swaps that are used to alter the interest
rate characteristics of its interest-sensitive liabilities are accrued and
recognized as an adjustment of the interest expense on the related borrowing.
The related net receivable or payable from counterparties is included in other
assets or other liabilities. Gains and losses associated with the termination of
swaps for designated positions are deferred and amortized over the remaining
life of the designated instrument as an adjustment to interest expense.
The Company's credit exposure on swaps is limited to the value of the swaps
that have become favorable to the Company in the event of nonperformance by the
counterparties. The Company manages the credit risk associated with these
instruments by performing credit reviews of counterparties and monitoring
market conditions to establish counterparty, sovereign and instrument-type
credit lines and, when appropriate, requiring collateral.
Foreign Currency Derivatives
The Company enters into various foreign currency swaps, forward currency
exchange agreements and options on forward currency exchange agreements to hedge
its foreign currency linked debt agreements. These contracts mature concurrently
with the maturities of the debt and are subject to the same credit standards as
interest rate swaps. Foreign currency derivatives and the related foreign
currency borrowings are translated at the market rates of exchange as of the
balance sheet date. Gains and losses on foreign currency transactions that are
designated hedges are deferred and included in the basis of the designated
instrument.
Federal Income Taxes
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Earnings per Common Share
Earnings per common share are computed using the weighted average of common
and common equivalent shares outstanding for the period. Common equivalent
shares include shares issuable upon exercise of incentive stock options.
Consolidation
The consolidated financial statements include the accounts of SLM Holding
and its subsidiaries, after eliminating significant intercompany accounts and
transactions.
F-10
<PAGE> 74
Reclassification
Certain prior year amounts in the Consolidated Statements of Income for the
six months ended June 30, 1996 and for the years ended December 31, 1995 and
1994 have been reclassified to conform with the 1996 year-end presentation.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the six months ended June 30, 1997
are not necessarily indicative of the results for the year ending December 31,
1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, reported
amounts of revenues and expenses and other disclosures. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share," which
is required to be adopted on December 15, 1997. At that time, the Company will
be required to change the method used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
adoption is expected to have no material impact on SLM Holding's reported
earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", which is effective for periods after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income in a
full set of general purpose financial statements. The Company is currently
evaluating the effect of this pronouncement on its financial statement
presentation and disclosure.
3. STUDENT LOANS
The GSE purchases student loans from originating lenders, typically just
before the student leaves school and is required to begin repayment of the loan.
The GSE's portfolio consists principally of loans originated under two federally
sponsored programs the Federal Family Education Loan Program ("FFELP") and the
Health Education Assistance Loan Program ("HEAL"). The GSE also purchases
privately insured loans from time to time, principally those insured by a
wholly-owned subsidiary.
There are four principal categories of FFELP loans: Stafford loans, PLUS
loans, SLS loans and consolidation loans. Generally, these loans have repayment
periods of between five and ten years, with the exception of consolidation
loans, and obligate the borrower to pay interest at a stated fixed rate or an
annually reset variable rate that has a cap. However, the yield to holders is
subsidized on the borrowers' behalf by the federal government to provide a
market rate of return. The formula through which the subsidy is determined is
referred to as the special allowance formula. Special allowance is paid whenever
the average of all of the 91-day Treasury bill auctions in a
F-11
<PAGE> 75
calendar quarter, plus a spread of between 2.50 and 3.50 percentage points
depending on the loan status and when it was originated, exceeds the rate of
interest which the borrower is obligated to pay.
In low interest rate environments the rate which the borrower is obligated
to pay may exceed the rate determined by the special allowance formula. In those
instances the rate paid by the borrower becomes a floor on an otherwise variable
rate asset. In 1996, the Company entered into contracts with third parties
under which it agreed to pay the future floor revenues received on student
loans with a principal balance of $13 billion in exchange for upfront payments
of $128 million. The upfront payments, which are recorded in other liabilities
are being amortized over the average life of these contracts, which is
approximately 2 years. For the six months ended June 30, 1997 and 1996 and for
the year ended December 31, 1996, the amortization of the upfront payments
increased student loan income by $21 million, $8 million, and $23 million,
respectively. For the six months ended June 30, 1997 and 1996 and for the year
ended December 31, 1996, payments under the contracts totaled $10 million, $4
million, and $12 million, respectively.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA"), enacted on August
10, 1993, made significant changes to the student loan delivery system and
created a program of direct lending to students by the federal government.
Management estimates that the Federal Direct Student Loan Program ("FDSLP")
replaced approximately 7 percent of the FFELP originations in the 1994-1995
academic year and 31 percent in the 1995-1996 academic year. The FDSLP has a
legislated market share goal of 50 percent for the 1996-1997 academic year.
Management believes these changes to the student loan delivery system along with
the FDSLP, which reduce the pool of loans originated by the bank-based FFELP,
will have an increasing material adverse effect on the Company's long-term
earning prospects as a higher percentage of loans subject to OBRA will be
available to the Company and the full effects of direct lending originations
are factored in. OBRA also required the GSE to pay an annual 30 basis point
"offset fee" on FFELP student loans purchased and held on or after August 10,
1993.
The estimated average remaining term of student loans in the Company's
portfolio, including student loan participations, was approximately 6.0
years at June 30, 1997, December 31, 1996 and 1995. The following table
reflects the distribution of the Company's loan portfolio by program.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FFELP-- Stafford.............. $14,323,238 $17,292,273 $20,210,325
FFELP-- PLUS/SLS.............. 2,940,619 3,580,803 4,514,976
FFELP-- Consolidation loans... 8,359,899 7,658,035 5,960,091
HEAL.......................... 2,708,339 2,758,860 2,764,244
Privately insured............. 1,236,618 1,017,959 886,575
----------- ----------- -----------
Insured student loans
purchased..................... 29,568,713 32,307,930 34,336,211
Student loan participations... 1,918,871 1,445,596 --
----------- ----------- -----------
Total student loans........... $31,487,584 $33,753,526 $34,336,211
=========== =========== ===========
</TABLE>
As of June 30, 1997 and December 31, 1996 and 1995, 82 percent, 84 percent
and 84 percent, respectively, of the Company's on-balance sheet student loan
portfolio was in repayment.
Holders of FFELP loans are insured against the borrower's default, death,
disability, or bankruptcy. Insurance on FFELP loans is provided by certain state
or non-profit guarantee agencies, which are reinsured by the federal government.
FFELP loans originated after October 1, 1993, of which the Company owned $14.3
billion at June 30, 1997, $14.5 billion at December 31, 1996 and $9.1 billion at
December 31, 1995, are insured for 98 percent of their unpaid balance resulting
in 2 percent risk-sharing for holders of these loans. HEAL loans are directly
insured by the federal government. Both FFELP and HEAL loans are subject to
regulatory requirements relating to servicing. In the event of default on a
student loan or the borrower's death, disability, or bankruptcy, the Company
files a claim with the insurer or guarantor of the loan, who, provided the loan
has been properly originated and serviced, and in the case of HEAL, litigated,
pays the Company the unpaid principal balance and accrued interest on the loan
less risk-sharing, where applicable.
F-12
<PAGE> 76
Claims not immediately honored by the guarantor because of servicing or
origination defects are returned for remedial servicing, during which period
income is not recognized. On certain paid claims, guarantors assess a penalty
for minor servicing defects. Costs associated with claims on defaulted student
loans, which include such penalties, reduced interest income on student loans by
$5.7 million, $6.8 million, $12.8 million, $15.8 million, and $16.8 million for
the six months ended June 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994, respectively.
The following table summarizes the reserves that the Company has recorded
for estimated losses due to risk-sharing, unpaid guarantee claims and defaults
on privately insured loans.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------- ----------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF
PERIOD.......................... $84,063 $60,337 $60,337 $64,928 $66,814
Additions
Provisions for loan losses.... 5,983 9,167 29,749 800 202
Recoveries.................... 4,470 3,739 7,235 6,096 5,998
Deductions
Reductions for sales on
student loans............... (4,328) (1,601) (3,188) -- --
Losses on loans............... (7,725) (7,377) (10,070) (11,487) (8,086)
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD........ $82,463 $64,265 $84,063 $60,337 $64,928
======= ======= ======= ======= =======
</TABLE>
4. WAREHOUSING ADVANCES
Warehousing advances are secured loans made, generally, to finance student
loans and other education-related loans at certain financial and educational
institutions and public sector agencies. Such advances are collateralized by
student loans, obligations of the United States government or instrumentalities
thereof, or by other collateral, such as residential first mortgages and
mortgage-backed securities. As of June 30, 1997, approximately 98 percent were
collateralized by student loans, 1 percent by U.S. government securities and 1
percent by other collateral. As of December 31, 1996, approximately 97 percent
were collateralized by student loans, 1 percent by U.S. government securities
and 2 percent by other collateral. A summary of warehousing advances by industry
concentration follows:
F-13
<PAGE> 77
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Commercial banks...... $1,284,049 $1,547,193 $2,612,125
Public sector
agencies............ 1,150,800 1,126,095 985,182
Educational
institutions........ 60,329 116,197 167,786
Thrift institutions... -- -- 100,000
---------- ---------- ----------
$2,495,178 $2,789,485 $3,865,093
========== ========== ==========
</TABLE>
Warehousing advances have specific maturities and generally bear rates of
interest which vary with the 91-day Treasury bill rate, or the London Interbank
Offered Rate ("LIBOR"), or which are fixed for the term of the advance. A
summary of warehousing advance interest rate characteristics follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Variable rate:
Treasury bill... $1,798,656 $1,723,588 $2,138,929
LIBOR........... 677,496 1,046,086 1,623,028
Fixed rate....... 19,026 19,811 103,136
---------- ---------- ----------
$2,495,178 $2,789,485 $3,865,093
========== ========== ==========
</TABLE>
The average remaining term to maturity of warehousing advances was 3.5
years as of June 30, 1997 and 1.0 year as of December 31, 1996.
The following table summarizes the maturities of warehousing advances at
June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
YEAR OF MATURITY JUNE 30, 1997 DECEMBER 31, 1996
---------------- ------------- -----------------
<S> <C> <C>
1997............ $ 119,628 $ 1,221,148
1998............ 1,190,496 1,232,186
1999............ 1,000 175,391
2000............ 624,335 127,863
2001............ -- --
After 2001...... 559,719 32,897
----------- -----------
$ 2,495,178 $ 2,789,485
=========== ===========
</TABLE>
5. ACADEMIC FACILITIES FINANCINGS
Academic facilities financings are comprised of bonds issued by and loans
to educational institutions to finance their physical plant and equipment.
At December 31, 1994, academic facilities bonds were classified as
held-to-maturity securities and carried at amortized cost. In December 1995, as
a result of the one-time reclassification permitted in connection with the
issuance of a special report issued by the FASB staff, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" ("FASB No. 115 Q&A"), academic facilities bonds were
transferred from held-to-maturity to available-for-sale securities. The academic
facilities bonds transferred had a fair market value of approximately $710
million with an amortized cost of $690 million.
The following tables summarize the academic facilities bonds at June 30,
1997 and December 31, 1996 and 1995.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
BONDS -- AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- --------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed.................... $ 758,643 $ 18,053 $ (360) $ 776,336
Variable................. 51,193 6 (300) 50,899
--------- -------- ------ ---------
Total academic facilities
bonds.................... $ 809,836 $ 18,059 $ (660) $ 827,235
========= ======== ===== =========
</TABLE>
F-14
<PAGE> 78
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
BONDS -- AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed..................... $831,711 $19,794 $ (978) $850,527
Variable.................. 84,401 10 (457) 83,954
-------- ------- ------- --------
Total academic facilities
bonds..................... $916,112 $19,804 $(1,435) $934,481
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
BONDS -- AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
---------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed.................... $591,407 $23,628 $(1,692) $613,343
Variable................. 98,394 48 (1,673) 96,769
-------- ------- ------- --------
Total academic facilities
bonds.................... $689,801 $23,676 $(3,365) $710,112
======== ======= ======= ========
</TABLE>
The following table summarizes academic facilities loans at June 30, 1997
and at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
LOANS 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Fixed rate.................. $ 465,657 $ 474,659 $ 489,913
Variable rate............... 60,619 64,191 112,209
--------- --------- ---------
Total academic facilities
loans...................... $ 526,276 $ 538,850 $ 602,122
========= ========= =========
</TABLE>
The average remaining term to maturity of academic facilities financings
was 8.0 years at both June 30, 1997 and December 31, 1996. The stated maturities
and maturities if accelerated to the put or call dates for academic facilities
bonds and loans at June 30, 1997 and December 31, 1996 are shown in the
following table:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
BONDS LOANS BONDS LOANS
------------------- -------- ------------------- ---------
MATURITY MATURITY
TO TO
STATED PUT OR STATED STATED PUT OR STATED
YEAR OF MATURITY MATURITY CALL DATE MATURITY MATURITY CALL DATE MATURITY
---------------- -------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997............ $ 19,459 $ 48,447 $ 2,048 $ 44,078 $ 97,657 $ 8,325
1998............ 46,218 104,666 8,917 77,409 127,774 14,065
1999............ 42,663 58,312 47,776 43,638 57,366 45,115
2000............ 73,936 101,145 16,270 78,588 98,515 17,368
2001............ 108,676 127,130 23,070 87,197 107,464 22,673
2002-2006....... 422,708 350,194 102,530 486,168 410,945 104,872
after 2006...... 113,575 37,341 325,665 117,403 34,760 326,432
--------- --------- --------- --------- --------- ---------
$ 827,235 $ 827,235 $ 526,276 $ 934,481 $ 934,481 $ 538,850
========= ========= ========= ========= ========= =========
</TABLE>
6. INVESTMENTS
At June 30, 1997 and December 31, 1996 and 1995, all investments with the
exception of other investments are classified as available-for-sale securities
under FAS No. 115 and carried at fair market values. The fair market value for
all available-for-sale securities, except for U.S. Treasury securities,
approximates amortized cost. The fair market value of U.S. Treasury securities
is adjusted for unrealized gains and losses on interest rate swaps, which are
held to reduce interest rate risk related to these securities ($29.2 million and
$19.5 million of unrealized gains at June 30, 1997 and December 31, 1996,
respectively, and $56.6 million of unrealized losses at December 31, 1995).
During 1995, as a result of the one-time reclassification permitted in
connection with the issuance of the FASB No. 115 Q&A, asset-backed securities,
variable corporate bonds, federal funds and bank deposits, student loan revenue
bonds and commercial paper were transferred from held-to-maturity securities to
available-for-sale securities at fair market values which approximated amortized
cost. A summary of investments at June 30, 1997 and at December 31, 1996 and
1995 follows:
F-15
<PAGE> 79
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations
U.S. Treasury securities.............. $ 955,529 $ 499,840 $ (141) $ 1,455,228
State and political subdivisions of
the United States
Student loan revenue bonds............ 184,614 5,455 (299) 189,770
Asset-backed and other securities
Asset-backed securities............... 5,112,738 6,313 (68) 5,118,983
Variable corporate bonds.............. 521,974 462 -- 522,436
Commercial paper...................... 58,030 -- -- 58,030
Federal funds & bank deposits......... 425,000 -- -- 425,000
Other securities...................... 15,600 -- -- 15,600
---------- ---------- ------ -----------
Total available-for-sale investment
securities............................ $7,273,485 $ 512,070 $ (508) $ 7,785,047
========== ========== ====== ===========
HELD-TO-MATURITY
Other.................................... $ 584,576 $ 86 $ (236) $ 584,426
========== ========== ====== ===========
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations
U.S. Treasury securities.............. $ 809,164 $ 508,758 $ (41) $ 1,317,881
State and political subdivisions of
the United States
Student loan revenue bonds............ 201,248 5,563 (431) 206,380
Asset-backed and other securities
Asset-backed securities............... 4,645,046 4,746 (167) 4,649,625
Variable corporate bonds.............. 634,925 489 -- 635,414
Commercial paper...................... 24,395 -- -- 24,395
----------- --------- ------ -----------
Total available-for-sale investment
securities............................. $ 6,314,778 $ 519,556 $ (639) $ 6,833,695
=========== ========= ====== ===========
HELD-TO-MATURITY
Other..................................... $ 601,887 $ 125 $ (267) $ 601,745
=========== ========= ====== ===========
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations
U.S. Treasury securities.............. $ 728,584 $ 596,577 $ (56,661) $ 1,268,500
State and political subdivisions of
the United States
Student loan revenue bonds............ 271,514 9,152 (4) 280,662
Asset-backed and other securities
Asset-backed securities............... 4,305,127 1,180 (334) 4,305,973
Variable corporate bonds.............. 611,344 312 (2) 611,654
Commercial paper...................... 121,410 -- -- 121,410
Federal funds and bank deposits....... 400,000 -- -- 400,000
----------- ---------- --------- -----------
Total available-for-sale investment
securities.......................... $ 6,437,979 $ 607,221 $ (57,001) $ 6,988,199
=========== ========== ========= ===========
HELD-TO-MATURITY
Other.................................... $ 625,856 $ 928 $ (97) $ 626,687
=========== ========== ========= ===========
</TABLE>
The Company sold available-for-sale securities with a carrying value of
$1.4 billion, $2.6 billion, $4.6 billion and $6.6 billion for the six months
ended June 30, 1997 and 1996 and for the years ended December 31, 1996 and 1995,
respectively. There were no sales of available-for-sale securities in 1994.
F-16
<PAGE> 80
As of June 30, 1997 and December 31, 1996, stated maturities and maturities
if accelerated to the put or call dates for investments are shown in the
following table:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
--------------------------------------------- ----------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------- --------------------------- ---------------- ---------------------------
MATURITY TO MATURITY TO
STATED STATED PUT OR STATED STATED PUT OR
YEAR OF MATURITY MATURITY MATURITY CALL DATE MATURITY MATURITY CALL DATE
- ---------------- ------------- ------------ ------------ ---------------- ----------- -----------
<C> <C> <C> <C> <C> <C> <C>
1997............ $ 82,171 $ 571,292 $ 571,292 $ 106,823 $ 216,807 $ 275,955
1998............ 13,678 342,283 392,614 12,493 278,153 278,528
1999............ 10,073 531,107 490,166 9,229 532,975 488,182
2000............ 103,564 301,554 311,621 102,879 142,401 150,981
2001............ 5,357 950,096 965,088 4,721 1,059,148 1,073,776
2002-2006....... 45,100 2,352,269 2,336,199 46,058 2,534,058 2,514,787
After 2006...... 324,633 2,736,446 2,718,067 319,684 2,070,153 2,051,486
---------- ----------- ----------- --------- ----------- -----------
$ 584,576 $ 7,785,047 $ 7,785,047 $ 601,887 $ 6,833,695 $ 6,833,695
========== =========== =========== ========= =========== ===========
</TABLE>
7. SHORT-TERM BORROWINGS
Short-term borrowings have an original or remaining term to maturity of one
year or less. The following tables summarize outstanding short-term notes at
June 30, 1997, and December 31, 1996, 1995 and 1994, the weighted average
interest rates at the end of each period, and the related average balances,
weighted average interest rates and weighted average effective interest rates,
which include the effects of related off-balance sheet financial instruments
(see Note 10) during the periods.
<TABLE>
<CAPTION>
AT JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1997
-------------------------- ----------------------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
------------ ----------- -------------- ------------ ------------
Six month floating rate notes......... $ 2,749,528 5.34% $ 2,952,202 5.37% 5.46%
Other floating rate notes............. 2,800,789 5.36 2,522,616 5.35 5.37
Discount notes........................ 4,237,503 5.76 6,046,055 5.38 5.43
Fixed rate notes...................... 6,820,497 5.94 5,033,317 5.98 5.54
Securities sold -- not yet purchased
and repurchase agreements........... 74,906 5.95 331,528 5.37 5.37
Short-term portion of long-term
notes............................... 9,166,848 5.57 10,309,073 5.67 5.51
------------ ---- ------------ ---- ----
Total short-term notes................ $ 25,850,071 5.65% $ 27,194,791 5.60% 5.48%
============ ==== ============ ==== ====
Maximum outstanding at any month
end................................... $ 29,084,281
============
<CAPTION>
AT DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1996
--------------------------- ----------------------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Six month floating rate notes.......... $ 2,699,477 5.23% $ 2,485,322 5.32% 5.42%
Other floating rate notes.............. 2,188,722 5.25 2,088,347 5.43 5.35
Discount notes......................... 2,377,976 6.43 3,072,019 5.31 5.36
Fixed rate notes....................... 3,964,777 6.01 1,211,197 6.07 5.53
Securities sold -- not yet purchased
and repurchase agreements............ -- -- 165,792 4.93 4.93
Short-term portion of long-term
notes................................ 11,286,675 5.55 11,956,008 5.75 5.45
------------ ---- ------------ ---- ----
Total short-term notes................. $ 22,517,627 5.66% $ 20,978,685 5.61% 5.43%
============ ==== ============ ==== ====
Maximum outstanding at any month
end.................................... $ 25,271,494
============
</TABLE>
F-17
<PAGE> 81
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
--------------------------- --------------------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
----------- ------------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Six month floating rate notes........ $ 2,699,595 5.64% $ 3,608,930 5.78% 5.86%
Other floating rate notes............ 1,942,360 5.82 1,221,480 5.60 5.78
Discount notes....................... 1,074,257 5.58 1,427,363 5.81 5.86
Fixed rate notes..................... 350,000 6.97 903,670 7.99 5.82
Securities sold -- not yet purchased
and repurchase agreements.......... 131,112 6.38 311,797 6.10 6.10
Short-term portion of long-term
notes.............................. 11,249,676 5.79 7,937,658 5.83 5.90
---------- ---- ----------- ---- ----
Total short-term notes............... $17,447,000 5.79% $15,410,898 5.93% 5.88%
=========== ==== =========== ==== ====
Maximum outstanding at any month
end.................................. $18,046,974
===========
<CAPTION>
AT DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1994
---------------------------- --------------------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
------------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Six month floating rate notes........ $ 3,849,125 5.39% $ 3,410,090 4.40% 4.52%
Other floating rate notes............ 811,550 5.75 596,894 3.96 4.43
Discount notes....................... 2,696,122 5.89 3,244,158 4.28 4.45
Fixed rate notes..................... 1,397,717 9.04 836,816 9.27 4.95
Securities sold -- not yet purchased
and repurchase agreements.......... 402,015 6.29 245,169 5.36 5.36
Short-term portion of long-term
notes.............................. 6,859,065 5.90 8,243,360 5.75 4.35
------------ ---- ------------ ---- ----
Total short-term notes............... $ 16,015,594 6.05% $ 16,576,487 5.29% 4.45%
============ ==== ============ ==== ====
Maximum outstanding at any month
end.................................. $ 19,030,670
============
</TABLE>
At December 31, 1996, the short-term portion of long-term notes included
issues totaling $80 million repayable in U.S. dollars, with principal repayment
obligations tied to foreign currency exchange rates. At June 30, 1997 and
December 31, 1996, the short-term portion of long-term notes also included
issues totaling $778 million and $771 million, respectively, which require the
payment of interest and principal in foreign currencies. To eliminate its
exposure to the effect of currency fluctuations on these contractual
obligations, the Company has entered into various foreign currency agreements
with independent parties (see Note 10).
To match the interest rate characteristics on short-term notes with the
rate characteristics of its assets, the Company enters into interest rate swaps
with independent parties. Under these agreements, the Company makes periodic
payments, indexed to the related asset rates, in exchange for periodic payments
which generally match the Company's interest obligations on fixed or variable
rate notes (see Note 10).
8. LONG-TERM NOTES
The following tables summarize outstanding long-term notes at June 30,
1997, and December 31, 1996 and 1995, the weighted average interest rates and
related notional amount of derivatives at the end of the periods, and the
related average balances and weighted average effective interest rates, which
include the effects of related off-balance sheet financial instruments (see Note
10), during the periods.
F-18
<PAGE> 82
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AT JUNE 30, 1997 JUNE 30, 1997
---------------------------- ----------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE NOTIONAL EFFECTIVE
ENDING INTEREST AMOUNT AVERAGE INTEREST
BALANCE RATE OF DERIVATIVES BALANCE RATE
------------ --------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due
1998-2003 ................. $ 7,158,424 5.33% $ 1,554,023 $ 7,472,062 5.46%
----------- ---- ------------ ------------ ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due
1998-2018.................. 11,481,801 6.17 18,646,147 12,131,991 5.60
Zero coupon, due 1998-2022... 339,998 8.28 362,772 333,417 7.64
Dual currency, due 1998......... 251,487 7.63 272,000 249,958 6.73
Foreign currency:
Interest bearing, due
1999-2000.................. 257,100 5.57 496,209 257,100 5.43
----------- ---- ----------- ----------- ----
Total fixed rate notes............ 12,330,386 6.25 19,777,128 12,972,466 5.67
----------- ---- ----------- ----------- ----
Total long-term notes............. $19,488,810 5.91% $21,331,151 $20,444,528 5.59%
=========== ==== =========== =========== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
AT DECEMBER 31, 1996 DECEMBER 31, 1996
-------------------- -----------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE NOTIONAL EFFECTIVE
ENDING INTEREST AMOUNT AVERAGE INTEREST
BALANCE RATE OF DERIVATIVES BALANCE RATE
------------ ----------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due
1998-2003.................. $ 8,844,825 5.27% $ 2,022,044 $12,740,190 5.46%
----------- ---- ----------- ----------- ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due
1998-2018.................. 12,928,983 6.35 21,676,042 11,971,640 5.59
Zero coupon, due 326,875 8.25 358,071 304,990 7.68
1998-2022..................
Dual currency, due 1998......... 248,443 7.63 272,000 245,569 6.65
Foreign currency:
Interest bearing, due
1999-2000.................. 257,100 5.34 495,785 577,592 5.31
Zero coupon, due 1997........ -- -- -- 183,647 5.42
----------- ---- ----------- ----------- ----
Total fixed rate notes............ 13,761,401 6.40 22,801,898 13,283,438 5.64
----------- ---- ----------- ----------- ----
Total long-term notes............. $22,606,226 5.96% $24,823,942 $26,023,628 5.55%
=========== ==== =========== =========== ====
</TABLE>
F-19
<PAGE> 83
<TABLE>
<CAPTION>
YEAR ENDED
AT DECEMBER 31, 1995 DECEMBER 31, 1995
--------------------------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE NOTIONAL EFFECTIVE
ENDING INTEREST AMOUNT AVERAGE INTEREST
BALANCE RATE OF DERIVATIVES BALANCE RATE
------------ ----------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due
1997-2002............. $16,995,853 5.58% $ 5,053,732 $ 21,998,541 5.95%
----------- ---- ----------- ------------ ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due
1997-2018............. 11,430,127 6.70 17,050,772 12,035,074 5.99
Zero coupon, due
1997-2022............. 400,023 8.27 435,001 283,282 7.99
Dual currency, due 1998.... 242,775 7.63 206,000 240,182 7.02
Foreign currency:
Interest bearing, due
1997-2000............. 767,100 4.01 1,486,130 627,900 5.78
Zero coupon, due 1997... 246,737 5.79 253,626 188,399 5.85
----------- ---- ------------ ------------ ----
Total fixed rate notes....... 13,086,762 6.59 19,431,529 13,374,837 6.02
----------- ---- ------------ ------------ ----
Total long-term notes........ $30,082,615 6.02% $ 24,485,261 $ 35,373,378 5.98%
=========== ==== ============ ============ ====
</TABLE>
At June 30, 1997 and December 31, 1996, the Company had outstanding
long-term debt issues with call features totaling $13.8 billion and $14.1
billion, respectively. As of June 30, 1997 and December 31, 1996, the stated
maturities and maturities if accelerated to the call dates for long-term notes
are shown in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
--------------------------- ----------------------------
STATED MATURITY TO STATED MATURITY TO
YEAR OF MATURITY MATURITY CALL DATE MATURITY CALL DATE
---------------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
1997............ $ -- $ 10,980,927 $ -- $ 12,794,908
1998............ 4,010,521 3,824,302 7,466,131 5,510,293
1999............ 7,952,279 2,361,092 7,676,221 2,185,610
2000............ 4,206,943 1,683,893 4,077,772 1,483,972
2001............ 2,366,570 79,200 2,465,758 79,200
2002-2022....... 952,497 559,396 920,344 552,243
----------- ----------- ----------- ------------
$19,488,810 $19,488,810 $22,606,226 $ 22,606,226
=========== =========== =========== ============
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, the Company
repurchased certain long-term notes prior to their scheduled maturity to lower
future years' interest expense. The following table summarizes these
transactions (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Maturity value..... $ 90 $ 62 $ 138
==== ==== =====
Carrying value..... $ 8 $ 8 $ 21
==== ==== =====
Premiums........... $ 7 $ 8 $ 14
==== ==== =====
</TABLE>
The Company issues debt with interest and/or principal payment
characteristics tied to foreign currency indices to attempt to minimize its cost
of funds. At June 30, 1997 and December 31, 1996 and 1995, the Company had
outstanding long-term foreign currency notes which require the payment of
principal and interest in foreign currencies, and dual currency notes which
require the payment of interest in foreign currencies. To eliminate the
corporation's exposure to the effect of currency fluctuations on these
contractual obligations, the Company has entered into various foreign currency
agreements with independent parties (see Note 10).
To match the interest rate characteristics on its long-term borrowings with
the interest rate characteristics of its assets, the Company enters into
interest rate swaps with independent parties. Under these agreements, the
Company makes periodic payments, indexed to the related asset rates, in exchange
for periodic payments which generally match the Company's interest obligations
on fixed or variable rate borrowings (see Note 10).
F-20
<PAGE> 84
9. STUDENT LOAN SECURITIZATION
For the first six months of 1997 and 1996 and for the year ended December
31, 1996 and in October 1995, SLM Funding Corporation, a wholly-owned special
purpose finance subsidiary, purchased from the GSE and sold $4.5 billion, $3
billion, $6 billion and $1 billion, respectively, of student loans to trusts
which issued floating rate student loan asset-backed securities in underwritten
public offerings. At June 30, 1997 and December 31, 1996, securitized student
loans outstanding totaled $10.0 billion and $6.3 billion, respectively.
On July 23, 1997, the U.S. Department of Education decided that the 30
basis point annual offset fee which the GSE is required to pay on student loans
which it owns does not apply to student loans that the GSE has securitized. The
Department of Education was under a court order since January 10, 1997 to
announce its final position on the application of the offset fee on securitized
loans by July 31, 1997. The GSE initially filed suit in the U.S. District Court
for the District of Columbia in April 1995 challenging the Secretary of
Education's attempt to apply the offset fee to securitized loans. The GSE
prevailed, and the Court of Appeals ruled that the fee applies only to loans
that the GSE owns and remanded the case to the District Court with instructions
to remand the matter to the Secretary of Education. In addition, the Court of
Appeals upheld the constitutionality of the offset fee, which applies annually
with respect to the principal amount of student loans that the GSE holds on
balance sheet and that were acquired on or after August 10, 1993.
Based upon the favorable final ruling in this matter, the contingent gain
of approximately $97 million pre-tax that had not been recognized in income
through June 30, 1997 will now be released and recognized in income in the third
quarter. All future securitization gains will be calculated without
consideration of the offset fee.
In October of 1997, the U.S. Supreme Court rejected the GSE's appeal of a
U.S. Court of Appeals ruling that upheld the constitutionality of the offset
fee on loans owned by the GSE.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative Financial Instruments Held or Issued for Purposes Other than Trading
The Company enters into various financial instruments with off-balance
sheet risk in the normal course of business primarily to reduce interest rate
risk and foreign currency exposure on certain borrowings. These financial
instruments include interest rate swaps, interest rate cap and collar
agreements, foreign currency swaps, forward currency exchange agreements,
options on currency exchange agreements, options on securities and financial
futures contracts.
The Company enters into three general types of interest rate swaps under
which it pays the following: 1) a floating rate in exchange for a fixed rate
(standard swaps); 2) a fixed rate in exchange for a floating rate (reverse
swaps); and 3) a floating rate in exchange for another floating rate, based upon
different market indices (basis/reverse basis swaps). At June 30, 1997, the
Company had outstanding $19.3 billion, $1.1 billion, and $16.4 billion of
notional principal amount of standard swaps, reverse swaps, and basis/reverse
basis swaps, respectively. Of the Company's $36.8 billion of interest rate swaps
outstanding at June 30, 1997, $35.7 billion was related to debt and $1.1 billion
was related to assets. At December 31, 1996, the Company had outstanding $18.2
billion, $1.1 billion, and $17.8 billion of notional principal amount of
standard swaps, reverse swaps, and basis/reverse basis swaps, respectively. Of
the Company's $37.1 billion of interest rate swaps outstanding at December 31,
1996, $36 billion was related to debt and $1.1 billion was related to assets.
The following tables summarize the ending balances of the borrowings that
have been matched with interest rate swaps and foreign currency agreements at
June 30, 1997, and December 31, 1996 and 1995 (dollars in billions).
F-21
<PAGE> 85
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------------------------------------------------------
SWAPS
-------------------------------------------
FOREIGN
BASIS/ CURRENCY TOTAL
BORROWINGS STANDARD REVERSE REVERSE BASIS AGREEMENTS DERIVATIVES
---------- -------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM NOTES
Six month floating rate notes....... $ -- $ -- $ -- $ -- $ -- $ --
Other floating rate notes........... .3 -- -- .5 -- .5
Discount notes...................... -- -- -- -- -- --
Fixed rate notes.................... 6.0 6.0 -- 3.7 -- 9.7
Securities sold-- not yet
purchased and repurchase
agreements........................ -- -- -- -- -- --
Short-term portion of long-term
notes............................. 3.6 1.7 -- 2.7 .7 5.1
----- ----- ----- ------ ----- ------
Total short-term notes......... 9.9 7.7 -- 6.9 .7 15.3
----- ----- ----- ------ ----- ------
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing............... 1.0 .3 -- 1.3 -- 1.6
Fixed rate notes:
U.S. dollar denominated:
Interest bearing............... 10.9 10.9 -- 7.7 -- 18.6
Zero coupon.................... .2 .2 -- .2 -- .4
Dual currency..................... .2 .2 -- .1 -- .3
Foreign currency:
Interest bearing............... .3 -- -- .2 .3 .5
----- ----- ----- ------ ----- ------
Total long-term notes........ 12.6 11.6 -- 9.5 .3 21.4
----- ----- ----- ------ ----- ------
Total notes.................. $22.5 $19.3 $ -- $ 16.4 $ 1.0 $ 36.7
===== ===== ===== ====== ===== ======
</TABLE>
F-22
<PAGE> 86
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------------------------
SWAPS
------------------------------------------
FOREIGN
BASIS/ CURRENCY TOTAL
BORROWINGS STANDARD REVERSE REVERSE BASIS AGREEMENTS DERIVATIVES
---------- -------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM NOTES
Six month floating rate notes....... $ .3 $ -- $ -- $ .3 $ -- $ .3
Other floating rate notes........... .3 -- -- .6 -- .6
Discount notes...................... -- -- -- -- -- --
Fixed rate notes.................... 3.4 3.4 -- 2.2 -- 5.6
Securities sold-- not yet
purchased and repurchase
agreements........................ -- -- -- -- -- --
Short-term portion of long-term
notes............................. 4.5 1.8 -- 3.2 .9 5.9
----- ----- ----- ----- ----- -----
Total short-term notes........ 8.5 5.2 -- 6.3 .9 12.4
----- ----- ----- ----- ----- -----
LONG-TERM NOTES
Floating rate notes:................
U.S. dollar denominated:
Interest bearing............... 1.4 .3 -- 1.8 -- 2.1
Fixed rate notes:...................
U.S. dollar denominated:
Interest bearing............... 12.3 12.3 -- 9.3 -- 21.6
Zero coupon.................... .2 .2 -- .1 -- .3
Dual currency..................... .2 .2 -- .1 -- .3
Foreign currency:
Interest bearing............... .3 -- -- .2 .3 .5
Zero coupon.................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total long-term notes........ 14.4 13.0 -- 11.5 .3 24.8
----- ----- ----- ----- ----- -----
Total notes.................. $22.9 $18.2 $ -- $17.8 $ 1.2 $37.2
===== ===== ===== ===== ===== =====
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------------------------------------------
SWAPS
------------------------------------------
FOREIGN
BASIS/ CURRENCY TOTAL
BORROWINGS STANDARD REVERSE REVERSE BASIS AGREEMENTS DERIVATIVES
---------- -------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM NOTES
Six month floating rate notes....... $ -- $ -- $ -- $ -- $ -- $ --
Other floating rate notes........... 1.5 -- -- 2.8 -- 2.8
Discount notes...................... -- -- -- -- -- --
Fixed rate notes.................... .3 .3 -- -- -- .3
Securities sold-- not yet
purchased and repurchase
agreements........................ -- -- -- -- -- --
Short-term portion of long-term
notes............................. 5.7 1.4 .3 6.7 .3 8.7
----- ---- ---- ----- ---- -----
Total short-term notes......... 7.5 1.7 .3 9.5 .3 11.8
----- ---- ---- ----- ---- -----
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing............... 3.9 .9 -- 4.1 -- 5.0
Fixed rate notes:
U.S. dollar denominated:
Interest bearing............... 10.8 10.8 -- 6.1 .2 17.1
Zero coupon.................... .3 .3 -- .2 -- .5
Dual currency..................... .2 .2 -- -- -- .2
Foreign currency:
Interest bearing............... .8 -- -- .7 .8 1.5
Zero coupon .2 -- -- -- .2 .2
----- ----- ---- ----- ---- -----
Total long-term notes........ 16.2 12.2 -- 11.1 1.2 24.5
----- ----- ---- ----- ---- -----
Total notes.................. $23.7 $13.9 $ .3 $20.6 $1.5 $36.3
===== ===== ==== ===== ==== =====
</TABLE>
The following table summarizes the activity for the Company's interest rate
swaps, foreign currency agreements and futures contracts held or issued for
purposes other than trading for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997 (dollars in millions).
F-23
<PAGE> 87
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL
-----------------------------
FOREIGN FUTURES
INTEREST RATE CURRENCY CONTRACT
SWAPS AGREEMENTS AMOUNTS
-------------- ----------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993..... $ 23,253 $ 1,500 $ 1,805
Issuances/Opens ............. 15,402 510 4,437
Maturities/Expirations ...... (9,518) (575) (3,088)
Terminations/Closes ......... (99) (37) (2,598)
-------- -------- --------
Balance, December 31, 1994..... 29,038 1,398 556
Issuances/Opens ............. 19,549 466 2,370
Maturities/Expirations ...... (10,634) (380) (535)
Terminations/Closes ......... (1,773) -- (2,211)
-------- -------- --------
Balance, December 31, 1995..... 36,180 1,484 180
Issuances/Opens ............. 14,571 14 2,631
Maturities/Expirations ...... (13,369) (310) (708)
Terminations/Closes ......... (300) -- (1,925)
-------- -------- --------
Balance, December 31, 1996..... 37,082 1,188 178
Issuances/Opens ............. 4,840 7 1,958
Maturities/Expirations ...... (5,094) (160) (510)
Terminations/Closes ......... -- -- (625)
-------- -------- --------
Balance, June 30, 1997 ........ $ 36,828 $ 1,035 $ 1,001
======== ======== ========
</TABLE>
Interest Rate Swaps
Net payments related to the debt-related swaps are recorded in interest
expense. For the six months ended June 30, 1997 and 1996 and for the years ended
December 31, 1996, 1995 and 1994, the Company received net payments on all
debt-related swaps reducing interest expense by $66 million, $89 million, $165
million, $94 million and $262 million, respectively.
As of June 30, 1997 and December 31, 1996, stated maturities of interest
rate swaps and maturities if accelerated to the put dates, are shown in the
following table (dollars in millions). The maturities of interest rate swaps
generally coincide with the maturities of the associated assets or borrowings.
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
--------------------------- ----------------------------
STATED MATURITY TO STATED MATURITY TO
YEAR OF MATURITY MATURITY PUT DATE MATURITY PUT DATE
---------------- -------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
1997............ $ 4,671 $10,949 $ 7,599 $15,161
1998............ 9,986 10,550 7,102 7,001
1999............ 10,816 8,100 10,541 7,925
2000............ 6,781 4,760 7,225 4,560
2001............ 3,135 1,350 3,235 1,350
2002-2008....... 1,439 1,119 1,380 1,085
------- ------- ------- -------
$36,828 $36,828 $37,082 $37,082
======= ======= ======= =======
</TABLE>
Foreign Currency Agreements
At December 31, 1996 and 1995, the Company had borrowings repayable in U.S.
dollars, with principal repayment obligations tied to foreign currency exchange
rates of $80 million and $235 million, respectively. At June 30,1997 and
December 31, 1996 and 1995, the Company also had borrowings with principal
repayable in foreign currencies of $1.0 billion. Such debt issuances were hedged
by forward currency exchange agreements, foreign currency swaps, and options on
currency exchange agreements. Such agreements typically mature concurrently with
the maturities of the debt. At both June 30, 1997 and December 31, 1996, the
Company also had outstanding $1.0 billion of notional principal in foreign
currency swaps. Also, at December 31, 1996, the Company had outstanding $80
million of notional principal in foreign currency exchange agreements and in
foreign currency options. The following table summarizes the outstanding amount
of these borrowings and their currency translation values at June 30, 1997 and
December 31, 1996 and 1995, using spot rates at the respective dates (dollars in
millions).
F-24
<PAGE> 88
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Carrying value of outstanding foreign currency debt... $1,035 $1,108 $1,249
Currency translation value of outstanding foreign
currency debt........................................ 949 1,002 1,149
</TABLE>
Futures Contracts
The Company enters into financial futures contracts to hedge the risk of
future interest rate changes. The contracts are typically anticipatory hedges of
debt to be issued to fund the Company's assets, mainly the portfolio of student
loans in the PLUS program. These student loans pay interest that are indexed to
the one-year Treasury bill, reset annually on the final auction prior to June 1.
The gains and losses on these hedging transactions are deferred and included in
other assets and will be recognized as an adjustment of interest expense. At
June 30, 1997 and December 31, 1996 and 1995, the futures contracts sold by the
Company hedged approximately $1 billion, $178 million and $180 million,
respectively, of anticipated funding. Approximately $1 million and $2 million of
realized losses have been deferred and are being amortized over the life of the
underlying debt at June 30, 1997 and December 31, 1996, respectively, related to
futures contracts. At December 31, 1995, approximately $493,000 of realized
gains related to futures contracts was deferred.
Derivative Financial Instruments Held or Issued for Trading Purposes
From time to time the Company maintains a small number of active trading
positions in derivative financial instruments which are designed to generate
additional income based on market conditions. Trading results for these
positions were immaterial to the Company's financial statements for the six
months ended June 30, 1997 and 1996 and for the years ended December 31, 1996,
1995 and 1994. During December 1995, the Company entered into a derivative
contract of $1.5 billion notional amount whose value is determined by both the
market value and the yield of certain AAA rated variable rate asset-backed
securities. The contract, which had an original maturity date of January 1997,
was extended to January 1998. The mark-to-market gain on this contract, which is
included in gains/(losses) on sales of securities in the Consolidated Statements
of Income, was $3 million, $2 million, $4 million and immaterial for the six
months ended June 30, 1997 and 1996 and for the years ended December 31, 1996
and 1995, respectively.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires estimation of the fair values of financial instruments. The following
is a summary of the assumptions and methods used to estimate those values.
Student Loans
Fair value was determined by analyzing amounts which the Company has paid
recently to acquire similar loans in the secondary market.
Warehousing Advances and Academic Facilities Financings
The fair values of both warehousing advances and academic facilities
financings were determined through standard bond pricing formulas using current
interest rates and credit spreads.
Cash and Investments
For investments with remaining maturities of three months or less, carrying
value approximated fair value. Investments in U.S. Treasury securities were
valued at market quotations. All other investments were valued through standard
bond pricing formulas using current interest rates and credit spreads.
F-25
<PAGE> 89
Short-term Borrowings and Long-term Notes
For borrowings with remaining maturities of three months or less, carrying
value approximated fair value. Where available the fair value of financial
liabilities was determined from market quotations. If market quotations were
unavailable standard bond pricing formulas were applied using current interest
rates and credit spreads.
Off-balance Sheet Financial Instruments
The fair values of off-balance sheet financial instruments, including
interest rate swaps, interest rate cap and collar agreements, foreign currency
swaps, forward exchange agreements and financial futures contracts, were
estimated at the amount that would be required to terminate such agreements,
taking into account current interest rates and credit spreads.
The following table summarizes the fair values of the Company's financial
assets and liabilities, including off-balance sheet financial instruments
(dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
JUNE 30, 1997 1996 1995
--------------------------------- ------------------------------ --------------------------------
FAIR CARRYING FAIR CARRYING FAIR CARRYING
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
------- -------- ---------- ----- ----- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Student loans ........... $ 31,779 $ 31,488 $ 291 $ 34,005 $ 33,754 $ 251 $ 34,551 $ 34,336 $ 215
Warehousing advances .... 2,488 2,495 (7) 2,793 2,790 3 3,878 3,865 13
Academic facilities
financings ............ 1,358 1,353 5 1,473 1,473 -- 1,347 1,313 34
Cash and investments .... 10,593 10,593 -- 7,706 7,706 -- 8,868 8,867 1
------- ------- ------- ------- ------- ------- ------- ------- -------
Total earning assets .... 46,218 45,929 289 45,977 45,723 254 48,644 48,381 263
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST BEARING
LIABILITIES
Short-term borrowings ... 25,827 25,850 23 22,457 22,518 61 17,423 17,447 24
Long-term notes ......... 19,385 19,489 104 22,519 22,606 87 30,252 30,083 (169)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest bearing
liabilities ........... 45,212 45,339 127 44,976 45,124 148 47,675 47,530 (145)
------- ------- ------- ------- ------- ------- ------- ------- -------
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest rate swaps ..... (41) -- (41) (21) -- (21) 245 -- 245
Forward exchange agreements
and foreign currency
swaps.................. (141) -- (141) (161) -- (161) (184) -- (184)
Warehousing advance
commitments ........... -- -- -- -- -- -- -- -- --
Academic facilities
financing commitments.. -- -- -- -- -- -- -- -- --
Letters of credit ....... -- -- -- -- -- -- -- -- --
------- ------- -------
Excess of fair value over
carrying value ........ $ 234 $ 220 $ 179
======= ======= =======
</TABLE>
At June 30, 1997 and December 31, 1996 and 1995, substantially all interest
rate swaps and foreign exchange agreements and foreign currency swaps were
hedging liabilities.
12. COMMITMENTS AND CONTINGENCIES
The Company has committed to purchase student loans during specified
periods and to lend funds under the warehousing advance commitment, academic
facilities financing commitment and letters of credit programs. Letters of
credit support the issuance of state student loan revenue bonds. They represent
unconditional guarantees of the Company to repay holders of the bonds in the
event of a default. In the event that letters of credit are drawn upon, such
loans are collateralized by the student loans underlying the bonds.
F-26
<PAGE> 90
Commitments outstanding are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Student loan purchase commitments $19,548,570 $15,845,821 $14,244,234
Warehousing advance commitments.. 3,403,288 2,367,288 698,019
Academic facilities financing
commitments.................... 21,600 9,930 6,330
Letters of credit ............... 4,624,695 3,743,892 3,063,390
----------- ----------- -----------
$27,598,153 $21,966,931 $18,011,973
=========== =========== ===========
</TABLE>
F-27
<PAGE> 91
The following schedules summarize expirations of commitments outstanding at
June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
----------------------------------------------------- ---------------------------------------------------
ACADEMIC ACADEMIC
STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF
PURCHASES ADVANCES FINANCINGS CREDIT PURCHASES ADVANCES FINANCINGS CREDIT
--------- ---------- ---------- ---------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997....... $ 1,141,198 $ 6,500 $ 250 $ -- $ 3,299,173 $ 348,072 $1,230 $ 367,829
1998....... 2,284,320 194,745 9,650 30,346 1,793,359 172,647 -- 1,122,724
1999....... 6,656,026 40,000 11,700 167,428 4,367,745 103,609 8,700 861,630
2000....... 1,423,172 52,387 -- 266,313 272,743 34,859 -- 826,690
2001....... -- -- 0 271,306 -- -- -- 207,620
2002-2017.. 8,043,854 3,109,656 0 3,889,302 6,112,801 1,708,101 -- 357,399
----------- ---------- -------- ---------- ----------- ---------- ------ ----------
Total.. $19,548,570 $3,403,288 $ 21,600 $4,624,695 $15,845,821 $2,367,288 $9,930 $3,743,892
=========== ========== ======== ========== =========== ========== ====== ==========
</TABLE>
LITIGATION
On June 11, 1996, Orange County, California filed a complaint against the
Company in the U.S. Bankruptcy Court for the Central District of California. The
case is currently pending in the U.S. District Court for the Central District of
California. The complaint alleges that the Company made fraudulent
representations and omitted material facts in offering circulars on various bond
offerings purchased by Orange County, which contributed to Orange County's
market losses and subsequent bankruptcy. The complaint seeks to hold SLMA
responsible for losses resulting from Orange County's bankruptcy, but does not
specify the amount of damages claimed. In addition, the complaint includes
counts under the California Corporations Code, as well as a count for common law
fraud. The Company believes that the complaint is without merit and intends to
defend the case vigorously. At this time, Management believes the impact of the
lawsuit will not be material to the Company.
13. MINORITY INTEREST
As part of the GSE's privatization, SLM Holding Corporation became the
parent company of, and successor to, the GSE on August 7, 1997. As a result, the
GSE's preferred stock is now reflected as a minority interest in the
consolidated financial statements. The financial statements for prior periods
have been restated to reflect this change.
The GSE's 4.3 million outstanding shares of non-voting adjustable rate
cumulative preferred stock, par value $50.00 per share, pay cumulative quarterly
dividends at a per annum rate of 4.5 percentage points below the highest yield
of certain United States Treasury obligations. However, the dividend rate for
any dividend period will not be less than 5 percent per annum nor greater than
14 percent per annum. The dividend rate was 5 percent for the six months ended
June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994. The
stock is redeemable, at the option of the GSE, in whole or in part, at $50.00
per share plus accrued dividends.
In May 1986, the Board of Directors authorized management, under certain
circumstances, to repurchase up to $50 million of the GSE's adjustable rate
cumulative preferred stock at market prices. As of June 30, 1997 and December
31, 1996, the GSE had repurchased 722,350 shares at an average price of $45.23
per share, totaling $32.7 million.
14. COMMON STOCK
The Board of Directors has reserved 11 million common shares for issuance
under various compensation and benefit plans with 6 million shares remaining at
both June 30, 1997 and December 31, 1996.
The Company has engaged in repurchases of its common stock since 1986. In
December 1996, the Company retired 59 million shares of common stock held as
treasury stock at an average price of $44.36. As a result, treasury stock
decreased by $2.6 billion with a corresponding decrease of $12 million to common
stock, par; $568 million to additional paid-in capital; and $2.0 billion to
retained earnings. As of June 30, 1997 and December 31, 1996, the Company held
as treasury stock 13.8 million common shares purchased at an average price of
$53.41 and 12 million common shares purchased at an average price of $44.75,
respectively.
F-28
<PAGE> 92
Earnings per common share are computed based on net income divided by the
weighted average common and common equivalent shares outstanding for the period.
Average common and common equivalent shares outstanding for the six months ended
June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994
totaled 53,316,841; 56,782,781; 55,811,279; 67,450,889; and 79,776,993,
respectively.
15. STOCK OPTION PLANS
The Company maintains a stock option plan for key employees which permits
grants of stock options for the purchase of common stock with exercise prices
equal to the market value on the date of the grant. Stock options are
exercisable one year after date of grant and have ten year terms. The Company's
1993-1998 Employee Stock Option Plan authorized the grant of options for up to
5.1 million shares of common stock. The following table summarizes employee
stock options plan activity.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period...................... 931,857 $60.80 1,094,975 $48.80 931,255 $54.49 698,550 $58.80
Granted....................... 353,800 107.92 325,545 73.08 517,800 37.15 367,150 48.03
Exercised..................... (360,412) 63.29 (485,363) 41.88 (223,180) 42.76 (13,445) 31.56
Canceled...................... (15,750) 108.00 (3,300) 73.00 (130,900) 53.52 (121,000) 62.33
-------- ------ ------ ----- --------- ------ -------- -----
Outstanding at end of
period...................... 909,495 $77.32 931,857 $60.80 1,094,975 $48.80 931,255 $54.49
======= ------ ======= ------ ========= ------ ======== ------
Exercisable at end of
period ..................... 570,195 $59.14 609,612 $54.30 641,075 $57.09 587,855 $58.34
======= ------ ======= ------ ========= ------ ======== ------
Weighted-average fair
value of options granted during
the period.................. $47.10 $25.87 $10.18
------ ------ ------
</TABLE>
The following table summarizes the number, weighted-average of exercise
prices (which ranged from $34 to $121) and weighted-average remaining
contractual life of the employee stock options outstanding at June 30, 1997.
<TABLE>
<CAPTION>
AVERAGE REMAINING
EXERCISE PRICES OPTIONS AVERAGE PRICE CONTRACTUAL LIFE
--------------- -------- ------------- -----------------
<S> <C> <C> <C>
Under $40 119,720 $36.73 7.0 yrs.
$40-$80 451,675 65.12 6.5
Above $80 338,100 108.01 9.5
------- ------ --------
Total 909,495 $77.33 7.5 yrs.
======= ------ --------
</TABLE>
The following table summarizes the number, weighted-average of exercise
prices (which ranged from $29 to $95) and weighted-average remaining contractual
life of the employee stock options outstanding at December 31, 1996.
<TABLE>
<CAPTION>
AVERAGE REMAINING
EXERCISE PRICES OPTIONS AVERAGE PRICE CONTRACTUAL LIFE
--------------- -------- ------------- -----------------
<S> <C> <C> <C>
Under $40 178,938 $36.63 7.5 yrs.
$40-$80 751,419 66.48 7.0
Above $80 1,500 94.75 10.0
------- ------ ---------
Total 931,857 $60.80 7.0 yrs.
======= ------ ---------
</TABLE>
In May 1996, shareholders approved the Board of Directors Stock Option
Plan, which authorized the grant of options to acquire up to 200,000 shares of
common stock. Options under this plan are exercisable on the date of grant and
have ten year terms. The following table summarizes the Board of Directors Stock
Option Plan activity.
F-29
<PAGE> 93
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------------- ------------------------
AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- -------
<S> <C> <C> <C>
Outstanding at beginning of period................ 63,000 $ 73.00 -- $ --
Granted........................................... 21,000 108.00 63,000 73.00
Exercised ........................................ (17,850) 73.00 -- --
Canceled ......................................... -- -- -- --
------ ------- ------ ------
Outstanding at end of period...................... 66,150 $ 84.11 63,000 $73.00
====== ------- ====== ------
Exercisable at end of period...................... 66,150 $ 84.11 63,000 $73.00
====== ------- ====== ------
Weighted-average fair value of options granted
during the period............................... $ 47.26 $25.84
------ ------
</TABLE>
At both June 30, 1997 and December 31, 1996, the outstanding Board of
Directors options had a weighted-average remaining contractual life of 9 years.
The Company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which results in no compensation expense for stock options granted
under the plans.
The following table summarizes pro forma disclosures for the six months
ended June 30, 1997 and 1996 and for the years ended December 31, 1996 and 1995,
as if the Company had accounted for employee and Board of Directors stock
options granted subsequent to December 31, 1994 under the fair market value
method as set forth in FAS No. 123, "Accounting for Stock-Based Compensation."
The fair value for these options was estimated at the date of grant using the
Extended Binomial Options Pricing Model, a variation of the Black-Sholes option
pricing model, with the following weighted average assumptions for the six
months ended June 30, 1997 and 1996 and for the years ended December 31, 1996
and 1995, respectively: risk-free interest rate of 7 percent, 6 percent, 6
percent and 8 percent; volatility factor of the expected market price of the
Company's common stock of 30 percent, 29 percent, 29 percent and 29 percent;
dividend growth rate of 8 percent; vesting period of one year from date of
grant; and time of exercise-expiration date.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- ------------------------
1997 1996 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income........................... $232,654 $200,528 $408,716 $355,585
======== ======== ======== ========
Pro forma net income................. $227,687 $197,480 $402,427 $352,806
======== ======== ======== ========
Earnings per common share............ $ 4.36 $ 3.53 $ 7.32 $ 5.27
======== ======== ======== ========
Pro forma earnings per common
share................................ $ 4.27 $ 3.48 $ 7.21 $ 5.23
======== ======== ======== ========
</TABLE>
16. BENEFIT PLANS
Pension Plans
The Company has a qualified noncontributory defined benefit pension
plan (the "Plan") covering substantially all employees who meet certain
service requirements. The Plan's benefits are based on years of service and the
employee's compensation. Effective April 1, 1995, the Company modified the Plan
to compute plan benefits on 5-year highest average base salary, a maximum
service accrual period of 30 years, and normal retirement age of 62. Prior to
these modifications, plan benefits were computed based on 3-year highest
average base salary, a maximum service accrual period of 26.67 years, and a
normal retirement age of 60. The Plan is funded annually based on the maximum
amount that can be deducted for federal income tax purposes. The assets of the
plan are primarily invested in equities and fixed income securities.
The following table sets forth the Plan's actuarially determined funded
status and amounts recognized in the Company's consolidated financial
statements.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated Benefits:
Actuarial present value of accumulated benefit
obligations:
Vested...................................... $39,949 $34,232
Nonvested................................... 5,099 6,840
------- -------
Total.................................... $45,048 $41,072
======= =======
Pension Asset (Liability):
Actuarial present value of projected benefit
obligation for
</TABLE>
F-30
<PAGE> 94
<TABLE>
<S> <C> <C>
service rendered to date...................... $ (75,106) $ (72,361)
Plan assets at fair value........................ 75,587 54,222
--------- ----------
Plan assets (less than) greater than projected
benefit obligation.......................... 481 (18,139)
Unrecognized prior service cost.................. (4,023) (4,444)
Unrecognized transition obligation............... 1,286 1,500
Unrecognized (gain) loss......................... (7,149) 12,613
--------- ----------
Accrued pension cost.......................... $ (9,405) $ (8,470)
========= ==========
</TABLE>
In determining the projected benefit obligation, the weighted-average
assumed discount rate used was 7.5 percent in 1996, 7.0 percent in 1995 and 8.0
percent in 1994, while the assumed average rate of compensation increase was 6.0
percent in 1996 and in 1995 and 7.0 percent in 1994. The expected long-term rate
of return on plan assets used in determining net periodic pension cost was 8.0
percent in 1996, 1995 and 1994.
F-31
<PAGE> 95
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.................................... $ 8,369 $ 8,867 $ 6,737
Interest cost on project benefit
obligations................................. 5,055 3,659 3,345
Actual return on plan assets................ (13,009) (11,736) (1,228)
Net amortization and deferral............... 8,429 8,327 (220)
-------- -------- -------
Net periodic pension cost................. $ 8,844 $ 9,117 $ 8,634
======== ======== =======
</TABLE>
The Company maintains a non-qualified pension plan for certain key
employees as designated by the Board of Directors and a nonqualified pension
plan for its Board of Directors. Total pension expense for these plans in 1996,
1995 and 1994 was $11.9 million, $11.2 million and $11.7 million, respectively.
Thrift and Savings Plans
The Company's Thrift and Savings Plan ("the Plan") is a defined
contribution plan that is intended to qualify under section 401(k) of the
Internal Revenue Code. The Plan covers substantially all employees who have been
employed by the Company for one or more years and have completed at least a
thousand hours of service. Participating employees may contribute up to 6
percent of base salary and these contributions are matched 100 percent by the
Company.
The Company also maintains a non-qualified Thrift and Savings Plan to
assure that designated participants receive the full amount of benefits to which
they would have been entitled under the Thrift and Savings Plan but for limits
on compensation and contribution levels imposed by the Internal Revenue Code.
Total expenses related to the Thrift and Savings Plan was $5.0 million,
$4.9 million and $4.8 million in 1996, 1995 and 1994, respectively.
17. FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax liabilities and assets as of June 30, 1997 and
December 31, 1996 and 1995 under the liability method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Leases.......................... $347,987 $351,093 $344,438
Unrealized investment gains..... 185,569 188,050 199,686
Other........................... 36,441 32,669 19,574
-------- -------- -------
569,997 571,812 563,698
-------- -------- -------
Deferred tax assets:
ExportSS operating costs........ 66,459 68,874 54,953
Student loan reserves........... 50,173 47,004 31,566
In-substance defeasance
transactions................... 30,627 30,788 31,014
Asset valuation allowances...... 24,490 24,842 25,512
Securitization transactions..... 19,473 13,076 --
Other........................... 34,440 31,211 25,522
-------- -------- --------
225,662 215,795 168,567
-------- -------- --------
Net deferred tax liabilities...... $344,335 $356,017 $395,131
======== ======== ========
</TABLE>
The GSE is exempt from all state, local and District of Columbia taxes
except for real property taxes. Deferred tax assets on in-substance defeasance
transactions resulted from premiums on the debt extinguished. These premiums are
capitalized and amortized over the life of the defeasance trust for tax
purposes.
F-32
<PAGE> 96
Reconciliations of the statutory United States federal income tax rates to
the Company's effective tax rate follow:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE YEARS ENDED DECEMBER
30, 31,
-------------------- ----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statutory rate....................... 35.0% 35.0% 35.0% 35.0% 35.0%
Tax exempt interest and dividends
received deduction................. (3.3) (3.5) (3.8) (6.4) (5.7)
Other, net........................... (1.0) (1.2) (1.3) (1.2) (.4)
---- ---- ---- ---- ---
Effective tax rate................... 30.7% 30.3% 29.9% 27.4% 28.9%
==== ==== ==== ==== ====
</TABLE>
Federal income taxes paid for the six months ended June 30, 1997 and 1996
and for the years ended December 31, 1996, 1995 and 1994 were $110 million, $109
million, $202 million, $122 million and $188 million, respectively.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------------------------------
FIRST SECOND FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.............. $199,026 $207,461 $232,679 $219,561 208,988 $205,208
Other income..................... 75,940 78,055 21,754 27,899 35,211 62,052
Operating expenses............... 101,559 115,283 98,773 100,145 100,075 106,659
Federal income taxes............. 54,570 51,069 47,968 44,340 42,877 48,313
Minority interest in net
earnings of subsidiary.......... 2,674 2,673 2,673 2,674 2,673 2,674
-------- -------- -------- -------- ------- --------
Income before premiums on debt
extinguished.................... 116,163 116,491 105,019 100,301 98,574 109,614
Premiums on debt extinguished,
net of tax...................... -- -- (4,792) -- -- --
-------- -------- -------- -------- ------- --------
Net income........................ $116,163 $116,491 $100,227 $100,301 $98,574 $109,614
======== ======== ======== ======== ======= ========
Earnings per common share before
premiums on debt
extinguished.................... $ 2.17 $ 2.20 $ 1.82 $ 1.79 $ 1.79 $ 2.01
======== ======== ======== ======== ======= ========
Earnings per common share......... $ 2.17 $ 2.20 $ 1.74 $ 1.79 $ 1.79 $ 2.01
======== ======== ======== ======== ======= ========
<CAPTION>
1995
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- -------
<S> <C> <C> <C> <C>
Net interest income............................. $221,147 $222,694 $227,952 $228,948
Other operating income.......................... 321 7,883 8,971 33,238
Operating expenses.............................. 101,768 111,368 118,325 107,240
Federal income taxes............................ 30,906 31,187 32,031 47,139
Minority interest in net earnings
of subsidiary................................. 2,674 2,673 2,674 2,673
----- ----- ----- -----
Income before premiums on debt extinguished..... 86,120 85,349 83,893 105,134
Premiums on debt extinguished, net of tax....... -- -- -- (4,911)
-------- -------- -------- -------
Net income...................................... $ 86,120 $ 85,349 $ 83,893 $100,223
======== ======== ======== ========
Earnings per common share before premiums on
debt extinguished............................. $ 1.17 $ 1.20 $ 1.28 $ 1.76
======== ======== ======== ========
Earnings per common share....................... $ 1.17 $ 1.20 $ 1.28 $ 1.67
======== ======== ======== ========
</TABLE>
19. COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION
In 1987, the Company assisted in creating the College Construction Loan
Insurance Association ("Connie Lee"), a private, for-profit, stockholder-owned
corporation, authorized by Congress to insure and reinsure educational
facilities obligations. At both June 30, 1997 and December 31, 1996, the
carrying value of the Company's investment in Connie Lee was approximately $44
million, and as of June 30, 1997 and December 31, 1996, through its ownership
of preferred and common stock and through agreements with other shareholders,
the Company effectively controlled 42 percent and 36 percent, respectively, of
Connie Lee's outstanding voting stock. In February 1997, Connie Lee converted
to a private, shareholder-controlled corporation pursuant to statutory
provisions under Pub. L. No. 104-208 that required Connie Lee to repurchase
shares of its stock owned by the U.S. government at a purchase price determined
by an independent appraisal. On February 28, 1997 the Company loaned Connie Lee
$18 million to repurchase the shares. On May 27, 1997 the term of this loan was
extended to June 29, 1997 and on June 26, 1997, the loan was further extended
to December 29, 1997.
F-33
<PAGE> 97
<TABLE>
<S> <C>
- ---------------------------------------------------- -------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS SLM HOLDING CORPORATION
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
SELLING STOCKHOLDERS. NEITHER THE DELIVERY OF THIS 555,015 SHARES OF COMMON STOCK
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE --------------
INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION PROSPECTUS
IS GIVEN. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO --------------
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------------
TABLE OF CONTENTS
Page
----
Available Information . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . 7
Use of Proceeds . . . . . . . . . . . . . . 8 OCTOBER 21, 1997
Selling Stockholders . . . . . . . . . . . 8
Plan of Distribution . . . . . . . . . . . 8
Business . . . . . . . . . . . . . . . . . 10
Regulation . . . . . . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . 22
Selected Financial Data . . . . . . . . . . 23
Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . . 24
Description of the Common Stock . . . . . . 50
Management . . . . . . . . . . . . . . . . 51
Director Compensation . . . . . . . . . . . 55
Executive Officers of the Company . . . . . 56
Executive Compensation . . . . . . . . . . 56
Ownership of the Common Stock . . . . . . . 60
Legal Matters . . . . . . . . . . . . . . . 61
Experts . . . . . . . . . . . . . . . . . . 61
==================================================== ====================================================
</TABLE>
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Company in
connection with the offering of the Shares being registered, other than
discounts and commissions. The Selling Stockholders will not share any portion
of these expenses.
<TABLE>
<S> <C>
Registration Fee . . . . . . . . . . . . . . . . $27,056.98
Printing Expenses . . . . . . . . . . . . . . . . 12,000.00
Legal Fees and Expenses . . . . . . . . . . . . . 30,000.00
Accounting Fees and Expenses . . . . . . . . . . 30,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . 943.02
------------
Total . . . . . . . . . . . . . . . . . $100,000.00
============
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article XIII of the Registrant's By-Laws provides for indemnification of the
officers and directors of SLM Holding Corporation to the fullest extent
permitted by applicable law. Section 145 of the Delaware General Corporation
Law provides, in relevant part, that a corporation organized under the laws of
Delaware shall have the power, and in certain cases the obligation, to
indemnify any person who was or is a party or is threatened to be made a party
to any suit or proceeding because such person is or was a director, officer,
employee or agent of the corporation or is or was serving, at the request of
the corporation, as a director, officer, employee or agent of another
corporation, against all costs actually and reasonably incurred by him in
connection with such suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal proceeding, he had no reason
to believe his conduct was unlawful. Similar indemnity is permitted to be
provided to such persons in connection with an action or suit by or in right of
the corporation, provided such person acted in good faith and in a manner he
believed to be in or not opposed to the best interests of the corporation, and
provided further (unless a court of competent jurisdiction otherwise
determines) that such person shall not have been adjudged liable to the
corporation.
The directors and officers of the Registrant and its subsidiaries will be
covered by a policy of insurance under which they will be insured, within
limits and subject to certain limitations, against certain expenses in
connection with the defense of actions, suits or proceedings, and certain
liabilities that might be imposed as a result of such actions, suits or
proceedings in which they are parties by reason of being or having been
directors or officers.
II-1
<PAGE> 99
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 16. EXHIBITS
The following exhibits are filed herewith or incorporated by
reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<S> <C>
**2 Agreement and Plan of Reorganization by and among the Student Loan Marketing Association
("Sallie Mae"), SLM Holding Corporation ("Registrant"), and Sallie Mae Merger Company
("MergerCo")
*3.1 Amended and Restated Certificate of Incorporation of Registrant
*3.2 By-Laws of Registrant
*4 Warrant Certificate No. W-2, dated as of August 7, 1997
*5 Opinion of Marianne M. Keler, General Counsel, as to the legality of the securities being
registered
**10.1 Board of Directors' Restricted Stock Plan
**10.2 Board of Directors' Stock Option Plan
**10.3 Deferred Compensation Plan for Directors
**10.4 Incentive Performance Plan
**10.5 Stock Compensation Plan
**10.6 1993-1998 Stock Option Plan
**10.7 Supplemental Pension Plan
**10.8 Supplemental Employees' Thrift & Savings Plan
**21 Subsidiaries of the Registrant
*23.1 Consent of Ernst & Young LLP
*24.2 Power of Attorney (contained on the signature page hereto)
*27 Financial Data Schedule
**99.1 Charter of the GSE
*99.2 By-Laws of the GSE
</TABLE>
- -------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
II-2
<PAGE> 100
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in the post-effective amendment by those paragraphs is contained
in periodic reports filed by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of
the subscription offer, the transactions by the underwriters during the
subscription period, the amount of unsubscribed securities to be purchased by
the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to
II-3
<PAGE> 101
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Washington, District of Columbia.
SLM HOLDING CORPORATION
By: /s/ Edward A. Fox
-------------------------------
Edward A. Fox
Chairman of the Board of Directors
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Edward A. Fox, Albert L. Lord, J. Paul
Carey and Lucy C .Weymouth, and each of them, his attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully as
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward A. Fox Chairman of the Board of October 21, 1997
------------------ Directors
Edward A. Fox
/s/ Albert L. Lord Chief Executive Officer October 21, 1997
------------------- (principal executive officer)
Albert L. Lord
/s/ Mark G. Overend Chief Financial Officer October 21, 1997
-------------------- (principal financial and
Mark G. Overend accounting officer)
/s/ James E. Brandon Director October 21, 1997
---------------------
James E. Brandon
/s/ Charles L. Daley Director October 21, 1997
---------------------
Charles L. Daley
/s/ Thomas J. Fitzpatrick Director October 21, 1997
--------------------------
Thomas J. Fitzpatrick
/s/ Diane S. Gilleland Director October 21, 1997
-----------------------
Diane S. Gilleland
/s/ Ann Torre Grant Director October 21, 1997
--------------------
Ann Torre Grant
</TABLE>
II-5
<PAGE> 103
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ronald F. Hunt Director October 21, 1997
-------------------
Ronald F. Hunt
/s/ Benjamin J. Lambert, III Director October 21, 1997
-----------------------------
Benjamin J. Lambert, III
/s/ Marie V. McDemmond Director October 21, 1997
-----------------------
Marie V. McDemmond
/s/ Barry A. Munitz Director October 21, 1997
--------------------
Barry A. Munitz
/s/ A. Alexander Porter Director October 21, 1997
------------------------
A. Alexander Porter
/s/ Wolfgang Schoellkopf Director October 21, 1997
-------------------------
Wolfgang Schoellkopf
/s/ Steven L. Shapiro Director October 21, 1997
----------------------
Steven L. Shapiro
/s/ Randolph H. Waterfield Director October 21, 1997
---------------------------
Randolph H. Waterfield
</TABLE>
II-6
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF DOCUMENT NUMBERED PAGE
----------- ----------------------- -------------
<S> <C> <C>
**2 Agreement and Plan of Reorganization by and among the Student Loan
Marketing Association ("Sallie Mae"), SLM Holding Corporation
("Registrant"), and Sallie Mae Merger Company ("MergerCo")
*3.1 Amended and Restated Certificate of Incorporation of Registrant
*3.2 By-Laws of Registrant
*4 Warrant Certificate No. W-2, dated as of August 7, 1997
*5 Opinion of Marianne M. Keler, General Counsel, as to the legality of the
securities being registered
**10.1 Board of Directors' Restricted Stock Plan
**10.2 Board of Directors' Stock Option Plan
**10.3 Deferred Compensation Plan for Directors
**10.4 Incentive Performance Plan
**10.5 Stock Compensation Plan
**10.6 1993-1998 Stock Option Plan
**10.7 Supplemental Pension Plan
**10.8 Supplemental Employees' Thrift & Savings Plan
**21 Subsidiaries of the Registrant
*23.1 Consent of Ernst & Young LLP
*24.2 Power of Attorney +
*27 Financial Data Schedule
**99.1 Charter of the GSE
*99.2 By-Laws of the GSE
</TABLE>
- ------------
* Filed herewith.
** Previously filed.
+ Contained on the signature page hereto.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SLM HOLDING CORPORATION
SLM Holding Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
(1) The name of the Corporation is SLM Holding Corporation.
(2) The name under which the Corporation was originally incorporated
was SLM Holding Corporation and the original Certificate of Incorporation of
the Corporation was filed with the Secretary of State of the State of Delaware
on February 3, 1997.
(3) This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation and by the sole
stockholder of the Corporation in accordance with the provisions of Sections
228, 242 and 245 of the General Corporation Law of the State of Delaware.
(4) This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the Amended and Restated Certificate of
Incorporation of the Corporation.
(5) The Amended and Restated Certificate of Incorporation of the
Corporation, upon its filing with the Secretary of State of the State of
Delaware, shall read in its entirety as follows:
<PAGE> 2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SLM HOLDING CORPORATION
FIRST: The name of the Corporation is SLM Holding Corporation
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 270,000,000 shares of capital stock,
consisting of (i) 250,000,000 shares of common stock, par value $.20 per share
(the "Common Stock"), and (ii) 20,000,000 shares of preferred stock, par value
$.20 per share (the "Preferred Stock").
a. COMMON STOCK. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of the Common Stock are
as follows:
(1) Voting. Except as otherwise expressly required
by law or provided in this Certificate of Incorporation, and
subject to any voting rights provided to holders of Preferred
Stock at any time outstanding, at each annual or special
meeting of stockholders, each holder of record of shares of
Common Stock on the relevant record date shall be entitled to
cast one vote in person or by proxy for each share of the
Common Stock standing in such holder's name on the stock
transfer records of the Corporation; provided, however, that
at all elections of directors of the Corporation, each holder
of record of shares of Common Stock on the relevant record
date shall be entitled to cast as many votes, in person or by
proxy, which (except for this provision) such holder would be
entitled to cast for the election of directors with respect
to its shares of stock multiplied by the number of directors
to be elected at such election, and that such holder may cast
all such votes for a single director or may distribute them
among the number to be voted for, or for any two or more of
them as such holder sees fit.
(2) Dividends. Subject to the rights of the holders
of Preferred Stock, and subject to any other provisions of
this Certificate of Incorporation, as it may be amended from
time to time, holders of shares of Common Stock shall be
entitled to receive such dividends and other distributions in
cash, stock or
2
<PAGE> 3
property of the Corporation when, as and if declared thereon
by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor.
(3) Liquidation, Dissolution, etc. In the event of
any liquidation, dissolution or winding up (either voluntary
or involuntary) of the Corporation, the holders of shares of
Common Stock shall be entitled to receive the assets and
funds of the Corporation available for distribution after
payments to creditors and to the holders of any Preferred
Stock of the Corporation that may at the time be outstanding,
in proportion to the number of shares held by them.
(4) No Preemptive or Subscription Rights. No holder
of shares of Common Stock shall be entitled to preemptive or
subscription rights.
b. PREFERRED STOCK. The Board of Directors is hereby
expressly authorized to provide for the issuance of all or any shares
of the Preferred Stock in one or more classes or series, and to fix
for each such class or series such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of such class or series,
including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times
and at such price or prices; (ii) entitled to receive dividends (which
may be cumulative or non-cumulative) at such rates, on such
conditions, and at such times, and payable in preference to, or in
such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the
dissolution of, or upon any distribution of the assets of, the
Corporation; or (iv) convertible into, or exchangeable for, shares of
any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions.
c. POWER TO SELL AND PURCHASE SHARES. Subject to the
requirements of applicable law, the Corporation shall have the power
to issue and sell all or any part of any shares of any class of stock
herein or hereafter authorized to such persons, and for such
consideration, as the Board of Directors shall from time to time, in
its discretion, determine, whether or not greater consideration could
be received upon the issue or sale of the same number of shares of
another class, and as otherwise permitted by law. Unless approved by
the affirmative vote of not less than a majority of the voting power
of the shares of capital stock of the Corporation then entitled to
vote at an election of directors, the Corporation shall not take any
action that would result in the acquisition by the Corporation,
directly or indirectly, from any person or "group" (as defined in
Section 13(d) of the Securities Exchange Act of 1934) of five percent
or more of the shares of Common Stock issued and outstanding, at a
price in excess of the prevailing
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market price of such Common Stock, other than pursuant to a tender
offer made to all stockholders or to all stockholders owning less than
100 shares of Common Stock.
d. LIMITATION ON STOCKHOLDER RIGHTS PLAN. Notwithstanding any
other powers set forth in this Certificate of Incorporation, the Board
of Directors shall not adopt a stockholders "rights plan" (which for
this purpose shall mean any arrangement pursuant to which, directly or
indirectly, Common Stock or Preferred Stock purchase rights may be
distributed to stockholders that provide all stockholders, other than
persons who meet certain criteria specified in the arrangement, the
right to purchase the Common Stock or Preferred Stock at less than the
prevailing market price of the Common Stock or Preferred Stock),
unless (i) such rights plan is ratified by the affirmative vote of a
majority of the voting power of the shares of capital stock of the
Corporation then entitled to vote at an election of directors at the
next meeting (annual or special) of stockholders; (ii) by its terms,
such rights plan expires within thirty-seven (37) months from the date
of its adoption, unless extended by the affirmative vote of a majority
of the voting power of the shares of capital stock of the Corporation
then entitled to vote at an election of directors; and (iii) at any
time the rights issued thereunder will be redeemed by the Corporation
upon the affirmative vote of a majority of the voting power of the
shares of capital stock of the Corporation then entitled to vote at an
election of directors.
FIFTH: Reserved.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
a. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
b. The directors shall have concurrent power with the
stockholders to make, alter, amend, change, add to or repeal the
By-Laws of the Corporation.
c. (1) (i) The number of directors of the
Corporation shall be fifteen (15). The number of
directors of the Corporation shall be changed only
by the affirmative vote of not less than a majority
of the voting power of the shares of capital stock
of the Corporation then entitled to vote at an
election of directors. Election of directors need
not be by written ballot unless the By-Laws so
provide.
(ii) Directors may be removed with or
without cause by a vote of the holders of shares
entitled to vote at an election of directors at a
duly called meeting of such holders, provided that
no director shall be removed for cause except by the
affirmative vote of not less than a majority of the
voting power of the shares then entitled to vote at
an election of directors, and provided further that
if less than the entire
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board of directors is to be removed, no director may
be removed without cause if the votes cast against
his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire
board of directors.
(iii) Notwithstanding the foregoing,
whenever the holders of any one or more classes or
series of Preferred Stock issued by the Corporation
shall have the right, voting separately by class or
series, to elect directors at an annual or special
meeting of stockholders, the election, term of
office, filling of vacancies and other features of
such directorships shall be governed by the terms of
this Certificate of Incorporation applicable
thereto.
(2) A director shall hold office until the
succeeding annual meeting (or special meeting in lieu
thereof) and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(3) Any vacancy on the Board of Directors,
regardless of whether resulting from death, resignation,
retirement, disqualification, removal from office or
otherwise, may be filled only by stockholders of the
Corporation.
d. No director shall be personally liable to the Corporation
or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL or (iv) for any transaction from
which the director derived an improper personal benefit. Any repeal or
modification of this Article SIXTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
e. In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, subject, nevertheless,
to the provisions of the GCL, this Certificate of Incorporation, and
any By-Laws adopted by the stockholders; provided, however, that no
such action by the Board of Directors, unless approved by a majority
of the voting shares of capital stock of the Corporation then entitled
to vote at an election of directors, shall amend, alter, change or
repeal the right of stockholders as provided for in the By-Laws to
call a special meeting of stockholders; and provided further that no
By-Laws hereafter adopted by the stockholders shall invalidate any
prior act of the directors which would have been valid if such By-Laws
had not been adopted.
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SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
EIGHTH: Any action required to be taken at any annual or special
meeting of stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation delivery to its
registered office, its principal place of business or an officer or director of
the Corporation having custody of the book in which proceedings of meetings of
members are recorded.
NINTH: Pursuant to Section 203(b)(1) of the GCL, the Corporation
hereby expressly opts not to be governED by GCL Section 203.
TENTH: Any action by the Board of Directors to make, alter, amend,
change, add to or repeal this Certificate of Incorporation shall be approved by
the affirmative vote of not less than a majority of the voting power of the
shares of capital stock of the Corporation then entitled to vote at an election
of directors. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
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IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed on its behalf this 6th day
of August, 1997.
SLM HOLDING CORPORATION
By: /s/ Albert L. Lord
-----------------------------------
Albert L. Lord
Chief Executive Officer
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EXHIBIT 3.2
BY-LAWS
OF
SLM HOLDING CORPORATION
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I -- OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Offices. The principal office of the Corporation shall be
located in the City and Jurisdiction as the Board of Directors may, from time
to time, determine. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
from time to time determine.
ARTICLE II -- MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place within the continental United States, either within or without the State
of Delaware, as shall be designated from time to time by the Board of Directors
or, in the case of a special meeting called pursuant to Section 3 of this
Article at the request in writing of the holders of at least one-third of the
capital stock of the Corporation issued and outstanding and entitled to vote at
an election of directors, as shall be designated by such stockholders or their
representative, and stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting, stating the place, date and hour of the
meeting, shall be given to each stockholder entitled to vote at such meeting
not less than ten nor more than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by
the Certificate of Incorporation, Special Meetings of Stockholders, for any
purpose or purposes, shall be called by the Secretary (i) at the direction of
either (x) the Chairman or (y) the Chief Executive
<PAGE> 2
Officer, if the Chief Executive Officer is a member of the Board of Directors,
or (ii) at the request in writing of either (x) a majority of the Board of
Directors or (y) the holders of at least one-third of the capital stock of the
Corporation issued and outstanding and entitled to vote at an election of
directors. Any such request shall state the purpose or purposes of the proposed
meeting. Written notice of a Special Meeting, stating the place, date and hour
of the meeting and purpose or purposes for which the meeting is called, shall
be given to each stockholder entitled to vote at such meeting not less than ten
nor more than sixty days before the date of the meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, at all meetings of the stockholders, the holders
of a majority of the capital stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder entitled to
vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate
of Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder, provided,
however, that at all elections of directors of the Corporation, each holder of
record of shares of Common Stock on the relevant record date shall be entitled
to cast as many votes, in person or by proxy, which (except for this provision)
such holder would be entitled to cast for the election of directors with
respect to its shares of stock multiplied by the number of directors to be
elected at such election, and that such holder may cast all such votes for a
single director or may distribute them among the number of directors to be
voted for, or for any two or more of them as such holder sees fit. Such votes
may be cast in person or by proxy, but no proxy shall be voted on or after
three years from its date, unless such proxy provides for a longer period. The
Board of Directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in his discretion, may require that any
votes cast at such meeting shall be cast by written ballot.
Section 6. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary
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business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
principal office of the Corporation. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
Section 7. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 6 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 8. Meeting Business. No business shall be brought before any
meeting of shareholders unless it has been properly brought before the meeting
in accordance with the procedures set forth in these By-Laws; provided,
however, that nothing in this Section shall be deemed to preclude discussion by
any shareholder of any business properly brought before such meeting.
To be properly brought before an annual meeting, such business must be
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof), or (c) otherwise brought before the annual meeting by any shareholder
of the Corporation who is a shareholder of record on the date of the giving of
the notice provided for in Section 2 of this Article and on the record date for
the determination of shareholders entitled to vote at the such annual meeting.
To be properly brought before an annual meeting, such business also must be a
proper subject for action by shareholders, provided that the law of Delaware
shall govern whether such business is a proper subject for action by
shareholders.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in proper written form to the Secretary
of the Corporation. To be timely, a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation
not less than thirty (30) nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting; provided,
however, that in the event that the annual meeting is called for a date that is
not within thirty (30) days before or after such anniversary date, notice by
the shareholder in order to be timely must be so received not later than the
close of business on the tenth day following the day on which notice of the
date of such annual meeting was mailed. When a date is set for the
determination of the timeliness of a shareholder's notice, such date shall
apply to any adjournment of such meeting. To be in proper written form, a
shareholder's notice to the Secretary must set forth as to each matter such
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and record
address such shareholder, (c) the number of shares of the Corporation which are
owned (beneficially or of record) by such
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shareholder, (d) a description of all arrangements or understandings between
such shareholder and any other person or persons (including their names) in
connection with the proposal of such business by such shareholder and any
material interest of such shareholder in such business, and (e) a
representation that such shareholder intends to appear in person or by proxy at
the annual meeting to bring such business before the meeting. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of the reports of officers and committees, but in connection with such
reports no new business shall be acted upon at such annual meeting unless
brought before the meeting in accordance with the procedures set forth in this
Section.
The business conducted at any special meeting of shareholders shall be
limited to the purposes stated in the notice of such special meeting.
The Chairman shall determine the order of business and the procedure
at any shareholder meeting, including such regulation of the manner of voting
and the conduct of discussion as seem to the Chairman in order and not
inconsistent with these By-Laws. If the Chairman determines that business was
not properly brought before the meeting in accordance with these By-Laws, the
Chairman shall so declare and such business shall not be conducted.
Section 9. Board Nominations. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors at any annual meeting of shareholders. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
shareholders (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof), or (b) by any shareholder of the Corporation who
is a shareholder of record on the date of the giving of the notice provided for
in Section 2 of this Article II and on the record date for the determination of
shareholders entitled to vote at such annual meeting.
In addition to any other applicable requirements, for a nomination to
be made by a shareholder, the shareholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than thirty (30) nor
more than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) days before or
after such anniversary date, notice by the shareholder in order to be timely
must be so received not later than the close of business on the tenth day
following the day on which notice of the date of such annual meeting was
mailed. When a date is set for the determination of the timeliness of a
shareholder's notice, such date shall apply to any adjournment of such meeting.
To be in proper written form, a shareholder's notice to the Secretary must set
forth (a) as to each person whom such shareholder proposes to nominate for
election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person and the purported basis for such person's eligibility to serve on the
Board of Directors, if elected, (iii) the number of shares of the Corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required by law to be
disclosed in a
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proxy statement or in other filings required to be made in connection with
solicitations of proxies for election of directors, including information
required pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the rules and regulations promulgated
thereunder; and (b) as to the shareholder giving the notice (i) the name and
record address of such shareholder, (ii) the number of shares of the
Corporation which are owned beneficially or of record by such shareholder,
(iii) a description of all arrangements or understandings between such
shareholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
such shareholder, (iv) a representation that such shareholder intends to appear
in person or by proxy at the annual meeting to nominate the persons named in
its notice and (v) any other information relating to such shareholder that
would be required by law to be disclosed in a proxy statement or in other
filings required to be made in connection with solicitations of proxies for
election of directors, including information required pursuant to Section 14 of
the Exchange Act and the rules and regulations promulgated thereunder. Such
notice must be accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve as a director if elected.
If the Chairman determines that a nomination was not properly brought
before the meeting in accordance with these By-Laws, the Chairman shall so
declare and such defective nomination shall be disregarded.
ARTICLE III -- DIRECTORS
Section 1. Election of Directors. Except as provided in Section 2 of
this Article, directors shall be elected by a plurality of the votes cast at
Annual Meetings of Stockholders, and each director so elected shall hold office
until the succeeding Annual Meeting (or special meeting in lieu thereof) and
until his successor is duly elected and qualified, or until his earlier
resignation or removal. Any director may resign at any time upon notice to the
Corporation. Such resignation shall take effect at the time specified therein
or, if the time be not specified, upon the receipt thereof and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. Directors need not be stockholders of the
Corporation. The number of directors of the Corporation shall be changed only
by the affirmative vote of not less than a majority of the voting power of the
shares then entitled to vote at an election of directors.
Section 2. Vacancies. Vacancies on the Board of Directors shall be
filled in accordance with the provisions of the Corporation's Certificate of
Incorporation.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors, which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of
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the Board of Directors may be held at such time and at such place as may from
time to time be determined by the Board of Directors. Special meetings of the
Board of Directors shall be called by the Secretary (i) at the direction of (x)
the Chairman or (y) the Chief Executive Officer, if the Chief Executive Officer
is a member of the Board of Directors, or (ii) at the written request of a
majority of the entire Board of Directors. Notice of a meeting of the Board of
Directors, stating the place, date and hour of the meeting, shall be given to
each director either by mail not less than forty-eight (48) hours before the
date of such meeting, by telephone or by telegram or facsimile transmission not
less than twenty-four (24) hours before the date of such meeting. A waiver of
such notice by any director or directors, in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed the equivalent of such notice.
Section 5. Quorum. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business, and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all of the members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings, setting forth the action so taken, are filed with the
minutes of proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or of any committee thereof, may
participate in a meeting of the Board of Directors or such committee by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section 7 shall constitute presence in person at
such meeting.
Section 8. Committees. The Board of Directors shall adopt resolutions
establishing the following committees: (i) Executive, (ii) Audit, (iii)
Nominations and Board Affairs and (iv) Compensation and Personnel. In addition,
the Board of Directors may, by resolution passed by a majority of the entire
Board of Directors, designate one or more additional committees. Each committee
shall consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
any such committee. In the absence or disqualification of a member of a
committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member,
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the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum or a fixed number of shares of the Corporation's stock for attendance
at each meeting of the Board of Directors and/or as compensation for service as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for
attending committee meetings.
Section 10. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of
Directors or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at
a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
Section 11. Qualification of Directors. Notwithstanding any other
provision of these By-Laws, (i) the Board of Directors shall consist of a
majority of Independent directors, (ii) the Executive Committee of the Board of
Directors shall consist of a majority of Independent directors, and (iii) the
Audit, Nominations and Board Affairs and Compensation and Personnel Committees
of the Board of Directors shall consist solely of Independent directors. For
purposes hereof, a director will not generally be considered Independent if he
or she: (a) has been employed by the Corporation or one of its affiliates in an
executive capacity; (b) is an employee or owner of a firm that is one of the
Corporation's or its affiliates' paid advisers or consultants; (c) is employed
by a significant customer or supplier; (d) has a personal services
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contract with the Corporation or one of its affiliates; (e) is employed by a
foundation or university that receives significant grants or endowments from
the Corporation or one of its affiliates; (f) is a relative of an executive of
the Corporation or one of its affiliates; (g) is part of an interlocking
directorate in which an executive officer of the Corporation serves on the
board of another corporation that employs the director; or (h) is an employee
of a firm that directly competes against the Corporation or one of its
affiliates.
ARTICLE IV -- OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board (who must be a
director), a Chief Executive Officer, a General Counsel, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a
President and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these By-Laws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation
or removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chief Executive Officer or the General
Counsel or such other authorized officer of the Corporation, and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and powers incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
Board of Directors shall preside at all meetings of the stockholders and of the
Board of Directors. The Chairman of the Board of Directors shall also perform
such other duties and may exercise such
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other powers as from time to time may be assigned to him by these By-Laws or by
the Board of Directors.
Section 5. Chief Executive Officer. The Chief Executive Officer shall,
subject to the control of the Board of Directors and the Chairman of the Board
of Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors
or the Chief Executive Officer. In the absence or disability of the Chairman of
the Board of Directors, the Chief Executive Officer shall preside at all
meetings of the stockholders and the Board of Directors. The Chief Executive
Officer shall also perform such other duties and may exercise such other powers
as from time to time may be assigned to him by these By-Laws or by the Board of
Directors.
Section 6. Vice Presidents. At the request of the Chief Executive
Officer or in his absence, or in the event of his inability or refusal to act,
the Vice President or the Vice Presidents if there is more than one (in the
order designated by the Board of Directors) shall perform the duties of the
Chief Executive Officer, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the Chief Executive Officer. Each Vice
President shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Vice
President, the Board of Directors shall designate the officer of the
Corporation who, in the absence of the Chief Executive Officer, or in the event
of the inability or refusal of the Chief Executive Officer to act, shall
perform the duties of the Chief Executive Officer, and when so acting, such
officer shall have all the powers of and be subject to all the restrictions
upon the Chief Executive Officer.
Section 7. General Counsel. The General Counsel shall (a) be the
principal consulting officer of the Corporation for all legal matters; (b) be
responsible for and direct all counsel, attorneys, employees and agents in the
performance of all legal duties and services for and on behalf of the
Corporation; (c) perform such other duties and have such other powers as are
ordinarily incident to the office of the General Counsel; and (d) perform such
other duties as from time to time may be assigned to him by the Chief Executive
Officer or by the Board of Directors.
Section 8. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties, when required, for the committees of
the Board of Directors. The Secretary shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or Chief Executive Officer, under whose supervision he shall
be. If the Secretary shall be unable or shall refuse to cause to be given
notice of all meetings of the stockholders and special meetings of the Board of
Directors, and if there be no Assistant Secretary, then either the Board of
Directors
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<PAGE> 10
or the Chief Executive Officer may choose another officer to cause such notice
to be given. The Secretary shall have custody of the seal of the Corporation
and the Secretary or any Assistant Secretary, if there be one, shall have
authority to affix the same to any instrument requiring it, and when so
affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all
books, reports, statements, certificates and other documents and records
required by law to be kept or filed are properly kept or filed, as the case may
be.
Section 9. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chief Executive Officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise provided
in these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the Chief Executive Officer, or the Secretary, and in the
absence of the Secretary or in the event of his disability or refusal to act,
shall perform the duties of the Secretary, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chief Executive Officer, or the
Treasurer, and in the absence of the Treasurer or in the event of his
disability or refusal to act, shall perform the duties of the Treasurer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an
Assistant Treasurer shall give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
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Section 12. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
Section 13. Employee Conduct. No officer or employee shall engage,
directly or indirectly, in any personal business transaction or private
arrangement for personal profit which accrues from or is based upon his
official position or authority or upon confidential information which he gains
by reason of such position or authority, and each officer and employee shall
reasonably restrict his personal business affairs so as to avoid conflicts of
interest with his official duties. No officer or employee shall divulge
confidential information to any unauthorized person, or release any such
information in advance of authorization for its release, nor shall he accept,
directly or indirectly, any valuable gift, favor or service from any person
with whom he transacts business on behalf of the Corporation.
Section 14. Outside or Private Employment. No officer or employee
shall have any outside or private employment or affiliation with any firm or
organization incompatible with his concurrent employment by the Corporation,
nor shall he accept or perform any outside or private employment which the
Chief Executive Officer of the Corporation determines will interfere with the
efficient performance of his official duties.
ARTICLE V -- STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the Chief Executive
Officer or a Vice President and (ii) by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation,
certifying the number of shares owned by him in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, such certificate may be issued by the Corporation with
the same effect as if he were such officer, transfer agent or registrar at the
date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
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Section 4. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be canceled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than sixty days nor
less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI -- NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his
address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Written notice may also be given
personally or by facsimile, telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VII -- GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
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of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Acquisition of Common Stock by the Corporation. Unless
approved by holders of a majority of the outstanding capital stock of the
Corporation then entitled to vote at an election of directors, the Corporation
shall not take any action that would result in the acquisition by the
Corporation, directly or indirectly, from any one person or "group" (as defined
in Section 13(d) of the Securities Exchange Act of 1934) of one percent or more
of the shares of Common Stock then outstanding, in one or a series of related
transactions, at a price in excess of the prevailing market price of such
stock, other than pursuant to a tender offer made to all holders of Common
Stock or to all holders of less than 100 shares of Common Stock.
Section 3. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 5. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII -- INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
than those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director or officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably
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believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that he is or was a director or officer of the Corporation, or is or
was a director or officer of the Corporation serving at the request of the
Corporation as a director or officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1 or
Section 2 of this Article VIII, as the case may be. Such determination shall be
made (i) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (ii) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (iii) by the stockholders. To the extent,
however, that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on the records or books of account of the
Corporation or another enterprise, or on information supplied to him by the
officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public accountant
or
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by an appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" as used in
this Section 4 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Sections 1
or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this Article VIII. The basis of such indemnification by a court
shall be a determination by such court that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the
director or officer seeking indemnification has not met any applicable standard
of conduct. Notice of any application for indemnification pursuant to this
Section 5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding may be paid by the Corporation, upon the
determination by the Board of Directors, in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VIII, provided the Corporation approves in advance
counsel selected by the director or officer (which approval shall not be
unreasonably withheld).
Section 7. Non-exclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under the Certificate of Incorporation or any By-Law,
agreement, contract, vote of stockholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of
the Corporation that indemnification of the persons specified in Sections 1 and
2 of this Article VIII shall be made to the fullest extent permitted by law.
The provisions of this Article VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
Article VIII but whom the Corporation has the power or
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obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether or not
the Corporation would have the power or the obligation to indemnify him against
such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer
of such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes
of this Article VIII, references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references
to "serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes duties
on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by the Corporation
pursuant to this Article VIII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer (in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
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Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX -- AMENDMENTS
Section 1. Amendments. These By-Laws of the Corporation may be
altered, amended, changed, added to or repealed in whole or in part, or new
By-Laws may be adopted, by the stockholders or the Board of Directors,
provided, however, that notice of such alteration, amendment, repeal or
adoption of new By-Laws is provided before the date on which the meeting of
stockholders at which such shall become effective or be voted on, as the case
may be. For purposes of this Article IX, filing such alteration, amendment,
repeal or new By-Laws with the Securities and Exchange Commission and/or the
principal securities exchange on which the common stock of the Corporation is
traded shall be deemed to provide notice thereof. All such amendments must be
approved by either the holders of a majority of the outstanding capital stock
of the Corporation entitled to vote thereon or by a majority of the entire
Board of Directors.
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EXHIBIT 4
NEITHER THE WARRANTS EVIDENCED BY THIS WARRANT CERTIFICATE
NOR THE COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND NEITHER SUCH WARRANTS NOR SUCH COMMON STOCK MAY BE TRANSFERRED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO UNLESS AN EXEMPTION UNDER SUCH ACT
IS THEN AVAILABLE. THE COMMON STOCK ISSUABLE UPON EXERCISE
OF SUCH WARRANTS IS SUBJECT TO THE REGISTRATION PROVISIONS OF SECTION 10 OF
THIS WARRANT CERTIFICATE.
No. W-2 555,015 Warrants
SLM HOLDING CORPORATION
(A Delaware Corporation)
WARRANT CERTIFICATE
Dated as of August 7, 1997
VOID AFTER 5:00 P.M., EASTERN TIME, ON SEPTEMBER 30, 2008
SLM Holding Corporation, a Delaware corporation (the "Company"),
hereby certifies that NatWest Securities Limited or its registered assigns (the
"Registered Holder") is registered as the holder of the number of warrants
first set forth above (the "Warrants"), each of which entitles the Registered
Holder to purchase from the Company, subject to the terms and conditions set
forth in this Warrant Certificate, at any time or from time to time, on or
before September 30, 2008 at not later than 5:00 p.m. Eastern time, one share
of Common Stock, par value $.20 per share, of the Company ("Common Stock"), at
a purchase price of $72.43 per share. The number of shares purchasable upon
exercise of the Warrants, and the purchase price per share, each as adjusted
from time to time pursuant to the provisions of this Warrant Certificate, are
hereinafter referred to as the "Warrant Stock" and the "Purchase Price,"
respectively.
1. Exercise of Warrants.
(a) Manner of Exercise and Payment. The Warrants may be
exercised by the Registered Holder, in whole or in part, by surrendering this
Warrant Certificate, with an Election to Purchase in the form attached hereto
as Exhibit A, duly executed by such Registered Holder, at the offices of the
Company at the address set forth in Section 11, or at such other office or
agency as the Company may designate, accompanied by payment in full, in lawful
money of the United States, of the Purchase Price payable in respect of the
number of shares of Warrant Stock purchased upon such exercise. Payment of the
Purchase Price shall be in immediately available
<PAGE> 2
funds by wire transfer to an account to be specified by the Company upon
request by the Registered Holder prior to exercise. All Warrants that have not
been exercised previously in accordance with the terms of this Warrant
Certificate shall expire at 5:00 p.m. Eastern time on September 30, 2008.
(b) Effectiveness. An exercise of the Warrants shall be
deemed to have been effected immediately prior to the close of business on the
day on which this Warrant Certificate shall have been surrendered to the
Company as provided in Section 1(a). At such time, the person or persons in
whose name or names any certificates for Warrant Stock shall be issuable upon
such exercise as provided in Section 1(c) shall be deemed to have become the
holder or holders of record of the Warrant Stock represented by such
certificates.
(c) Delivery of Certificates. As soon as practicable after
the exercise of the Warrants in whole or in part, the Company, at its expense,
will cause to be issued in the name of, and delivered to, the Registered Holder
or, subject to the terms and conditions hereof and upon payment by such
Registered Holder of any applicable transfer taxes, as such Registered holder
may direct:
(i) a certificate or certificates for the number of
full shares of Warrant Stock to which such Registered Holder
shall be entitled upon such exercise plus, in lieu of any
fractional share to which such Registered Holder would
otherwise be entitled, cash in an amount determined pursuant
to Section 1(d), and
(ii) in the event that such exercise is in part
only, a new Warrant Certificate (dated the date hereof) of
like tenor for the balance of the Warrants.
(d) Fractional Shares. The Company shall not be required upon
the exercise of the Warrants to issue any fractional shares, but shall make an
adjustment therefor in cash equal to the same fraction of the current market
value of a share of Common Stock. For purposes of this Section 1(d), the
current market value of a share of Common Stock shall be the closing price of
the Common Stock on the New York Stock Exchange for the trading day immediately
prior to the date of exercise of the Warrants; provided, however, that if the
Common Stock is no longer traded on the New York Stock Exchange, then the
current market value of a share of Common Stock shall be determined in good
faith by the Board of Directors of the Company.
2. Anti-Dilution Provisions.
(a) Dilutive Issuances of Common Stock or Convertible
Securities. If the Company shall issue or sell any shares of Common Stock (or
any Common Stock Equivalent, as hereinafter defined), except for shares issued
pursuant to employee stock plans and certain transactions as set forth in
Section 2(f), at a price per share (or in the case of a Common Stock
Equivalent, having a conversion or exercise price per share) that is less than
the lesser of (1) the Purchase Price per share hereunder in effect immediately
prior to such issuance or sale, or (2) the current market price per share of
the Common Stock (as determined under Section 2(e)) on the
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<PAGE> 3
date of such issuance or sale, and if immediately following such issuance or
sale the number of shares of Common Stock outstanding shall exceed 55,501,548
(as adjusted for any stock split, stock dividend or similar transaction), then
in each case the Purchase Price per share hereunder shall be reduced, effective
as of the Company's next business day after such issuance or sale, by
multiplying such Purchase Price by a fraction, the numerator of which shall be
the sum of
(i) the number of shares of Common Stock outstanding at the
close of business on the day prior to the date of such issuance or
sale, plus
(ii) the number of shares of Common Stock which the aggregate
of the offering price of the total number of shares of Common Stock so
offered for purchase (or the aggregate initial conversion or exercise
price of such Common Stock Equivalents) would purchase at the Purchase
Price in effect immediately prior to such issuance or sale (if the
Purchase Price is required to be adjusted by reason of an issuance or
sale below the Purchase Price in effect immediately prior to such
issuance or sale), or at the then current market price (if the
Purchase Price is required to the adjusted by reason of an issuance or
sale below the then current market price),
and the denominator of which shall be the sum of
(x) the number of shares of Common Stock outstanding at the
close of business on the day prior to the date of such issuance or
sale, plus
(y) the number of shares of Common Stock offered for such
issuance or sale or into which or for which the Common Stock
Equivalents are initially convertible or exercisable.
Each such adjustment of the Purchase Price shall be calculated to the nearest
cent.
(b) Adjustment to Number of Shares. Upon each adjustment of
the Purchase Price as a result of the calculations made under Section 2(a),
each Warrant outstanding immediately prior to the making of that adjustment
shall thereafter evidence the right to purchase, at the adjusted Purchase
Price, that number of shares of Common Stock obtained by (x) multiplying the
number of shares of Common Stock purchasable upon exercise of a Warrant
immediately prior to that adjustment by the Purchase Price in effect
immediately prior to that adjustment of the Purchase Price and (y) dividing the
product so obtained by the Purchase Price in effect immediately after that
adjustment of the Purchase Price.
(c) Treatment of Common Stock Equivalents. For the purposes
of this Section 2, if the Company shall issue any Common Stock Equivalents,
except for such rights issued pursuant to employee stock plans and certain
transactions as set forth in Section 2(f), the maximum total number of shares
of Common Stock issuable upon exercise of such rights shall thereupon be deemed
to have been issued and to be outstanding, and the consideration received by
the Company therefor shall be deemed to include the initial consideration
payable upon the exercise of such rights. No further adjustment of the Purchase
Price adjusted upon the issuance of such rights shall be made as a result of
the actual issuance of shares of Common Stock on the
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<PAGE> 4
exercise of any such rights. If the provisions of any Common Stock Equivalents
with respect to the purchase price or the number of shares purchasable shall
change or expire, any adjustment previously made hereunder for such right shall
be readjusted as of the date of issuance of such rights to such as would have
obtained on the basis of the rights as modified by such change or expiration
(except for the operation of any anti-dilution provisions thereof).
(d) Consideration. In case the Company shall issue shares of
its Common Stock or Common Stock Equivalents for a consideration wholly or
partly other than cash, the amount of the consideration other than cash
received by the Company shall be as determined in good faith by the Board of
Directors of the Company whose good faith determination shall be conclusive.
(e) Meanings of Terms. For purposes of this Section 2, the
term "Common Stock Equivalents" includes any securities convertible into or
exchangeable for shares of Common Stock.
For purposes of this Section 2, the number of shares of
Common Stock outstanding at any time shall not include shares held in the
treasury of the Company.
For purposes of this Section 2, the "current market price"
per share of Common Stock on any date shall be deemed to be the average of the
daily closing prices for the twenty (20) consecutive trading days commencing
thirty (30) trading days before the day in question. The closing price for each
day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way, in either case on the New York Stock Exchange, or
if the Common Stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading, or if not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers
Automated Quotations National Market System or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted on
such National Market System, the average of the closing bid and asked prices in
the over-the-counter market as furnished by any New York Stock Exchange member
firm selected from time to time by the Company for that purpose. For the
purposed of this Section 2(e), the term "trading day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are not traded on such exchange or in such market.
(f) Exceptions to Anti-Dilution. Notwithstanding any other
provisions of this Section 2, no adjustments in the Purchase Price or the
number of shares of Warrant Stock as provided for in this Section 2 shall be
made by reason of or in connection with:
(i) the issuance of shares of Common Stock or Common
Stock Equivalents (whether issued before, at the same time as
or after the issuance of the Warrants) pursuant to employee
stock option, stock purchase, stock incentive or stock
compensation plan of any sort adopted by the Board of
Directors of the Company for the issuance of shares of Common
Stock or Common Stock Equivalents to directors, officers,
employees or consultants, or
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<PAGE> 5
(ii) securities issued solely in consideration for
the acquisition (whether by merger or otherwise) by the
Company of all or substantially all of the assets or capital
stock of any other entity or business organization, or
securities issued solely in consideration for the grant by or
to the Company of marketing rights, distribution rights,
license rights or similar rights granted by or to the Company
in consideration of the exchange of proprietary technology,
whether of the Company or any other entity, provided the
issuance of such securities is approved by the Board of
Directors of the Company.
3. Adjustments. The number of shares of Warrant Stock shall be
subject to the following adjustments:
(a) Changes in Common Stock. If the Company shall (i)
subdivide the outstanding shares of Common Stock into a greater number of
shares, (ii) issue additional shares of Common Stock as a dividend or other
distribution with respect to the Common Stock, or (iii) combine the outstanding
shares of Common Stock into a lesser number of shares, then the number of
shares of Warrant Stock issuable upon exercise of each Warrant shall be
adjusted so that the Registered Holder shall immediately thereafter be entitled
to receive, upon exercise of each Warrant, the kind and number of shares of
Common Stock or other securities of the Company that the Registered Holder
would have been entitled to receive after the happening of any of the events
described above if such Warrant had been exercised immediately prior to the
happening of such event or any record date with respect thereto. The Purchase
Price in effect immediately prior to any such subdivision of Common Stock or at
the record date of such dividend or other distribution shall upon the
effectiveness of such subdivision or immediately after such record date be
proportionately reduced. The Purchase Price in effect immediately prior to any
such combination of Common Stock shall, upon the effectiveness of such
combination, be proportionately increased.
(b) Major Transactions. If there shall occur any capital
reorganization or reclassification of the Common Stock (other than a change in
par value or a subdivision or combination as provided for in Section 3(a)), or
any consolidation or merger of the Company with or into another corporation, or
a transfer of all or substantially all of the assets of the Company, or the
payment of a liquidating distribution, then, as part of any such
reorganization, reclassification, consolidation, merger, sale or liquidating
distribution, lawful provision shall be made so that the Registered Holder
shall have the right thereafter to receive, upon the exercise of the Warrants,
the kind and amount of shares of stock or other securities or property which
such Registered Holder would have been entitled to receive if, immediately
prior to any such reorganization, reclassification, consolidation, merger, sale
or liquidating distribution, as the case may be, such Registered Holder had
held the number of shares of Common Stock which were then purchasable upon the
exercise of such Warrants. In any such case, appropriate adjustment (as
reasonably determined by the Board of Directors of the Company) shall be made
in the application of the provisions set forth herein with respect to the
rights and interests thereafter of the Registered Holder such that the
provisions set forth in this Section 3 (including provisions with respect to
adjustment of the Purchase Price) shall thereafter be applicable, as nearly as
is
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<PAGE> 6
reasonably practicable, in relation to any shares of stock or other securities
or property thereafter deliverable upon the exercise of the Warrants.
(c) Certificate of Adjustment. When any adjustment is
required to be made in the Purchase Price pursuant to Section 2 or this Section
3, the Company shall promptly send to the Registered Holder a certificate
setting forth the Purchase Price after such adjustment and including a brief
statement of the facts requiring such adjustment. Such certificate shall also
set forth the kind and amount of stock or other securities or property which
shall be issuable upon exercise of the Warrants following the occurrence of any
of the events specified in this Section 3.
4. Property Dividends. If the Company pays a dividend or makes a
distribution on the Common Stock payable otherwise than in cash out of earnings
or earned surplus (determined in accordance with generally accepted accounting
principles) except for a stock dividend payable in shares of Common Stock (a
"Property Dividend"), then the Company will pay or distribute to the Registered
Holder, upon exercise of the Warrants, in addition to the Warrant Stock
purchased upon such exercise, the Property Dividend which would have been paid
to such Registered Holder if it had been the owner of record of such shares of
Warrant Stock immediately prior to the date on which a record is taken for such
Property Dividend or, if no record is taken, the date as of which the record
holders of Common Stock entitled to such dividends or distribution are to be
determined.
5. Compliance with Securities Laws.
(a) Warrants Not Registered. Each holder of the Warrants
acknowledges that the Warrants have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and by accepting delivery of
this Warrant Certificate agrees and covenants not to sell, pledge, distribute,
offer for sale, transfer or otherwise dispose of the Warrants in the absence of
(i) an effective registration statement under the Securities Act as to the
Warrants and registration or qualification of the Warrants under any applicable
state securities or "blue sky" laws, or (ii) an opinion of counsel or other
evidence, in each case reasonably satisfactory to the Company, that such
registration and qualification are not required.
(b) Delay of Transfers. Without limiting the generality of
the foregoing, the Company may delay the registration of any transfer of the
Warrants on the books of the Company pursuant to Section 8 until completion of
any action or obtaining of any consent which the Company deems necessary under
any applicable law (including, without limitation, state securities or "blue
sky" laws).
6. Reservation of Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the exercise of the
Warrants, such shares of Warrant Stock and other stock, securities and
property, as from time to time shall be issuable upon the exercise of the
Warrants.
7. Replacement of Warrant Certificate. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant Certificate
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<PAGE> 7
and (i) in the case of loss, theft or destruction, upon delivery of an
indemnity agreement (with surety if required by the Company) in an amount
reasonably satisfactory to the Company, or (ii) in the case of mutilation, upon
surrender and cancellation of this Warrant Certificate, the Company will issue,
in lieu thereof, a new Warrant Certificate of like tenor.
8. Transfers of Warrants.
(a) Warrant Register. The Company will maintain a register
containing the names and addresses of the Registered Holders of the Warrants
(the "Warrant Register"). The Registered Holder may change its, his or her
address as shown on the Warrant Register by written notice to the Company
requesting such change.
(b) Transferability. Subject to the provisions of Section 5,
the Warrants shall be transferable, in whole or in part, (in whole numbers
only) on the Warrant Register, upon surrender of this Warrant Certificate at
the offices of the Company at the address set forth in Section 11, or at such
other office or agency as the Company may designate, together with (i) an
Assignment in the form attached hereto as Exhibit B, duly executed by the
Registered Holder, and (ii) any funds required to pay any transfer, stamp or
other taxes payable in connection with such transfer. Upon such surrender and
payment, the Company will cause to be issued a new Warrant Certificate, in the
name of the assignee and in the denomination (in whole numbers only) specified
on such Assignment; provided, however, that the Warrants may be transferred and
new Warrant Certificates issued only in minimum denominations of 20,000
Warrants. If fewer than all of the Warrants are being transferred, the Company
shall cancel the Warrant Certificate which was surrendered and cause to be
issued a new Warrant Certificate (dated the date hereof) of like tenor for the
balance of the Warrants.
(c) Recognition of Ownership. Until any transfer of the
Warrants is made on the Warrant Register, the Company may treat the Registered
Holder of the Warrants as the absolute owner hereof for all purposes; provided,
however, that if and when this Warrant Certificate is properly assigned in
blank, the Company may (but shall not be obligated to) treat the bearer hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to
the contrary.
9. No Rights as Stockholder. Until the exercise of the Warrants,
the Registered Holder of the Warrants shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
10. Registration of Warrant Stock.
(a) Filing and Effectiveness of Registration Statement. The
Company shall prepare and file with the Securities and Exchange Commission (the
"SEC"), as soon as practicable but in any event on or prior to the date (the
"Filing Date") which is 49 days following the date hereof, a registration
statement (as amended from time to time, the "Registration Statement") on the
appropriate form for an offering to be made on a continuous basis pursuant to
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<PAGE> 8
Rule 415 of the Securities Act, registering the offering and sale from time to
time of the Warrant Stock (the Warrant Stock covered by the Registration
Statement, the "Registered Warrant Stock") by the selling holders thereof (the
"Selling Holders"). The Company shall use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
soon as practicable following the Filing Date, and shall use its best efforts
to keep the Registration Statement continuously effective under the Securities
Act, subject to the provisions of the immediately following sentence, until the
date that is two years after the last outstanding Warrant has been exercised or
the date the last outstanding Warrant has expired unexercised or, if earlier,
the date on which all of the Registered Warrant Stock has been sold pursuant to
the Registration Statement or all of the Warrant Stock has been sold pursuant
to Rule 144(b) under the Securities Act or may be sold pursuant to Rule 144(k)
under the Securities Act. In the event (A) of any Amendment Event (as defined
herein), or (B) that, in the good faith judgment of the Company, it is
advisable to suspend the use of the prospectus which forms part of the
Registration Statement (the "Prospectus") due to a pending material corporate
development or similar material event that has not at the time been publicly
disclosed and as to which the Company believes public disclosure would be
prejudicial to the Company, the Company shall provide notice to any Selling
Holder and any Registered Holder who has requested to include Warrant Stock in
the Registration Statement to the effect of the foregoing and thereafter the
use of the Prospectus shall be suspended, and the Company, subject to the terms
of this Section 10(a), shall thereafter not be required to maintain the
effectiveness of or update the Registration Statement. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed, in the
case of suspension under clause (A), as soon as practicable and, in the case of
suspension under clause (B), as soon as in the good faith judgment of the
Company public disclosure of all such material corporate developments or
similar material events would not be prejudicial to the Company.
Notwithstanding the foregoing, the periods in which the use of the Prospectus
is suspended pursuant to clause (A) or clause (B) in the aggregate shall not
exceed 30 days in any three-month period.
For purposes of this Section 10(a), the term "Amendment Event" shall
mean the occurrence (i) of any request by the SEC or any other federal or state
governmental or self-regulatory authority for amendments or supplements to the
Registration Statement or related Prospectus or for additional information,
(ii) of the issuance by the SEC or any other federal or state governmental or
self-regulatory authority of any stop order suspending the effectiveness of the
Registration Statement or the initiation or threatening of any proceedings for
that purpose, (iii) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the shares of the Registered Warrant Stock for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, (iv) of the existence of any fact or happening of any event which
makes any statement of a material fact in the Registration Statement or related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue or which would require the making of any changes in the
Registration Statement or related Prospectus in order that, in the case of the
Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that, in the case
of the Prospectus, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or (v) of
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<PAGE> 9
the Company's determination that a post-effective amendment to the Registration
Statement would be appropriate.
(b) Indemnification.
(i) Indemnification by the Company. In connection
with any registration of securities pursuant to this Section
10, to the extent permitted by law, the Company shall
indemnify and hold harmless each Selling Holder, its
directors, trustees and officers or general and limited
partners (and directors, trustees and officers thereof, and
if such Selling Holder is a portfolio or investment fund, its
investment advisers or agents) each underwriter, if any, for
the sale of distribution of such Selling Holder's securities,
and each person, if any, who controls such Selling Holder or
underwriter (within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), (such Selling Holder and any such other person
hereinafter referred to as an "Indemnitee") against any and
all losses, claims, damages, liabilities and expenses to
which such Indemnitee may become subject, under the
Securities Act or the Exchange Act or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement,
Prospectus or preliminary prospectus, or any amendment or
supplement to any of the foregoing, or arise out of or are
based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided, however, that the Company shall not be required to
indemnify and hold harmless or reimburse an Indemnitee to the
extent that any such loss, claim, damage, liability or
expense (or any action in respect thereof) arises out of or
is based upon an untrue statement or alleged untrue statement
or omission or alleged omission in any document made in
reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Indemnitee
expressly for use in the preparation of such Registration
Statement, Prospectus or preliminary prospectus, or any
amendment or supplement thereto.
(ii) Indemnification by Selling Holders. In connection with
the Registration Statement in which Registered Warrant Stock
of a Selling Holder is included, such Selling Holder shall
furnish to the Company in writing such information as shall
be reasonably requested by the Company for use in any such
Registration Statement or Prospectus contained therein and
shall, to the extent permitted by law, severally and not
jointly, indemnify and hold harmless the Company, its
directors, officers and agents and each person, if any, who
controls the Company (within the meaning of the Securities
Act or the Exchange Act) (the Company and any such other
person hereinafter referred to as a "Company Indemnitee")
against all losses, claims, damages, liabilities or expenses
(or actions in respect thereof) to which any such Company
Indemnitee may become subject, under the Securities Act or
the
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<PAGE> 10
Exchange Act or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in
respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in any Registration Statement, Prospectus or
preliminary prospectus, or any amendment or supplement to any
of the foregoing, or arise out of or are based upon the
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading, in each case, to the extent, but only to the
extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in
reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Selling
Holder expressly for use in the preparation of such
Registration Statement, Prospectus or preliminary prospectus,
or any amendment or supplement thereto; provided, however, in
no event shall the liability of any Selling Holder or any
affiliate thereof under this Section 10 be greater in amount
than the dollar amount of the proceeds (net of payment of
underwriting commissions, if any) received by such Selling
Holder upon the sale of the Registered Warrant Stock giving
rise to such indemnification obligation.
(iii) Indemnification Procedures. Promptly after receipt by
an indemnified party under Section 10(b)(i) or Section
10(b)(ii) of notice of the commencement of any action, suit,
proceeding or investigation or threat thereof (collectively,
a "claim") made in writing for which such person will claim
indemnification or contribution pursuant hereto, the
indemnified party shall notify the indemnifying party thereof
in writing and, unless in such indemnified party's reasonable
judgment a conflict of interest may exist between such
indemnifying and indemnified parties with respect to such
claim, shall permit such indemnifying party to assume and
control the defense of such claim at its expense with counsel
reasonably satisfactory to such indemnified party. The
failure so to notify the indemnifying party shall not relieve
the indemnifying party from any liability hereunder with
respect to such claim except to the extent that such
indemnifying party is actually prejudiced by such failure to
give notice. If the indemnifying party gives notice to such
indemnified party of its election to assume and control the
defense of such claim, the indemnifying party shall not be
liable to such indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in
connection with the defense or investigation of such claim
unless the indemnified party shall have given the
indemnifying party notice of a conflict of interest with
respect to such claim. The failure of an indemnifying party
to give notice to the indemnified party of its election to
assume and control the defense of any claim for which notice
has been received by the indemnifying party in accordance
with this Section 10 (b)(iii) within 45 days after the
receipt of such notice shall constitute an election by the
indemnifying party not to assume and control the defense of
such claim. An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim shall not be
obligated to pay the fees and expenses of more than one
counsel (and, to the extent applicable, one local counsel) in
any one jurisdiction for all parties indemnified by such
indemnifying party with respect to such claim. No
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indemnifying party shall consent to entry of any judgment or
enter into any settlement with respect to a claim without the
consent of the indemnified party. No indemnified party shall
consent to entry of any judgment or enter into any settlement
of any such action the defense of which has been assumed by
an indemnifying party without the consent of such
indemnifying party, which consent shall not be unreasonably
withheld or delayed.
(iv) Rights of Contribution. In order to provide for just and
equitable contribution in circumstances under which the
indemnity contemplated by Sections 10(b)(i) and 10(b)(ii) for
any reason not available, other than by reason of the
exceptions provided therein, the parties required to
indemnify by the terms thereof shall contribute to the
aggregate losses, liabilities, claims, damages and expenses
of the nature contemplated by such indemnity agreement
incurred by the Company, any Selling Holder and one or more
other indemnified parties, except to the extent that
contribution is not permitted under Section 11(f) of the
Securities Act. In determining the amounts which the
respective parties shall contribute, there shall be
considered the parties' relative knowledge and access to
information concerning the matter with respect to which the
claim was asserted, the opportunity to correct and prevent
any statement or omission and any other equitable
considerations appropriate under the circumstances. For
purposes of this Section 10(b)(iv), each person, if any, who
controls an underwriter within the meaning of the Securities
Act or the Exchange Act shall have the same rights to
contribution as such underwriter, and each director, officer
and agent of the Company and each person, if any, who
controls the Company or a Selling Holder within the meaning
of the Securities Act or the Exchange Act shall have the same
rights to contribution as the Company or Selling Holder, as
the case may be.
11. Notices. All notices, requests and other communications hereunder
shall be in writing, and shall be either (i) delivered by hand, (ii) made by
facsimile transmission, (iii) sent by overnight courier, or (iv) sent by
registered mail, postage prepaid, return receipt requested. Notices from the
Company to the Registered Holder shall be sent to the address of the Registered
Holder shown on the Warrant Register. All notices from the Registered Holder to
the Company shall be delivered to the Company at its offices at 1050 Thomas
Jefferson Street, NW, Washington, DC 20007, to the attention of the Corporate
Secretary, or such other address as the Company shall so notify the Registered
Holder. All notices, requests and other communications hereunder shall be
deemed to have been given (i) if delivered by hand, at the time of the delivery
thereof to the receiving party at the address of such party described above,
(ii) if made by facsimile transmission, at the time that receipt thereof has
been acknowledged by electronic confirmation or otherwise, (iii) if sent by
overnight courier, on the next business day following the day such notice is
delivered to the courier service, or (iv) if sent by registered mail, on the
fifth business day following the day such mailing is made.
12. Waivers and Amendments. Any term or provision of this Warrant
Certificate may be waived, amended or supplemented only by a written agreement
executed by Company and
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the Registered Holders of a majority of the then outstanding Warrants;
provided, however, that the consent of each Registered Holder shall be required
for any waiver, amendment or supplement pursuant to which the Purchase Price
would be increased or the number of shares of Common Stock purchasable upon
exercise of the Warrants would be decreased (other than pursuant to adjustments
as provided for herein). Notwithstanding the foregoing, the Company may waive
in a written document executed by it any term or provision of this Warrant
Certificate to the benefit of which the Company is entitled.
13. Headings. The headings in this Warrant Certificate are
for purposes of reference only and shall not limit or otherwise affect the
meaning or construction of any term or provision of this Warrant Certificate.
14. Governing Law. This Warrant Certificate will be governed
by and construed in accordance with the laws of the State of Delaware without
regard to the conflict of laws principles of such jurisdiction.
SLM HOLDING CORPORATION
/s/ J. Paul Carey
------------------------------------
J. Paul Carey
Executive Vice President,
Finance, Marketing and Administration
Date: 9/2/97
--------------------------------
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EXHIBIT A
FORM OF ELECTION TO PURCHASE
To: SLM Holding Corporation
[Address]
The undersigned, pursuant to the terms and provisions of the attached
Warrant Certificate (No. W-___) (the "Warrant Certificate"), issued by SLM
Holding Corporation (the "Company") and dated as of ____________, hereby
irrevocably elects to exercise the right represented by the Warrant Certificate
to purchase ______ shares of Common Stock of the Company, par value $.20 per
share (or such other securities or assets of the Company as are purchasable in
their place pursuant to the Warrant Certificate), and tenders payment for such
shares (or other securities or assets) to the order of SLM Holding Corporation
in the amount of $_________ in immediately available funds in accordance with
Section 1(a) of the Warrant Certificate. The undersigned requests that a
certificate for such shares (or other securities) be registered in the name of
______________, whose address is ______________, and that such certificate be
delivered to ______________, whose address is ______________. If said number of
shares is less than all of the shares purchasable pursuant to the Warrant
Certificate, the undersigned requests that a new Warrant Certificate
representing the balance of the shares be registered in the name of
_______________, whose address is ____________, and that such Warrant
Certificate be delivered to _______________, whose address is ____________.
Dated: [Name of Registered Holder]
----------------
By:
----------------------------
Name:
Title:
(Signature must conform in all respects to
name of Registered Holder as specified on
the face of the Warrant Certificate.)
13
<PAGE> 14
EXHIBIT B
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers to _____________________, whose address is __________________, all of
its, his or her right, title and interest in and to the attached Warrant
Certificate (No. W-___) (the "Warrant Certificate"), issued by SLM Holding
Corporation (the "Company") and dated as of _____________, and does hereby
irrevocably constitute and appoint _________________to be its, his or her true
and lawful attorney to transfer the Warrant Certificate on the books of the
Company, with full power of substitution. The undersigned hereby certifies that
the Warrant Certificate is being sold, assigned and transferred pursuant to
either (i) an effective registration statement under the Securities Act of
1933, as amended, as to the Warrants and registration or qualification of the
Warrants under any applicable state securities or "blue sky" laws, or (ii) an
opinion of counsel or other evidence, in each case reasonably satisfactory to
the Company, that such registration and qualification are not required.
Dated: [Name of Registered Holder]
------------------
By
----------------------
Name:
Title:
(Signature must conform in all respects to
name of Registered Holder as specified on
the face of the Warrant Certificate.)
14
<PAGE> 1
EXHIBIT 5
Marianne M. Keler
General Counsel
October 15, 1997
SLM Holding Corporation
11600 Sallie Mae Drive
Reston, Virginia 20193
Ladies and Gentlemen:
This opinion is being furnished in connection with the Registration
Statement on Form S-1 (the "Registration Statement") being filed by SLM Holding
Corporation, a Delaware corporation (the "Company") under the Securities Act of
1933, as amended, relating to the registration of up to 555,015 shares (the
"Shares") of the Company's common stock, par value $.20 per share (the "Common
Stock") to be issued or issuable upon the exercise of outstanding warrants (the
"Warrants") to purchase from the Company shares of Common Stock at $72.43 per
share on or before September 30, 2008. The Warrants were originally issued to
the District of Columbia Financial Responsibility and Management Assistance
Authority (the "Control Board") pursuant to Section 602(a) of the Student Loan
Marketing Association Reorganization Act of 1996.
I or a member of my staff have examined originals or copies, certified
or otherwise identified to my satisfaction, of such corporate records and other
documents, and have conducted such other investigations of fact and law, as I
have deemed necessary or advisable for purposes of this opinion.
Based upon the foregoing, I am of the opinion that the Shares have
been duly authorized and, subject to the Registration Statement becoming
effective, when issued pursuant to the terms of the Warrants, and upon receipt
by the Company of the consideration therefor, the Shares will be legally
issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me in the Prospectus forming
part of the Registration Statement.
Very truly yours,
/s/ Marianne M. Keler
Marianne M. Keler
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 13, 1997 (except as to the third and fourth
paragraphs of Note 2, as to which the date is April 7, 1997), in the
Registration Statement (Form S-1 No. 333-_____) and related Prospectus of SLM
Holding Corporation for the registration of 555,015 shares of its common stock
/s/ Ernst & Young LLP
Washington, D.C.
October 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 49,439
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,174,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,612,282
<INVESTMENTS-CARRYING> 584,576
<INVESTMENTS-MARKET> 584,426
<LOANS> 34,509,038
<ALLOWANCE> 82,463
<TOTAL-ASSETS> 47,898,918
<DEPOSITS> 0
<SHORT-TERM> 25,850,071
<LIABILITIES-OTHER> 1,503,568
<LONG-TERM> 19,488,810
0
0
<COMMON> 13,231
<OTHER-SE> 829,355
<TOTAL-LIABILITIES-AND-EQUITY> 47,685,035
<INTEREST-LOAN> 1,373,466
<INTEREST-INVEST> 338,595
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,712,061
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,305,574
<INTEREST-INCOME-NET> 406,487
<LOAN-LOSSES> 5,983
<SECURITIES-GAINS> 7,382
<EXPENSE-OTHER> 216,842
<INCOME-PRETAX> 343,640
<INCOME-PRE-EXTRAORDINARY> 232,654
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,654
<EPS-PRIMARY> 4.36
<EPS-DILUTED> 4.36
<YIELD-ACTUAL> 1.78
<LOANS-NON> 0
<LOANS-PAST> 900,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84,063
<CHARGE-OFFS> 12,053
<RECOVERIES> 4,470
<ALLOWANCE-CLOSE> 82,463
<ALLOWANCE-DOMESTIC> 82,463
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.2
BY-LAWS
OF
STUDENT LOAN MARKETING ASSOCIATION
EFFECTIVE SEPTEMBER 18, 1997
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
NAME, LOCATION OF OFFICES, AND SERVICE OF PROCESS
<TABLE>
<S> <C> <C>
SECTION 1. Location of Offices.................................................... 1
SECTION 2. Service of Process..................................................... 1
ARTICLE II
PURPOSES
SECTION 1. Statutory Purposes..................................................... 1
SECTION 2. Ancillary Purposes..................................................... 1
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. Powers................................................................. 2
SECTION 2. Number and Type of Directors........................................... 3
SECTION 3. Vacancies.............................................................. 3
SECTION 4. Removal................................................................ 4
SECTION 5. Resignation............................................................ 4
SECTION 6. Meetings............................................................... 4
SECTION 7. Conference Telephone Meetings.......................................... 5
SECTION 8. Waiver of Notice....................................................... 5
SECTION 9. Quorum................................................................. 5
SECTION 10. Majority Vote.......................................................... 5
SECTION 11. Assumption of Assent................................................... 5
SECTION 12. Action Without a Meeting............................................... 6
SECTION 13. Executive and Other Committees.......................................... 6
SECTION 14. Conflicts of Interest................................................... 7
SECTION 15. Compensation........................................................... 7
SECTION 16. Chairman and Vice Chairman.............................................. 8
</TABLE>
<PAGE> 3
ARTICLE IV
OFFICERS AND EMPLOYEES
<TABLE>
<S> <C> <C>
SECTION 1. Number and Type..........................................................8
SECTION 2. Appointment and Confirmation............................................ 8
SECTION 3. Removal................................................................. 9
SECTION 4. Vacancies............................................................... 9
SECTION 5. The President........................................................... 9
SECTION 6. The Vice President...................................................... 9
SECTION 7. The Chief Financial Officer.............................................10
SECTION 8. The General Counsel.................................................... 10
SECTION 9. The Secretary.......................................................... 10
SECTION 10. The Treasurer.......................................................... 11
SECTION 11. Compensation........................................................... 11
SECTION 12. Bonds.................................................................. 11
SECTION 13. Employee Conduct....................................................... 11
SECTION 14. Outside or Private Employment...........................................12
SECTION 15. Voting Securities.......................................................12
ARTICLE V
SHAREHOLDERS
SECTION 1. Annual Meeting......................................................... 13
SECTION 2. Special Meetings....................................................... 13
SECTION 3. Notice................................................................. 13
SECTION 4. Waiver of Notice....................................................... 14
SECTION 5. Record Date............................................................ 14
SECTION 6. Voting Lists........................................................... 14
SECTION 7. Quorum................................................................. 15
SECTION 8. Proxies................................................................ 15
SECTION 9. Organization........................................................... 15
SECTION 10. Voting of Shares....................................................... 16
</TABLE>
<PAGE> 4
ARTICLE VI
SHARES OF STOCK
<TABLE>
<S> <C> <C>
SECTION 1. Issuance and Conditions................................................ 16
SECTION 2. Common Stock............................................................16
SECTION 3. Dividends on Common Stock.............................................. 17
SECTION 4. Preferred Stock........................................................ 17
SECTION 5. Dividends, Redemption, Conversion of
Preferred Shares....................................................... 17
SECTION 6. Preference on Liquidation.............................................. 17
SECTION 7. Purchase of Own Shares................................................. 18
SECTION 8. Rights and Options to Acquire Shares................................... 18
SECTION 9. Consideration for Shares............................................... 18
SECTION 10. Stated Capital......................................................... 18
SECTION 11. No Preemptive Rights................................................... 19
SECTION 12. Liability of Shareholders...............................................19
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates........................................................... 19
SECTION 2. Contents............................................................... 20
SECTION 3. Transfer............................................................... 20
SECTION 4. Lost, Stolen or Destroyed Certificates................................. 20
ARTICLE VIII
INDEMNIFICATION AND LIABILITY
SECTION 1. Indemnification in Third Party Actions................................. 21
SECTION 2. Indemnification in Actions By or in the Right of the
Corporation............................................................ 22
SECTION 3. Indemnification in Cases of Successful Defense......................... 23
SECTION 4. Procedure.............................................................. 23
SECTION 5. Advance Payments....................................................... 23
SECTION 6. Other Rights to Indemnification........................................ 24
SECTION 7. Insurance.............................................................. 24
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 8. Indemnification After Merger or Consolidation...........................24
SECTION 9. Indemnification under Employee Benefit Plans........................... 25
SECTION 10. Heirs, Executors and Administrators.................................... 25
SECTION 11. Limitation of Liability................................................ 25
ARTICLE IX
FISCAL YEAR............................................................ 26
ARTICLE X
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts...............................................................26
SECTION 2. Loans.................................................................. 26
SECTION 3. Checks, Drafts, etc.....................................................26
SECTION 4. Deposits............................................................... 26
ARTICLE XI
FACSIMILE SIGNATURES....................................................27
ARTICLE XII
AMENDMENTS..............................................................27
</TABLE>
<PAGE> 6
BY-LAWS
OF
STUDENT LOAN MARKETING ASSOCIATION
ARTICLE I
LOCATION OF OFFICES AND SERVICE OF PROCESS
SECTION 1. Location of Offices
The principal office of the Corporation shall be located in
Washington, D.C. The Corporation may establish other offices in such other
places, within or without the District of Columbia, as the Board of Directors
shall from time to time deem useful for the conduct of the Corporation's
business.
SECTION 2. Service of Process
The General Counsel or the Corporate Secretary or any
Assistant Secretary of the Corporation shall be agents of the Corporation upon
whom any process, notice or demand required or permitted by law to be served
upon the Corporation may be served.
ARTICLE II
PURPOSES
SECTION 1. Statutory Purposes
The Corporation is organized pursuant to the governing
statute, Section 439 of the Higher Education Act of 1965, as amended, to serve
as a secondary market and warehousing facility for student loans and to
undertake such other activities authorized by said Act or the Public Health
Service Act as may be necessary and appropriate to further the availability of
funds for postsecondary education and education facilities.
SECTION 2. Ancillary Purposes
The Corporation is further organized to engage in such other
related activities as are not prohibited and as the Board of Directors shall
from time to time determine to be in furtherance of its statutory purpose.
Page 1
<PAGE> 7
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. Powers
Except as otherwise provided in these By-laws, the powers of
the Corporation shall be exercised by the Board of Directors. Pursuant to the
governing statute, and in furtherance of the purposes expressed therein, the
Corporation by the Board of Directors shall have all powers granted to it by
its governing statute, as it may be amended from time to time, and such other
powers not inconsistent with its governing statute or other applicable federal
law, including but not limited to the power:
A. To have perpetual succession by its corporate name until
dissolved;
B. To sue and be sued, complain and defend, in its corporate
name and through its own counsel;
C. To adopt, alter and use the corporate seal, which shall be
circular in form and shall have inscribed thereon the name of the Corporation,
the year and fact of its creation by Act of Congress and the words "Corporate
Seal";
D. To lease, purchase, or otherwise acquire, own, hold,
improve, use, or otherwise deal in and with any property, real, personal,
mixed, or any interest therein, wherever situated;
E. To sell, convey, mortgage, pledge, lease, exchange and
otherwise dispose of its property and assets;
F. To enter into contracts, to execute instruments and to
incur liabilities, including but not limited to, obligations guaranteed by the
Secretary of Education or issued with the approval of the Secretary of the
Treasury, having such maturities and bearing such rate or rates of interest as
may be determined by the Board of Directors or such committee of the Board of
Directors, officer or officers as the Board of Directors may by resolution
stipulate, such obligations being redeemable at the option of either the
noteholder or the Corporation before maturity as the Board of Directors may
stipulate therein;
G. To lend money, to enter into purchase and lending
commitments including letters of credit, and to service, purchase or
repurchase, sell or resell, offer participations or pooled interests in, insure
or otherwise deal in, student loans, either insured or uninsured, or other
obligations issued for the purpose of financing or
Page 2
<PAGE> 8
refinancing the construction, reconstruction, renovation or purchase of
educational and training facilities and related equipment, instrumentation and
furnishings at prices and on terms and conditions determined by the Board of
Directors or such committee of the Board of Directors, officer or officers as
the Board of Directors may by resolution stipulate;
H. To conduct its business, carry on its operations, and have
officers and exercise the power granted by the governing statute in any State
without regard to any qualification or similar statute in any such State;
I. To appoint such officers, attorneys, employees, special
consultants, advisors and agents as may be required, to determine their
qualifications, to define their duties, fix their compensation, require bonds
and fix the penalty thereof in the same manner;
J. To accept gifts or donations of services, or of property,
real, personal or mixed, tangible or intangible;
K. To pay pensions and establish pension plans, pension trusts
and profit sharing plans for any or all of its directors, officers and
employees;
L. To act as a committee of the whole in reviewing the
Corporation's aggregate financing arrangements to ensure compliance with
applicable federal capital requirements; and
M. To do all things as are necessary or incidental to the
proper management of its affairs and the proper conduct of its business.
SECTION 2. Number and Type of Directors
The Board of Directors shall consist of those directors
appointed or elected as provided in Section 439 of Part B of Title IV of the
Higher Education Act of 1965, as amended. Each director shall hold office for
the term for which he is elected or appointed and until his successor is
elected or appointed and shall qualify.
SECTION 3. Vacancies
Any vacancy occurring in the Board of Directors resulting from
the death, resignation, removal or disqualification of any elected director may
be filled by a majority of the shares entitled to vote at an election of
directors.
Page 3
<PAGE> 9
Any vacancy occurring in the Board of Directors resulting
from the death, resignation, removal or disqualification of any appointed
director may be filled by appointment by the President of the United States.
SECTION 4. Removal
Any elected director may be removed with or without cause by a
majority of the shares entitled to vote at an election of directors.
SECTION 5. Resignation
Any director may resign at any time upon written notice to the
President and Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified, upon
receipt thereof, and the acceptance of such resignation, unless required by the
terms thereof, shall not be necessary to make such resignation effective.
SECTION 6. Meetings
A regular meeting of the Board of Directors may be held,
without other notice than these By-laws, immediately after, and at the same
place as, the annual meeting of the shareholders. Other meetings of the Board
of Directors shall be held either within or without the District of Columbia,
at the call of the Chairman or Vice Chairman of the Board of Directors, or upon
either of their request, or upon the written request of a majority of the
directors. Meetings may be held by attendance in person at a place prescribed
or by use of a conference telephone or similar communications equipment as
provided in Section 7 of this Article. Notice shall be given to all directors
as to the time and manner of the meeting by the Secretary or by a person
calling the meeting by mail, postage prepaid, not later than the fifth day
before the meeting, or personally or by facsimile, telecopy, telegraph or
telephone not later than the day before the meeting. If in writing and mailed,
such notice shall be deemed delivered when deposited in the United States mail,
properly addressed, with postage thereon prepaid. If notice be in writing and
by telegram, such notice shall be deemed to be delivered when the telegram is
delivered to the carrier. In all other cases such notice shall be deemed given
when actually received at the office or residence of the recipient.
Page 4
<PAGE> 10
SECTION 7. Conference Telephone Meetings
All or any one or more of the directors may participate in a
meeting of the Board of Directors by means of a conference telephone or similar
communications equipment by means of which all persons participating in such
meeting can hear each other. Participation in a meeting pursuant to such
communications shall constitute presence in person at such meeting. The minutes
of any meeting of the Board of Directors held by conference telephone or
similar communications equipment shall be prepared in the same manner as a
meeting of the Board of Directors held in person.
SECTION 8. Waiver of Notice
The presence of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. A director may execute a written
waiver of notice either before or after a meeting. Neither the business to be
transacted at, nor the purpose of, any regular or other meeting of the Board of
Directors or any Committee thereof need be specified in the notice or waiver of
notice of the meeting.
SECTION 9. Quorum
A majority of the directors authorized by the governing
statute serving at the time of a meeting shall constitute a quorum for the
transaction of business, but if less than such majority are present at any
meeting of the Board of Directors, a majority of the directors present may
adjourn the meeting from time to time without further notice.
SECTION 10. Majority Vote
Except as otherwise provided in these By-laws, the act of a
majority of directors present at a meeting at which a quorum is present shall
be the act of the Board of Directors.
SECTION 11. Assumption of Assent
Any director of the Corporation who is present at a meeting of
the Board of Directors at which any corporate action is taken shall be presumed
to have assented to the taking of such action unless his dissent shall be
entered in the minutes of the meeting, or unless he shall file his written
dissent to such action with a person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary of the Corporation within ten days
Page 5
<PAGE> 11
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who voted in favor of such action.
SECTION 12. Action Without a Meeting
Any action required to be taken by the Board of Directors at a
meeting, or by a committee of the Board of Directors at a meeting, may be taken
without a meeting, if a consent in writing, setting forth the action so taken,
is signed by a majority of the directors, or a majority of the members of the
committee, as the case may be. Such consent shall have the same effect as a
majority vote of the Board of Directors or committee, as the case may be.
Written notice of any action taken pursuant to this section by a majority of
the directors, or members of a committee, as the case may be, shall, within ten
days of such action, be given to all directors or members of a committee not
signing such action by written consent.
SECTION 13. Executive and Other Committees
The Board of the Directors may designate from among the
members of the Board of Directors an Executive Committee and one or more other
committees, each of which, to the extent provided in any resolution designating
such membership and in these By-laws shall have and may exercise all the
authority of the Board of Directors. No such committee shall have the authority
of the Board of Directors in reference to any powers reserved to the full Board
of Directors by any resolution or these By-laws. Unless otherwise provided by
the Board of Directors, a majority of any such committee (or the member
thereof, if only one) shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of such committee present
at a meeting at which a quorum is present shall be the act of such committee.
Each committee shall keep a record of its acts and proceedings and shall report
thereon to the Board of Directors whenever requested so to do. Any or all
members of any such committee may be removed, with or without cause, by
resolution of the Board of Directors, passed by a majority of the whole Board.
All notice provisions and provisions regarding telephonic meetings with respect
to the Board of Directors set forth in these By-laws shall apply equally to
such other committees of the Board.
Page 6
<PAGE> 12
SECTION 14. Conflicts of Interest
No contract or other transaction between the Corporation and
one or more of its directors or officers or between the corporation and any
other corporation, firm, association or entity in which one or more of its
directors or officers are directors or officers, or financially interested,
shall be either void or voidable solely because of such relationship or
interest, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee thereof
which authorizes, approves or ratifies such contract or transaction or solely
because his or their votes are counted for such purpose if:
A. The material facts of such relationship or interest and as
to the contract or transaction are disclosed or known to the Board of Directors
or committee which in good faith authorizes, approves or ratifies the contract
or transaction by a vote or consent sufficient for the purpose without counting
the votes or consents of such interested directors; or
B. The material facts of such relationship or interest and as
to the contract or transaction are disclosed or known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by the affirmative vote of the holders of a majority of
shares; or
C. The contract or transaction is fair to the Corporation as
of the time it is authorized, approved or ratified by the Board of Directors, a
committee or the shareholders.
Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
SECTION 15. Compensation
Each director shall be paid such compensation as may be fixed
from time to time by resolution of the Board of Directors, and each director
shall also be reimbursed for his travel and subsistence expenses incurred while
attending meetings of the Board of Directors or committees thereof.
Page 7
<PAGE> 13
SECTION 16. Chairman and Vice Chairman
The President of the United States shall appoint one director
to be Chairman of the Board of Directors, who shall preside over meetings of
the Board of Directors.
The Board of Directors shall appoint one Vice Chairman, who
shall be an elected Director, and who shall serve at the pleasure of the Board
of Directors until the next regular annual meeting of the Board of Directors
described in Section 6 of this Article following his appointment and until his
successor has been elected and qualified or until his successor has been
appointed and qualified. The Vice Chairman of the Board of Directors shall act
as Chairman in the latter's absence and at any time when there is no incumbent
Chairman.
ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 1. Number and Type
The officers of the Corporation shall be a President, one or
more Vice Presidents (the number thereof to be determined by the Board of
Directors), a Chief Financial Officer, a General Counsel, a Secretary, and
Treasurer, each of whom shall be appointed by the Chairman of the Board of
Directors subject to confirmation by resolution of the Board of Directors. Such
other officers and assistant officers as may be deemed necessary may be
appointed by the Chairman subject to confirmation by resolution of the Board of
Directors. Any of the above offices may be held by the same person, except the
offices of President and Secretary.
SECTION 2. Appointment and Confirmation
The officers shall be appointed and confirmed annually at the
first meeting of the Board of Directors held after each annual meeting of the
shareholders. Each officer shall hold office until his successor shall have
been duly appointed and confirmed or until his death or until he shall resign
or shall have been removed in the manner hereinafter provided.
Page 8
<PAGE> 14
SECTION 3. Removal
Any officer may be removed, with or without cause, by the
Board of Directors. Appointment or confirmation of an officer shall not create
contract rights.
SECTION 4. Vacancies
A vacancy in an office because of death, resignation, removal,
disqualification or otherwise, may be filled by the Board of Directors.
SECTION 5. The President
The President shall be the principal executive officer of the
Corporation and, subject to the control of the Board of Directors, shall, in
general, supervise and control all of the business and affairs of the
Corporation. He may sign, singly or with the Secretary or any other proper
officer of the Corporation authorized by the Board of Directors, certificates
for shares of the Corporation, any deeds, mortgages, bonds, contracts, or other
instruments which the Board of Directors has authorized to be executed, except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation, or shall
be required to be otherwise signed or executed, and, in general, shall perform
all duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 6. The Vice President
In the absence of the President or in the event of his death,
inability, or refusal to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated at the
time of their election) shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the President. Any Vice President may sign, with the Secretary or
Assistant Secretary, certificates for shares of the Corporation, and shall
perform such other duties as from time to time may be assigned to him by the
President or by the Board of Directors.
Page 9
<PAGE> 15
SECTION 7. The Chief Financial Officer
The Chief Financial Officer shall: (a) have charge and custody
of and be responsible for all funds and securities of the Corporation, receive
and give receipts for monies due and to be payable to the Corporation from any
source whatsoever, and deposit all such monies in the name of the Corporation
in such banks, trust companies or other depositories as shall be selected in
accordance with a resolution of the Board of Directors; and (b) in general,
perform all of the duties incident to the office of the Chief Financial Officer
and such other duties as from time to time may be assigned to him by the
President or by the Board of Directors.
SECTION 8. The General Counsel
The General Counsel shall: (a) be the principal consulting
officer of the Corporation for all legal matters; (b) be responsible for and
direct all counsel, attorneys, employees and agents in the performance of all
legal duties and services for and on behalf of the Corporation; (c) perform
such other duties and have such other powers as are ordinarily incident to the
office of the General Counsel; and (d) perform such other duties as from time
to time may be assigned to him by the President or by the Board of Directors.
SECTION 9. The Secretary
The Secretary shall: (a) keep the minutes of the
shareholders', the Board of Directors' and committees' meetings in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these By-laws; (c) be the custodian of the
corporate records and of the seal of the Corporation and see that the seal of
the Corporation is affixed to all documents the execution of which on behalf of
the Corporation under its seal is duly authorized; (d) keep a register of the
post office address of each registered shareholder which shall be furnished to
the Secretary by such shareholder; (e) have custody of the seal of the
Corporation and the Secretary or any Assistant Secretary shall have authority
to affix the same to any instrument requiring it, and when so approved, it may
be attested by the Secretary or any such Assistant Secretary; (f) see that all
books, reports, statements, certificates and other documents and records
required by law to be kept or filed are properly kept or filed, as the case may
be; (g) in general, perform all duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him by the President
or by the Board of Directors. In the absence or inability to act as Secretary,
any Assistant Secretary may perform all the duties and exercise all the powers
of the Secretary. The performance of any such duty shall, in respect of any
other person dealing with the Corporation, be conclusive evidence of his or her
power to act. An Assistant Secretary shall also perform such other duties as
the Secretary or the Board of Directors may assign to him or her. The
performance of any such duty shall, in respect of any other person dealing with
the Corporation, be conclusive evidence of his or her
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power to act. An Assistant Secretary shall also perform such other duties as
the Secretary or the Board of Directors may assign to him or her.
SECTION 10. The Treasurer
The Treasurer shall perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned by the
President, the Chief Financial Officer, or the Board of Directors. In the
absence or inability to act of the Treasurer, any Assistant Treasurer may
perform all the duties and exercise all the powers of the Treasurer. The
performance of any such duty shall, in respect of any other person dealing with
the Corporation, be conclusive evidence of his or her power to act. An
Assistant Treasurer shall also perform such other duties as the Treasurer or
the Board of Directors may assign to him or her.
SECTION 11. Compensation
The compensation of the officers shall be fixed from time to
time by the Board of Directors and no officer shall be prevented from receiving
such compensation by reason that he is also a director of the Corporation.
SECTION 12. Bonds
If required by the Board of Directors, any officer or employee
specified by the Board of Directors shall give a bond for the faithful
discharge of his duties in such sum and with such surety or sureties as the
Board of Directors shall by resolution require.
SECTION 13. Employee Conduct
No officer shall engage, directly or indirectly, in any
personal business transaction or private arrangement for personal profit which
accrues from or is based upon his official position or authority or upon
confidential information which he gains by reason of such position or
authority, and he shall reasonably restrict his personal business affairs so as
to avoid conflicts of interest with his official duties. No officer shall
divulge confidential information to any unauthorized person, or release any
such information in advance of authorization for its release, nor shall he
accept, directly or indirectly, any valuable gift, favor or service from any
person with whom he transacts business on behalf of the Corporation; provided,
however, that nothing in this section shall prohibit any officer from sharing
information with the Corporation's sole shareholder or the U.
S. Department of Treasury.
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SECTION 14. Outside or Private Employment
No officer shall have any outside or private employment or
affiliation with any firm or organization incompatible with his concurrent
employment by the Corporation, and he shall not accept or perform any outside
or private employment which the President of the Corporation determines will
interfere with the efficient performance of such officer's official duties.
SECTION 15. Voting Securities
Powers of attorney, proxies, waivers of notice of meeting,
consents and other instruments relating to securities and ownership interests
owned by the Corporation may be executed in the name of and on behalf of the
Corporation by any officer of the Corporation and any such officer may, in the
name of and on behalf of the Corporation, take all such action as any such
officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
power incident to the ownership of such securities and which, as he owner
thereof, the Corporation might have existed and possessed if present. The Board
of Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
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ARTICLE V
SHAREHOLDERS
SECTION 1. Annual Meeting
An annual meeting of shareholders entitled to vote, for the
purpose of selecting directors and transacting such other business as may
properly be brought before the meeting, shall be held at such time and date as
the Board of Directors shall designate from time to time and as shall be stated
in the notice of the meeting. The annual meeting shall be held at such time and
place within or without the District of Columbia as shall be fixed by the Board
of Directors and as shall be designated in the notice of such meeting. If the
Board of Directors shall fail to designate a place for the holding of the
annual meeting, the place of the meeting shall be the principal office of the
Corporation. At such meeting, the shareholders, to the extent they are entitled
by the Higher Education Act of 1965, as amended, and these By-laws to do so,
may elect directors and transact other business with the same force and effect
as at an annual meeting duly called and held.
SECTION 2. Special Meetings
Special meetings of the shareholders shall be held upon the
call of either the Chairman, the President, or a majority of the directors of
the Corporation, and shall be called by the Chairman upon the written request
of holders of at least one-third of the shares of the Corporation having voting
power. A special meeting may be called for any purpose or purposes for which
shareholders may legally meet, and shall be held, within or without the
District of Columbia, at such place as may be determined by the Chairman, the
President, or a majority of the directors of the Corporation, whichever shall
call the meeting.
SECTION 3. Notice
Written or printed notice stating the place, day and hour of
any meeting and, in the case of a special meeting, the purpose for which the
meeting is called, shall be delivered not less than 10 nor more than 60 days
before the date of the meeting, either personally or by mail, by or at the
direction of the President, or the Secretary, or the officer or persons calling
the meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail with postage thereon prepaid, addressed to the shareholder
at his address as it appears on the stock transfer books of the Corporation or
such other address as the shareholder has in writing instructed the Secretary.
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SECTION 4. Waiver of Notice
Attendance by a shareholder at a meeting of shareholders,
whether in person or by proxy, without objection to the notice or lack thereof,
shall constitute a waiver of notice of the meeting. Any shareholder may either
before or after the time of the meeting execute a waiver of notice of such
meeting.
SECTION 5. Record Date
For the purpose of determining shareholders entitled to notice
or to vote at any meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors shall fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than 60
days and in case of a meeting of shareholders not less than 10 days prior to
the date on which the particular action requiring such determination of
shareholders is to be taken. If the Board of Directors fails to designate such
a date, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividends is adopted,
as the case may be, shall be the record date for such determination of
shareholders. When a date is set for the determination of shareholders entitled
to vote at any meeting of shareholders, such determination shall apply to any
adjournment thereof.
SECTION 6. Voting Lists
The officer or agent having charge of the stock transfer books
for shares of the Corporation shall make a complete record of the shareholders
entitled to vote at each meeting of the shareholders or any adjournment
thereof, arranged in alphabetical order, with the address and the number of
shares held by each. Such record shall be produced and kept open at the time
and place of the meeting and shall be subject to inspection by any shareholder
during the whole time of the meeting for the purposes thereof.
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SECTION 7. Quorum
A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn a meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. Shares of its own stock belonging to
the Corporation shall not be counted in determining the total number of
outstanding shares at any given time.
SECTION 8. Proxies
At all meetings of shareholders, a shareholder entitled to
vote may vote by proxy executed in writing by a shareholder or by its duly
authorized attorney-in-fact. Shares standing in the name of another corporation
may be voted by such officer, agent or proxy as the by-laws of such corporation
may prescribe, or, in the absence of such provision, as the board of directors
of such corporation may determine. All proxies shall be filed with the
Secretary of the Corporation before or at the time of the meeting, and shall be
revocable, if such revocation be in writing, until exercised. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
SECTION 9. Organization
Meetings of the shareholders shall be presided over by the
Chairman of the Board of Directors, or if he is not present, by the Vice
Chairman, or if neither the Chairman nor the Vice Chairman is present, by a
chairman to be chosen by holders of a majority of the shares entitled to vote
who are present in person or by proxy at the meeting. The Secretary of the
Corporation shall act as secretary of every meeting, and if the Secretary is
not present, the Chairman shall choose any person present to act as secretary
of the meeting.
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SECTION 10. Voting of Shares
Except as provided in this Section, at every meeting of the
shareholders, every holder of common stock entitled to vote on a matter coming
before such meeting shall be entitled to one vote for each share of common
stock registered in its name on the stock transfer books of the Corporation at
the close of the record date.
Every holder of common stock entitled to vote for the election
of directors shall have the right to cast the number of votes that is equal to
the product of the number of shares owned by it multiplied by the number of
directors to be elected, and it may cast all such votes for one person or may
distribute them evenly or unevenly among any number of persons not greater than
the number of such directors to be elected, at its option. Shares of its own
stock belonging to the Corporation shall not be eligible to vote on any matter.
Whenever directors are to be elected at a shareholders
meeting, they shall be elected by a plurality of the votes cast at the meeting
by the shareholders entitled to vote. Whenever any corporate action, other than
the election of directors, is to be taken by vote of shareholders at a meeting,
it shall, except as otherwise required by law (including without limitation
Section 439 of the Higher Education Act of 1965, as amended) or by these
By-laws, be authorized by a majority of the votes cast at the meeting by the
shareholders entitled to vote thereon.
ARTICLE VI
SHARES OF STOCK
SECTION 1. Issuance and Conditions
The Board of Directors shall have power in accordance with the
provisions of the governing statute to authorize the issuance of voting common,
non-voting common, and preferred shares of stock.
SECTION 2. Common Stock
The Corporation shall have voting common stock having such par
value as may be fixed by the Board of Directors. Each share of common stock
shall be entitled to one vote, with rights of cumulative voting at all
elections of directors.
Except as otherwise provided in these By-laws, the powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions applicable to all shares of common stock shall be
identical in every respect.
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Except as provided in this Section, the common stock shall be
fully transferable, except that, as to the Corporation, it shall be transferred
only on the books of the Corporation.
SECTION 3. Dividends on Common Stock
To the extent that income is earned and realized, the Board of
Directors may from time to time declare, and the Corporation shall pay,
dividends on the common stock. No dividend shall be declared or paid on any
share of common stock at any time when any dividend is due on the shares of
preferred stock and has not been paid.
SECTION 4. Preferred Stock
The Corporation may issue shares of preferred stock having
such par value, and such other powers, preferences and relative and other
special rights, and qualifications, limitations and restrictions applicable
thereto, as may be fixed by the Board of Directors. Such shares shall be freely
transferable, except that, as to the Corporation, such shares shall be
transferred only on the books of the Corporation.
SECTION 5. Dividends, Redemption, Conversion of Preferred Shares
The holders of the preferred shares shall be entitled to such
rate of dividends and such shares shall be subject to such redemption or
conversion provisions as may be provided for at the time of issuance. Such
dividends shall be paid out of the net income of the Corporation, to the extent
earned and realized.
SECTION 6. Preference on Liquidation
In the event of any liquidation, dissolution, or winding up of
the Corporation's business, the holders of shares of preferred stock shall be
paid in full at par value thereof, plus all accrued dividends, before the
holders of the common stock receive any payment.
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SECTION 7. Purchase of Own Shares
The Corporation shall have the right, pursuant to resolution
by the Board of Directors, to purchase, take, receive or otherwise acquire its
own shares, but purchases, whether direct or indirect, shall be made only to
the extent of unreserved and unrestricted earned or capital surplus available
therefor.
SECTION 8. Rights and Options to Acquire Shares
The Corporation may create and issue, pursuant to resolution
by the Board of Directors, rights or options entitling the holders thereof to
purchase from the Corporation shares of any class or classes of shares. Such
rights or options shall be evidenced in such manner as the Board of Directors
shall stipulate and shall be issued and become exercisable upon such terms and
conditions, for such duration and at such prices, subject to the provisions of
these By-laws governing consideration, as the resolution shall provide.
SECTION 9. Consideration for Shares
The Corporation shall issue shares of stock for such
consideration, expressed in dollars, but not less than the par value thereof,
as shall be fixed from time to time by the Board of Directors. That part of the
surplus of the Corporation which is transferred to stated capital upon issuance
of shares as a share dividend shall be deemed to be the consideration for the
shares so issued.
The consideration for the issuance of shares may be paid, in
whole or in part, in cash or other property acceptable to the Board of
Directors, except that a promissory note shall not constitute payment or
partial payment for the issuance of shares of the Corporation.
SECTION 10. Stated Capital
The consideration received upon the issuance of any share of
stock shall constitute stated capital to the extent of the par value of such
shares, and the excess, if any, of such consideration shall constitute capital
surplus. The stated capital of the Corporation may be increased from time to
time by resolution of the Board of Directors directing that all or a part of
the surplus of the Corporation be transferred to stated capital. The Board of
Directors may direct that the amount of the surplus so transferred shall be
deemed to be stated capital in respect of any designated class of shares.
The Board of Directors may by resolution from time to time
reduce the stated capital of the Corporation but only in the amount of the
aggregate par value of
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any shares of the Corporation which shall have been reacquired and canceled or
to the extent of any reduction in the par value of outstanding shares in
accordance with these By-laws. Any surplus created by virtue of a reduction of
stated capital shall be deemed to be capital surplus.
SECTION 11. No Preemptive Rights
No holder of the shares of the Corporation of any class, now
or hereafter authorized, shall as such holder have any preemptive or
preferential right to subscribe to, purchase, or receive any shares of the
Corporation of any class, now or hereafter authorized, or any rights or options
for any such shares or any rights or options to subscribe to or purchase any
such shares or other securities convertible into or exchangeable for or
carrying rights or options to purchase shares of any class or other securities,
which may at any time be issued, sold, or offered for sale by the Corporation
or subjected to the rights or options to purchase granted by the Corporation.
SECTION 12. Liability of Shareholders
A holder of shares of the Corporation shall be under no
obligation to the Corporation with respect to such shares other than the
obligation to pay to the Corporation the full consideration for which such
shares were or are to be issued.
Any person becoming a transferee of shares in good faith and
without notice or knowledge that the full consideration thereof had not been
paid shall not be personally liable to the Corporation for any unpaid portion
of such consideration.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates
The interest of each shareholder of the Corporation may be
evidenced by certificates representing shares of stock of the Corporation,
certifying the number of shares represented thereby, and shall be in such form
not inconsistent with the governing statute of the Corporation as the Board of
Directors may from time to time prescribe.
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The certificates of stock shall be signed by the President or
a Vice President and by the Secretary or Assistant Secretary and sealed with
the corporate seal or an engraved or printed facsimile thereof. The signatures
of such officers upon a certificate may be facsimile if the certificate is
manually signed on behalf of a transfer agent or a registrar other than the
Corporation itself or one of its employees. In the event that any officer who
has signed or whose facsimile signature has been placed upon such certificate
shall have ceased to be such before such certificate is issued, it may be
issued by the Corporation with the same effect as if such officer had not
ceased to be such at the time of the issue.
Each certificate or share shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled, and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that in the
case of a lost, destroyed or mutilated certificate, a new certificate may be
issued upon such terms and with such indemnity to the Corporation as the Board
of Directors may prescribe.
SECTION 2. Contents
Each certificate representing shares shall state the
following:
A. That the Corporation is organized pursuant to an Act of Congress;
B. The name of the person to whom issued;
C. The number and class of shares, and the designation of the series, if any,
which such certificate represents;
D. The par value of each share represented by such certificate;
E. The provisions by which such shares may be redeemed; and
F. That the shares represented shall not have any preemptive rights to purchase
unissued or treasury shares of the Corporation.
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Each certificate representing shares of preferred stock shall
state upon the face thereof the annual dividend rate for such shares, and shall
state upon the reverse side thereof the powers, preferences and relative and
other special rights, and the qualifications, limitations and restrictions
applicable to such shares of preferred stock.
No certificate shall be issued for any share until such share
is fully paid.
SECTION 3. Transfer
Transfer of shares of the Corporation shall be made only on
the stock transfer books of the Corporation by the holder of record thereof or
by his legal representative, who shall furnish proper evidence of the authority
to transfer, or by his attorney thereto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares.
The person in whose name shares stand in the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes.
SECTION 4. Lost, Stolen or Destroyed Certificates
The Corporation may issue a new stock certificate in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate or his or her legal representative to give the
Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of any such new certificate. The Board of
Directors may require such owner to satisfy other reasonable requirements.
ARTICLE VIII
INDEMNIFICATION AND LIABILITY
SECTION 1. Indemnification in Third Party Actions
The Corporation shall indemnify, to the extent permitted by
the Delaware General Corporation Law (as the same exists or may hereinafter be
amended) for a corporation subject to such law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise,
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against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. Indemnification in Actions By or in the Right of the Corporation
The Corporation shall indemnify, to the extent permitted by
the Delaware General Corporation Law (as the same exists or may hereinafter be
amended) for a corporation subject to such law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper.
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SECTION 3. Indemnification in Cases of Successful Defense
To the extent that a director or officer has been successful
on the merits or otherwise in defense of any action, suit or proceeding
referred to in Sections 1 and 2 of this Article, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
SECTION 4. Procedure
Any indemnification under Sections 1 and 2 of this Article
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon determination that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 1 and 2 of this Article. Such
determination shall be made (a) by the Board of Directors, or a duly designated
committee thereof, by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (b) if such a quorum is
not obtainable or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
shareholders at the next meeting of shareholders. In making a determination
under this Article, the Board of Directors or shareholders may rely, as to all
questions of law, on the advice of independent legal counsel.
SECTION 5. Advance Payments
Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding, provided the Corporation
approves in advance counsel selected by the director or officer (which approval
shall not be unreasonably withheld), and upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article. Such expenses (including attorneys'
fees) incurred by other employees of the Corporation may also be paid upon such
terms and conditions, if any, as the Corporation deems appropriate.
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SECTION 6. Other Rights to Indemnification
The indemnification and advancement of expenses provided by or
granted pursuant to the other sections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, but no person shall be entitled to indemnification by the Corporation
to the extent he is indemnified by any other party (other than a wholly-owned
subsidiary of the Corporation), including an insurer.
SECTION 7. Insurance
The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director or officer of the corporation, or is or
was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under this
Article.
SECTION 8. Indemnification After Merger or Consolidation
For purposes of this Article, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger with the Corporation which, if its separate existence
had continued, would have had power and authority to indemnify its directors or
officers so that any person who is or was a director or officer of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued.
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SECTION 9. Indemnification under Employee Benefit Plans
For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director or officer of the corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Article.
SECTION 10. Heirs, Executors and Administrators
The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
SECTION 11. Limitation of Liability
Directors or officers of the Corporation shall not be
personally liable to the Corporation or to shareholders for monetary damages
for breach of fiduciary duty acting in their respective capacities, provided,
however, such limitation of liability shall not apply to: (a) any breach of the
party's duty of loyalty to the Corporation or its shareholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (c) any transaction from which the party derived
an improper personal benefit. This provision shall not limit the liability of
any party for any act or omission occurring prior to September 18, 1992.
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ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first
day of January and end on the thirty-first day of December in each year.
ARTICLE X
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts
The Board of Directors may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2. Loans
No loans shall be contracted on behalf of the Corporation and
no evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors.
Such authority may be general or confined to specific instances.
SECTION 3. Checks, Drafts, etc.
All checks, drafts or other orders for the payment of money,
notes or other evidences of indebtedness issued in the name of the Corporation
shall be signed by such officer or officers, agent or agents, of the
Corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
SECTION 4. Deposits
All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board of Directors may select
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ARTICLE XI
FACSIMILE SIGNATURES
The Board of Directors may by resolution authorize the use of
facsimile signatures in lieu of manual signatures.
XII
AMENDMENTS
These By-laws may be altered, amended or repealed and new
By-laws, consistent with the governing statute, may be adopted by the majority
vote of the Board of Directors.
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