<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
REGISTRATION NO. 333-21217
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
SLM HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6199
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-2013874
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1050 THOMAS JEFFERSON STREET, N.W.
WASHINGTON, D.C. 20007
(202) 298-3152
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
TIMOTHY G. GREENE
GENERAL COUNSEL
SLM HOLDING CORPORATION
1050 THOMAS JEFFERSON STREET, N.W.
WASHINGTON, D.C. 20007
(202) 298-3150
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: UPON CONSUMMATION OF THE REORGANIZATION DESCRIBED HEREIN.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 (b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION CAPTION IN PROSPECTUS
- -------- --------------------------------------------- -------------------------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Cover of Registration Statement;
Outside Front Cover Page of
Prospectus; Cross Reference Sheet
Item 2 Inside Front and Outside Back Cover Pages of
Prospectus................................. Available Information; Table of
Contents
Item 3 Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Summary
Item 4 Terms of the Transaction..................... Summary; The Reorganization; Terms of
the Reorganization Agreement;
Comparison of Stockholder Rights;
Appendix A: Agreement and Plan of
Reorganization; Appendix B: Student
Loan Marketing Association
Reorganization Act of 1996
Item 5 Pro Forma Financial Information.............. Summary; Capitalization
Item 6 Material Contacts With the Company Being
Acquired................................... Summary; The Reorganization; Terms of
the Reorganization Agreement;
Appendix A: Agreement and Plan of
Reorganization
Item 7 Additional Information required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ *
Item 8 Interests of Named Experts and Counsel....... Legal Matters; Experts
Item 9 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ *
Item 10 Information With Respect to S-3
Registrants................................ *
Item 11 Incorporation of Certain Information by
Reference.................................. *
Item 12 Information With Respect to S-2 or S-3
Registrants................................ *
Item 13 Incorporation of Certain Information by
Reference.................................. *
Item 14 Information With Respect to Registrants Other
Than S-2 or S-3 Registrants................ Summary; The Reorganization; Terms of
the Reorganization Agreement;
Business; Regulation
Item 15 Information With Respect to S-3 Companies.... *
Item 16 Information With Respect to S-2 or S-3
Companies.................................. *
</TABLE>
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<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION CAPTION IN PROSPECTUS
- -------- --------------------------------------------- -------------------------------------
<S> <C> <C>
Item 17 Information With Respect to Companies Other
Than S-3 or S-2 Companies.................. Summary; The Reorganization; Terms of
the Reorganization Agreement;
Selected Financial Data; Financial
Statements; Management's Discussion
and Analysis of Financial Condition
and Results of Operation; Business;
Regulation
Item 18 Information if Proxies, Consents or
Authorizations are to be Solicited......... Front Cover Page of Prospectus;
Summary; Information Regarding
the Special Meeting; The
Reorganization; -- Reasons for the
Reorganization; Recommendation of
the Board of Directors
Item 19 Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer....................... *
</TABLE>
- ---------------
* Omitted because inapplicable or answer is negative.
<PAGE> 4
STUDENT LOAN MARKETING ASSOCIATION
1050 THOMAS JEFFERSON STREET, N.W.
WASHINGTON, D.C. 20007
(202) 298-3152
, 1997
Dear Sallie Mae Shareholder:
The Board of Directors of the Student Loan Marketing Association ("Sallie
Mae") invites you to attend a Special Meeting of Shareholders (the "Special
Meeting") to be held on Thursday, May 15, 1997, at _____ _.m., local time, at
the Ritz-Carlton, Tysons Corner, 1700 Tysons Blvd., McLean, VA 22102. At the
Special Meeting, Sallie Mae shareholders will be asked to consider and vote upon
the approval and adoption of an Agreement and Plan of Reorganization (the
"Reorganization Agreement") providing for the reorganization (the
"Reorganization") of Sallie Mae into a subsidiary of a new holding company named
SLM Holding Corporation (the "Holding Company"). If the Reorganization is
approved, each outstanding share of common stock, par value $.20 per share, of
Sallie Mae shall be converted into one share of common stock, par value $.20 per
share, of the Holding Company. The Reorganization is described in the attached
Proxy Statement/Prospectus, including the reasons why a majority of the Board
approved the Reorganization. The Holding Company Board will include six members
of the Sallie Mae Board, Sallie Mae's CEO, and nine outstanding new members. For
information concerning the Board of Directors of the Holding Company, see the
section entitled "MANAGEMENT" in the attached Proxy Statement/Prospectus. Eight
members of the Sallie Mae Board, none of whom will serve on the Holding Company
Board, voted against the Reorganization. A statement provided to Sallie Mae on
behalf of these directors of the reasons for their vote is transcribed at
Appendix D.
Federal legislation described herein authorized the Sallie Mae Board to
develop a plan for reorganizing Sallie Mae as a subsidiary of a new holding
company. The Reorganization Agreement is the plan approved by a majority of the
Sallie Mae Board. The Reorganization would effectively "privatize" Sallie Mae by
phasing out its federal sponsorship. This is a unique and important opportunity
for Sallie Mae and its shareholders.
NO MATTER HOW MANY SHARES YOU HOLD, YOU ARE URGED TO COMPLETE, SIGN AND
RETURN THE ENCLOSED PROXY CARD AT YOUR EARLIEST CONVENIENCE. This will help to
establish a quorum and avoid the cost of further solicitation. We hope that you
will be able to attend the meeting and encourage you to read the enclosed
materials describing the meeting agenda, the Reorganization and Sallie Mae in
detail.
We look forward to seeing you on May 15, 1997.
Sincerely,
William Arceneaux
Chairman of the Board
<PAGE> 5
STUDENT LOAN MARKETING ASSOCIATION
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 1997
------------------------
Consistent with the By-Laws of the Student Loan Marketing Association
("Sallie Mae"), notice is hereby given on behalf of the Board of Directors that
a Special Meeting of Shareholders of Sallie Mae (the "Special Meeting") will be
held on Thursday, May 15, 1997, at _____ _.m., local time at the Ritz-Carlton,
Tysons Corner, 1700 Tysons Blvd., McLean, VA 22102.
The purpose of the meeting is to consider and vote upon the approval and
adoption of an Agreement and Plan of Reorganization (the "Reorganization
Agreement") providing for the reorganization (the "Reorganization") of Sallie
Mae into a subsidiary of a new holding company named SLM Holding Corporation
(the "Holding Company"). If the Reorganization is approved, each outstanding
share of common stock, par value $.20 per share, of Sallie Mae shall be
converted into one share of common stock, par value $.20 per share, of the
Holding Company.
Holders of record of Sallie Mae Common Stock at the close of business on
March 17, 1997 will be entitled to vote at the Special Meeting or any
adjournments or postponements thereof. Accompanying this Notice of Special
Meeting are the form of proxy and the Proxy Statement/Prospectus describing in
detail the business to come before the Special Meeting.
THE BOARD OF DIRECTORS SOLICITS YOUR PROXY AND ASKS YOU TO COMPLETE, SIGN
AND RETURN THE ENCLOSED FORM OF PROXY AT YOUR EARLIEST CONVENIENCE IN ORDER TO
BE SURE YOUR VOTE IS RECEIVED AND COUNTED. RETURNING YOUR FORM OF PROXY WILL
HELP AVOID THE COSTS OF FURTHER SOLICITATION. PLEASE CHECK THE BOX ON THE FORM
OF PROXY IF YOU PLAN TO ATTEND THE SPECIAL MEETING OR ADVISE MY OFFICE DIRECTLY
AT (202) 298-3152.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU HOLD.
By Order of the Board of Directors
Ann Marie Plubell
Vice President, Associate General
Counsel and
Secretary
, 1997
Washington, D.C.
YOU ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN
THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. THE PROXY IS REVOCABLE AT ANY
TIME PRIOR TO ITS USE. THE AFFIRMATIVE VOTE OF HOLDERS OF AT LEAST A MAJORITY OF
THE OUTSTANDING COMMON STOCK OF SALLIE MAE IS REQUIRED FOR APPROVAL OF THE
REORGANIZATION.
<PAGE> 6
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 PROXY STATEMENT/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.
SUBJECT TO COMPLETION, DATED MARCH 25, 1997
PROXY STATEMENT OF
STUDENT LOAN MARKETING ASSOCIATION
------------------------
PROSPECTUS OF SLM HOLDING CORPORATION
------------------------
This Proxy Statement/Prospectus is being furnished to holders of record on
March 17, 1997 (the "Record Date") of the common stock, par value $.20 per share
(the "Sallie Mae Common Stock"), of the Student Loan Marketing Association, a
federally-chartered government-sponsored enterprise ("Sallie Mae"), in
connection with the solicitation of proxies by the Sallie Mae Board of Directors
(the "Sallie Mae Board") for use at the Special Meeting of Sallie Mae
shareholders (the "Special Meeting") to be held on Thursday, May 15, 1997 at
_____ _.m. at the Ritz-Carlton, Tysons Corner, 1700 Tysons Blvd., McLean, VA
22102 and at any adjournments or postponements thereof.
At the Special Meeting, Sallie Mae shareholders will be asked to consider
and vote upon the approval and adoption of an Agreement and Plan of
Reorganization (the "Reorganization Agreement") providing for the reorganization
(the "Reorganization") of Sallie Mae into a wholly-owned subsidiary of a new
holding company named SLM Holding Corporation (the "Holding Company"). If the
Reorganization is approved, each outstanding share of Sallie Mae Common Stock
shall be converted into one share of common stock, par value $.20 per share, of
the Holding Company ("Holding Company Common Stock").
The Reorganization is described herein. The reasons why a majority of the
Board approved the Reorganization are set forth in the section entitled
"BACKGROUND TO THE REORGANIZATION." The Holding Company Board of Directors will
include six members of the Sallie Mae Board, Sallie Mae's CEO, and nine new
members. For information concerning the Holding Company Board, see the section
herein entitled "MANAGEMENT." Eight members of the Sallie Mae Board, none of
whom will serve on the Holding Company Board, voted against the Reorganization.
A statement provided to Sallie Mae on behalf of these directors of the reasons
for their vote is transcribed at Appendix D.
This Proxy Statement/Prospectus also serves as the prospectus included as
part of a Registration Statement on Form S-4 that has been filed with the
Securities and Exchange Commission (the "SEC") covering the 54,600,000 shares of
Holding Company Common Stock issuable in the Reorganization. This Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the holders of Sallie Mae Common Stock on or about , 1997.
The following legend is required by the Privatization Act (as defined
herein) in connection with the offering of securities by the Holding Company,
including the Holding Company Common Stock:
OBLIGATIONS OF THE HOLDING COMPANY AND ANY SUBSIDIARY OF THE HOLDING COMPANY ARE
NOT GUARANTEED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES AND NEITHER THE
HOLDING COMPANY NOR ANY SUBSIDIARY OF THE HOLDING COMPANY IS A
GOVERNMENT-SPONSORED ENTERPRISE (OTHER THAN SALLIE MAE) 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 PROXY STATEMENT/ PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS 1997.
<PAGE> 7
AVAILABLE INFORMATION
A Registration Statement on Form S-4 has been filed with the SEC under the
Securities Act of 1933, as amended (the "1933 Act"), with respect to the shares
of Holding Company Common Stock issuable in exchange for Sallie Mae Common Stock
in the Reorganization as described herein (the "Registration Statement"). For
further information pertaining to the Holding Company Common Stock offered
hereby, reference is made to such Registration Statement and to the exhibits
thereto, which may be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
SEC at prescribed rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549.
Sallie Mae is exempt from the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Holding Company was
formed to effectuate the transactions described under "THE REORGANIZATION." The
Holding Company has not previously been subject to the requirements of the
Exchange Act, and there currently is no public market for its stock. However, if
the Reorganization described herein is approved and consummated, the Holding
Company will become subject to the information, reporting and proxy statement
requirements of the Exchange Act, and such information may be obtained from the
SEC at prescribed rates by addressing written requests for such copies to the
public reference facilities of the SEC at the above-stated address and should be
available 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. 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. Sallie Mae Common Stock is presently listed on the
New York Stock Exchange (the "NYSE") under the symbol "SLM" and Sallie Mae files
quarterly Information Statements and annual reports to shareholders with the
NYSE. In addition, Sallie Mae and the Holding Company have applied to have the
Holding Company Common Stock listed on the NYSE as of the effective date of the
Reorganization described herein. If the Reorganization is approved, Exchange Act
reports, proxy statements and other information concerning the Holding Company
will be available for inspection and copying at the offices of the NYSE at 20
Broad Street, New York, New York 10005.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus in connection
with the solicitation made hereby, and if given or made, such information or
representation must not be relied upon as having been authorized by Sallie Mae
or the Holding Company. This Proxy Statement/Prospectus does not constitute an
offer to sell, or a solicitation of an offer to purchase, any securities, or
solicitation of a proxy, to any person in any jurisdiction to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Proxy Statement/Prospectus nor any distribution of the
securities to which this Proxy Statement/Prospectus relates shall, under any
circumstances, create any inference that there has been no change in the affairs
of either Sallie Mae or the Holding Company since the date of this Proxy
Statement/Prospectus. Statements contained in this Proxy Statement/Prospectus as
to the contents of any contract or other document referred to herein are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus contains certain forward-looking statements
and information relating to Sallie Mae and the Holding Company that are based on
the beliefs of Sallie Mae and Holding Company management as well as assumptions
made by and information currently available to Sallie Mae and Holding Company.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions, as they relate to Sallie Mae and Holding
Company management, are intended to identify forward-looking statements. Such
statements reflect the current views of Sallie Mae and the Holding Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, described in this Proxy Statement/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. Sallie Mae and the Holding Company
do not intend to update these forward-looking statements.
ii
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY............................................................................... 1
Sallie Mae and the Holding Company............................................... 1
The Special Meeting.............................................................. 1
The Reorganization............................................................... 2
The Privatization Act............................................................ 3
Other Provisions of the Reorganization........................................... 5
Certain Federal Income Tax Consequences.......................................... 6
Regulation....................................................................... 6
Comparison of Stockholder Rights................................................. 6
Holding Company Board of Directors............................................... 7
Summary Selected Financial Data.................................................. 8
Market Data...................................................................... 9
INFORMATION REGARDING THE SPECIAL MEETING............................................. 10
Purpose.......................................................................... 10
Place, Time and Date of Meeting.................................................. 10
Record Date; Shares Entitled to Vote............................................. 10
Quorum; Votes Required........................................................... 10
Common Stock Information......................................................... 10
Voting and Revocation of Proxies................................................. 11
Solicitation of Proxies.......................................................... 11
No Dissenters' Appraisal Rights.................................................. 11
THE REORGANIZATION.................................................................... 12
Background....................................................................... 12
Reasons for the Reorganization; Recommendation of the Board of Directors......... 15
Corporate Structure Before and After the Reorganization.......................... 16
Diagrams of Current and Proposed Corporate Structures............................ 18
Exchange of Stock Certificates................................................... 19
Treatment of Preferred Stock..................................................... 19
Effect on Stock Options and Employee Benefits.................................... 19
Dividend Policy.................................................................. 19
Stock Exchange Listing........................................................... 20
Certain Consequences of Shareholder Vote......................................... 20
TERMS OF THE REORGANIZATION AGREEMENT................................................. 21
THE PRIVATIZATION ACT................................................................. 22
Reorganization................................................................... 22
Oversight Authority.............................................................. 23
Restrictions on Intercompany Relations........................................... 23
Limitations on Holding Company Activities........................................ 23
GSE Dissolution After Reorganization............................................. 24
Charter Sunset If Reorganization Does Not Occur.................................. 24
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 26
Reporting Requirement............................................................ 26
BUSINESS.............................................................................. 27
General.......................................................................... 27
Industry Overview................................................................ 27
Business Strategy................................................................ 28
Products and Services............................................................ 29
Loan Purchases.............................................................. 29
</TABLE>
iii
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Borrower Benefits and Program Technology Support............................ 30
Joint Venture with The Chase Manhattan Bank................................. 31
Servicing........................................................................ 31
Specialized Financial Services................................................... 31
Warehousing Advances........................................................ 32
Academic Facilities Financings and Student Loan Revenue Bonds............... 32
Letters of Credit........................................................... 32
Private Student Loan Insurance.............................................. 32
Financing/Securitization......................................................... 32
Economic Impact of the Privatization Act on the Company's Business............... 33
Funding Costs and Leverage.................................................. 33
Preferred Stock Redemption.................................................. 33
State Taxes................................................................. 34
Impact on Other Business Lines.............................................. 34
Consideration............................................................... 34
Operations Following the Reorganization.......................................... 34
Competition...................................................................... 35
College Construction Loan Insurance Association.................................. 36
Properties....................................................................... 36
Employees........................................................................ 36
Legal Proceedings................................................................ 36
REGULATION............................................................................ 38
Current Regulation............................................................... 38
GSE Regulation.............................................................. 38
Other Regulation............................................................ 39
Regulation Following Reorganization.............................................. 39
Non-Discrimination and Limitations on Affiliation with Depository Institutions... 39
CAPITALIZATION........................................................................ 40
SELECTED FINANCIAL DATA............................................................... 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 42
Overview......................................................................... 42
Results of Operations............................................................ 43
Student Loan Spread Analysis..................................................... 45
Net Interest Income.............................................................. 47
Average Balance Sheets........................................................... 48
Funding Costs.................................................................... 49
Rate/Volume Analysis............................................................. 49
Operating Expenses............................................................... 50
Federal and State Taxes.......................................................... 51
Liquidity and Capital Resources.................................................. 51
Preferred Stock.................................................................. 55
Other Related Events and Information............................................. 55
DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK.......................................... 59
General.......................................................................... 59
Common Stock..................................................................... 59
Preferred Stock.................................................................. 59
Warrants......................................................................... 60
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 61
General.......................................................................... 61
</TABLE>
iv
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Board of Directors............................................................... 61
Capitalization................................................................... 62
Purpose.......................................................................... 63
Dividends........................................................................ 63
Exemption from Certain Laws...................................................... 63
Limitations on Director Liability................................................ 63
Indemnification.................................................................. 64
Special Meetings of Stockholders................................................. 64
Amendment of Governing Documents................................................. 64
United States and Delaware Law................................................... 65
MANAGEMENT............................................................................ 67
Holding Company Board of Directors............................................... 67
Sallie Mae Board of Directors.................................................... 69
Statutory Requirements...................................................... 69
Meetings of the Board............................................................ 73
Audit Committee............................................................. 73
Compensation and Personnel Committee........................................ 74
Nominations and Board Affairs Committee..................................... 74
Transactions with Affiliated Institutions........................................ 74
DIRECTOR COMPENSATION................................................................. 75
EXECUTIVE OFFICERS OF THE COMPANY..................................................... 76
Names and Titles................................................................. 76
Previous Experience.............................................................. 76
EXECUTIVE COMPENSATION................................................................ 77
Report of the Compensation and Personnel Committee............................... 77
Policy...................................................................... 77
Compensation Related to Achievement of Annual and Long-Term Goals........... 78
Base Salary................................................................. 78
Annual Bonus................................................................ 78
Incentive Performance Plan.................................................. 78
Stock Option Plan........................................................... 79
Compensation Tables.............................................................. 80
Description of Benefit Plans..................................................... 82
Thrift and Savings Plans.................................................... 82
Stock Purchase Plan......................................................... 83
Deferred Compensation Plan for Key Employees................................ 83
Stock Option Plan........................................................... 83
Stock Compensation Plan..................................................... 83
Performance Graph........................................................... 84
OWNERSHIP OF SALLIE MAE STOCK......................................................... 85
Board and Management Ownership of the Company.................................... 85
Principal Holders................................................................ 87
LEGAL MATTERS......................................................................... 88
EXPERTS............................................................................... 88
SALLIE MAE ANNUAL MEETING SHAREHOLDER PROPOSALS....................................... 88
FINANCIAL STATEMENTS.................................................................. F-1
</TABLE>
v
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
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<S> <C>
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION.................................... A-1
APPENDIX B -- STUDENT LOAN MARKETING ASSOCIATION REORGANIZATION ACT OF 1996........... B-1
APPENDIX C -- THE FEDERAL FAMILY EDUCATION LOAN PROGRAM............................... C-1
APPENDIX D -- STATEMENT OF DISSENTING DIRECTORS....................................... D-1
APPENDIX E -- DISSENT TO THE REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE....... E-1
</TABLE>
vi
<PAGE> 12
SUMMARY
The following is a summary of certain important aspects of the
Reorganization (as defined below) and related information discussed elsewhere in
this Proxy Statement/Prospectus. This Summary does not purport to be complete
and is qualified in its entirety by, and should be read in conjunction with, the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Proxy Statement/Prospectus. Shareholders of the
Student Loan Marketing Association are urged to carefully read this Proxy
Statement/Prospectus in its entirety. Capitalized terms used but not otherwise
defined in this Summary have the meanings ascribed to them elsewhere in this
Proxy Statement/Prospectus.
SALLIE MAE AND THE HOLDING COMPANY
The Student Loan Marketing Association ("Sallie Mae" or the "GSE") was
established in 1972 as a for-profit, stockholder-owned, government-sponsored
enterprise to support the education credit needs of students by, among other
things, promoting liquidity in the student loan marketplace through secondary
market purchases. Sallie Mae is the largest source of financing and servicing
for education loans in the United States. The student loan industry in the
United States developed primarily to support federal student loan programs and,
accordingly, is highly regulated. The principal government program, the Federal
Family Education Loan Program (formerly the Guaranteed Student Loan Program)
(the "FFELP"), was created to ensure low cost access by both needy and middle
class families to post-secondary education. Sallie Mae's products and services
include student loan purchases, commitments to purchase student loans and
secured advances to originators of student loans. Sallie Mae also offers
operational support to originators of student loans and to post-secondary
education institutions. In addition, Sallie Mae provides other education-related
financial services. See "BUSINESS."
The Privatization Act (as defined below) authorized the restructuring of
the common stock ownership of Sallie Mae so that all of its outstanding common
stock would be owned directly by a holding company. If the Reorganization is
approved, SLM Holding Corporation, a recently formed Delaware corporation (the
"Holding Company"), will become the holding company of Sallie Mae, See "THE
REORGANIZATION" and "THE PRIVATIZATION ACT." AS USED HEREIN, THE "COMPANY"
REFERS TO SALLIE MAE PRIOR TO THE REORGANIZATION AND TO THE HOLDING COMPANY AS A
CONSOLIDATED ENTITY FROM AND AFTER THE EFFECTIVE TIME (AS DEFINED BELOW) OF THE
REORGANIZATION.
THE SPECIAL MEETING
The Special Meeting of Sallie Mae shareholders (the "Special Meeting") will
be held on Thursday, May 15, 1997 at _____ _.m., at the Ritz-Carlton, Tysons
Corner, 1700 Tysons Blvd., McLean, VA 22102. At the Special Meeting, Sallie Mae
shareholders will be asked to consider and vote upon the approval and adoption
of an Agreement and Plan of Reorganization (the "Reorganization Agreement")
providing for the reorganization (the "Reorganization") of Sallie Mae into a
wholly-owned subsidiary of the Holding Company pursuant to the merger (the
"Merger") of a newly-formed subsidiary of the Holding Company ("MergerCo") with
and into Sallie Mae, with Sallie Mae as the surviving corporation. If the
Reorganization is consummated, each outstanding share of common stock, par value
$.20 per share, of Sallie Mae ("Sallie Mae Common Stock") would be converted
into one share of common stock, par value $.20 per share, of the Holding Company
("Holding Company Common Stock"). See "INFORMATION REGARDING THE SPECIAL
MEETING."
Under the Privatization Act and Delaware law, the Reorganization requires
approval by the affirmative vote of the holders of a majority of the outstanding
shares of Sallie Mae Common Stock. This document and the enclosed form of proxy
are being furnished to you in connection with the solicitation by Sallie Mae's
Board of Directors (the "Sallie Mae Board") of proxies in the enclosed form for
use at the Special Meeting. Only holders of record of Sallie Mae Common Stock as
of the close of business on March 17, 1997 will be entitled to notice of and to
vote at the Special Meeting or any adjournments or postponements thereof.
As of the Record Date 53,092,020 shares of Sallie Mae Common Stock were
outstanding and eligible to be voted, held by approximately 23,000 shareholders.
As of the Record Date, Sallie Mae's directors and
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<PAGE> 13
named executive officers beneficially owned 285,084 shares of Sallie Mae Common
Stock, or less than 1% of the shares of Sallie Mae Common Stock outstanding as
of such date.
The vote on the Reorganization is being held at a Special Meeting rather
than an Annual Meeting because of the importance of the Reorganization to the
Company's future and the determination that shareholders should have an
opportunity to consider the Reorganization at a meeting dedicated to that
purpose. If the Reorganization is consummated, the Sallie Mae Board would be
appointed by the Holding Company. If the Reorganization is not approved by
shareholders, an Annual Meeting of Sallie Mae shareholders will be held as soon
as practicable to, among other things, elect Sallie Mae directors.
THE REORGANIZATION
BACKGROUND
For the last several years, Sallie Mae has advocated the "privatization" of
its business through a corporate restructuring that would permit a transition
from government-sponsored enterprise status to a fully private, state-chartered
corporation. Sallie Mae's federal charter restricts its business activities to
specified education finance related activities and imposes special obligations
on it as a government-sponsored enterprise. On September 30, 1996, Congress
enacted the Student Loan Marketing Association Reorganization Act of 1996 (the
"Privatization Act"), which authorized the creation of a holding company through
which the Company could pursue new business opportunities beyond the limited
scope of the Sallie Mae's restrictive federal charter and effect an orderly
wind-down of Sallie Mae following the transfer of ongoing business activities to
such a holding company. See "THE REORGANIZATION."
REASONS FOR THE REORGANIZATION; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The majority of the Sallie Mae Board has determined that the
Reorganization, upon the terms and conditions set forth in the Privatization Act
and the Reorganization Agreement, is in the best interests of Sallie Mae and its
shareholders. ACCORDINGLY, THE SALLIE MAE BOARD HAS APPROVED THE REORGANIZATION
AGREEMENT. THE MAJORITY OF THE SALLIE MAE BOARD RECOMMENDS THAT THE HOLDERS OF
THE OUTSTANDING SHARES OF SALLIE MAE COMMON STOCK VOTE FOR APPROVAL OF THE
REORGANIZATION AT THE SPECIAL MEETING. THE REORGANIZATION WAS APPROVED BY THE
SALLIE MAE BOARD BY A VOTE OF 13 MEMBERS IN FAVOR OF THE REORGANIZATION AND
EIGHT MEMBERS AGAINST THE REORGANIZATION. FOR A SUMMARY OF THE SALLIE MAE BOARD
DELIBERATIONS, SEE "THE REORGANIZATION." A statement provided to Sallie Mae on
behalf of the directors who voted against the Reorganization of the reasons for
their vote is transcribed at Appendix D. None of the directors who voted against
the Reorganization will serve on the Holding Company Board.
CORPORATE STRUCTURE BEFORE AND AFTER THE REORGANIZATION
Sallie Mae currently operates as a government-sponsored enterprise, subject
to the restrictions of its federal charter. Following the Reorganization, the
GSE would be one of several subsidiaries of the Holding Company. The
Privatization Act will impose certain restrictions on intercompany relations
between the GSE and its affiliates during the period prior to the GSE's
dissolution. In particular, the GSE must not extend credit to, nor guarantee any
debt obligations of, the Holding Company or the Holding Company's non-GSE
subsidiaries. Although 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 Holding Company, which in turn may
use such amounts to support its non-GSE subsidiaries. The Sallie Mae Charter (as
defined below) effectively requires that it maintain a minimum capital ratio.
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 Holding Company. See "THE REORGANIZATION -- Corporate Structure Before and
After the Reorganization."
TERMS OF THE REORGANIZATION AGREEMENT
Pursuant to the Reorganization Agreement, MergerCo, a newly-formed,
wholly-owned subsidiary of the Holding Company, will be merged with and into the
GSE with the GSE surviving, each outstanding share of Sallie Mae Common Stock
will be converted into one share of Holding Company Common Stock and the
outstanding shares of the common stock of MergerCo will be converted into all of
the issued and outstanding
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<PAGE> 14
shares of Sallie Mae Common Stock, all of which will then be owned by the
Holding Company. If the Reorganization is approved, the Reorganization will
become effective at the time the certificate of merger is filed with the
Secretary of State of the State of Delaware (the "Effective Time"), which
management expects to be on or about May 16, 1997. As a result of the
Reorganization, Sallie Mae will become a subsidiary of the Holding Company and
all of the Holding Company Common Stock outstanding immediately after the
Reorganization will be owned by the holders of Sallie Mae Common Stock
outstanding immediately prior to the Reorganization. Following the
Reorganization, the GSE will be gradually liquidated and its federal charter
will be rescinded on or before September 30, 2008.
The Reorganization will not result in any change to Sallie Mae's
outstanding class of preferred stock or to its outstanding debt obligations and
all of the outstanding securities of Sallie Mae (other than the Sallie Mae
Common Stock and common stock equivalents) will remain outstanding immediately
after the Reorganization. The Privatization Act requires that the GSE's
preferred stock be repurchased or redeemed upon the GSE's dissolution, no later
than September 30, 2008. See "THE REORGANIZATION -- Treatment of Preferred
Stock." The Privatization Act provides that the Reorganization will not modify
the attributes accorded to the debt obligations of Sallie Mae by the Sallie Mae
Charter.
It will not be necessary for holders of Sallie Mae Common Stock to
immediately exchange their existing stock certificates for stock certificates of
the Holding Company in connection with the Reorganization. Following the
Reorganization, new certificates bearing the name of SLM Holding Corporation
will be issued by ChaseMellon Shareholder Services as outstanding certificates
are presented for transfer. In addition, new certificates of the Holding Company
will be issued in exchange for old certificates of the GSE upon the request of
any shareholder. Certificates presented for transfer to a name other than that
in which the surrendered certificate is registered must be properly endorsed,
with the signature guaranteed, and accompanied by evidence of payment of any
applicable stock transfer taxes. See "TERMS OF THE REORGANIZATION AGREEMENT."
BUSINESS ACTIVITIES AFTER THE REORGANIZATION
Sallie Mae currently has no plans to effect any substantial changes to its
business following the Reorganization and expects that its principal
income-generating business activity will remain the purchase of
federally-insured loans. Following the Reorganization, the Company's non-GSE
affiliates will provide loan servicing and management support to the GSE and are
expected to engage in certain new business activities. For example, the Company
expects to begin to develop capabilities in a number of new areas, principally
government contracting and other fee-based businesses, that will leverage its
back-office resources and are expected to gradually expand its franchise. At
this time, however, Sallie Mae has no specific plans to invest materially or
take on any material risks in connection with such new business activities.
Following the Reorganization, the Company will have the opportunity to consider
certain strategic opportunities, such as acquisitions and joint ventures, that
currently are not feasible due to restrictions contained in the Sallie Mae
Charter. At this time, Sallie Mae has not actively explored the desirability of
any such specific strategic opportunities. See "BUSINESS -- Operations Following
the Reorganization."
THE PRIVATIZATION ACT
The Privatization Act provides the framework for effecting the
Reorganization and imposes certain restrictions on the operations of the Holding
Company and its subsidiaries after the Reorganization is consummated. See "THE
PRIVATIZATION ACT" and "REGULATION." The Privatization Act requires the Company
to pay $5 million to the District of Columbia Financial Responsibility and
Management Assistance Authority (the "D.C. Financial Control Board") for the
restricted use of the "Sallie Mae" name and to issue to the D.C. Financial
Control Board warrants to purchase 555,015 shares of Holding Company Common
Stock, exercisable at any time prior to September 30, 2008 at $72.43 per share.
SUBSIDIARY STOCK AND ASSET TRANSFERS
The Privatization Act requires that at the Effective Time, or as soon as
practicable thereafter, the GSE shall transfer to the Holding Company or one or
more of its non-GSE subsidiaries, certain assets, including all
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<PAGE> 15
of the capital stock of which the GSE is the beneficial owner in certain
subsidiaries (the "Transferred Subsidiaries"). It is anticipated that net asset
transfers (including the transfer of the Transferred Subsidiaries) occurring in
the first year after the Reorganization will aggregate approximately $100
million and that certain fixed assets will be transferred within approximately
three years of the Reorganization. Based on preliminary discussions with
commercial banking sources, the Company believes it will be able to secure
financing at a reasonable cost through the Holding Company for such asset
transfers. Although the foregoing asset transfers will likely result in some
incremental financing costs and state taxes, such expenses are not expected to
have any material impact on the Company's financial results. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
EMPLOYEE AND BENEFIT TRANSFERS
As required by the Privatization Act, all GSE employees will be transferred
from the GSE at the Effective Time. In connection with the Reorganization,
employee benefit obligations and benefit plans of the GSE will be transferred to
the Holding Company or one of its non-GSE subsidiaries. After the
Reorganization, Sallie Mae stock-based employee benefit plans will be amended to
provide for the delivery of Holding Company Common Stock instead of Sallie Mae
Common Stock.
WIND-DOWN PERIOD
Following the Reorganization, the GSE entity will be gradually liquidated
and its federal charter will be rescinded on or before September 30, 2008.
During this wind-down period, it is expected that the GSE's operations will be
managed by its non-GSE affiliates. Also, during this period, the Holding Company
will remain a passive entity which supports the operations of the GSE and its
other subsidiaries, and all business activities will be conducted through the
GSE and by the other subsidiaries. The use of the "Sallie Mae" name by the
Holding Company and its subsidiaries is restricted by the Privatization Act, as
described herein.
During the wind-down period, the GSE's new business activities are limited.
The GSE generally may continue to purchase student loans only through September
30, 2007. The GSE's other lines of business, such as warehousing advances,
letters of credit and standby bond purchase commitments, will be limited to
takedowns on contractual financing and guarantee commitments in place as of the
Effective Time.
In addition, the business activities of the Holding Company and its non-GSE
subsidiaries are also subject to certain limitations, including a de facto
limitation against purchases of FFELP loans for so long as the GSE continues
this type of activity. Subject to the foregoing, the Holding Company could elect
at any time to commence FFELP student loan purchases through its non-GSE
subsidiaries. At this time, management anticipates that the GSE will not be
dissolved prior to the year 2008 and that it will continue to be used for all
insured student loan purchase activity until the year 2007. However, the GSE's
student loan purchase activity may be transferred to one of the Holding
Company's non-GSE subsidiaries prior to such time if it becomes advantageous to
do so. In particular, such a transfer would be considered if certain litigation
relating to the offset fee described below is ultimately resolved adversely to
the Company, see "BUSINESS -- Legal Proceedings," or if Congress amends the
Sallie Mae Charter to extend such fee to securitized loans, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Other Related Events." In addition, it is expected that during the
wind-down period the GSE would provide financing and letter of credit support
under existing contractual commitments which aggregate approximately $2.4
billion and $3.7 billion, respectively, as of December 31, 1996. The GSE would
also maintain an investment portfolio during the wind-down.
After the Reorganization, Sallie Mae will be able to continue to issue debt
in the government agency market to finance student loans and other permissible
asset acquisitions, although the maturity date of such issuances generally may
not extend beyond September 30, 2008, Sallie Mae's final dissolution date. If at
any time during the wind-down period the GSE's capital ratio falls below certain
required levels (2 percent of assets until January 1, 2000 and 2.25 percent of
assets thereafter), the Holding Company is required to supplement the GSE's
capital to achieve the required level. Upon dissolution of the GSE, any
remaining GSE
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<PAGE> 16
obligations will be transferred into a defeasance trust for the benefit of the
holders of such obligations. If the GSE has insufficient assets to fully fund
such defeasance trust, the Holding Company must transfer sufficient assets to
such trust to account for this shortfall.
A law enacted at the same time as the Privatization Act contains amendments
to the Federal Deposit Insurance Act that prohibit depository institutions from
being affiliates of government-sponsored enterprises. This restriction
effectively limits 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.
CHARTER SUNSET IF REORGANIZATION DOES NOT OCCUR
If a reorganization pursuant to the Privatization Act does not occur on or
prior to March 31, 1998, the Privatization Act requires that it submit an
alternative wind-down plan to Congress and the Treasury Department by 2007. This
plan would call for the dissolution of Sallie Mae by 2013. During this
alternative wind-down period, Sallie Mae could not engage in new business
activities beyond those contemplated by the Sallie Mae Charter but could
transfer assets, except for the "Sallie Mae" name, at any time its statutory
capital requirements were satisfied. As with the Reorganization, any remaining
obligations, and assets sufficient to pay such obligations, would be transferred
to a fully collateralized trust at the time of dissolution. All other assets
would be distributed to Sallie Mae shareholders. Under this alternative, Sallie
Mae generally would have to cease its business activities after 2009 and could
not issue debt obligations that mature after 2013. The Secretary of the
Treasury, who would monitor the wind-down, could require Sallie Mae to amend its
plan of dissolution if deemed necessary to ensure full payment of its
obligations.
The Sallie Mae directors who approved the Reorganization Agreement,
representing a majority of the Board, expect that the Reorganization Agreement
will be approved by Sallie Mae shareholders. As a result, the Sallie Mae Board
has not determined what action, if any, it may take with respect to
privatization in the event the Reorganization Agreement is not approved. If the
Reorganization Agreement is not approved by shareholders, an Annual Meeting of
Sallie Mae shareholders will be held as soon as practicable to, among other
things, elect Sallie Mae directors. Under the Privatization Act, the effective
date of a reorganization providing for the restructuring of common stock
ownership of Sallie Mae so that all of its outstanding common stock would be
owned directly by a holding company must occur on or prior to March 31, 1998. If
the effective date has not occurred prior to such date, the charter sunset
provisions would apply. If the Reorganization Agreement is not approved, there
can be no assurance that the Sallie Mae Board will adopt an alternate plan of
reorganization, and, if the Sallie Mae Board adopted an alternate plan, there
can be no assurance as to the terms of such a plan or as to whether it would be
approved by holders of the requisite number of shares of Sallie Mae Common Stock
in a timely manner.
OTHER PROVISIONS OF THE REORGANIZATION
NO DISSENTERS' APPRAISAL RIGHTS
Sallie Mae shareholders have no statutory appraisal rights. See "COMPARISON
OF STOCKHOLDER RIGHTS -- United States and Delaware Law -- Dissenters' Rights."
DIVIDEND POLICY
It is anticipated that the Holding Company will initially pay dividends on
Holding Company Common Stock at the rate most recently paid, and on
approximately the same schedule, as dividends have been paid on Sallie Mae
Common Stock. No assurance, however, can be given as to the amount of future
dividends, which will necessarily be dependent on future earnings and the
financial requirements of the Holding Company and its subsidiaries, including
the GSE, after the Reorganization. The Holding Company's principal source of
funds is expected to be funds from dividends on the stock of its subsidiaries
and proceeds from any issuances of the Holding Company's equity or debt
securities. The ability of the GSE to pay dividends is generally subject to the
capital requirements included in Sallie Mae's federal charter set forth in
Section 439, Part B, Title VI of the Higher Education Act of 1965, as amended,
codified at 20 U.S.C. sec.1087-2, (the "Sallie Mae
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<PAGE> 17
Charter"), and to the priority of dividends on the preferred stock. See "THE
REORGANIZATION -- Dividend Policy."
STOCK EXCHANGE LISTING
Sallie Mae has filed an application to list the shares of Holding Company
Common Stock to be issued in connection with the Reorganization on the New York
Stock Exchange ("NYSE"), subject to approval of the Reorganization Agreement by
the Sallie Mae shareholders and official notice of issuance. The shares of
Sallie Mae Common Stock are traded, and the shares of Holding Company Common
Stock are expected to be traded, on the NYSE under the symbol "SLM." If the
Reorganization is consummated, shares of Sallie Mae Common Stock will be
delisted at the same time the Holding Company shares are listed. See "THE
REORGANIZATION -- Stock Exchange Listing."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The obligation of Sallie Mae to consummate the Reorganization is
conditioned upon the receipt by Sallie Mae of an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP in form and substance reasonably satisfactory to
Sallie Mae, dated as of the Effective Time, substantially to the effect that, on
the basis of facts, representations and assumptions set forth in such opinion
and set forth in certificates of officers of the Holding Company, Sallie Mae and
others, as well as representation letters of certain holders of Sallie Mae
Common Stock, all of which are consistent with the state of facts existing at
the Effective Time, the Merger will be treated for U.S. federal income tax
purposes as a nonrecognition transfer of shares of Sallie Mae Common Stock by
the holders thereof to the Holding Company for shares of Holding Company Common
Stock. See "TERMS OF THE REORGANIZATION" and "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
REGULATION
The GSE will continue to be subject to the requirements of the Sallie Mae
Charter and to certain regulations irrespective of whether the Reorganization is
approved. The Privatization Act amends the Sallie Mae Charter to provide for
increased oversight of GSE operations by, and the reimbursement of certain
oversight costs to, the Secretary of the Treasury as well as the increase of
Sallie Mae's required shareholders' equity ratio from the current level of 2
percent of assets to 2.25 percent of assets beginning after January 1, 2000.
Following the Reorganization, the Company will be an eligible lender under
the Higher Education Act of 1965, as amended, for purposes only of purchasing
and holding student loans made by other lenders. Like other participants in the
insured student loan programs, the Company will be subject, from time to time,
to review of its student lending operations by the U.S. Department of Education,
certain guarantee agencies and the General Accounting Office. In addition,
Sallie Mae Servicing Corporation, a wholly-owned subsidiary of Sallie Mae, as a
servicer of student loans, is subject to certain U.S. Department of Education
regulations regarding financial responsibility and administrative capability
that govern all third party servicers of insured student loans. See
"REGULATION."
COMPARISON OF STOCKHOLDER RIGHTS
There are certain differences between the present rights of holders of
Sallie Mae Common Stock and the rights of holders of Holding Company Common
Stock after the Reorganization. Certain of the material differences are
discussed below. While the Sallie Mae Charter provides for cumulative voting in
the election of directors, the Holding Company Charter would provide that
directors would be elected by a plurality of the shares voted. The Sallie Mae
Board includes 14 members who are elected to one year terms and seven members
appointed by the President. The Holding Company Board includes 16 members who
will be elected to one year terms. Seven of the Sallie Mae elected members must
be affiliated with financial institutions and seven must be affiliated with
educational institutions, while the Holding Company Board would have no
affiliation requirements. The Sallie Mae Charter may only be amended by
enactment of federal law. The
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<PAGE> 18
Holding Company Charter may be amended by action of the Holding Company Board
and the Holding Company stockholders. For a more comprehensive comparison of the
relative rights of holders of Sallie Mae Common Stock and holders of Holding
Company Common Stock, see "COMPARISON OF STOCKHOLDER RIGHTS."
HOLDING COMPANY BOARD OF DIRECTORS
Sallie Mae, as the sole stockholder of the Holding Company prior to the
Reorganization, will appoint the members of the Holding Company Board to serve
until their successors are duly elected. After the Effective Time, the Company
stockholders will elect all of the members of the Holding Company Board at each
annual meeting beginning with the 1998 Annual Meeting of the Company, which
meeting is expected to take place in April of 1998. The persons whom Sallie Mae
intends to appoint are identified elsewhere in this Proxy Statement/Prospectus
and are not identical to the current Sallie Mae Board. The Holding Company Board
will include six members of the Sallie Mae Board, Sallie Mae's CEO, and nine new
members. None of the eight members of the Sallie Mae Board that voted against
the Reorganization will serve on the Holding Company Board. See
"MANAGEMENT -- Holding Company Board of Directors."
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<PAGE> 19
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth selected financial and other operating
information of Sallie Mae. The selected financial data in the table are derived
from the consolidated financial statements of Sallie Mae. 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 herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995(1) 1994(1) 1993(1) 1992(1)
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income....................... $ 866 $ 901 $ 955 $ 1,149 $ 975
Net income................................ 419 496 403 430 394
Earnings per common share................. 7.32 7.20 4.91 4.83 4.21
Dividends per common share................ 1.64 1.51 1.42 1.25 1.05
Return on common stockholders' equity..... 50.13%(3) 39.85%(3) 29.06%(3) 40.26% 40.22%
Net interest margin....................... 1.90% 1.84% 2.09% 2.70% 2.30%
Return on assets.......................... .88 .96 .84 .97 .88
Dividend payout ratio..................... 22.40 20.97 28.89 25.88 24.92
Average equity/average assets............. 2.09 2.68 3.16 2.75 2.53
BALANCE SHEET DATA:
Student loans purchased................... $32,308 $34,336 $30,370 $26,804 $24,173
Student loan participations............... 1,446 - - - -
Warehousing advances...................... 2,789 3,865 7,032 7,034 8,085
Academic facilities financings............ 1,473 1,312 1,548 1,359 1,189
Total assets.............................. 47,630 50,002 52,961 46,509 46,621
Long-term notes........................... 22,606 30,083 34,319 30,925 30,724
Total borrowings.......................... 44,763 47,530 50,335 44,544 44,440
Stockholders' equity...................... 1,048(3) 1,081(3) 1,471(3) 1,280 1,220
Book value per common share............... 15.53 15.03 17.10 12.69 11.25
OTHER DATA:
Securitized student loans outstanding..... $ 6,263 $ 954 $ - $ - $ -
Core earnings(2).......................... 391 361 356 398 402
Premiums on debt extinguished............. 7 8 14 211 141
</TABLE>
- ---------------
(1) 1995 results reflect the change in method of accounting for student loan
income. The effect of the change increased net income by $151 million and
earnings per common share by $2.23. On a pro forma basis, assuming the
method of accounting for student loan income was applied retroactively
prior to 1992, net income would increase by $17 million ($.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) Core earnings is defined as Sallie Mae's net income less the after-tax
effect of floor revenues, the cumulative effect of accounting changes 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 Sallie Mae's earnings before the effects of
one time events such as floor revenues which are largely outside of Sallie
Mae'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 Sallie Mae's student loan operations.
(3) At December 31, 1996, 1995 and 1994, stockholders' equity reflects the
addition to stockholders' equity of $349 million, $371 million, and $300
million, respectively, net of tax, of unrealized gains on certain
investments recognized pursuant to the adoption of FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
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<PAGE> 20
MARKET DATA
Because the Holding Company is a newly-formed corporation and there is
currently no established trading market for its securities, no information can
be provided as to historical market prices for the Holding Company Common Stock.
Historical market prices for Sallie Mae Common Stock, however, may provide
relevant historical market information for determining the market value of the
Holding Company. Sallie Mae and the Holding Company will take all actions
necessary or advisable to ensure that the Holding Company Common Stock will be
approved for listing on the NYSE upon consummation of the Reorganization. The
Sallie Mae Common Stock trades on the NYSE under the symbol "SLM." The following
table sets forth, for the periods indicated, the high and low sales prices per
share of Sallie Mae Common Stock as reported on the NYSE Composite Tape, and the
quarterly cash dividends per share declared with respect thereto.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
---- --- --------
<S> <C> <C> <C>
1994
First Quarter................................. 49 7/8 42 7/8 .35
Second Quarter................................ 44 1/8 35 3/4 .35
Third Quarter................................. 39 1/8 32 .35
Fourth Quarter................................ 35 31 1/4 .37
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 (through March 17, 1997)........ 114 1/4 89 .44
</TABLE>
On January 23, 1997, the last trading day before the announcement that the
Sallie Mae Board had approved the Reorganization, the last sales price of Sallie
Mae Common Stock was $108.00 per share, as reported on the NYSE Composite Tape.
On , 1997, the date prior to the printing of this Proxy
Statement/Prospectus, the last sales price of Sallie Mae Common Stock was $
per share, as reported on the NYSE Composite Tape.
At March 17, 1997, the Record Date 53,092,020 shares of Sallie Mae Common
Stock were outstanding and eligible to be voted, held by approximately 23,000
shareholders.
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<PAGE> 21
INFORMATION REGARDING THE SPECIAL MEETING
PURPOSE
At the Special Meeting of Shareholders (the "Special Meeting") of the
Student Loan Marketing Association ("Sallie Mae" or the "GSE"), the shareholders
of Sallie Mae will be asked to consider and vote upon the approval and adoption
of an Agreement and Plan of Reorganization (the "Reorganization Agreement")
among Sallie Mae, SLM Holding Corporation, a newly-formed Delaware corporation
and wholly-owned subsidiary of Sallie Mae (the "Holding Company"), and Sallie
Mae Merger Company, a newly-formed Delaware corporation and wholly-owned
subsidiary of the Holding Company ("MergerCo"). The Reorganization Agreement
provides for the reorganization (the "Reorganization") of Sallie Mae into a
wholly-owned subsidiary of the Holding Company pursuant to the merger (the
"Merger") of MergerCo with and into Sallie Mae, with Sallie Mae as the surviving
corporation. If the Reorganization Agreement is approved and the Merger is
consummated, (i) each outstanding share of common stock, par value $.20 per
share, of Sallie Mae ("Sallie Mae Common Stock") would be converted into one
share of common stock, par value $.20 per share of the Holding Company ("Holding
Company Common Stock") and (ii) all of the outstanding shares of MergerCo would
be converted into all of the issued and outstanding shares of Sallie Mae Common
Stock, all of which will then be owned by the Holding Company.
STOCKHOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING
PROXY CARD AND RETURN IT PROMPTLY TO SALLIE MAE IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE.
This Proxy Statement/Prospectus is also furnished to Sallie Mae
shareholders as the prospectus of the Holding Company relating to the shares of
Holding Company Common Stock issuable in connection with the Reorganization. The
vote on the Reorganization is being held at a Special Meeting rather than an
Annual Meeting because of the importance of the Reorganization to the Company's
future and the determination that shareholders should have an opportunity to
consider the Reorganization at a meeting dedicated to that purpose. If the
Reorganization is consummated, the Sallie Mae Board would be appointed by the
Holding Company. If the Reorganization is not approved by shareholders, an
Annual Meeting of Sallie Mae shareholders will be held as soon as practicable
to, among other things, elect Sallie Mae directors.
PLACE, TIME AND DATE OF MEETING
The Special Meeting will be held on Thursday, May 15, 1997 at the
Ritz-Carlton, Tysons Corner, 1700 Tysons Blvd., McLean, VA 22102, beginning at
_____ _.m., local time, and at any adjournments or postponements thereof.
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record (each, a "Record Holder") of shares of Sallie Mae
Common Stock at the close of business on March 17, 1997, the record date for the
Special Meeting (the "Record Date"), are entitled to notice of, and to vote at,
the Special Meeting and any adjournments or postponements thereof.
QUORUM; VOTES REQUIRED
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Sallie Mae Common Stock entitled to vote at the Special
Meeting will be necessary to constitute a quorum for the transaction of
business. If such a quorum is not present, a majority of shares so represented
may adjourn the Special Meeting to a future date. Abstentions and broker
non-votes are counted when determining the presence of a quorum for the
transaction of business.
Approval of the Reorganization requires the affirmative vote of holders of
at least a majority of the outstanding shares of Sallie Mae Common Stock.
Abstentions and broker non-votes have the same effect as a vote against the
Reorganization.
COMMON STOCK INFORMATION
As of the Record Date, 53,092,020 shares of Sallie Mae Common Stock were
outstanding and eligible to be voted, held by approximately 23,000 shareholders.
As of the Record Date, Sallie Mae's directors, named
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executive officers beneficially owned 285,084 shares of Sallie Mae Common Stock,
or less than 1% of the shares of Sallie Mae Common Stock outstanding as of such
date. The Sallie Mae Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "SLM."
VOTING AND REVOCATION OF PROXIES
Shares of Sallie Mae Common Stock that are entitled to vote and are
represented at the Special Meeting by properly executed proxies received and not
properly revoked will be voted at the Special Meeting in the manner directed on
such proxies. Shares may be voted in person or by proxy. Any proxy given by a
Record Holder may be revoked by the person giving such proxy at any time before
the closing of the polls by executing a new proxy or voting in person his or her
shares at the Special Meeting. At the Special Meeting, the Chairman of the Board
shall designate the time that the polls shall close. Only those proxies received
and not properly revoked or votes cast prior to the closing of the polls shall
be valid.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by such proxy are voted at
the Special Meeting by (i) filing with the Secretary of Sallie Mae a written
notice of such revocation bearing a later date than the proxy, (ii) duly
executing a proxy relating to the same shares bearing a later date and
delivering it to the Secretary of Sallie Mae before the taking of the vote at
the Special Meeting, or (iii) voting in person at the Special Meeting.
Attendance at the Special Meeting will not in and of itself constitute a
revocation of a proxy. All written notices of revocation or other communication
with respect to revocation of proxies should be addressed as follows: Student
Loan Marketing Association, 1050 Thomas Jefferson Street, N.W., Washington, D.C.
20007, Attention: Ann Marie Plubell, Secretary, and must be received before the
taking of the vote at the Special Meeting.
PROXIES THAT ARE PROPERLY EXECUTED WITHOUT INDICATING ANY VOTING
INSTRUCTIONS AND TIMELY RECEIVED WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE
REORGANIZATION
If the Reorganization is not approved, Sallie Mae will hold the Annual
Meeting of Shareholders of the Student Loan Marketing Association as soon as
practicable after the Special Meeting votes are tabulated.
SOLICITATION OF PROXIES
Sallie Mae will bear all expenses of this solicitation, including the cost
of preparing and mailing this Proxy Statement/Prospectus. In addition to
solicitation by mail, directors, officers, regular employees or other agents of
Sallie Mae, who will not be specifically compensated for such services but may
be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation, may solicit proxies from Sallie Mae shareholders personally or by
telephone, telecopy, telegram or other means of communication. Sallie Mae will
also arrange with custodians, nominees and fiduciaries for the forwarding of
proxy solicitation materials to the beneficial owners of shares held of record
by such persons. Sallie Mae may reimburse such custodians, nominees and
fiduciaries reasonable out-of-pocket expenses incurred in connection therewith.
Sallie Mae has retained D.F. King & Co., Inc. to solicit proxies on its behalf.
D.F. King will be paid a fee, estimated not to exceed $50,000 and will be
reimbursed its reasonable out-of-pocket expenses in connection with such
solicitation services.
NO DISSENTERS' APPRAISAL RIGHTS
Sallie Mae shareholders have no statutory appraisal rights in connection
with the matters to be considered at the Special Meeting. See "COMPARISON OF
STOCKHOLDER RIGHTS -- United States and Delaware Law -- Dissenters' Rights."
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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THE REORGANIZATION
BACKGROUND
The Student Loan Marketing Association Reorganization Act of 1996 (the
"Privatization Act") was the result of a multi-year effort on the part of Sallie
Mae to win executive branch and Congressional support for privatization. As a
government-sponsored enterprise Sallie Mae has access to the "government agency"
debt market, exemptions from state taxes and certain securities laws, and lower
capital requirements. However, Sallie Mae's business activities are subject to
restrictions and burdens contained in Sallie Mae's federal charter, which is set
forth at Section 439, Part B, Title IV of the Higher Education Act of 1965, as
amended, codified at 20 U.S.C. sec. 1087-2 (the "Sallie Mae Charter"). The
Sallie Mae Charter may be changed by Congress, subject only to constitutional
limitations, without approval from Sallie Mae directors or shareholders. Sallie
Mae sought privatization to protect the value of its franchise from the
political risks of its government-sponsored enterprise status and the new
Federal Direct Student Loan Program (the "FDSLP"). As a government-sponsored
enterprise, Sallie Mae is exposed to the ongoing risk of targeted legislation.
Over recent years, a number of legislative actions have adversely and uniquely
impacted Sallie Mae including: (i) the imposition of a 30 basis point per annum
offset fee applicable solely to Sallie Mae, (ii) charter restrictions on the
scope of its business and (iii) unfunded mandates requiring certain actions by
Sallie Mae (e.g., acting as lender of last resort for the post-secondary
education credit program). Moreover, the 1993 expansion of the FDSLP, which
originally was intended to ultimately replace the FFELP, demonstrated Sallie
Mae's vulnerability to shifts in federal policy. Privatization will reduce the
risk of targeted legislation and shifts in federal policy and will allow the
Company to invest in new products and services designed to improve its
competitive position vis a vis FFELP participants and the FDSLP. In addition,
Sallie Mae recognized that changes in the student loan market, including the
advent of student loan securitization, had reduced the comparative advantages of
government-sponsored enterprise funding and capital levels. After passage of the
1993 Omnibus Budget Reconciliation Act ("OBRA"), which imposed the 30 basis
point offset fee referenced above and expanded the FDSLP, Sallie Mae worked with
the executive branch to produce a study on the "future of Sallie Mae" and put
forward a specific legislative framework to effect privatization through a
transitional holding company arrangement. During 1995 and 1996, Sallie Mae
negotiated with Congress and the executive branch to arrive at legislation
intended to provide a fair outcome for the government, Sallie Mae noteholders
and Sallie Mae shareholders. The Privatization Act, which was enacted on
September 30, 1996, will allow Sallie Mae to transition from a limited purpose
government-sponsored enterprise to a general purpose corporation that will
independently determine which new business opportunities to pursue.
The Privatization Act authorized the Sallie Mae Board of Directors (the
"Sallie Mae Board") to adopt a plan of reorganization pursuant to which Sallie
Mae would become a wholly-owned subsidiary of a holding company. Set forth below
is a summary of the deliberations of the Sallie Mae Board and committees
thereof.
At a Sallie Mae Board meeting held on November 22, 1996, the Sallie Mae
Board charged (i) the Nominations and Board Affairs Committee with consideration
of the corporate governance structure for the Holding Company, the composition
and selection of the Holding Company Board of Directors and the structure of the
proposal for presentation to shareholders and (ii) the Finance Committee with
consideration of various financial and operational aspects of the plan of
reorganization and related asset transfers. Each of these Committees was
instructed to formulate recommendations for action by the full Sallie Mae Board
at the regular meeting held January 24, 1997.
Consistent with its charge, the Nominations and Board Affairs Committee met
on December 17, 1996, January 16, 1997, January 23, 1997 and January 24, 1997.
At its meeting on December 17, 1996, the Committee considered the relative
merits of a broad range of corporate governance provisions and determined to
solicit the further views of the members of the Committee concerning a variety
of governance issues. In addition, the Committee determined to solicit the
members of the Sallie Mae Board and the President and Chief Executive Officer
for the names and qualifications of potential nominees to the Holding Company
Board of Directors.
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At the meetings of December 17, 1996 and January 16 and 23, 1997, the
Committee also discussed guidelines for the qualifications of Holding Company
Directors, as individuals and as members of a cohesive body. The Nominations and
Board Affairs Committee unanimously approved guidelines aimed at bringing to the
Holding Company Board persons of the highest individual character with diverse
resources and background. The guidelines adopted by the Committee provide
generally that the Holding Company Board must (i) be able to engage in
effective, cohesive conduct that is respectful of divergent views, (ii) be
composed of leaders of sufficient professional stature to attract other
well-qualified candidates, (iii) be able to attract the support of, and retain
the highest quality, managers on behalf of the shareholders and (iv) reflect
diverse points of view together with a balance of freshness of views and
continuity. According to such guidelines, individuals to be elected to the
Holding Company Board should be recognized for having added value within their
organizations, be qualified to timely deal with complex business and policy
issues and have significant experience of current application to the Company's
present business and new, potentially beneficial initiatives. In addition, such
guidelines provide that such persons must be able to commit the time required to
provide the energy and focus necessary to perform productively as a member of
the Holding Company Board, be able to function within the context of a governing
body and understand their duties to all shareholders, be capable of independence
in their deliberations and decision making and be committed to quality products
and services, ethical behavior and excellence.
At the meetings of January 16 and January 23, 1997, Mr. Brandon, moved that
the 14 members of the Sallie Mae Board who were elected by shareholders in 1996
be nominated as a body to constitute the entire Holding Company Board. The
motion was defeated, with Messrs. Jacobsen, Durmer, Spiegel and Thayer voting
against because the action would have given effective control of the Holding
Company to a minority of the present Sallie Mae Board who were initially elected
in 1995 representing a group under the name "The Committee to Restore Value at
Sallie Mae" (the "CRV"). The materials used to solicit proxies for their
election in 1995 stated that such directors were not seeking control of the
Sallie Mae Board and that their election would not result in their obtaining
control of the Sallie Mae Board. In addition, the majority believed such a slate
would not provide the breadth and depth desired for the Holding Company Board.
Specifically, unlike Sallie Mae, there is no requirement that directors of the
Holding Company be affiliated with financial or educational institutions. The
majority of the Nominations Committee believed that the Holding Company Board
should have representation from persons with a broader range of experience,
particularly since the seven directors appointed by the President could not
serve on the Holding Company Board. In addition, Mr. Brandon's proposal would
not have resulted in a diversity of background, providing for only one minority
member and no women on the Holding Company Board.
At the meeting of January 16, 1997, Mr. Brandon moved that the Company
separate the vote on the initial election of the Holding Company Board members
from the vote on the plan of reorganization. The motion was defeated, with
Messrs. Jacobsen, Durmer, Spiegel and Thayer voting against. The majority of the
Board believed that the identity of the members of the Board of Directors was an
essential component of the plan of reorganization, since such individuals would
have critical leadership responsibility going forward.
At its January 23, 1997 meeting, the Committee determined, by a vote of 4-1
(with Mr. Brandon voting against and Mr. Lambert absent) to recommend that the
full Sallie Mae Board adopt the charter and by-laws substantially in the form
described in this Proxy Statement/Prospectus.
At the January 23, 1997 meeting, Mr. Jacobsen also noted that on January
21, 1997 the names and qualifications of 26 individuals were provided to the
Committee members for their comment and review. He then moved that the 18
persons who are identified in the "Management -- Holding Company Board of
Directors" section of this Proxy Statement/Prospectus be recommended for
election to the initial Holding Company Board of Directors. After discussion,
the Committee voted 4-1 (with Mr. Brandon voting against and Mr. Lambert absent)
to recommend to the full Sallie Mae Board that these individuals be nominated
for election by Sallie Mae as the members of the Holding Company Board.
The Finance Committee met on December 19, 1996 and considered a number of
financial and operational issues related to the plan of reorganization. These
included the structure of the transaction to effect the new entity, the
structure of the new entity after reorganization, the transfer of employees and
assets
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and the capital structure of the new entity. On January 23, 1997, the Operations
and Finance Committees held a joint meeting to review the strategic
considerations relating to privatization, to summarize the economic and business
rationale for privatization and to review the mechanics of the Reorganization.
For a further discussion of such considerations, see "-- Reasons for the
Reorganization; Recommendation of the Board of Directors." The Company's outside
legal and financial advisors were available to answer questions at both the
January 23, 1997 Committee meeting and the January 24, 1997 Board meeting
discussed below. Members of management made presentations concerning terms and
financial aspects of the proposal at each of the Committee's meetings.
On January 24, 1997, the Sallie Mae Board met to consider, among other
business, the proposed plan of reorganization. Mr. Jacobsen, Chairman of the
Nominations and Board Affairs Committee, reviewed the activity of the Committee
in detail, including a description of the recommended corporate governance
provisions and the proposed slate of the Holding Company Directors and moved
adoption of the recommendations.
As part of the Board's discussion, Mr. Hunt indicated that, while he
favored privatization, he opposed the plan of reorganization because he does not
view the plan as friendly to shareholders in its governance structure and
believes it should provide for a separate vote on the Holding Company Board of
Directors. Mr. Lord indicated that he had similar objections.
Mr. Hunt further stated that he was willing to serve on the slate and
pledged that, if he were to engage in any active solicitation of shareholder
opposition to the reorganization plan, then he would withdraw from the slate. As
noted below, Mr. Hunt later voted against the Reorganization Agreement and
subsequently withdrew from the slate.
A majority of the Sallie Mae Board expressed the view that having nominees
on the Holding Company Board who were actively opposed to the plan of
reorganization would be confusing and not be in the best interests of
shareholders. As a result of this concern the Sallie Mae Board voted to provide
that Messrs. Hunt and Lord would have until close of business on January 31,
1997 to confirm that they had no objection to the plan of reorganization other
than as summarized in this Proxy Statement/Prospectus, and that neither Mr. Hunt
nor Mr. Lord would organize or participate in opposition to the plan of
reorganization and the slate of nominees contained therein. The motion was
approved with Messrs. Arceneaux, Berger, Daberko, Durmer, Jacobsen, Moore, Rohr,
Spiegel, Thayer, Vitale and Mmes. Gilleland, Montoya and Natividad voting for
and Messrs. Brandon, Daley, Hunt, Lambert, Lord, Porter, Shapiro and Waterfield
voting against such motion.
The Sallie Mae Board then voted to approve the recommendations of the
Nominations and Board Affairs Committee as set out above. The recommendations
were approved with Messrs. Arceneaux, Berger, Daberko, Durmer, Jacobsen, Moore,
Rohr, Spiegel, Thayer, Vitale and Mmes. Gilleland, Montoya and Natividad voting
for and Messrs. Brandon, Daley, Hunt, Lambert, Lord, Porter, Shapiro and
Waterfield voting against such recommendations.
Mr. Vitale, Chairman of the Finance Committee, reviewed the activity of the
Finance Committee in detail, including a description of the finance provisions
relating to the plan of reorganization and moved that the Sallie Mae Board
approve the provisions as described. The Sallie Mae Board voted unanimously to
approve the finance provisions relating to the proposed plan of reorganization.
The Sallie Mae Board, however, voted 13-8 to approve the recommendations of the
Nominations and Board Affairs Committee, including the corporate governance
provisions, and 13-8 to approve the proposed plan of reorganization, as a whole.
No plan of reorganization or business plan other than the plan of reorganization
contained in these documents was presented for consideration.
On January 31, 1997, Mr. Hunt advised the Chairman of the Sallie Mae Board
that, after evaluating his fiduciary duties, he was unable at that date to
provide the Sallie Mae Board with the confirmation it sought. On the same date,
Mr. Lord advised the Sallie Mae Board that his position on the plan of
reorganization and the opposition to the persons named to serve on the Holding
Company Board had not changed. Prior to any action in this regard by the Sallie
Mae Board, by letters dated March 3, 1997 and March 4, 1997, respectively,
Messrs. Lord and Hunt withdrew their consent to serve as members of the Holding
Company Board.
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On February 5, 1997, a written statement was delivered to the Company on
behalf of Messrs. Brandon, Daley, Hunt, Lambert, Lord, Porter, Shapiro and
Waterfield (collectively, the "Dissenting Directors") stating their reasons for
their votes, including certain of the reasons noted above. The Dissenting
Directors include eight of the 14 members of the Sallie Mae Board elected by the
shareholders and none of the seven members appointed by the President. Of the 16
persons who have consented to be named as directors of the Holding Company, six
are current members of the Sallie Mae Board. THE DISSENTING DIRECTORS' STATEMENT
HAS BEEN INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS AT THEIR REQUEST AND IS SET
FORTH IN APPENDIX D.
On March 10, 1997, Sallie Mae received a copy of a solicitation statement
(the "CRV Solicitation Statement") soliciting agent designations from Sallie Mae
shareholders to appoint certain individuals as shareholders' agents in order to
call and convene a special meeting of the shareholders of Sallie Mae on behalf
of the CRV, a group including the Dissenting Directors. Under the Sallie Mae
By-Laws, a special meeting must be called by the Chairman upon the written
request of holders of at least one-third of the shares of Sallie Mae having
voting power. According to the CRV Solicitation Statement, the purposes of the
CRV's proposed special meeting would be to consider and vote upon (i) a
reorganization plan proposed by the CRV, (ii) the individuals who would be named
by Sallie Mae to the Holding Company Board under the CRV reorganization plan and
(iii) a proposal to amend the Sallie Mae By-Laws to provide for the
reimbursement of reasonable expenses incurred by Sallie Mae shareholders in
calling a special meeting of shareholders. Although the CRV Solicitation
Materials indicate that a vote at such a special meeting could be binding,
Sallie Mae believes that a vote held at such a meeting would be precatory. On
March 18, 1997, Sallie Mae mailed certain materials (the "Revocation Materials")
to Sallie Mae shareholders in opposition to the CRV's solicitation and
soliciting agent revocations. The Revocation Materials ask shareholders not to
give agent designations to the CRV and provide instructions to revoke any agent
designations that shareholders may have given already to the CRV. From time to
time Sallie Mae may distribute similar materials to shareholders in the future.
At the regular meeting of the Sallie Mae Board held on March 21, 1997, at
the recommendation of management, the Sallie Mae Board approved certain
modifications to the corporate governance structure of the Reorganization. The
modifications included elimination of a classified board and a related
requirement for a super-majority vote of stockholders to amend certain
provisions of the Holding Company Charter. As a result, commencing in April
1998, stockholders will elect the entire Holding Company Board annually. In
addition, Holding Company stockholders will be authorized, along with the
Holding Company Board, to fill vacancies on the Holding Company Board. Under the
existing Holding Company By-Laws, holders of one-third of the Holding Company's
outstanding shares could request the calling of a special meeting of
stockholders for any purpose. Under the modified governance structure, at such a
special meeting, holders of a majority of the shares can replace any directors
or the entire Holding Company Board, with or without cause.
REASONS FOR THE REORGANIZATION; RECOMMENDATION OF THE BOARD OF DIRECTORS
The majority of the Sallie Mae Board has determined that the
Reorganization, upon the terms and conditions set forth in the Privatization Act
and the Reorganization Agreement, is in the best interests of the shareholders
of Sallie Mae. ACCORDINGLY, THE SALLIE MAE BOARD (IN A 13-8 VOTE) HAS APPROVED
THE REORGANIZATION AGREEMENT. THE MAJORITY OF THE SALLIE MAE BOARD RECOMMENDS
THAT THE HOLDERS OF OUTSTANDING SHARES OF SALLIE MAE COMMON STOCK VOTE FOR
APPROVAL OF THE REORGANIZATION AT THE SPECIAL MEETING.
In reaching their determination to adopt the Reorganization Agreement and
recommend that the Sallie Mae shareholders approve the Reorganization, the
majority of the Sallie Mae Board considered a number of factors, including the
following material factors:
a. The expectation that, based upon their own analysis and management
presentations, the Reorganization will enhance Sallie Mae's core business
by enabling the Holding Company to more effectively respond to intensified
competition in the student loan marketplace among the Federal Family
Education Loan Program ("FFELP") participants, and with the FDSLP by
extending Sallie Mae's school-based strategy and engaging in a broader
array of campus-based services.
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b. The expectation that, based upon their own analysis and management
presentations, the Reorganization will provide a mechanism for expansion of
the business, new sources of revenue and, over time, business
diversification.
c. The belief, based on its experience through 1996 with five
successful securitization transactions, that, with the advent of student
loan securitizations, Sallie Mae's government-sponsored enterprise status
is no longer necessary to ensure its ability to obtain large volume, long
term funding on advantageous terms.
d. The belief that the persons selected to serve as the Holding
Company Board are best able to lead the Company through privatization, and
reflect strong and diverse backgrounds, attributes and skills, including
technology, marketing, finance and vision as well as diversity of gender,
race, age and geography.
e. The belief that the Holding Company corporate governance provisions
provide a proper balance of the interests of all of the shareholders and
permit the Holding Company to effectively pursue the creation of
stockholder value over the longer term.
f. The belief that the current management's performance in managing
Sallie Mae's business and preparing for privatization was a significant
factor in Sallie Mae's results and the increases in the price of Sallie Mae
Common Stock over the past year, and that their retention was important to
the effective transition to privatization and to the Company's future.
g. The expectation that the Reorganization will reduce the level of
political risk to which Sallie Mae is subject because of its status as a
government-sponsored enterprise.
h. The belief that the terms and conditions of the Privatization Act
and the Reorganization Agreement which, among other things, permit the
Company to retain GSE status during a transition period while developing
the Company's future business, were generally favorable to Sallie Mae,
based on presentations by management developed in consultation with the
Company's outside legal and financial advisors. See "THE PRIVATIZATION ACT"
and "TERMS OF THE REORGANIZATION AGREEMENT."
i. The fact that the Reorganization will privatize the Company, by
making all members of the Board of Directors subject to shareholder vote
and by phasing out federal government involvement with corporate governance
of the Company.
j. The determination that liquidation pursuant to the charter sunset
provisions of the Privatization Act is not in the best interests of Sallie
Mae and its shareholders because it would surrender a highly valuable, well
established franchise, limit future growth, foreclose business
diversification opportunities and leave Sallie Mae vulnerable to business
risks associated with liquidation. The liquidation charter sunset scenario,
while extending the GSE's ability to purchase loans by two years and its
wind-down period by five years, would force a break-up of the GSE and would
pose uncertain political risks, including risks relating to establishment
of the terms of the wind-down plan. See "THE PRIVATIZATION ACT -- Charter
Sunset If Reorganization Does Not Occur."
k. The expectation that the Merger will be treated for U.S. federal
income tax purposes as a nonrecognition transfer of shares of Sallie Mae
Common Stock by the holders thereof to the Holding Company for shares of
Holding Company Common Stock. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Reorganization, the Sallie Mae Board did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching their determinations. In
addition, individual members of the Sallie Mae Board may have given different
weights to different factors.
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THE MAJORITY OF THE SALLIE MAE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF
THE REORGANIZATION AND URGES EACH SHAREHOLDER TO VOTE "FOR" THE REORGANIZATION.
CORPORATE STRUCTURE BEFORE AND AFTER THE REORGANIZATION
Sallie Mae was created in 1972 as a federally-chartered,
government-sponsored enterprise. The Sallie Mae Charter defines and limits its
corporate authority to education finance related activities, while imposing
certain fees and obligations on Sallie Mae. The Privatization Act authorizes the
reorganization of Sallie Mae into a subsidiary of a state-chartered corporation
and provides that Sallie Mae will be gradually liquidated and its federal
charter will be rescinded on or before September 30, 2008. Under the
Privatization Act, consummation of the Reorganization is conditioned on approval
by the requisite vote of Sallie Mae shareholders on or prior to March 31, 1998.
If shareholder approval is not obtained within this time frame, the
Privatization Act's "charter sunset" provisions would require Sallie Mae to
restrict operations in the future and to ultimately dissolve by July 1, 2013.
See "THE PRIVATIZATION ACT -- Charter Sunset If Reorganization Does Not Occur."
To carry out the Reorganization, Sallie Mae has formed the Holding Company
as a new Delaware corporation. All of the outstanding stock of the Holding
Company is owned by Sallie Mae. Two other new Delaware corporations, Sallie Mae
Merger Company ("MergerCo") and Sallie Mae, Inc. (the "Management Company") have
been organized. Prior to the Reorganization, none of the Holding Company,
MergerCo or the Management Company has any business, properties or liabilities
of its own except that all of the outstanding stock of MergerCo is owned by the
Holding Company.
The Reorganization would be effected pursuant to the Reorganization
Agreement by merging MergerCo with and into Sallie Mae, with Sallie Mae as the
surviving corporation, resulting in Sallie Mae becoming a wholly-owned
subsidiary of the Holding Company. In addition, as soon as practicable after
consummation of the Reorganization, the stock of certain of the GSE's
subsidiaries, including Sallie Mae Servicing Corporation (collectively, the
"Transferred Subsidiaries") would be transferred to the Holding Company or one
of its non-GSE subsidiaries. See "BUSINESS -- Operation Following the
Reorganization."
Sallie Mae's outstanding class of preferred stock and debt securities will
remain outstanding as securities of Sallie Mae immediately after the
Reorganization. See "Treatment of Preferred Stock" below. Pursuant to the
Privatization Act, the Holding Company will issue to the District of Columbia
Financial Responsibility and Management Assistance Authority (the "D.C.
Financial Control Board") warrants to purchase 555,015 shares of Holding Company
Common Stock, exercisable at any time prior to September 30, 2008, at $72.43 per
share. These provisions of the Privatization Act were part of the terms
negotiated with the Administration and Congress as consideration for the GSE's
privatization.
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DIAGRAMS OF CURRENT AND PROPOSED CORPORATE STRUCTURES
The following diagrams show the current corporate structure of the Company
and the proposed structure of the Company following the Reorganization.
[CURRENT CORPORATE STRUCTURE DIAGRAM]
Graphic: Current Corporate Strcuture
Box: with words "Student Loan Marketing Association (GSE)" connected
by vertical lines to boxes: with words "Sallie Mae Servicing
Corporation," "Education Securities, Inc.," "HICA Companies," "MPC
Associates, Inc." and "Kaludis Consulting Group."
[PROPOSED STRUCTURE DIAGRAM]
Graphic: Proposed Structure following the Reorganization
Box: with words "SLM Holding Corporation" connected by vertical lines
to boxes: with words "Student Loan Marketing Association (GSE)";
"Sallie Mae Servicing Corporation," "Sallie Mae, Inc." (with its own
vertical lines to boxes with words "Kaludis, Consulting Group" and
HICA Companies") "MPC Associates, Inc." and "Education Securities,
Inc."
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EXCHANGE OF STOCK CERTIFICATES
Because the Reorganization Agreement provides that, at the Effective Time
(as defined below), each outstanding share of Sallie Mae Common Stock shall be
converted automatically into one share of Holding Company Common Stock, it will
not be necessary for holders of Sallie Mae Common Stock to exchange their
existing stock certificates for certificates of Holding Company Common Stock.
Following the Reorganization, as outstanding certificates for Sallie Mae
Common Stock are presented to Chase Mellon Shareholder Services for transfer,
new certificates bearing the name of the Holding Company will be issued in their
place. In addition, upon the request of any shareholder, new certificates for
Holding Company Common Stock will be issued in exchange for old certificates of
Sallie Mae Common Stock. Certificates presented for transfer to a name other
than that in which the surrendered certificate is registered must be properly
endorsed, with the signature guaranteed, and accompanied by evidence of payment
of any applicable stock transfer taxes.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
TREATMENT OF PREFERRED STOCK
The proposed Reorganization will not result in any change in Sallie Mae's
outstanding class of preferred stock. The Privatization Act requires that upon
the dissolution date of September 30, 2008, Sallie Mae shall repurchase or
redeem, or make proper provisions for repurchase or redemption of any
outstanding shares of Sallie Mae preferred stock. Sallie Mae has the option of
effecting an earlier dissolution if certain conditions are met. Sallie Mae's
preferred stock will continue to rank senior to Sallie Mae Common Stock (all of
which, after the Reorganization, will be held by the Holding Company) as to
dividends and as to the distribution of assets of Sallie Mae in the event of the
liquidation of Sallie Mae. The preferred stock is carried at its liquidation
value of $50 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. See "FINANCIAL STATEMENTS -- Footnote 13."
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFITS
After the Reorganization, all stock-based Sallie Mae director, officer and
employee benefit plans, including the Sallie Mae Employees' Stock Purchase Plan,
Employee's Thrift and Savings Plan, Supplemental Employees' Thrift and Savings
Plan, Deferred Compensation Plan for Key Employees, key employee stock option
plans, Stock Compensation Plan, Incentive Performance Plan, Board of Director's
Stock Option Plan, Board of Directors' Deferred Compensation Plan and Board of
Directors' Restricted Stock Plan (collectively, the "Plans") will be amended to
provide for the delivery of Holding Company Common Stock instead of Sallie Mae
Common Stock thereunder. Each right to acquire shares of Sallie Mae Common
Stock, including, without limitation, rights (including stock options) to
acquire Sallie Mae Common Stock pursuant to any of the Plans, granted and
outstanding immediately prior to the Effective Time shall, by virtue of the
Reorganization and without any action on the part of the holder thereof, be
converted into and become a right to acquire the same number of shares of
Holding Company Common Stock at the same price per share, and upon the same
terms and subject to the same conditions as were applicable immediately prior to
the Reorganization under the relevant right.
DIVIDEND POLICY
It is anticipated that the Holding Company will initially pay dividends on
Holding Company Common Stock at the rate most recently paid, and on
approximately the same schedule, as dividends have been paid on Sallie Mae
Common Stock. No assurance, however, can be given as to the amount of future
dividends, which will necessarily be dependent on future earnings and financial
requirements of the Holding Company and its subsidiaries, including Sallie Mae
after the Reorganization.
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The Holding Company's principal sources of funds are expected to be
dividends on the stock of its subsidiaries and proceeds from any issuances of
the Holding Company's equity or debt securities.
The ability of Sallie Mae to pay dividends on its capital stock is
generally subject to the capital requirements set forth in the Sallie Mae
Charter, see "REGULATION -- Current Regulation," and to the priority of
dividends on outstanding Sallie Mae preferred stock. See "THE REORGANIZATION --
Treatment of Preferred Stock."
Holders of Holding Company Common Stock will be entitled to receive
dividends when, as and if declared by the Board of Directors of the Holding
Company out of funds legally available therefor. The timing and amount of future
dividends will be within the discretion of the Board of Directors of the Holding
Company and will depend on the consolidated earnings, financial condition,
liquidity and capital requirements of the Holding Company and its subsidiaries,
applicable governmental regulations and policies, and other factors deemed
relevant by the Board of Directors.
Subject to the earnings and financial condition of the GSE after the
Reorganization, dividends on the GSE's preferred stock will continue to be paid
at the prescribed times and rates. See "THE REORGANIZATION -- Treatment of
Preferred Stock." If the Holding Company issues preferred stock subsequent to
the Reorganization, the payment of dividends on Holding Company Common Stock may
be restricted to the extent that dividends on such preferred stock of the
Holding Company have not been paid in accordance with the terms of such stock
established by the Board of Directors upon its issuance.
STOCK EXCHANGE LISTING
Sallie Mae has filed an application to list the shares of Holding Company
Common Stock to be issued in connection with the Reorganization on the NYSE,
subject to approval of the Reorganization Agreement by the Sallie Mae
shareholders and official notice of issuance. The shares of Sallie Mae Common
Stock are traded, and the shares of Holding Company Common Stock are expected to
be traded, on the NYSE under the symbol "SLM." If the Reorganization is
consummated, shares of Sallie Mae Common Stock will be delisted in conjunction
with the listing of the shares of Holding Company Common Stock.
CERTAIN CONSEQUENCES OF SHAREHOLDER VOTE
Under the Privatization Act, the effective date of a reorganization
providing for the restructuring of common stock ownership of Sallie Mae so that
all of its outstanding common stock would be owned directly by a holding company
must occur on or prior to March 31, 1998. If the effective date has not occurred
prior to such date, the charter sunset provisions would apply. The Sallie Mae
directors who approved the Reorganization Agreement, representing a majority of
the Board, expect that the Reorganization Agreement will be approved by Sallie
Mae shareholders. As a result, the Sallie Mae Board has not determined what
action, if any, it may take with respect to privatization in the event the
Reorganization is not approved. If the Reorganization is not approved by
shareholders, an Annual Meeting of Sallie Mae shareholders will be held as soon
as practicable to, among other things, elect Sallie Mae directors. If the
Reorganization Agreement is not approved, the Privatization Act would permit
Sallie Mae to privatize pursuant to another plan of reorganization. However, to
be effective under the Privatization Act, such a plan would have to be adopted
by the Sallie Mae Board and approved by the holders of a majority of the
outstanding shares of Sallie Mae Common Stock. There can be no assurance that
the Sallie Mae Board would adopt an alternate plan of reorganization, and if the
Sallie Mae Board adopted an alternate plan, there can be no assurance as to the
terms of such a plan or as to whether it would be approved by holders of the
requisite number of shares of Sallie Mae Common Stock in a timely manner. See
"THE PRIVATIZATION ACT -- Charter Sunset If Reorganization Does Not Occur."
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TERMS OF THE REORGANIZATION AGREEMENT
The following discussion of the terms and conditions of the Reorganization
Agreement is qualified in its entirety by reference to the provisions of the
Reorganization Agreement, which are attached to this Proxy Statement/Prospectus
as Appendix A and incorporated herein by reference.
Pursuant to the Reorganization Agreement, MergerCo will be merged with and
into Sallie Mae, each outstanding share of Sallie Mae Common Stock will be
converted into one share of Holding Company Common Stock, and the outstanding
shares of the common stock of MergerCo will be converted into all of the issued
and outstanding shares of Sallie Mae Common Stock, all of which will then be
owned by the Holding Company. If the Reorganization is approved, it will become
effective at the time the certificate of merger is filed with the Secretary of
State of the State of Delaware (the "Effective Time"), which management expects
to be on or about May 16, 1997. As a result of the Reorganization, Sallie Mae
will become a subsidiary of the Holding Company and all of the Holding Company
Common Stock outstanding immediately after the Reorganization will be owned by
the holders of Sallie Mae Common Stock outstanding immediately prior to the
Reorganization. Shares of Holding Company Common Stock held by Sallie Mae and
the Sallie Mae Common Stock held in treasury will be canceled and retired.
Shares of the outstanding class of preferred stock of Sallie Mae will not be
affected by the Reorganization, and will remain outstanding, with the same
voting powers, designations, preferences, rights, qualifications, limitations
and restrictions. See "The REORGANIZATION -- Treatment of Preferred Stock."
Consummation of the Reorganization is subject to the fulfillment of the
following conditions: (i) the approval of the Reorganization Agreement by the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Sallie Mae Common Stock, (ii) receipt of an opinion of counsel with
respect to the federal income tax consequences of the Merger and (iii) approval
by the NYSE of Holding Company Common Stock for listing upon official notice of
issuance. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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THE PRIVATIZATION ACT
The Privatization Act establishes the basic framework for effecting the
Reorganization and imposes certain restrictions on the operations of the Holding
Company and its subsidiaries after the Reorganization is consummated and prior
to the ultimate dissolution of Sallie Mae. The Privatization Act amends the
Higher Education Act of 1965, as amended, to permit Sallie Mae, which is now a
federally-chartered, government-sponsored enterprise, to be reorganized as a
wholly-owned subsidiary of a state-chartered holding company owning all of
Sallie Mae's outstanding common stock. See "THE REORGANIZATION." The
Privatization Act also amends the Sallie Mae Charter (i) to require certain
enhanced regulatory oversight of Sallie Mae to ensure its financial safety and
soundness, see "REGULATION -- Current Regulation," and (ii) to provide for the
dissolution of Sallie Mae by July 1, 2013 if Sallie Mae does not reorganize
pursuant to the Privatization Act on or before March 31, 1998, see "Charter
Sunset If Reorganization Does Not Occur."
REORGANIZATION
The Privatization Act requires the Sallie Mae Board to propose to
shareholders a restructuring plan under which their share ownership in the GSE
will be automatically converted to an equivalent share ownership in a
state-chartered holding company that will own all of the common stock of the
GSE. Following the Reorganization, the remaining GSE entity will be liquidated
on or before September 30, 2008, and its federal charter will be rescinded.
During this wind-down period, the Holding Company will remain a passive entity
that supports the operations of the GSE and its other non-GSE subsidiaries, and
any new business activities would be conducted through such subsidiaries. See
"REGULATION." The legislation provides a maximum eighteen month period for the
Sallie Mae Board to obtain shareholder approval for privatization on the terms
contained in the Privatization Act.
The Privatization Act requires certain personnel and asset transfers in
connection with the Reorganization, including the transfer of the GSE's interest
in the Transferred 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 Sallie Mae Board determines to
be necessary for or appropriate to continued GSE operations, may be retained by
the GSE. It is anticipated that net asset transfers occurring in the first year
after the Reorganization will aggregate approximately $100 million and that
certain fixed assets will be transferred within approximately three years of the
Reorganization. It is anticipated that employees of the GSE will be transferred
to the Management Company at the Effective Time. Employees of non-GSE
subsidiaries of the GSE will continue to be employed by such subsidiaries.
During the wind-down period, following the Reorganization and prior to the
GSE's dissolution, the GSE will be 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 will be limited to takedowns on contractual
financing and guarantee commitments in place at the Effective Time. In addition,
the GSE must discontinue its FFELP loan purchase activity once the Holding
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 the GSE performs such functions, however, it
will not be required to pay the offset fee on such loans. The GSE will be able
to transfer assets and to declare dividends, from time to time, provided it
maintains the 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
Holding Company is required to recapitalize the GSE in an amount necessary to
achieve such minimum capital ratio.
The GSE's debt obligations that are outstanding at the time of
Reorganization will continue to be outstanding obligations of the GSE
immediately after the Reorganization 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 will not modify the attributes accorded to the debt
obligations of Sallie Mae by the Sallie Mae Charter. After the Reorganization,
the GSE
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will be able to 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 will 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 makes it 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 exist at the time of
Reorganization or are subsequently issued.
OVERSIGHT AUTHORITY
During the wind-down period, the Secretary of the Treasury is granted
extended oversight authority to monitor the activities of the Holding 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
Sallie Mae submit periodic reports regarding any potentially material financial
risk of its associated persons and its procedures for monitoring and controlling
such risk. The Holding Company is expressly prohibited from transferring
ownership of Sallie Mae or causing Sallie Mae 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 Sallie Mae's safety and soundness requirements or the requirements
of the Privatization Act in general.
RESTRICTIONS ON INTERCOMPANY RELATIONS
During the wind-down period, Sallie Mae operations will be managed by its
affiliates or independent third parties. The Privatization Act also provides
certain restrictions on intercompany relations between Sallie Mae and its
affiliates during the wind-down period. Specified corporate formalities must be
followed to ensure that the separate corporate identities of Sallie Mae and its
affiliates are maintained. Specifically, the Privatization Act provides that
Sallie Mae must maintain books and records that clearly reflect the assets and
liabilities of Sallie Mae, separate from the assets and liabilities of the
Holding Company. In addition, the Privatization Act also provides that (i) the
funds and assets of Sallie Mae must at all times be maintained separately from
the funds and assets of the Holding Company, (ii) Sallie Mae must not extend
credit to, nor guarantee any debt obligations of, the Holding Company, (iii)
Sallie Mae must maintain a corporate office that is physically separate from any
office of the Holding Company, (iv) no director of Sallie Mae who is appointed
by the President may serve as a director of the Holding Company and (v) at least
one officer of Sallie Mae must be an officer solely of Sallie Mae.
Furthermore, the Privatization Act mandates that transactions between
Sallie Mae and the Holding Company, including any loan servicing arrangements,
shall be on terms no less favorable to Sallie Mae than Sallie Mae could obtain
from an unrelated third party, and any amounts collected on behalf of Sallie Mae
by the Holding Company pursuant to a servicing contract or other arrangement
between Sallie Mae and the Holding Company shall be immediately deposited by the
Holding Company to an account under the sole control of Sallie Mae.
LIMITATIONS ON HOLDING COMPANY ACTIVITIES
The Holding Company must remain a passive entity that holds the stock of
its subsidiaries and provides funding and management support to such
subsidiaries. It is prohibited from directly engaging in any business activities
until the GSE is dissolved. After the Effective Time and prior to the
dissolution of the GSE, all business activities of the Holding Company must be
conducted through its subsidiaries. The Privatization Act extends to the Holding
Company and its subsidiaries the GSE's "eligible lender" status for loan
consolidation and secondary market purchases. See "BUSINESS."
The Holding Company generally may begin to purchase FFELP student loans
only after the GSE discontinues such activity. Subject to the foregoing, the
Holding Company could elect, at any time, to transfer new student loan purchase
activity from the GSE to one of its non-GSE subsidiaries. Under OBRA, loans
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acquired after August 10, 1993 and held by the GSE are subject to a 30 basis
point per annum "offset fee." The GSE has challenged the offset fee's
constitutionality and the Secretary of Education's statutory authority to apply
the fee on loans securitized by the GSE. See "BUSINESS -- Legal Proceedings."
The offset fee does not apply to loans held or securitized by the Holding
Company or non-GSE subsidiaries of the Holding Company.
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 Holding Company, which in turn may
use such amounts to support its non-GSE subsidiaries. The Sallie Mae Charter
requires that the GSE maintain a minimum capital ratio of at least 2 percent
until 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 (whether or not the Reorganization occurs). In the event that the
GSE's capital falls below the applicable required level, the Holding 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
Holding Company.
In exchange for the payment of $5 million to the D.C. Financial Control
Board, the Holding Company and its other subsidiaries may continue to use the
"Sallie Mae" name, 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 from its affiliated entities. During the GSE wind-down, the "Sallie Mae"
name may not be used by any Holding Company unit that issues debt obligations or
other securities to any person or entity other than the Holding Company or its
subsidiaries.
GSE DISSOLUTION AFTER REORGANIZATION
If shareholders of Sallie Mae approve the Reorganization, the Privatization
Act provides that the wind-down period will terminate and Sallie Mae will
liquidate and dissolve on September 30, 2008, unless an earlier dissolution is
requested by Sallie Mae and the Secretary of Education makes no finding that
Sallie Mae continues to be needed as a lender of last resort under the Sallie
Mae 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 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. At December 31, 1996, Sallie Mae had $372 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 Holding 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 Sallie Mae preferred stock. The preferred stock is
carried at its liquidation value of $50 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. See "FINANCIAL STATEMENTS -- Footnote 13."
Upon dissolution, the Sallie Mae Charter will terminate, and any assets that
Sallie Mae continues to hold after establishment of the trust or which remain in
the trust after full payment of the remaining obligations of Sallie Mae assumed
by the trust, will be transferred to the Holding Company or its affiliates, as
determined by the Holding Company Board of Directors.
CHARTER SUNSET IF REORGANIZATION DOES NOT OCCUR
If a reorganization pursuant to the Privatization Act does not occur on or
prior to March 31, 1998, certain "charter sunset" provisions will apply. These
provisions will result in the dissolution of Sallie Mae by July 1, 2013, after
the discharge of all outstanding debt obligations and liquidations (the "Sunset
Dissolution Date"). Notwithstanding these charter sunset provisions, Sallie Mae
may dissolve prior to the Sunset Dissolution Date unless the Secretary of
Education finds that Sallie Mae continues to be needed as a lender of last
resort under the Sallie Mae Charter or to purchase loans under certain
agreements with the Secretary of Education.
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Prior to July 1, 2007, Sallie Mae would be required to submit a detailed
plan for the orderly winding-up of its business activities to the Secretary of
the Treasury and to the Chairman and Ranking Member of the Committee on Labor
and Human Resources of the Senate and the Chairman and Ranking Member of the
Committee on Economic and Educational Opportunities of the House of
Representatives. Upon implementation, this dissolution plan would (i) ensure
that Sallie Mae will have adequate assets to transfer to the trust to ensure
full payment of its remaining obligations; (ii) provide that all assets not used
to pay liabilities will be distributed to shareholders; and (iii) ensure that
the operations of Sallie Mae remain separate and distinct from those of any
entity to which such assets are transferred. While the Privatization Act would
allow Sallie Mae to amend the dissolution plan to reflect changed circumstances,
no amendments could extend the date for full implementation of the plan beyond
the Sunset Dissolution Date. The Privatization Act also allows the Secretary of
the Treasury to require that Sallie Mae amend the dissolution plan, if the
Secretary of the Treasury deems such amendments necessary to ensure full payment
of all obligations of Sallie Mae.
If the charter sunset provisions apply, the GSE could not engage in new
business activities beyond its GSE charter, but could generally transfer assets
at any time that its statutory capital requirements were satisfied. In addition,
the GSE would have to cease its business activities other than certain specified
permitted activities at the request of the Secretary of Education and with the
approval of the Secretary of the Treasury. In addition, except in connection
with such permitted activities, the GSE will be prohibited, after July 1, 2009,
from issuing debt obligations that mature later than July 1, 2013. The charter
sunset provisions also prohibit the GSE from transferring or permitting the use
of the names "Student Loan Marketing Association," "Sallie Mae," or any
variations thereof, to or by any entity other than a subsidiary of the GSE.
If the Reorganization does not occur, the final liquidation of Sallie Mae
would occur on the Sunset Dissolution Date. At that time, Sallie Mae would be
required to take actions similar to those required at the time of a dissolution
after reorganization. See "-- GSE Dissolution After Reorganization." Remaining
obligations would be transferred to a defeasance trust and proper provision
would need to be made for the repurchase or redemption of any preferred stock of
Sallie Mae then outstanding. Finally, any assets remaining after establishment
of the trust or any assets remaining in the trust after full pay-off of Sallie
Mae debt would be transferred to holders of Sallie Mae Common Stock.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, the following
summary, based upon current law, is a discussion of certain United States
federal income tax consequences of the Merger to Holding Company, Sallie Mae,
MergerCo and holders of shares of Sallie Mae Common Stock. The summary is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, judicial decisions, administrative pronouncements and current
administrative rulings, all of which are subject to change, possibly with
retroactive effect. Any such change could affect the continuing validity of this
summary. The summary does not purport to be a comprehensive description of all
of the tax consequences applicable to a particular taxpayer. In particular, the
summary does not address any aspect of state, local or foreign taxation or the
tax treatment to holders subject to special tax rules, such as insurance
companies, foreign persons, tax-exempt organizations, dealers in securities,
banks and other financial institutions, holders who acquired their shares of
Sallie Mae Common Stock pursuant to the exercise of options or otherwise as
compensation or through a tax-qualified retirement plan. In addition, the
summary only applies to holders who hold shares of Sallie Mae Common Stock as
capital assets. No rulings have been or will be requested from the Internal
Revenue Service (the "IRS") with respect to any of the matters discussed herein.
There can be no assurance that future legislation, regulations, court decisions
or administrative pronouncements or rulings would not alter the tax consequences
set forth below. Opinions of counsel are not binding on the IRS. HOLDERS OF
SALLIE MAE COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
The obligation of Sallie Mae to consummate the Reorganization is
conditioned upon the receipt by Sallie Mae of an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP in form and substance reasonably satisfactory to
Sallie Mae, dated as of the Effective Time, substantially to the effect that, on
the basis of facts, representations and assumptions set forth in such opinion
and set forth in certificates of officers of the Holding Company, Sallie Mae and
others, as well as representation letters of certain holders of Sallie Mae
Common Stock, all of which are consistent with the state of facts existing at
the Effective Time, the Merger will be treated for U.S. federal income tax
purposes as a nonrecognition transfer of shares of Sallie Mae Common Stock by
the holders thereof to the Holding Company for shares of Holding Company Common
Stock.
If, in accordance with the opinion referred to in the preceding paragraph,
the Merger will be treated as a nonrecognition transfer of shares of Sallie Mae
Common Stock by holders thereof under the Code, then, (i) no gain or loss will
be recognized by Holding Company, Sallie Mae or MergerCo as a result of the
Merger, and (ii) a holder of Sallie Mae Common Stock whose shares of Sallie Mae
Common Stock are converted in the Merger into Holding Company Common Stock will
not recognize gain or loss upon such conversion. The aggregate tax basis of the
Holding Company Common Stock received by such holder will be equal to the
aggregate tax basis of the Sallie Mae Common Stock so converted, and the holding
period of the Holding Company Common Stock will include the holding period of
the Sallie Mae Common Stock so converted.
REPORTING REQUIREMENT
Each holder of Sallie Mae Common Stock that receives Holding Company Stock
in the Merger will be required to retain records and file with such holder's
federal income tax return a statement setting forth certain facts relating to
the Merger.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
INFORMATION PURPOSES ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS. SHAREHOLDERS OF SALLIE MAE ARE URGED TO CONSULT
THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS).
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BUSINESS
As used herein, the "Company" refers to Sallie Mae prior to the
Reorganization and to the Holding Company, on a consolidated basis, from and
after the Effective Time of the Reorganization.
Industry data on the FFELP and the FDSLP contained in this Proxy
Statement/Prospectus is based on sources that the Company believes to be
reliable and to represent the best available information for these purposes,
including published and unpublished Department of Education 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. Founded in 1972 as a government sponsored
enterprise, Sallie Mae'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 December 31, 1996, the Company's managed portfolio of
student loans totaled approximately $40 billion (including loans owned, loans
securitized and loan participations). The Company also had commitments to
purchase an additional $15.8 billion of 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 has as clients over 900 financial and education institutions and
state agencies. Through its six regional loan servicing centers, the Company
processes student loans for more than 4 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."
Management believes that the Company has successfully fulfilled its
original government-sponsored-enterprise mandate by fostering a thriving,
competitive secondary market in student loans 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 sound financial management strategy. In recognition of the
increasingly important role that college and university administrators play in
the loan process, the Company adopted a school-based focus. 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 elect to
work with lenders committed to the Company. This strategy, combined with
superior servicing and technology capabilities, has also enabled the Company to
build valuable partnerships with lenders, guarantee agencies and others.
In 1993, the Company launched a three year effort to obtain Congressional
approval to recharter as a fully private, state-chartered corporation.
Legislation to privatize the Company was approved by Congress and signed by
President Clinton in September 1996.
Immediately following the Reorganization, the principal business of the
Company will continue to be the acquisition, financing and servicing of student
loans, as presently conducted by the GSE. Although the GSE's activities will be
phased out over time as described in "REGULATION" and the student loan business
will eventually be conducted through the Company's non-GSE units, it is expected
that student loan acquisitions will continue to be effected through the GSE
exclusively (as generally required by the Privatization Act) for so long as it
is advantageous to do so. See "-- Operations Following the Reorganization."
INDUSTRY OVERVIEW
The student loan industry provides affordable financing to students and
their families to fund post-secondary education. Banks and other eligible
lenders are able to 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, originally 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 education
institutions. In 1972, to encourage further bank participation in the program,
Congress established the Company as a for-profit, stockholder-owned national
secondary market for student loans. The FFELP
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industry currently includes a network of approximately 5,300 originators and
6,300 educational institutions. Also, 39 state-sponsored or non-profit guarantee
agencies collectively guarantee and administer the FFELP under contract with the
Department of Education. In addition to the Company, a number of non-profit
entities, banks and other financial intermediaries operate as secondary markets.
The Company believes that lender participation in the program is relatively
concentrated, with an estimated 90% 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 the Congress about every five
years. The next reauthorization is required in 1998. The provisions of the FFELP
are also subject to revision from time to time by the Congress. For an overview
of the FFELP and other federally sponsored student loan programs, see Appendix C
"The Federal Family Education Loan Program."
The 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% in 1985. Federal legislation
enacted in late 1992 expanded loan limits and borrower eligibility that, in
part, resulted in an increase of over 50% in annual loan volume of
federally-guaranteed student loans ($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 administered by the U.S. Department of Education. 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 1995-6. The federal government contracts out loan administration
and collections services while financing its lending activity through U.S.
Treasury borrowing. The FDSLP had a legislated market share goal of up to 50%
for academic year 1996-7, but, based on current Department of Education
projections, management expects direct loan volume to reach between 35-40% of
total student loan volume for such academic year. See "-- Competition".
BUSINESS STRATEGY
Sallie Mae's strategy is to expand its higher education franchise as a
preferred provider of branded products and services to higher education
institutions, consumers and lenders, while leveraging the unrealized value
embedded in its consumer database and servicing operation. Management believes
the Company's statutory mandate, to provide liquidity to FFELP lenders, no
longer adequately characterizes the breadth of the Company's products and
services or the customer needs they currently address. Management believes
privatization will allow the Company to exploit its servicing, technology and
financing expertise to better and more broadly serve higher education
institutions and students. In addition, management believes that privatization
will allow the Company to realize value-enhancing opportunities to expand beyond
its core business, leveraging its servicing capability and unique consumer
database.
Competition in the student loan industry has intensified both among the
participants in the FFELP, and, with the expansion of the FDSLP, between private
industry participants and the government's direct student loan program. To
address these pressures and legislatively-directed margin reductions, the
Company's strategy has been to increase its share of owned and committed FFELP
loans and encourage consumer support for private sector solutions to higher
education credit needs. To this end, Sallie Mae has developed a school-based
strategy that brings value more directly to the higher education customer,
generating loan product flows at the source for Sallie Mae's network of
affiliated lenders. This school-based strategy has resulted in substantial
volume growth over the past five years, notwithstanding increased competition.
The expansion of Sallie Mae's customer focus to include colleges and
universities, in addition to lenders, is based on the increasingly active role
played by college administrators in the referral of loan providers to their
students.
As the cost of education continues to rise, schools are looking for the
least expensive, most efficient source of student loan credit. To meet customer
needs and differentiate its lender partners, the Company has developed a
"branded" family of products and services. These include borrower benefits,
which reward on-time repayment by reducing total loan cost; flexible repayment
options; and specialized software and electronic communications systems.
Products such as LineSS(R) (school loan processing software) and ExportSS(R) (a
loan origination and administration outsourcing service) demonstrate Sallie
Mae's expertise in providing
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technology and operational support to help schools and lenders manage student
loan-related costs. The recently formed relationship with PeopleSoft to develop
a student information system and financial aid software and the acquisition of
Kaludis Consulting Group, a higher education strategic consulting firm, are
expected to enhance the Company's capabilities in this regard. Management
believes that privatization will further allow the Company to develop new
products for certain segments of the education market.
The Company's academic facilities financing business has complemented its
expanded customer focus. This business, now conducted through Education
Securities, Inc. ("ESI"), a wholly-owned, broker-dealer subsidiary, has allowed
the Company to strengthen relationships at several hundred schools across the
country and has increased the Company's name recognition on campus. See
"-- Specialized Financial Services -- Academic Facilities Financings and Student
Loan Revenue Bonds."
The Company's valuable network of lender clients is an established and
reliable nationwide source of loan originations. The Company plans to continue
to support and expand its network of lending partners. Leveraging their
relationship with the Company, many of these lenders have developed a reputation
for service to schools and strong name recognition with students, both of which
are critical to being selected as the lender. Although the Company is well known
on campuses as the industry's leading servicer of student loans, it is less well
known among families who are in need of college loans. The Company plans to
heighten its visibility with consumers to favorably position itself for future
new product offerings. To improve its competitive position vis a vis FFELP
participants and the FDSLP, the Company's business strategy entails the
development of products and businesses which improve the delivery, distribution
and servicing of education credit for the private sector program. The Company
also plans to continue to build strong relationships with colleges and families
by providing state-of-the-art loan origination capabilities, best-in-class loan
servicing and preferred loan programs. Privatization is expected to provide
enhanced flexibility to pursue investments in ventures related to the Company's
core student loan business.
In addition, privatization will permit the Company to pursue opportunities
outside the student loan industry. Although at this time the Company has no
specific plans to make any material investments outside of its core business,
over time it expects to broaden the services it provides to higher education
institutions. In addition, privatization will permit the Company to explore
opportunities to (i) leverage its servicing and technology expertise, (ii)
capitalize on its unique consumer database and (iii) build upon its existing
school and lender relationships.
The Company intends to supplement its business strategy by continuing to
aggressively control costs and proficiently manage its capital base. The Company
reduced operating expenses as a percentage of managed student loans from 1.36%
for the year ended December 31, 1994 to 1.09% for the year ended December 31,
1996. In addition, the number of shares of Sallie Mae Common Stock outstanding
was reduced by approximately 36% from January 1, 1994 to December 31, 1996
through stock repurchases. Prudent capital management, including the potential
for further stock repurchases, is expected to remain a priority for the Company.
PRODUCTS AND SERVICES
LOAN PURCHASES. The Company's purchases of student loans 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 United States Department of Education. The FFELP is more fully described in
Appendix C. The Company also purchases student loans originated under the Health
Education Assistance Loan Program ("HEAL"), which are insured directly by the
United States Department of Health and Human Services. HEAL loans are made to
health professions graduate students under the Public Health Services Act. As of
December 31, 1996, the Company's managed portfolio of student loans totaled $40
billion, including $36.2 billion (including loans owned, loans securitized and
loan participations) of FFELP loans and $2.8 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
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Insurance Corporation of America ("HICA") subsidiary (if not already insured by
HICA prior to 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
December 31, 1996, the Company owned approximately $1.0 billion of such private
education loans, including HICA insured Signature Education Loans(sm).
The Company purchases student loans primarily from commercial banks. In
addition, the Company purchases student loans from other eligible FFELP lenders,
including savings and loan associations, mutual savings banks, credit unions,
certain pension funds and insurance companies, education institutions, and state
and private nonprofit loan originating and secondary market agencies.
Most lenders using the secondary market hold loans while borrowers are in
school and sell loans shortly before their conversion to repayment status, when
servicing costs increase significantly. Traditionally, the Company has purchased
most loans just prior to their conversion to repayment status, although the
Company also buys "in-school" loans and those 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
effected pursuant to purchase commitments in 1996 and 1995. 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
the selling institutions with operational support in the form of PortSS(R), an
automated loan administration system for the lender to use at its own offices
prior to loan sale, or in the form of loan origination and interim servicing
provided through one of the Company's loan servicing centers (ExportSS(R)). In
1995 and 1996, more than 80% of 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), TransportSS(sm), and ExportSS(R) provide the
Company and the lender with the assurance that the loans will be efficiently
administered by the Company and that the 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 the consolidation
of eligible insured loans into a single new insured loan with terms of from 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. As of December 31, 1996, the Company owned
approximately $7.7 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 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 not only help borrowers, but also help 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
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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"), the largest originator of student loans under the FFELP with an
estimated market share of 7.0%. Historically, Chase has also been the Company's
largest client, representing 11% of 1995 purchases. The Company and TCB
Education First Corporation, 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 the date hereof, the Trust owns approximately $2.9 billion in
federally-insured education loans. Substantially all loans owned by the Trust
are serviced on behalf of the Trust by Sallie Mae Servicing Corporation on a
fee-for-service basis. Management believes the Chase Joint Venture reflects its
ability to leverage its servicing operations and differentiated product line to
strengthen its position in its core student loan purchasing business.
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 a wholly-owned subsidiary, Sallie Mae Servicing
Corporation ("SMSC"). The Company is now the 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 is integral to its school-based
growth strategy. As of December 31, 1996, the Company serviced approximately $38
billion of loans, including approximately $25.5 billion of loans owned by Sallie
Mae and $6.3 billion owned by five securitization trusts sponsored by Sallie
Mae, $4.3 billion of loans currently owned by ExportSS(R) customers and $1.9
billion of the $2.9 billion owned by the Chase Joint Venture Trust. The
remaining $1.0 billion of loans owned by the Chase Joint Venture Trust will
eventually be serviced by the Company.
The Company currently has six loan servicing centers located in Florida,
Kansas, Massachusetts, Pennsylvania, Texas and Washington. This geographical
coverage, together with total systems integration among centers, facilitates
operations and customer service.
The United States Department of Education and the various guarantee
agencies prescribe rules and regulations that govern the servicing of federally
insured student loans. The Company's originations 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 has recently introduced imaging technology to further increase
servicing productivity and capacity. Management believes that ongoing
investments in servicing technology and personnel training will continue to
enhance its leading position in student loan servicing.
Management believes that a long-term commitment to developing loan
servicing expertise and efficiency has created new opportunities for the
Company. The Company is beginning to bid on federal and state government
contracts to provide various services including loan collection, claims
processing, and administration of prepaid tuition plan records. It is expected
that privatization will allow for new opportunities for government contracting
and third-party servicing activities for the Company.
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 of student loan revenue and
facilities
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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 December 31, 1996, the Company held
approximately $2.8 billion of warehouse loans with an average term of 1.0 year.
These loans will remain assets of the GSE. The GSE will be able to extend new
warehousing advances during its wind-down only pursuant to financing commitments
in place as of the Effective Time. As of December 31, 1996, the GSE held
approximately $2.4 billion of such commitments. The non-GSE affiliates are not
expected to 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., which manages the GSE's municipal bond portfolio and is developing an
array of specialized underwriting and financial advisory services for the
education sector. It is expected that following the Reorganization, the Company
will reduce its investment activity in the academic facilities and student loan
revenue bond products, but will expand its underwriting and financial advisory
activities in these and other market segments. As of December 31, 1996, this
portfolio totaled $1.5 billion.
LETTERS OF CREDIT. In the past, the GSE has also offered letters of credit
to guarantee issues of state and nonprofit agency student loan revenue bonds.
Currently outstanding letters of credit have original terms of up to 17 years.
As of December 31, 1996, the GSE held approximately $3.7 billion of such
commitments outstanding. After the Reorganization is consummated, letter of
credit activity by the GSE will be limited to guarantee commitments in place at
the Effective Time.
PRIVATE STUDENT LOAN INSURANCE. In 1995, the GSE acquired HICA, a South
Dakota stock insurance company exclusively engaged in protecting lenders against
credit loss on their education-related, non-federally insured loans to students
attending post-secondary educational institutions. A significant portion of
HICA's insured loan portfolio is made up of loans owned by the GSE. See
"Products and Services -- Loan Purchases."
FINANCING/SECURITIZATION
The Company obtains funds for its operations primarily from the sale of GSE
debt securities in the domestic and overseas capital markets, through public
offerings and private placements of U.S. dollar 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."
Sallie Mae debt securities are currently rated at the highest credit rating
level by Moody's Investor Services and Standard & Poor's, in part due to the
GSE's current status as a government-sponsored-enterprise. The GSE is expected
to retain its credit ratings after the Reorganization. Although the Company has
not begun specific discussions with the ratings agencies as of the date of this
Proxy Statement/Prospectus, it is expected that the credit rating on debt
securities of the Holding Company would be lower than debt securities of the
GSE.
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 the 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. The Reorganization provides for access to the
government-sponsored-enterprise debt market to fund student loans and other
permitted asset acquisitions with maturity dates through September 30, 2008. 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 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 Holding Company
must transfer sufficient assets to the trust to account for this shortfall. The
Privatization Act requires that upon the
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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.
In addition, 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, that, 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 its securitization program
are not GSE securities, the Company has been and in the future expects to be
able to fund its student loans to term through such program, even for those
assets whose final maturities extend beyond 2008. The Company has taken the
position that the 30 basis point per annum offset fee does not apply to
securitized loans. See "Legal Proceedings." It is anticipated that
securitization will remain a primary student loan funding mechanism for the
Company once it conducts student loan purchase activity through a non-GSE
subsidiary.
Management believes that the initial financing requirements of the Holding
Company will be relatively modest and can be accommodated through a number of
alternative sources, including public and private debt placement, bank
borrowings and dividends from subsidiaries. Securitization is expected to
provide the principal funding source for the student loan purchases of the
Holding Company after such function is transferred to the GSE. However, there
will be a need for on-balance sheet financing for such activities during the
period prior to securitization. Such financings may require the Holding Company
to obtain a bond rating. Ratings for Holding Company debt will not be known
until specific debt is issued. Although the Company has not begun specific
discussions with the ratings agencies as of the date of this Proxy
Statement/Prospectus, it is expected that these ratings will be below the GSE's
current credit rating levels.
ECONOMIC IMPACT OF THE PRIVATIZATION ACT ON THE COMPANY'S BUSINESS
The economics of Sallie Mae's contemplated privatization reflect a
trade-off between government-sponsored-enterprise benefits, which have been
significantly eroded in recent years, and the opportunity for an expanded
franchise. It is difficult to precisely quantify either the changing value of
government-sponsored-enterprise status or the potential value of new business
opportunities. However, management believes that Sallie Mae's competitive
posture is now primarily a function of strategic marketplace issues rather than
its government-sponsored-enterprise status. Moreover, in management's view the
costs and risks of privatization, within the framework of the Privatization Act
and with the advent of securitization, are manageable and are expected to have a
relatively modest impact on the core student loan business. The additional
economic advantage of privatization is that it mitigates the potential for
further erosion of net returns based on political actions targeted at Sallie
Mae.
FUNDING COSTS AND LEVERAGE. The Reorganization would eventually remove the
Company's ability to issue GSE debt on relatively attractive terms based on the
perception of implicit federal support. In addition, as described under
"Financing/Securitization", the Company will be obligated to repay or defease
GSE debt obligations remaining on the dissolution date. However, management
believes that funding costs should not be a significant issue following the
Reorganization for several reasons.
First, the Privatization Act allows Sallie Mae to continue to issue debt
securities as a government-sponsored-enterprise with maturities no later than
September 30, 2008. Second, the 30 basis point offset fee on student loans
Sallie Mae holds effectively raises funding costs. Third, the recent
availability of securitization greatly reduces the need for capital and the
traditional government-sponsored-enterprise advantage of relatively high balance
sheet leverage.
Management believes that Sallie Mae's experience with its securitization
program and the growth in student loan securitizations generally demonstrate
that, following the Reorganization, the Company can efficiently fund its core
business. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Securitization"
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PREFERRED STOCK REDEMPTION. As described above, the Privatization Act
requires that upon the dissolution date, Sallie Mae shall repurchase or redeem,
or make proper provisions for repurchase or redemption of any outstanding shares
of Sallie Mae preferred stock. The preferred stock is carried at its liquidation
value of $50 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.
STATE TAXES. As a government-sponsored-enterprise, Sallie Mae is exempt
from certain state and local taxes. The Company's non-GSE's units will not be
exempt from such taxes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- FEDERAL AND STATE TAXES."
IMPACT ON OTHER BUSINESS LINES. It is anticipated that following the
Reorganization, the GSE will maintain an investment portfolio consistent with
liquidity needs, the availability of attractive credit spreads and prudent
capital management. As the level of the GSE's investment portfolio (including
tax exempt securities) gradually declines, the Company will forego certain
earnings opportunities. It is expected that swaps and other derivatives will
continue to be utilized by the GSE to manage interest rate risk and match asset
and liability characteristics.
Privatization will limit Sallie Mae's warehousing advance activity, letter
of credit business and academic facilities portfolio lending, all areas of
decreasing business opportunity. While contractual commitments in place at the
Effective Time will be honored by the GSE, it is expected that the Holding
Company will not pursue these business lines. Instead, the Company will seek to
maintain client relationships in these areas by refocusing its product lines
primarily through its broker-dealer subsidiary, ESI.
CONSIDERATION. Under the Privatization Act, the Company must pay $5
million to the D.C. Financial Control Board for use of the "Sallie Mae" name
within 60 days after the Effective Time. In addition, if the Reorganization is
consummated the Holding Company must issue to the D.C. Financial Control Board
warrants to purchase 555,015 shares of Holding Company Common Stock. These
warrants are transferable and exercisable at any time prior to September 30,
2008 at $72.43 per share. These provisions of the Privatization Act were part of
the terms negotiated with the Administration and Congress as consideration for
the GSE's privatization.
OPERATIONS FOLLOWING THE REORGANIZATION
Privatization will enable the Company to commence new business activities
without regard to the GSE's charter restrictions immediately after the Effective
Time. Specifically, after the consummation of the Reorganization, the stock of
certain GSE subsidiaries, including Sallie Mae Servicing Corporation, HICA and
ESI, would be transferred to the Holding Company, see "THE REORGANIZATION --
Structure Before and After the Reorganization," such that the business
activities of such subsidiaries would no longer be subject to restrictions
contained in the Sallie Mae Charter. In addition, the GSE's employees will be
transferred to the Management Company at the Effective Time.
The Privatization Act also provides for a wind-down of the GSE's business
operations by September 30, 2007. At the time of the Reorganization or as soon
as practicable thereafter, the GSE will transfer personnel and certain assets to
the Holding 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. During the wind-down
period following the Reorganization, the GSE generally will be 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 which mature beyond September 30, 2008. Neither the
Holding 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
"PRIVATIZATION ACT -- Limitations on Holding Company Activity." During the
wind-down period, GSE operations will be managed pursuant to arms-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
"PRIVATIZATION ACT -- Separate Operation of Corporations."
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Although loans held by the Holding Company and its non-GSE affiliates will
not be subject to the 30 basis point per annum offset fee, it is expected that
the Company will continue its secondary market purchase activities and
on-balance sheet funding through the GSE until the Holding Company's
creditworthiness is established. While student loans held on balance sheet by
the GSE would remain subject to the offset fee, the GSE's funding costs and
exemption from state taxes lessen its effect. Moreover, loans sold by the GSE to
asset-backed securitization trusts would not be subject to the offset fee if
certain litigation regarding this matter is resolved in favor of the Company.
See "-- Legal Proceedings."
At this time, management anticipates that the GSE will not be dissolved
prior to the year 2008 and that the GSE will continue to be used for all insured
student loan purchase activity until the year 2007. However, the GSE's student
loan purchase activity may be transferred to one of the Holding Company's
non-GSE subsidiaries prior to such time if it becomes advantageous to do so. In
particular, such a transfer could occur if certain litigation relating to the
offset fee described below is ultimately resolved adversely to the Company, see
"BUSINESS -- Legal Proceedings," or if Congress amends the GSE's charter to
extend such fee to securitized loans, see "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Other Related Events." In
addition, it is expected that during the wind-down period, the GSE would provide
financing and letter of credit support under existing contractual commitments
which aggregate $2.4 billion and $3.7 billion, respectively, as of December 31,
1996.
The GSE's investment portfolio will be maintained consistent with liquidity
needs, the availability of attractive credit spreads and prudent capital
management. Similarly, swaps and other derivatives will continue to be utilized
by the GSE to manage interest rate risk and match asset and liability
characteristics.
The non-GSE subsidiaries of the Holding Company would provide loan
servicing support for the loans owned and securitized by the GSE and are
expected to develop new business opportunities in the higher education finance
arena and beyond, as described above. At this time, Sallie Mae has no specific
plans to invest materially or take on any material risks in connection with such
new business activities. Following the Reorganization, the Company may consider
certain strategic opportunities, such as acquisitions and joint ventures, that
currently are not feasible due to restrictions contained in the Sallie Mae
Charter. At this time, Sallie Mae has not actively explored the desirability of
any such specific strategic opportunities. See generally "-- Economic Impact of
the Privatization Act on the Company's Business."
COMPETITION
The Company is the major financial intermediary for higher education
credit, but it is subject to competition on a national basis from several large
commercial banks and nonprofit secondary market agencies as well as on a state
or local basis by smaller banks and state-based secondary markets. While
Congress establishes loan limits and interest rates on student loans, market
share in the FFELP industry is increasingly becoming 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 depends mainly on its network of lender partners and its
school-based strategy for new loan volume. Through this approach, which is based
on the Company's branded products and services, the Company competes to acquire
FFELP loans from originators of those loans. 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 U.S. Department of Education, at the end of fiscal year 1994, Sallie
Mae's share (in dollars) of outstanding FFELP loans was 33%, banks and other
financial institutions held 48% and state secondary market participants held
19%.
The Company also faces competition from the FDSLP, both for new and
existing loan volume. Based upon current Department of Education 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%,
31% and 36%, respectively. The Department of Education projects that FDSLP
originations will represent 38% of total student loan originations in the
1997-98 academic year. Loans made under the direct loan program are not
available for
35
<PAGE> 47
purchase by the Company. The Department of Education 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 a satisfactory income-sensitive payment plan. Approximately $320 million
of the GSE's FFELP loans have been consolidated into the FDSLP. In early 1995,
the GSE began offering an income-sensitive plan to compete with FDSLP
refinancing. However, the FDSLP also provides an income contingent option not
available under the FFELP program pursuant to which the government will
ultimately forgive student loan debt after 25 years. At this time it is not
certain what action, if any, the Congress will take with regard to the FDSLP in
connection with the anticipated 1998 reauthorization of the Higher Education
Act. However, management believes, based upon public statements by members of
Congress and the administration, that the FFELP and the FDSLP will continue to
coexist as competing programs for the forseeable future.
COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION
In 1987, Sallie Mae assisted in creating 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 Sallie Mae's investment in Connie
Lee was approximately $44 million and at December 31, 1996, Sallie Mae
effectively controlled 36 percent of Connie Lee's outstanding voting stock
through its ownership of preferred and common stock and through agreements with
other shareholders. On February 1997, Connie Lee privatized pursuant to
statutory provisions enacted at the same time as the Privatization Act, 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.
PROPERTIES
The Company's principal office is located at leased space at 1050 Thomas
Jefferson Street, N.W., Washington, D.C. 20007.
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>
It is expected that these properties will be retained by the GSE until the
year 2000 at which time they will be transferred to the Holding Company or one
of its non-GSE subsidiaries. In addition, 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.
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.
Sallie Mae's Washington, D.C. headquarters lease expires in 2001.
EMPLOYEES
As of December 31, 1996, the Company employed 4,792 employees nationwide.
LEGAL PROCEEDINGS
OBRA included a provision which applied a 30 basis point per annum fee to
student loans held by Sallie Mae. The Secretary of Education interpreted the
provisions of OBRA in such a manner as to apply that fee
36
<PAGE> 48
not only to loans held by Sallie Mae but also to loans sold by Sallie Mae 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 Sallie Mae and
the United States appealed. On January 10, 1997, the U.S. Court of Appeals for
the District of Columbia issued a decision affirming the District Court's ruling
as to the constitutionality of the fee, and striking down the interpretation of
OBRA by which the Secretary of Education had sought to apply the fee to
securitized loans. Under the Court of Appeals' decision, however, the case was
remanded to the District Court for remand to the Secretary of Education. At this
time, it is uncertain whether the Secretary of Education will seek to develop a
new interpretation of OBRA in a further attempt to apply the fee to securitized
loans, and whether any such interpretation could withstand legal challenge. If
the final outcome following the remand is that the offset fee is not applicable
to loans securitized by Sallie Mae, the gains resulting from prior
securitizations would be increased. As of December 31, 1996, the gains resulting
from such securitizations would have been increased by approximately $55
million, pre-tax. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- 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 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, Sallie Mae 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 acted erroneously in refusing to allow Sallie
Mae to claim adjustments to special allowance payments on certain FFELP loans
which were required to be converted retrospectively from a fixed rate to a
variable rate. The Secretary has filed a notice of appeal of the District
Court's decision.
37
<PAGE> 49
REGULATION
As a government-sponsored-enterprise, the GSE is organized under federal
law and its operations are restricted by its government charter. While the
Reorganization will permit an expansion of the Holding Company's private
activities through unregulated subsidiaries, such activities will be restricted
in certain ways until the GSE is dissolved, and the GSE's operations will
continue to be subject to broad federal regulation.
CURRENT REGULATION
GSE REGULATION. Sallie Mae's structure and the scope of its business
activities are set forth in the Sallie Mae Charter. The Sallie Mae Charter,
which is subject to review and change by Congress, sets forth certain
restrictions on Sallie Mae's business and financing activities and charges the
federal government with certain oversight responsibilities with respect to these
activities. In addition to the limitation on its corporate purposes described
under "COMPARISON OF STOCKHOLDER RIGHTS -- Purpose," the Sallie Mae Charter also
grants it certain exemptions from federal and state laws. The Sallie Mae
Charter's primary regulatory restrictions and exemptions, including certain
provisions added by the Privatization Act, may be summarized as follows:
1. One-third of Sallie Mae's 21 member Board of Directors is appointed
by the President of the United States. The other 14 members are elected by
the holders of Sallie Mae Common Stock. The Chairman of the Board is
designated by the President of the United States from among the 21 members.
2. Debt obligations issued by Sallie Mae are exempt from state
taxation to the same extent as United States government obligations. Sallie
Mae is exempt from all taxation by any state or by any county,
municipality, or local taxing authority except with respect to real
property taxes. Sallie Mae is not exempt from the payment of federal
corporate income taxes.
3. All stock and other securities of Sallie Mae are deemed to be
exempt securities under the laws administered by the Securities and
Exchange Commission to the same extent as obligations of the United States.
4. Sallie Mae 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
Sallie Mae's business is generally limited by its federal charter).
5. The issuance of Sallie Mae's debt obligations must be approved by
the Secretary of the Treasury.
6. Sallie Mae is required to have its financial statements examined
annually by independent certified public accountants and to submit a report
of the audit to the Secretary of the Treasury. The Treasury Department is
also authorized to conduct audits of Sallie Mae and to otherwise monitor
Sallie Mae's financial condition. Sallie Mae is required to submit annual
reports of its operations and activities to the President of the United
States and the Congress. Sallie Mae must pay up to $800,000 per year to the
Department of the Treasury to cover the costs of its oversight.
7. Sallie Mae is subject to certain "safety and soundness" regulations
including the requirement that Sallie Mae maintain a 2.00 percent capital
adequacy ratio (increasing to 2.25 percent after January 1, 2000). Sallie
Mae 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 or the Secretary of the Treasury may
request that the Attorney General bring an action in the United States
District Court for the District of Columbia to enforce the safety and
soundness requirements placed on Sallie Mae by the Sallie Mae Charter.
9. A 30 basis point annual "offset fee" unique to Sallie Mae is
payable to the Secretary of Education on student loans purchased and held
by Sallie Mae on or after August 10, 1993. Sallie Mae has challenged the
constitutionality of the 30 basis point fee and the application of the fee
to loans securitized by Sallie Mae. See "BUSINESS -- Legal Proceedings."
38
<PAGE> 50
10. At the request of the Secretary of Education, Sallie Mae 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 fee on loans held by Sallie Mae.
OTHER REGULATION. Under the Higher Education Act of 1965, as amended,
Sallie Mae is and, following the Reorganization the Company will be, an
"eligible lender" for purposes only of purchasing and holding loans made by
other lenders. Like other participants in the insured student loan programs,
Sallie Mae is and, the Company will be subject, from time to time, to review of
its student lending operations by the General Accounting Office, the Department
of Education and certain guarantee agencies. In addition, Sallie Mae Servicing
Corporation, a wholly-owned subsidiary of Sallie Mae, as a servicer of student
loans, is subject to certain U.S. Department of Education regulations regarding
financial responsibility and administrative capability that govern all third
party servicers of insured student loans. ESI, a wholly-owned subsidiary of
Sallie Mae, is a broker-dealer registered with the Securities and Exchange
Commission 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 and indirect subsidiary of Sallie Mae, is subject to the
ongoing regulatory authority of the South Dakota Division of Insurance and that
of comparable governmental agencies in six other states.
REGULATION FOLLOWING REORGANIZATION
The Privatization Act modifies the Sallie Mae Charter and sets forth the
basic framework for effecting the Reorganization and the ultimate dissolution of
the GSE. Although the Privatization Act generally imposes no constraints on the
types of permissible activities of the privatized business, it does impose
certain restrictions on transactions between the GSE and the Holding Company and
its non-GSE subsidiaries after the Reorganization is consummated and prior to
the dissolution of the GSE. See "THE PRIVATIZATION
ACT -- Reorganization; -- Oversight Authority; -- Restrictions on Intercompany
Relations; -- Limitations on Holding Company Activities." In addition, the
Company will also be subject to the regulations described above under
"-- Current Regulation -- Other Regulation."
NON-DISCRIMINATION AND LIMITATIONS ON AFFILIATION WITH DEPOSITORY INSTITUTIONS
The Privatization Act also amended the Higher Education Act to provide that
Sallie Mae and, if the Reorganization occurs, any successor entity (including
the Holding 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 which 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 Holding Company nor any
of its subsidiaries could be affiliated with a depository institution until
Sallie Mae is dissolved. These restrictions effectively limit the ability of the
Holding 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, as amended.
39
<PAGE> 51
CAPITALIZATION
The following table sets forth the capitalization of Sallie Mae at December
31, 1996 and the capitalization of the Holding Company "as adjusted" for the
Reorganization as of that date. No other pro forma information of the Holding
Company related to the Reorganization is included herein, since such pro forma
information would reflect no material change from the financial statements of
Sallie Mae at the time of such effectiveness. The information set forth in the
table below should be read in conjunction with the audited financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Sallie Mae" included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
AS
ACTUAL ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
Borrowed funds:
Short-term borrowings......................................... $22,156,548 $22,156,548
Long-term notes............................................... 22,606,226 22,606,226
----------- -----------
Total borrowed funds....................................... 44,762,774 44,762,774
----------- -----------
Minority interest in wholly-owned subsidiary.................... - 213,883(a)
Stockholders' equity:
Preferred stock, par value $50.00 per share, 5,000,000 shares
authorized and issued, 4,277,650 shares outstanding........ 213,883 -
Common stock, par value $.20 per share, 250,000,000 shares
authorized, 65,695,571 shares issued (53,690,595 shares
issued, as adjusted)....................................... 13,139 10,738
Additional paid-in capital.................................... - -(b)
Unrealized gains on investment, net of tax.................... 349,235 349,235
Retained earnings............................................. 1,008,737 489,143
----------- -----------
Stockholders' equity before treasury stock.................... 1,584,994 849,116
Common stock held in treasury at cost, 12,004,976 shares
(none, as adjusted)........................................ 537,164 -(c)
----------- -----------
Total stockholders' equity.................................... 1,047,830 849,116
----------- -----------
Total capitalization............................................ $45,810,604 $45,825,773
=========== ===========
</TABLE>
- ---------------
(a) After the Reorganization, the preferred stock of Sallie Mae will not become
Holding Company Stock. Accordingly, the preferred stock of Sallie Mae will
be reflected as minority interest in a wholly-owned subsidiary in the
consolidated financial statements of the Company. Preferred dividends paid
by the GSE will be reflected as an expense of the Company affecting net
income; however, such payments will have no effect on earnings available
for common shareholders.
(b) Pursuant to the terms of the Privatization Act, the Holding Company will
issue to the D.C. Financial Control Board warrants to purchase 555,015
shares of Holding Company Common Stock at a price of $72.43 per share. The
fair value of the warrants will be capitalized as an organization asset
with a resulting increase in stockholders' equity at the time of the
Reorganization. The fair value of the warrants was established at $27.33
per share, using an option pricing model, for a total of $15.2 million.
(c) Concurrent with the consummation of the Reorganization, all existing
treasury shares of Sallie Mae's Common Stock will be retired and cancelled.
40
<PAGE> 52
SELECTED FINANCIAL DATA
The following table sets forth selected financial and other operating
information of Sallie Mae. The selected financial data in the table are derived
from the consolidated financial statements of Sallie Mae. 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 herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995(1) 1994(1) 1993(1) 1992(1)
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income....................... $ 866 $ 901 $ 955 $ 1,149 $ 975
Net income................................ 419 496 403 430 394
Earnings per common share................. 7.32 7.20 4.91 4.83 4.21
Dividends per common share................ 1.64 1.51 1.42 1.25 1.05
Return on common stockholders' equity..... 50.13%(3) 39.85%(3) 29.06%(3) 40.26% 40.22%
Net interest margin....................... 1.90% 1.84% 2.09% 2.70% 2.30%
Return on assets.......................... .88 .96 .84 .97 .88
Dividend payout ratio..................... 22.40 20.97 28.89 25.88 24.92
Average equity/average assets............. 2.09 2.68 3.16 2.75 2.53
BALANCE SHEET DATA:
Student loans purchased................... $32,308 $34,336 $30,370 $26,804 $24,173
Student loan participations............... 1,446 - - - -
Warehousing advances...................... 2,789 3,865 7,032 7,034 8,085
Academic facilities financings............ 1,473 1,312 1,548 1,359 1,189
Total assets.............................. 47,630 50,002 52,961 46,509 46,621
Long-term notes........................... 22,606 30,083 34,319 30,925 30,724
Total borrowings.......................... 44,763 47,530 50,335 44,544 44,440
Stockholders' equity...................... 1,048(3) 1,081(3) 1,471(3) 1,280 1,220
Book value per common share............... 15.53 15.03 17.10 12.69 11.25
OTHER DATA:
Securitized student loans outstanding..... $ 6,263 $ 954 $ - $ - $ -
Core earnings(2).......................... 391 361 356 398 402
Premiums on debt extinguished............. 7 8 14 211 141
</TABLE>
- ---------------
(1) 1995 results reflect the change in method of accounting for student loan
income. The effect of the change increased net income by $151 million and
earnings per common share by $2.23. On a pro forma basis, assuming the
method of accounting for student loan income was applied retroactively
prior to 1992, net income would increase by $17 million ($.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) Core earnings is defined as Sallie Mae's net income less the after-tax
effect of floor revenues, the cumulative effect of accounting changes 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 Sallie Mae's earnings before the effects of
one time events such as floor revenues which are largely outside of Sallie
Mae'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 Sallie Mae's student loan operations.
(3) At December 31, 1996, 1995 and 1994, stockholders' equity reflects the
addition to stockholders' equity of $349 million, $371 million, and $300
million, respectively, net of tax, of unrealized gains on certain
investments recognized pursuant to the adoption of FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
41
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994-1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994 ARE PRESENTED IN A NEW FORMAT FROM PRIOR PRESENTATIONS OF
THE PUBLICLY AVAILABLE FINANCIAL STATEMENTS OF THE STUDENT LOAN MARKETING
ASSOCIATION ("SALLIE MAE" OR THE "GSE") TO BETTER PORTRAY THE CHANGING NATURE OF
SALLIE MAE'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 FORMAT ARE THAT
THE SECURITIZATION RELATED INCOME, FEE INCOME AND GAINS AND LOSSES ON SALES OF
AVAILABLE FOR SALE 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.
THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995
WAS RESTATED ASSUMING THE CHANGE IN METHOD OF ACCOUNTING FOR STUDENT LOAN INCOME
WAS ADOPTED ON JANUARY 1, 1995. SEE NOTE 2 TO THE SALLIE MAE CONSOLIDATED
FINANCIAL STATEMENTS. FOR COMPARATIVE PURPOSES THE CONDENSED STATEMENTS OF
INCOME, STUDENT LOAN SPREAD ANALYSIS, NET INTEREST INCOME TABLE, AVERAGE BALANCE
SHEETS, RATE VOLUME ANALYSIS AND THE COMPARATIVE DISCUSSIONS OF EARNINGS THAT
FOLLOW ARE PRESENTED ON A PRO FORMA BASIS ASSUMING THE CHANGE IN METHOD OF
ACCOUNTING FOR STUDENT LOAN INCOME WAS APPLIED RETROACTIVELY PRIOR TO 1994.
Sallie Mae was established in 1972 as a for-profit, stockholder-owned,
government-sponsored enterprise to support the education credit needs of
students by, among other things, promoting liquidity in the student loan
marketplace through secondary market purchases. Sallie Mae is the largest source
of financing and servicing for education loans in the United States. The student
loan industry in the United States developed primarily to support federal
student loan programs and, accordingly, is highly regulated. The principal
government program, the Federal Family Education Loan Program (formerly the
Guaranteed Student Loan Program) (the "FFELP"), was created to ensure low cost
access by both needy and middle class families to post-secondary education.
Sallie Mae's products and services include student loan purchases, commitments
to purchase student loans and secured advances to originators of student loans.
Sallie Mae also offers operational support to originators of student loans and
to post-secondary education institutions. In addition, Sallie Mae provides other
education-related financial services.
Sallie Mae purchases student loans from originating lenders, typically just
before the student leaves school and is required to begin repayment of the loan.
Sallie Mae's portfolio consists principally of loans originated under two
federally sponsored programs -- the FFELP and the Health Education Assistance
Loan Program ("HEAL"). Sallie Mae 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 subsidy is referred to as the Special Allowance Payment ("SAP"). The
federal government pays SAP to holders of FFELP loans whenever the average of
all of the 91-day Treasury bill auctions in a 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, no SAP is paid and the interest rate paid on the loan by the borrower
becomes, in effect, a floor on an otherwise variable rate asset. When this
happens, the difference between the interest rate paid by the borrower and the
rate determined by the SAP formula is referred to as student loan floor revenue
or floor revenue.
42
<PAGE> 54
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------
YEARS ENDED DECEMBER 31, 1996 VS. 1995 1995 VS. 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)
----- ----- ----- ----- --- ---- ----
Income before premiums on debt
extinguished............................ 424 371 429 53 14 (58) (14)
Premiums on debt extinguished, net of
tax..................................... (5) (5) (9) - 2 4 47
----- ----- ----- ----- --- ---- ----
NET INCOME................................ 419 366 420 53 15 (54) (13)
Preferred stock dividend.................. 11 11 11 - - - -
----- ----- ----- ----- --- ---- ----
Net income attributable to common stock... $ 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............................. $ 391 $ 361 $ 356 $ 30 8% $ 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..................... $22,157 $17,447 $ 4,710 27% $ 1,431 9%
Long-term notes........................... 22,606 30,083 (7,477) (25) (4,236) (12)
Other liabilities......................... 1,819 1,391 428 31 236 20
------- ------- ------- --- ------- ---
Total liabilities......................... 46,582 48,921 (2,339) (5) (2,569) (5)
------- ------- ------- --- ------- ---
Stockholders' equity before treasury
stock................................... 1,585 3,876 (2,291) (59) 470 14
Common stock held in treasury at cost..... 537 2,795 (2,258) (81) 860 44
------- ------- ------- --- ------- ---
Total stockholders' equity................ 1,048 1,081 (33) (3) (390) (27)
------- ------- ------- --- ------- ---
Total liabilities and stockholders'
equity.................................. $47,630 $50,002 $(2,372) (5)% $(2,959) (6)%
======= ======= ======= === ======= ===
</TABLE>
RESULTS OF OPERATIONS
Sallie Mae's net income was $419 million ($7.32 per common share) for 1996
compared to $366 million ($5.27 per common share) in 1995 before the cumulative
effect of an accounting change.
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 $23 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
43
<PAGE> 55
federal government regarding SAP on certain student loans. These positive
factors were somewhat offset by the increase in loans subject to Omnibus Budget
Reconciliation Act ("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 (7 percent of shares outstanding) in 1996.
The 1995 net income before the cumulative effect of the accounting change
of $366 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 before
the cumulative effect of the accounting change were $5.27, an increase of $.14
(3 percent) from 1994, largely a result of Sallie Mae's repurchase of 16.1
million common shares (22 percent of shares outstanding) during 1995.
OBRA imposed legislative fees and risk-sharing on Sallie Mae and other
participants in the Federal Family Education Loan Program ("FFELP") including an
offset fee applicable only to Sallie Mae, 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 Sallie Mae'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. Sallie Mae
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 Sallie Mae'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 Sallie Mae's operating performance are core earnings
and the core student loan spread. Core earnings is defined as Sallie Mae's net
income less the after-tax effect of floor revenues, the cumulative effect of
accounting changes 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 Sallie Mae's earnings before the
effects of one time events such as floor revenues which are largely outside of
Sallie Mae'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 Sallie Mae's core student loan operations.
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. Sallie Mae, 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.
44
<PAGE> 56
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, and increased student loan
loss reserves, offset by the impact of the monetization of student loan floors
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 the relative lower spreads earned on student loans
acquired in recent years due to increased competition.
In the third quarter of 1996, Sallie Mae restructured its business
relationship with Chase Manhattan Bank ("Chase") whereby Sallie Mae and Chase
formed a joint venture ("the Chase Joint Venture") that will market education
loans to be made by Chase and sold to a trust which holds the loans on behalf of
the Joint Venture. The Chase Joint Venture finances the loan purchases through
sales of student loan participations to Sallie Mae and Chase. The contractual
interest rate paid on student loan participations is a variable rate determined
based on the yield of the underlying student loans less amounts to cover its
operating expenses of the Chase Joint Venture. Sallie Mae's investment in the
Chase Joint Venture is accounted for using the equity method. At December 31,
1996, the Chase Joint Venture owned $2.9 billion of federally insured education
loans with substantially all of the loans serviced by Sallie Mae's servicing
subsidiary.
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 SAP. Depending on the loan's status and when it was originated, 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 which the borrower is obligated to pay
exceeds the variable rate determined by the SAP formula, the borrower's interest
rate which is the minimum interest rate earned on FFELP loans becomes, in
effect, a floor rate. The floor enables Sallie Mae to earn wider spreads on
these student loans since Sallie Mae's variable cost of funds, which are 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 which 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 or
the borrower's interest rate is reset which
45
<PAGE> 57
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 December 31, 1996, approximately $30 billion of Sallie Mae'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, Sallie Mae "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 remaining
lives of these contracts, which is approximately 2 years. The amortization of
these payments, which are 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, Sallie Mae 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 Sallie Mae completed four securitization transactions in which
a total of $6.0 billion of student loans was sold to a special purpose finance
subsidiary and by the 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
Sallie Mae'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 to date have been reduced by the present value effect
of the payment of future offset fees on loans securitized. (See below for
further discussion of the offset fee litigation.) 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 as well as the outcome of the
offset fee litigation described below.
In November 1995, the U.S. District Court for the District of Columbia
ruled, contrary to the Secretary of Education's statutory interpretation, that
student loans owned by the securitization trusts are not subject to the 30 basis
point annual offset fee which Sallie Mae is required to pay on student loans
which it owns. The Department of Education appealed this decision and in January
1997, the U.S. Court of Appeals for the District of Columbia issued a decision
affirming the District Court's ruling. However the Court of Appeals remanded the
case to the District Court with instructions for remand to the Secretary of
Education. It is therefore uncertain what the final outcome of this litigation
will be. If the final outcome following the remand is that the offset fee is not
applicable to loans securitized by Sallie Mae, the gains resulting from prior
securitizations would be increased. As of December 31, 1996, the gains resulting
from such securitizations would have been increased by approximately $55
million, pre-tax. Management considers this increase in gains as a contingent
asset which will be recognized upon a favorable final ruling in this matter.
Offset fees relating to securitizations have not been paid pending the final
resolution of the case.
In addition to the initial gain on sale, Sallie Mae is entitled to the
residual earnings from the trust. Although the loans are sold to the trusts,
Sallie Mae continues to service such loans for a fee. The residual earnings and
the fees for servicing the loans are reflected as servicing and securitization
revenues in the Consolidated Statements of 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%.
46
<PAGE> 58
NET INTEREST INCOME
<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........................... 542 697 499 (155) (22) 198 40
Taxable equivalent adjustment......... 36 52 54 (16) (30) (2) (5)
------ ------ ------ ----- --- ---- ---
Total taxable equivalent interest
income................................ 3,479 3,973 3,178 (494) (12) 795 25
Interest expense........................ 2,577 3,020 2,143 (443) (15) 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 of $4.5 billion in loans subject to
OBRA fees such as the 30 basis point offset fee (unique to Sallie Mae) and risk
sharing on claim payments (applicable to loans originated on or after October 1,
1993) plus loan origination fees and rebates to the Department of Education 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 Sallie Mae 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
in 1994, respectively. 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 $23 million and the reversal of a
previously established reserve of $9 million as a result of the successful
outcome of the SAP litigation. 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
Sallie Mae reduced these assets and utilized the capital supporting them to
purchase shares of its common stock. Since Sallie Mae'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. 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 and the amount of FFELP
loans subject to 2 percent risk-sharing. To recognize these potential losses on
student loans, Sallie Mae maintained a reserve of $84 million, $60 million and
$65 million at December 31, 1996, 1995, and 1994, respectively. In 1996, Sallie
Mae 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.
47
<PAGE> 59
Management believes that the allowance for loan losses is adequate to cover
anticipated losses in the on-balance sheet student loan portfolio. However, this
evaluation is inherently subjective as it requires material estimates that may
be susceptible to significant changes.
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.
AVERAGE BALANCE SHEETS
<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 5.85 11,154 6.46 11,283 4.65
------- ---- ------- ---- ------- ----
Total interest earning assets.............. 47,423 7.34% 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.............. 18,366 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......... 46,875 5.50% 50,784 5.95% 46,974 4.56%
==== ==== ====
Non-interest bearing liabilities........... 1,377 1,237 977
Stockholders' equity....................... 1,029 1,433 1,684
------- ------- -------
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 were 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 Sallie Mae
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
of student loan floor revenues in 1994 and the increase in OBRA costs.
48
<PAGE> 60
FUNDING COSTS
Sallie Mae'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................................. 166 4.93 312 6.11 261 5.71
------- ------- ------- ------- ------- -------
Total................................. $46,875 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 London Interbank Offered Rate ("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.
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................................ $ (494) $(202) $(292)
Interest expense.................................................. (443) (175) (268)
---------- ----- ------
Taxable equivalent net interest income............................ $ (51) $ (27) $ (24)
======= ===== ======
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 $27 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 $15 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 the SAP litigation, and a higher
percentage of student loans relative to average earning assets. The $24 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
49
<PAGE> 61
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 Sallie Mae'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......... 22 8 30 40 11 51 22 9 31
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.................... 781 4,011 4,792 875 3,866 4,741 876 4,121 4,997
==== ===== ===== ==== ===== ===== ==== ===== =====
</TABLE>
<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:
(1) CyberMark expenses in 1995 which totaled $22 million versus $6 million in
1994; (2) costs associated with the student loan business, including advertising
and promotion costs related to the corporate image campaign and subsidiary
operating costs of $11 million; (3) $3 million related to the 1995 Annual
Meeting and a proxy contest concerning the election of directors; and (4)
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 Sallie Mae'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 percent 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
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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)
("ExportSS") loan origination and administration service, the costs of
converting newly acquired portfolios onto Sallie Mae's servicing platform or
those of third party servicers and costs of loan consolidation activities. The
ExportSS service provides back-office support to clients by performing loan
origination and servicing prior to the sale of portfolios to Sallie Mae. Student
loans added to the ExportSS pipeline, which represents loan volume serviced by
and committed for sale to Sallie Mae, 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 lenders totaled $4.0 billion at
December 31, 1996, down 11 percent from $4.5 billion at December 31, 1995. This
trend is expected to continue commensurate with the growth in direct lending.
FEDERAL AND STATE TAXES
Sallie Mae 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. Sallie Mae 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. However, this tax exemption is
effective at the GSE level and does not apply to its operating subsidiaries.
Under its Privatization Act, the Company's GSE and non-GSE activities would be
separated, with non-GSE activities being subject to taxation at the state and
local level. 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.
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 Sallie Mae's
base of commitment clients, particularly those who used the ExportSS loan
origination service. Sallie Mae 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
private placements of U.S. dollar and foreign currency denominated debt of
varying maturities and interest rate characteristics. Sallie Mae's debt
securities are currently rated at the highest credit rating level by Moody's
Investor Services and Standard & Poor's. Historically, the rating agencies'
ratings of Sallie Mae have been largely a factor of its status as a GSE.
Management believes that, since the Privatization Act does not modify the
attributes of debt issued by the GSE, it will retain its current credit ratings
after the Reorganization.
The Sallie Mae Charter, as most recently amended by the Student Loan
Marketing Association Reorganization Act of 1996 (the "Privatization Act"),
effectively requires that Sallie Mae 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" regulations designed to restore such
statutory ratio. At December 31, 1996, Sallie Mae's statutory capital adequacy
ratio was 2.11 percent. Additionally, the Privatization Act now requires
management, prior to the payment of dividends by Sallie Mae, 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 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 the Holding Company or the Holding Company's non-GSE
subsidiaries. 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 Holding Company, which in turn may
contribute such amounts to its non-GSE subsidiaries. As discussed under
"Liquidity and Capital Resources," management
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intends to on a quarterly basis, declare and pay dividends to the Holding
Company to the extent the GSE has capital in excess of the minimum required
under the safety and soundness provisions of its charter.
Management believes that the initial financing requirements of the Holding
Company will be relatively modest and can be accommodated through a number of
alternative sources, including public and private debt placement, bank
borrowings and dividends from subsidiaries, principally the GSE. Management
intends to declare such dividends and to pay such amounts to the Holding Company
on a quarterly basis. Based on preliminary discussions with commercial banking
sources, the Company believes it will be able to secure financing at a
reasonable cost through the Holding Company for asset transfers during the first
year after the Reorganization. Although the foregoing asset transfers will
likely result in some incremental financing costs and state taxes, such expenses
are not expected to have any material impact on the Company's financial results
in 1997. Over the long term, securitization is expected to provide the principal
funding source for the anticipated student loan purchase activities of the
Holding Company when such activities commence. However, when student loan
purchase activities commence in the Holding Company there will also be a need
for on-balance sheet financing for such activities until the loans are
securitized. Such financings will likely require the Holding Company to obtain a
bond rating and such ratings will not be known until specific debt is issued. It
is expected that these ratings will be below the GSE's current credit rating
levels.
Sallie Mae 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, Sallie Mae issued $8.3 billion of long-term notes to refund
maturing and repurchased obligations. At December 31, 1996, Sallie Mae had $14.1
billion of outstanding long-term debt issues with stated maturities that could
be accelerated through call provisions. Sallie Mae also funds its student loan
assets through securitizations. Sallie Mae has 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, Sallie Mae 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 company has operated near the statutory minimum capital ratio of 2.00%
of risk adjusted assets required under its GSE charter. Capital in excess of
such amounts has been used to repurchase common shares. As of December 31, 1996,
Sallie Mae 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 repurchase in that relatively short timeframe 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 up to 7 percent of
the outstanding shares in 1997.
Cash Flows
In 1996, operating activities provided net cash inflows of $574 million, an
increase of $388 million from 1995. This increase was due mainly to the decrease
in other liabilities of $549 million and to the increase in net income before
the cumulative effect of the change in accounting method 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, Sallie Mae purchased $9.9
billion of student loans and student loan participations. Sallie Mae also
securitized $6.0 billion of student loans and received $5.6 billion in student
loan and warehousing advance repayments. Financing activities used $3.2 billion
in cash in 1996 as Sallie Mae repaid a net $7.4 billion in long-term notes and
saw an increase in net short-term borrowings of $4.7 billion. As student loans
are securitized the need for long term financing of these assets on balance
sheet will decrease.
Securitization
Sallie Mae's unsecured borrowings typically have terms to maturity which
are of a shorter duration than the student loans. In addition, Sallie Mae is
assessed a 30 basis point annual offset fee on student loans that it holds,
which effectively raises the cost of funding such assets on balance sheet. Since
1995, Sallie Mae has diversified its funding sources independent of its GSE
borrower status by securitizing a portion of its student
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loan assets. A securitization involves the sale of student loans by Sallie Mae
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 ("ABS securities"). As student loans are
securitized, Sallie Mae's on-balance sheet funding needs are reduced. During
1996, Sallie Mae completed four transactions in which it sold a total of $6.0
billion of student loans to trusts which issued securities backed by the loans.
While ABS securities generally have a higher cost of funds than Sallie
Mae's traditional on-balance sheet financing (due principally to term
match-funding and the fact that ABS securities do not benefit from Sallie Mae's
government-sponsored enterprise status), management believes that securitization
is an efficient use of capital. See "Results of Operations -- Securitizations"
for discussion of the offset fee litigation. These asset backed transactions
allow the Holding Company to obtain financing at a lower cost than it would
otherwise be able to achieve if it were to borrow on an unsecured basis. Sallie
Mae'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 Sallie Mae's current
status as a GSE. The securitizations require less capital than would otherwise
be required had the assets remained on balance sheet. The Company currently
anticipates securitizing between at least $7 billion and $9 billion of loans in
1997 and management believes that securitization will grow in importance as a
source of funding for the Company.
Interest Rate Risk Management
Sallie Mae'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. Sallie Mae 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,
Sallie Mae 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, Sallie Mae 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 Sallie Mae'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
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specific future time intervals. The following gap analysis reflects
rate-sensitive positions at December 31, 1996 and is not necessarily reflective
of positions that existed throughout the period.
<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........................... 38,839 3,541 47 61 396 4,746
-------- -------- -------- ------- -------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................ 15,542 2,269 4,346 - - -
Long-term notes...................... 8,505 - - 2,951 10,242 908
Interest rate swaps.................. 14,522 2,410 (4,271) (2,966) (10,153) 458
Other liabilities.................... - - - - - 1,819
Stockholders' equity................. - - - - - 1,048
-------- -------- -------- ------- -------- ------
Total........................... 38,569 4,679 75 (15) 89 4,233
-------- -------- -------- ------- -------- ------
Period gap........................... $ 270 $ (1,138) $ (28) $ 76 $ 307 $ 513
======= ======= ======= ======= ======== ======
Cumulative gap....................... $ 270 $ (868) $ (896) $ (820) $ (513) $ -
======= ======= ======= ======= ======== ======
Ratio of cumulative gap to total
assets............................. .6% 1.8% 1.9% 1.7% 1.1% -%
======= ======= ======= ======= ======== ======
Ratio of interest-sensitive assets to
interest-sensitive liabilities..... 161.5% 156.1% 1.1% 2.1% 3.9% 312.7%
======= ======= ======= ======= ======== ======
</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" discussion). 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 Sallie Mae'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
Sallie Mae's earning assets and liabilities at December 31, 1996:
AVERAGE TERMS TO MATURITY
(IN YEARS)
<TABLE>
<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>
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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.
PREFERRED STOCK
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 the years ended December 31, 1996, 1995 and 1994, the preferred stock
dividend rate was 5.00 percent and reduced net income attributable to common
stock by $10.7 million, respectively. 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 of any outstanding preferred
stock. Sallie Mae has the option of effecting an earlier dissolution if certain
conditions are met.
OTHER RELATED EVENTS AND INFORMATION
Privatization
On September 30, 1996, the Student Loan Marketing Association
Reorganization Act of 1996 ("the Privatization Act") was enacted. The
Privatization Act authorized the creation of a state-chartered holding company
(the "Holding Company") that would become the parent of the GSE pursuant to a
reorganization which must be approved by a majority vote of the GSE's
shareholders, such vote to take place on or before April 1, 1998.
If the Reorganization is approved by shareholders, the GSE will transfer
certain assets, including stock in certain subsidiaries, to the Holding Company
or one of its non-GSE subsidiaries. All GSE employees will be transferred to the
Holding Company or one of its non-GSE subsidiaries. During the wind-down period,
it is expected that non-GSE operations will be managed by the GSE's non-GSE
affiliates. The Holding Company will remain a passive entity which supports the
operations of the GSE and its other subsidiaries, and all business activities
would be conducted through the GSE by such other subsidiaries.
During the wind-down period following the Reorganization and prior to the
GSE's dissolution, the GSE will be restricted in the new business activities it
may undertake. The GSE may continue to purchase student loans only through
September 30, 2007. Warehousing advance, letter of credit and standby bond
purchase activity by the GSE will be limited to takedowns on contractual
financing and guarantee commitments in place. The Holding Company generally may
begin to purchase student loans only after the GSE discontinues such activity.
GSE debt obligations that are outstanding at the time of Reorganization will
continue to be outstanding obligations of the GSE immediately after the
Reorganization. The GSE will be able to continue to issue debt in the government
agency market to finance student loans and other permissible asset acquisitions,
although the maturity date of such issuances generally may not extend beyond
September 30, 2008, the GSE's final dissolution date, if it has not been
repurchased prior to that date. At December 31, 1996, the GSE had $372 million
in outstanding debt with maturities after September 30, 2008. Such debt will be
transferred into a defeasance trust on the final dissolution date. The
Privatization Act requires that on the dissolution date, the GSE shall
repurchase or redeem, or make proper provisions for repurchase or redemption of
any outstanding shares of Sallie Mae preferred stock. Sallie Mae has the option
of effecting an earlier dissolution if certain conditions are met. The preferred
stock is carried at its liquidation value of $50 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. See "FINANCIAL
STATEMENTS -- Footnote 13."
As a government-sponsored enterprise, Sallie Mae is exempt from certain
state and local taxes. Earnings of non-GSE units would not be exempt from such
taxes. As the proportion of the Company's earnings generated by the non-GSE
units increases over time, the expense associated with such taxes will increase.
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 expected to increase operating
expenses by approximately two to three percent. Management believes the gradual
imposition of such taxes represents the single most significant cost of
privatization.
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The Privatization Act requires that within 60 days after the merger, the
Company must pay $5 million to the D.C. Financial Control Board for use of the
"Sallie Mae" name. In addition, the Holding Company must issue to the D.C.
Financial Control Board warrants to purchase 555,015 shares of Holding Company
Common Stock. These warrants are transferable and exercisable at any time prior
to September 30, 2008 at $72.43 per share. These provisions of the Privatization
Act were part of the terms negotiated with the Administration and Congress as
consideration for the GSE's privatization.
If a reorganization pursuant to the Privatization Act does not occur on or
prior to March 31, 1998, the Privatization Act requires that Sallie Mae submit
an alternative wind-down plan to Congress and the Treasury Department by 2007.
This plan would call for the dissolution of Sallie Mae by 2013. During this
alternative wind-down period, Sallie Mae could not engage in new business
activities beyond its GSE charter, but could transfer assets, except for the
"Sallie Mae" name, at any time its statutory capital requirements were
satisfied. As with the Reorganization, any remaining obligations, and assets
sufficient to pay such obligations, would be transferred to a fully
collateralized trust at the time of dissolution. All other assets would be
distributed to Sallie Mae shareholders. Under this alternative, Sallie Mae
generally would have to cease its business activities after 2009 and could not
issue debt obligations that mature after 2013. The Secretary of the Treasury,
who would monitor the wind-down, could require Sallie Mae to amend its plan of
dissolution if deemed necessary to ensure full payment of its obligations.
Direct Loan Program and 1993 FFELP Changes
Sallie Mae'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 Federal Direct Student Loan
Program ("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 Sallie Mae 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. Sallie Mae
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 Department of Education. 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 were
participating in the FDSLP for the 1996-97 academic year. Based on Department of
Education 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% 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, Sallie Mae 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 Sallie Mae's purchases of student loans. As the volume of
FDSLP loans reaching the repayment phase increases, Sallie Mae's percentage
share of the overall student loan market will decline. In 1994, the Department
of Education began to offer existing FFELP
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borrowers the opportunity to refinance FFELP loans into FDSLP loans. As of
December 31, 1996, approximately $346 million of FFELP loans owned by Sallie Mae
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 that the special allowance for student loans made on or after
July 1, 1998 will be based on the U.S. Treasury security with comparable
maturity plus 1.0 percent for Stafford, Unsubsidized Stafford, and PLUS loans.
(See Appendix C) The Secretary of Education has not adopted regulations
specifying the U.S. Treasury security on which these interest rates will be
based or how often the special allowance rate will reset. Borrower rates are
reset annually. Sallie Mae 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 Sallie
Mae's business, because of the uncertain availability and costs of funding to
support this new type of instrument. Representatives of the student loan
industry are currently engaged in discussions with congressional staff
concerning possible legislative modification of this OBRA provision.
OBRA also requires Sallie Mae 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 Sallie Mae. If the Secretary of Education determines that Sallie
Mae is not adequately implementing this provision, the offset fee paid by Sallie
Mae 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. 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. Sallie Mae management
believes the application of this Statement will have no material impact on
Sallie Mae'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. It is not known at this time whether Congress
will be willing to reverse this decision and provide funds for new borrowers. As
of July 1, 1996, the Department of Education 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 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 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
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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, Sallie Mae 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 acted erroneously in refusing to allow Sallie
Mae to claim adjustments to SAP 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
Sallie Mae 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 Sallie Mae contributing the
smart card system it developed over the past three years through its CyberMark
subsidiary. Sallie Mae also contributed the CyberMark name to the joint venture
company.
In September 1996, Sallie Mae successfully restructured its arrangement
with The Chase Manhattan Bank, Sallie Mae's largest lending client, in light of
Chase's merger with Chemical Banking Corporation. Chase and Sallie Mae
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. Sallie Mae 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 Sallie Mae offset fee to loans sold by
Sallie Mae as part of securitized transactions. In addition, the President has
proposed a significant restructuring of guaranty agency finances and operations.
If enacted, these proposals could have a material negative impact on Sallie Mae
earnings which has not been quantified at this time. Sallie Mae is unable to
predict whether, when or in what form the President's proposals will be enacted
into law.
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DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK
The statements set forth under this heading with respect to certain
provisions of the Delaware General Corporation Law (the "DGCL"), the Certificate
of Incorporation of the Holding Company, as in effect as of the Effective Time
(the "Holding Company Charter"), and the by-laws of the Holding Company (the
"Holding Company 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 Holding Company Charter and the Holding Company
By-Laws, as appropriate.
GENERAL
The Holding Company Charter authorizes capital stock consisting of
250,000,000 shares of Holding Company Common Stock, par value $.20 per share,
and 20,000,000 shares of preferred stock ("Holding Company Preferred Stock"). In
connection with the Reorganization, each outstanding share of Sallie Mae Common
Stock will be converted into one share of Holding Company Common Stock, and the
outstanding shares of the common stock of MergerCo, a newly-created,
wholly-owned subsidiary of the Holding Company will be converted into all of the
issued and outstanding shares of Sallie Mae Common Stock, all of which will then
be owned by the Holding Company. Accordingly, the number of shares of Holding
Company Common Stock issued and outstanding immediately following the
Reorganization will be equal to the number of shares of Sallie Mae Common Stock
issued and outstanding immediately prior to the Reorganization. No shares of
Holding Company Preferred Stock will be issued or outstanding prior to or
immediately following the Reorganization.
The Reorganization will become effective at the Effective Time, which
management expects to be on or about May 16, 1997. As a result of the
Reorganization, Sallie Mae will become a subsidiary of the Holding Company and
all of the Holding Company Common Stock outstanding immediately after the
Reorganization will be owned by the holders of Sallie Mae Common Stock
outstanding immediately prior to the Reorganization. Shares of Holding Company
Common Stock held by Sallie Mae and the Sallie Mae Common Stock held in treasury
will be canceled and retired. Shares of the outstanding class of preferred stock
of Sallie Mae will not be affected by the Reorganization, and will remain
outstanding, with the same voting powers, designations, preferences, rights,
qualifications, limitations and restrictions as prior to the Reorganization.
COMMON STOCK
The holders of Holding Company Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. As a result, the holders of a majority of the shares
voting for the election of directors can elect all the members of the Holding
Company Board.
Holders of Holding Company Common Stock: (i) have equal and ratable rights
to dividends from funds legally available therefor when, as and if declared by
the Holding Company Board, subject to any rights of the holders of Holding
Company Preferred Stock; (ii) subject to any rights of the holders of Holding
Company Preferred Stock, are entitled to share ratably in any distribution to
holders of Holding Company Common Stock upon liquidation, after payment in full
of all creditors; and (iii) do not have preemptive rights. Holding Company
Common Stock is not redeemable or convertible. The outstanding shares of Holding
Company Common Stock are, and the shares to be issued in the Reorganization will
be, fully paid and non-assessable. The registrar and transfer agent for Holding
Company Common Stock is Chase Mellon Shareholder Services.
PREFERRED STOCK
The Holding Company Board, without further approval of the stockholders,
may from time to time authorize the issuances of one or more series of Holding
Company Preferred Stock, with such designations of titles; dividend rates; any
redemption provisions; special or relative rights in the event of liquidation,
dissolution, distribution or winding up; any sinking fund provisions; any
conversion provisions; any voting rights thereof; and any other preferences,
privileges, powers, rights, qualifications, limitations and restrictions, as
shall be set forth as and when established by the Holding Company Board. The
shares of any series of Holding
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Company Preferred Stock will be, when issued, fully paid and nonassessable and
holders thereof will have no preemptive rights in connection therewith.
The Holding Company Board, without stockholder approval, may issue Holding
Company Preferred Stock with voting rights and other rights that could adversely
affect the voting power of holders of Holding Company Common Stock and such
stock could be used to prevent a hostile takeover of the Holding Company. The
Holding Company has no present plans to issue any shares of Holding Company
Preferred Stock.
WARRANTS
Pursuant to the Privatization Act, the Holding Company must issue to the
D.C. Financial Control Board warrants to purchase 555,015 shares of Holding
Company Common Stock. These warrants are transferable and exercisable at any
time prior to September 30, 2008, at $72.43 per share. This provision of the
Privatization Act was part of the terms negotiated with the Administration and
Congress as consideration for the GSE's privatization.
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COMPARISON OF STOCKHOLDER RIGHTS
The statements set forth under this heading with respect to certain
provisions of the Privatization Act, the Sallie Mae Charter and the Sallie Mae
By-Laws, the DGCL, the Holding Company Charter, and the Holding Company 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 Privatization
Act, the Sallie Mae Charter and the Sallie Mae By-Laws, the DGCL, the Holding
Company Charter, and the Holding Company By-Laws, as appropriate.
GENERAL
As a result of the Reorganization, holders of Sallie Mae Common Stock,
whose rights are presently governed by the Sallie Mae Charter and federal common
law and by the Sallie Mae By-Laws (which were adopted by the Sallie Mae Board)
will become stockholders of Holding Company, a Delaware corporation.
Accordingly, their rights will be governed by the DGCL and the Holding Company
Charter and By-Laws. The following is a summary of certain material similarities
and differences between the present rights of holders of Sallie Mae Common Stock
and the rights of holders of Holding Company Common Stock after the
Reorganization.
BOARD OF DIRECTORS
NUMBER AND ELIGIBILITY. The Sallie Mae Charter provides for a Board of
Directors consisting of 21 members, seven of whom are Presidential appointees
and 14 of whom are elected by holders of Sallie Mae Common Stock. The President
of the United States (the "President") also has authority to designate the
Chairman of the Board. Shareholder-elected directors must be affiliated with
certain financial or educational institutions.
The Holding Company Charter provides that the Holding Company Board shall
consist of between 9 and 19 members all of whom are to be elected by holders of
Holding Company Common Stock. The initial number of directors has been
established at 16 and may be set, from time to time, by resolution of the
Holding Company Board of Directors. The President will not have authority to
appoint the members of the Holding Company Board of Directors or to designate
the Chairman of the Board. Under the Privatization Act, Sallie Mae directors
appointed by the President may not serve on the Holding Company Board. There are
no affiliation requirements for Holding Company directors.
The Holding Company By-Laws also require that independent directors
constitute a majority of the Holding Company Board and the Executive Committee
and all members of the Nominations Committee. Under the Holding Company By-Laws,
a director will not generally be considered "independent" if he or she: (a) has
been employed by the Holding Company or one of its affiliates in an executive
capacity; (b) is an employee or owner of a firm that is one of the Holding
Company's or its affiliate's paid advisors or consultants; (c) is employed by a
significant customer or supplier; (d) has a personal services contract with the
Holding Company or one of its affiliates; (e) is employed by a foundation or
university that receives significant grants or endowments from the Holding
Company or one of its affiliates; (f) is a relative of an executive of the
Holding Company or one of its affiliates; or (g) is part of an interlocking
directorate in which an executive officer of the Holding Company serves on the
board of another corporation that employs the director.
TERM OF OFFICE. Under the Sallie Mae Charter, directors appointed by the
President serve at the pleasure of the President and until their successors have
been appointed and qualified. Elected members of the Sallie Mae Board of
Directors are elected for a term ending on the date of the next annual meeting
and serve until their successors have been elected and have qualified.
Prior to the Effective Time, Sallie Mae, as sole stockholder of the Holding
Company, expects to cause the initial Holding Company Board to be composed of
those individuals identified under "MANAGEMENT -- Holding Company Board of
Directors." After the Effective Time, the Company stockholders will elect all of
the members of the Holding Company Board at each annual meeting beginning with
the 1998 Annual Meeting of the Company, which meeting is expected to take place
in April of 1998.
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CUMULATIVE VOTING. The Sallie Mae Charter provides for cumulative voting
in the election of directors. Under cumulative voting, each share of stock
entitled to vote in an election of directors has such number of votes as is
equal to the number of directors to be elected. A shareholder may then cast all
of his or her votes for a single candidate or may allocate them among as many
candidates as the shareholder may choose.
The Holding Company Charter does not provide for cumulative voting rights.
Thus, holders of shares representing a majority of the votes entitled to be cast
in an election of directors for Holding Company will be able to elect all
directors then being elected.
REMOVAL. Pursuant to Sallie Mae's By-Laws, Sallie Mae directors may be
removed only for cause by vote of two-thirds of the directors remaining in
office, provided that at least a majority of the shareholder-elected directors
consent to such removal.
The Holding Company Charter provides that directors may be removed only by
the affirmative vote of the holders of a majority of the Holding Company's then
outstanding capital stock entitled to vote at an election of directors.
VACANCIES. The Sallie Mae Charter provides that any appointive seat on the
Sallie Mae Board that becomes vacant shall be filled by appointment of the
President, and any elective seat on the Board that becomes vacant after the
annual election of the directors shall be filled by the Board, but only for the
unexpired portion of the term.
The DGCL and the Holding Company By-Laws provide that vacancies, including
those created by an increase in the size of the Holding Company Board, may be
filled by vote of the majority of the directors then in office or by the
stockholders at any annual meeting or at a special meeting called for such
purpose.
MEETINGS AND FUNCTIONS OF THE BOARD. The Sallie Mae Charter provides that
the Sallie Mae Board shall meet at the call of its Chairman, but at least
semiannually. The Sallie Mae Board determines the general policies that govern
the operations of Sallie Mae. The Chairman of the Board, with the approval of
the Sallie Mae Board, selects, appoints, and compensates the officers of Sallie
Mae as provided for in the Sallie Mae By-Laws.
The Holding Company By-Laws provide that the Holding Company Board shall
have regular meetings as may be determined from time to time by the Holding
Company Board. Special Meetings of the Holding Company Board shall be called by
the Secretary upon the direction of the Chairman or the President, if the
President is a member of the Holding Company Board, or upon the written request
of a majority of the entire Holding Company Board of Directors. The Holding
Company By-Laws require the Holding Company Board to meet at least six times
during each calendar year. Similar to Sallie Mae, the Holding Company Board
shall determine the general policies that shall govern the operations of the
Holding Company.
CAPITALIZATION
Under the Sallie Mae Charter, the maximum number of shares of voting common
stock that Sallie Mae may issue and have outstanding at any one time shall be
fixed by the Sallie Mae Board from time to time, and Sallie Mae is authorized to
issue nonvoting preferred stock having such par value as may be fixed by the
Sallie Mae Board from time to time. Sallie Mae currently is authorized to issue
up to 250,000,000 shares of the Sallie Mae Common Stock, and up to 5,000,000
shares of the preferred stock.
Under the DGCL, the amount of capital stock must be set forth in the
certificate of incorporation, and may not be altered without the consent of the
stockholders. The Holding Company is authorized to issue, without further action
by shareholders, up to 250,000,000 shares of Holding Company Common Stock, and
up to 20,000,000 shares of Holding Company Preferred Stock.
PURPOSE
Under the Sallie Mae Charter, Sallie Mae's corporate purposes generally are
to be a private corporation financed by private capital and serving as a
secondary market and warehousing facility for student loans, including insured
loans, to provide liquidity for student loan investments in order to facilitate
secured
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transactions involving student loans, to assure nationwide the establishment of
adequate loan insurance programs for students, and to provide for an additional
program of loan insurance to be covered by agreements with the Secretary of
Education.
The Holding Company's purpose is to engage in any lawful activity, as is
typical of ordinary state-chartered for-profit corporations.
DIVIDENDS
Under the Sallie Mae Charter, subject to rights of holders of Sallie Mae
preferred stock, dividends may be declared on shares of Sallie Mae Common Stock
by the Sallie Mae Board to the extent that net income is earned and realized and
the specified statutory capital ratio is satisfied.
Under the DGCL, dividends are generally payable out of surplus or, if there
is no surplus, out of net profits for the fiscal year in which the dividend is
paid and the prior year.
EXEMPTION FROM CERTAIN LAWS
Under the Sallie Mae Charter, Sallie Mae is exempt from all state and local
taxes, other than taxes on real property. Sallie Mae also is exempt from certain
state and federal securities laws and from state registration requirements to do
business in a particular jurisdiction. After the Reorganization, Sallie Mae
would continue to have such exemptions. Sallie Mae currently undertakes to
provide to its shareholders substantially all information that would otherwise
be required to be provided under federal securities laws.
The Holding Company and its other subsidiaries would not receive the
benefit of any such exemptions. Consequently, all operations conducted by the
Holding Company and its subsidiaries other than Sallie Mae would be subject to
state and local tax liabilities. In addition, in connection with the proposed
Reorganization, shares of Holding Company Common Stock have been registered
under the Securities Act of 1933, as amended. Following the Reorganization, the
Holding Company will issue and file all periodic reports required under federal
and state securities laws, including the Securities Exchange Act of 1934, as
amended, and subject to rules governing proxy solicitations.
LIMITATIONS ON DIRECTOR LIABILITY
Under the Sallie Mae By-Laws, directors, officers, and members of the
Directors' Advisory Council of Sallie Mae shall not be personally liable to
Sallie Mae or to shareholders for monetary damages for breach of fiduciary duty
acting in their respective official capacities, provided, however, such
limitation of liability shall not apply to (a) any breach of the party's duty of
loyalty to Sallie Mae 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.
The Holding Company Charter and Holding Company By-Laws contain certain
provisions limiting the liability of its directors to the extent permitted under
Delaware law. Under Delaware law, a corporation may include in its certificate
of incorporation, a provision eliminating or limiting the liability of a
director to the company or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision may not eliminate or
limit the liability of a director: (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) for certain acts concerning unlawful payment of dividends or stock
purchases or redemptions under Section 174 of the DGCL; or (iv) for any
transaction from which a director derived an improper personal benefit.
INDEMNIFICATION
Sallie Mae's By-Laws generally provide that directors, officers and
employees of Sallie Mae shall be indemnified to the extent permitted by the
DGCL.
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The Holding Company By-Laws contain provisions that provide for indemnity
of the Holding Company's officers and directors to the fullest extent permitted
under Delaware law. Under Delaware law, a corporation is permitted to indemnify
its officers, directors and certain others against any liability incurred in any
civil, criminal, administrative or investigative proceeding if they acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the company, and, with respect to any criminal proceeding,
had no reasonable cause to believe their conduct was unlawful. In addition,
under Delaware law, to the extent that a director, officer, employee or agent of
a company has been successful on the merits or otherwise in defense of any
proceeding referred to above or in defense of any claim, issue or matter
therein, he must be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
SPECIAL MEETINGS OF STOCKHOLDERS
The Sallie Mae By-Laws provide that a special meeting of stockholders may
be called by either the Chairman or a majority of the directors and shall be
called by the Chairman upon the written request of holders of at least one-third
of the outstanding Sallie Mae Common Stock.
The Holding Company By-Laws provide that a special meeting of stockholders
shall be called by the Secretary upon the direction of either the Chairman or
the President of the Holding Company, if the President of the Holding Company is
a member of the Holding Company Board, or upon the written request of either a
majority of the Holding Company Board or the holders of one-third of the then
outstanding capital stock entitled to vote at an election of directors.
AMENDMENT OF GOVERNING DOCUMENTS
CHARTER. The Sallie Mae Charter is contained in a federal statute and may
be amended only by act of Congress. Sallie Mae stockholders have no right to
amend or otherwise direct the provisions of the Sallie Mae Charter.
An amendment to the Holding Company Charter must be authorized by the
Holding Company Board and generally requires the approval of holders of the
majority of all outstanding shares entitled to vote thereon at a meeting of
shareholders. Certain specified amendments affecting the rights of holders of a
class of securities, however, must be approved by vote of the majority of all
outstanding shares of such class entitled to vote thereon, even though they
ordinarily would not have voting rights. Certain limited amendments to the
Holding Company Charter require only the approval of the Holding Company Board.
BY-LAWS. The Sallie Mae By-Laws may be amended, consistent with the Sallie
Mae Charter, by the majority vote of the Sallie Mae Board. Sallie Mae
shareholders do not have authority to amend the Sallie Mae By-Laws.
Under the DGCL, subject to the stockholders' right to amend the bylaws,
directors can amend the bylaws only if such right is expressly conferred upon
the directors in the company's certificate of incorporation. The Holding Company
Charter expressly provides its directors with such authority.
UNITED STATES AND DELAWARE LAW
-- ANTI-TAKEOVER LAWS
UNITED STATES. The authority of the President of the United States to
appoint one-third of the Sallie Mae Board (particularly given the cumulative
voting provisions contained in the Sallie Mae Charter) and to designate the
Chairman of the Sallie Mae Board, as well as the authority of the federal
government to amend the Sallie Mae Charter, could have a deterrent effect on a
potential acquiror. In addition, because certain amendments to the Federal
Deposit Insurance Act and the Federal Credit Union Act prohibit depository
institutions from being affiliates of government-sponsored enterprises, such
institutions are prohibited from being affiliates of Sallie Mae.
DELAWARE. Section 203 of the DGCL generally prohibits a publicly held
Delaware company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the
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date of the transaction in which the person became an interested stockholder,
unless (i) prior to the date of the business combination, the transaction is
approved by the board of directors of the company, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock or (iii) on or after such date the business combination is approved
by the board and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
transaction" includes mergers, assets sales and other transactions resulting in
a financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the company's voting stock.
In addition, the provision in the Holding Company Charter for the issuance
of preferred stock with such designations, rights and preferences as the Holding
Company Board may authorize may be characterized as anti-takeover in nature.
Such a provision provides the Holding Company Board with greater flexibility for
future financings but may also be viewed as a means to restrict takeover bids.
-- MERGERS
UNITED STATES. There is no general federal merger statute. Moreover, the
Sallie Mae Charter and Sallie Mae's status as a government-sponsored enterprise
present various obstacles to merger activity in the absence of congressional
action. The Privatization Act provides that the Reorganization must be approved
by the affirmative vote of holders of a majority of the outstanding shares of
Sallie Mae Common Stock.
DELAWARE. Approval of mergers and consolidations and of sales, leases or
exchanges of all or substantially all of the property or assets of a company,
requires the approval of the holders of a majority of the outstanding shares
entitled to vote, except that no vote of stockholders of the company surviving a
merger is necessary if: (i) the merger does not amend the certificate of
incorporation of the company, (ii) each outstanding share immediately prior to
the merger is to be an identical share after the merger, and (iii) either no
common stock of the company and no securities or obligations convertible into
common stock are to be issued in the merger; or the common stock to be issued in
the merger plus that initially issuable on conversion of other securities issued
in the merger does not exceed 20% of the common stock of the company immediately
before the merger. In addition, no vote is required under the DGCL to approve
the merger of a parent corporation and one or more of its subsidiaries when the
parent corporation owns at least 90% of the outstanding shares of each class of
stock of all such subsidiaries.
-- DISSENTERS' RIGHTS
UNITED STATES. Neither the Sallie Mae Charter nor the Privatization Act
provides for any dissenters' rights.
DELAWARE. Stockholders are entitled to demand appraisal of their shares in
the case of mergers or consolidations, except where (i) they are stockholders of
the surviving company and the merger did not require their approval under the
DGCL or (ii) the company shares are either listed on a national securities
exchange or Nasdaq or held of record by more than 2,000 stockholders. Appraisal
rights are available in either (i) or (ii) above, however, if the stockholders
are required by the terms of the merger or consolidation to accept any
consideration other than (a) stock of the company surviving or resulting from
the merger or consolidation, (b) shares of stock of another company which are
either listed on a national securities exchange or held of record by more than
2,000 stockholders, (c) cash in lieu of fractional shares or (d) any combination
of the foregoing. Appraisal rights are not available in the case of a sale,
lease, exchange or other disposition by a company of all or substantially all of
its property and assets, nor in the case of a merger of a parent corporation and
one or more of its subsidiaries when the parent corporation owns at least 90% of
the outstanding shares of each class of stock of all such subsidiaries.
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MANAGEMENT
HOLDING COMPANY BOARD OF DIRECTORS
Prior to the Effective Time, Sallie Mae, as sole stockholder of the Holding
Company, expects to appoint the following persons, each of whom has consented to
serve as a member of the Holding Company Board, as directors of the Holding
Company. Eight members of the Sallie Mae Board, all of whom voted against the
Reorganization, will not serve on the Holding Company Board. Two current Sallie
Mae directors, Messrs. Hunt and Lord, withdrew their consent to be appointed to
the Holding Company Board.
<TABLE>
<CAPTION>
NAME AND AGE AT DECEMBER 31, 1996
- --------------------------------------------
<S> <C>
WILLIAM ARCENEAUX*.......................... President, Louisiana Association of Independent
Age 55 Colleges and Universities, Baton Rouge, LA
(1987-present). Mr. Arceneaux also is Chairman
of CSLA, Inc. and Foundation CODOFIL. He is
director and former chairman of the Board of
Friends of Louisiana Public Broadcasting.
DOLORES E. CROSS**.......................... President, Chicago State University
Age 58 (1990-present), Chicago, Illinois. She is a
Director of Northern Trust Company where she
serves on the Business Risk and Strategic
Planning Committees. Dr. Cross served as a
member the Sallie Mae Board of Directors
(1992-1995). Dr. Cross also serves as a
Director of Campus Compact and of the
Association of Black Women in Higher Education.
Dr. Cross previously served as Secretary to the
Board, American Council on Education. Dr. Cross
is Chairman-elect of the American Association
of Higher Education.
DAVID A. DABERKO*........................... Chairman and Chief Executive Officer of
Age 51 National City Corporation (July 1995-present).
Mr. Daberko previously served as President and
Chief Operating Officer (1993-July 1995) and as
Deputy Chairman at National City Corporation
(1987-1993), as well as Chairman, National City
Bank, both located in Cleveland, OH. He also
serves as a director of National City Bank,
Cleveland; National City Bank, Columbus;
National City Bank, Indiana. He is also on the
Boards of Case-Western Reserve University, and
the Ohio Foundation of Independent Colleges.
LAWRENCE A. HOUGH........................... President and Chief Executive Officer of Sallie
Age 52 Mae (July 1990-present). Mr. Hough is a trustee
of The George Washington University and the
Massachusetts Institute of Technology.
THOMAS H. JACOBSEN*......................... Chairman, President, and Chief Executive
Age 57 Officer of Mercantile Bancorporation Inc., St.
Louis, MO (1989-present). Mr. Jacobsen
presently serves as director of Trans World
Airlines, Inc. and Union Electric Company.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE AT DECEMBER 31, 1996
- --------------------------------------------
<S> <C>
BOBBIE GAUNT................................ General Marketing Manager, Ford Division, Ford
Age 50 Motor Company, Detroit, MI (1995-present). She
previously served as General Sales Manager,
Lincoln- Mercury Division, Ford Motor Co.
(1993-95) and Director, Marketing Research and
Strategies, North American Automotive
Operations, Ford Motor Co. (1992).
ANN REESE................................... Executive Vice President and Chief Financial
Age 43 Officer, ITT Corporation (1996-present). Ms.
Reese served in various positions of increasing
responsibility at ITT Corporation (1987-1996).
LAWRENCE RICCIARDI.......................... Senior Vice President and General Counsel,
Age 56 International Business Machines (1995-present).
Previously, Mr. Ricciardi served in various
positions of increasing responsibility at RJR
Nabisco Holding Corp., including President,
Co-Chairman and Chief Executive Officer and
Executive Vice President & General Counsel.
(1987-1995)
JAMES E. ROHR*.............................. President and Director of PNC Bank Corp., and
Age 48 President and Chief Executive Officer, PNC
Bank, N.A., Pittsburgh, PA (1992-present). Mr.
Rohr served previously as Vice Chairman of PNC
Bank Corp. (1989-1992). Mr. Rohr serves on the
boards of Allegheny Corporation,
Telephone/Equitable Resources, Inc. and
Carnegie-Mellon University.
ROGER SANT.................................. Chairman, The AES Corporation (1981-present).
Age 65 Mr. Sant is a member of the Board of Marriot
International, Inc.
VINCENT SARNI............................... Chairman and CEO, PPG Industries (1989-1993).
Age 68 Mr. Sarni is a member of the Board of Directors
of PPG Industries, Hershey Foods Corporation,
LTV Corporation, and PNC Bank Corporation. He
also serves as a Trustee of Carnegie-Mellon
University.
KENNETH A. SHAW**........................... Chancellor and President, Syracuse University
Age 57 (1991-present), Syracuse, New York. Dr. Shaw is
a Director of Unity Mutual Life Insurance Co.,
Syracuse, New York. Dr. Shaw also served as a
member of the Sallie Mae Board of Directors
(1993-1995).
WILLIAM EDWARD SIMMS........................ President, Risk Management Products and
Age 52 Services Group, Transamerica Life Companies
(1995-Present). Previously, Mr. Simms served as
President, Reinsurance of Transamerica Life
Companies (1992-1995). Mr. Simms is a director
of Transamerica Occidental Life Insurance
Companies and serves on the board of directors
of NationsBank, N.A. He is a Partner in the
Carolina Panthers football club, and a member
of the board of Trustees, National Urban
League.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE AT DECEMBER 31, 1996
- --------------------------------------------
<S> <C>
JOHN W. SPIEGEL*............................ Executive Vice President and Chief Financial
Age 55 Officer, SunTrust Banks, Inc. and Treasurer,
SunTrust Banks of Georgia, Atlanta, GA
(1985-present). He is also a member of the
board of directors of Rock-Tenn Company and
ContiFinancial Corporation, and Suburban Lodges
of America.
PETER UEBERROTH............................. Managing Director and Principal, The Contrarian
Age 59 Group (1989-present). Co-chairman of GQHP
(1992-1993). He presently serves as Co-chairman
of the Board of Doubletree and Doubletree
Partners. Mr. Ueberroth is a member of the
board of directors of Ambassadors
International, Inc., The Coca Cola Company and
Transamerica Corporation.
DAVID J. VITALE*............................ Vice Chairman of First Chicago NBD Corporation
Age 50 and President of The First National Bank of
Chicago, Chicago, IL (1995-present). In 1995,
Mr. Vitale served as Senior Risk Management
Officer. He previously served as Vice Chairman
(1993-1995) of The First National Bank of
Chicago and First Chicago Corporation, Chicago,
IL and as Executive Vice President of First
Chicago Corporation (1986-1993). Mr. Vitale is
a director of First Chicago Investment
Management Company, Chicago, IL and a Trustee
of the Illinois Institute of Technology.
</TABLE>
- ---------------
* Currently a member of the Sallie Mae Board of Directors.
** Currently a member of the Sallie Mae Board of Directors Advisory Council and
formerly a member of the Sallie Mae Board of Directors. Not reelected at the
1995 Annual Meeting of Sallie Mae shareholders.
SALLIE MAE BOARD OF DIRECTORS
STATUTORY REQUIREMENTS
The Sallie Mae Charter provides that the Sallie Mae Board will consist of
21 directors: 14 elected by the shareholders and seven appointed by the
President of the United States. The Sallie Mae Charter provides that, for
purposes of qualifying for election to the Board, seven directors must be
affiliated with eligible institutions and seven directors must be affiliated
with eligible lenders, as described in the Sallie Mae Charter. A nominee may be
considered to be affiliated with an eligible institution or eligible lender if
he or she has been, within five years of election to the Sallie Mae Board, an
employee, officer, director, or similar official of: (1) any such institution or
lender; (2) an association whose members consist primarily of such institutions
or lenders; or (3) a state agency, authority, instrumentality, commission, or
similar institution, the primary purpose of which relates to educational matters
or banking matters. The Sallie Mae Charter also provides that the 14 elected
directors serve for a term ending on the date of the next annual meeting and
until their successors have been elected and have duly qualified. The Sallie Mae
Charter further provides that the seven appointed members serve at the pleasure
of the President of the United States and until their successors have been
appointed and have duly qualified. The Sallie Mae Charter also provides that the
President may designate a Chairman from among the 21 members of the Sallie Mae
Board, and on November 12, 1993, President Clinton designated Mr. William
Arceneaux as Chairman of the Sallie Mae Board.
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<PAGE> 80
SHAREHOLDER-ELECTED DIRECTORS:
<TABLE>
<CAPTION>
PRIMARY EMPLOYMENT DURING THE PAST FIVE YEARS
NAME AND AGE AT DECEMBER 31, 1996 AND DIRECTORSHIPS AT DECEMBER 31, 1996
- -------------------------------------------- -----------------------------------------------
<S> <C>
WILLIAM ARCENEAUX(3)(4)(5).................. See "-- Holding Company Board of Directors"
Director since 5/17/79
Age 55
JAMES E. BRANDON, ESQ.(1)................... Attorney and Certified Public Accountant,
Director since 7/5/95 Amarillo, TX. Mr. Brandon is President and
Age 70 director of National Cattle Co., Inc.,
Automated Electronics Corp., Park-Princess,
Inc., Kirby Royalties, Inc., El Paso Venezuela
Company, Oldham Ranches, Inc., Grain
Properties, Inc., and investments in real
estate. Mr. Brandon is a trustee of Eureka
College in Illinois. Mr. Brandon previously
served as a director of Sallie Mae from 1982 to
1991.
DAVID A. DABERKO(3)(4)...................... See "-- Holding Company Board of Directors"
Director since 5/20/87
Age 51
CHARLES L. DALEY(2)......................... Director, Executive Vice President and
Director since 7/5/95 Secretary of TEB Associates, Inc., Voorhees,
Age 64 NJ, a real estate finance company
(1992-Present). Previously, Mr. Daley was
Executive Vice President and Chief Operating
Officer of First Peoples Financial Corporation
(1987-1992) and Executive Vice President and
Chief Operating Officer of First Peoples Bank
of New Jersey (1984-1992.)
RONALD F. HUNT, ESQ.(2)(4).................. Attorney in New Bern, NC (1990-present). Since
Director since 7/5/95 1987 he has served as Corporate Secretary of
Age 53 the College Construction Loan Insurance
Association and as a director and Corporate
Secretary of Connie Lee Insurance Company and
of Connie Lee Management Services Corporation.
THOMAS H. JACOBSEN(3)....................... See "-- Holding Company Board of Directors"
Director since 1/20/87
Age 57
BENJAMIN J. LAMBERT, III(3)................. Virginia State Senator and optometrist,
Director since 7/5/95 Richmond, VA (1962-Present). Mr. Lambert is
Age 57 currently a director of Consolidated Bank &
Trust Company, Virginia Power and Dominion
Resources. Mr. Lambert is also Secretary of the
Board of Trustees of Virginia Union University.
ALBERT L. LORD(2)(4)........................ President, LCL, Ltd., Washington D.C. (1994-
Director since 7/5/95 present). Previously, Mr. Lord served as
Age 51 Executive Vice President and Chief Operating
Officer of Sallie Mae (1990-1994). Mr. Lord is
a director of Princeton Bank, Princeton, MN
(1995-present) and of First Alliance
Corporation, Irvine, CA.
A. ALEXANDER PORTER, JR.(1)................. President, Porter, Felleman, Inc., New York, NY
Director since 7/5/95 (1983-Present). Mr. Porter is a trustee of
Age 57 Davidson College in North Carolina.
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
PRIMARY EMPLOYMENT DURING THE PAST FIVE YEARS
NAME AND AGE AT DECEMBER 31, 1996 AND DIRECTORSHIPS AT DECEMBER 31, 1996
- -------------------------------------------- -----------------------------------------------
<S> <C>
JAMES E. ROHR(3)............................ See "-- Holding Company Board of Directors"
Director since 5/27/93
Age 58
STEVEN L. SHAPIRO(3)........................ Chairman of Alloy, Silverstein, Shapiro, Adams,
Director since 7/5/95 Mulford & Co., Certified Public Accountants,
Age 56 Cherry Hill, NJ (1960-Present). Mr. Shapiro is
Commissioner of the New Jersey Casino
Reinvestment Development Authority and Trustee
of the West Jersey Hospital Foundation. Mr.
Shapiro is also a member of the Executive
Advisory Council of Rutgers University and
serves on the board of Carnegie Bancorp,
Princeton, NJ.
JOHN W. SPIEGEL(3).......................... See "-- Holding Company Board of Directors"
Director since 5/27/93
Age 55
DAVID J. VITALE(2)(4)....................... See "-- Holding Company Board of Directors"
Director since 5/19/77
Age 50
RANDOLPH H. WATERFIELD, JR.(1).............. Certified Public Accountant and Accounting
Director since 7/5/95 Consultant, Barnegat Light, NJ (1990-Present).
Age 65 Mr. Waterfield currently serves as a trustee of
Drexel University.
</TABLE>
- ---------------
(1) Affiliated with eligible institutions.
(2) Affiliated with eligible lenders.
(3) Affiliated with eligible institutions and eligible lenders.
(4) Member of the Executive Committee.
(5) Designated Chairman of the Board, November 12, 1993 by the President of the
United States, pursuant to Section 439(c)(1)(B) of the Sallie Mae Charter.
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<PAGE> 82
PRESIDENTIAL APPOINTEES:
THE FOLLOWING DIRECTORS, APPOINTED BY THE PRESIDENT OF THE UNITED STATES
PURSUANT TO SECTION 439(c)(1)(A) OF THE SALLIE MAE CHARTER, SERVE AT THE
PLEASURE OF THE PRESIDENT OF THE UNITED STATES AND ARE NOT ELECTED BY
SHAREHOLDERS. UNDER THE PRIVATIZATION ACT, DIRECTORS OF SALLIE MAE APPOINTED BY
THE PRESIDENT OF THE UNITED STATES ARE NOT ELIGIBLE TO SERVE ON THE HOLDING
COMPANY BOARD.
<TABLE>
<CAPTION>
PRIMARY EMPLOYMENT DURING THE PAST FIVE YEARS
NAME AND AGE AT DECEMBER 31, 1996 AND DIRECTORSHIPS AT DECEMBER 31, 1996
- -------------------------------------------- -----------------------------------------------
<S> <C>
MITCHELL W. BERGER, ESQ.(1)................. President and Founder of the Fort Lauderdale,
Director since 3/25/94 FL law of Berger & Davis, P.A. (1985-Present).
Age 40 Mr. Berger currently serves on the Board of
Governors of the Nova University School of
Business and is a Commissioner on The Florida
Environmental Regulation Commission
(1991-Present). In 1994, Mr. Berger served as
Co-Chair of the Community Relations Committee
for the Summit of the Americas in Miami, FL.
Mr. Berger was recently appointed by the
Governor of Florida to serve on the Board of
the South Florida Water Management District.
KRIS E. DURMER, ESQ. ....................... Attorney, Kris E. Durmer Law Office, Nashua, NH
Director since 3/25/94 (1994-Present). Prior to his current position,
Age 47 Mr. Durmer was director of the law firm
Currier, Zall, Durmer, Shepard & Barry, P.A.
(1988-1993).
DIANE S. GILLELAND.......................... Senior Fellow, American Council on Education
Director since 3/25/94 (as of January 1, 1997) and Director, Arkansas
Age 50 Department of Higher Education, Little Rock, AR
(1990-Present). She currently serves on the
boards of several organizations including the
Board of the Arkansas School of Mathematics and
Science.
REGINA T. MONTOYA, ESQ.(1).................. President of WorkRules Company, a consulting
Director since 3/25/94 firm and Visiting Professor at the University
Age 43 of Texas at Dallas since September 1995. Ms.
Montoya was elected national president of Girls
Incorporated in April 1996. Ms. Montoya has
also been a political analyst for KDFW-TV since
August 1995. Previously, Ms. Montoya served as
President of Jayhawk, Inc. and Vice President
for Special Projects and Special Advisor to the
Chairman of the Board of Westcott
Communications, Inc. Dallas, TX (1994-1995). In
1993, Ms. Montoya served as Assistant to
President Clinton and Director of the Office of
Intergovernmental Affairs. Ms. Montoya
previously worked with the Texas law firm of
Godwin & Carlton from September 1990 to January
1993. Ms. Montoya has also served as a member
of the Board of Directors of Jayhawk Acceptance
Corporation since February 1994, and as a
member of the Board of Directors of Trammell
Crow Company since December 1993. Ms. Montoya
also serves on the Board of Trustees of
Wellesley College and is Vice President and
member of the Board of Directors of the Harvard
Alumni Association.
</TABLE>
71
<PAGE> 83
<TABLE>
<CAPTION>
PRIMARY EMPLOYMENT DURING THE PAST FIVE YEARS
NAME AND AGE AT DECEMBER 31, 1996 AND DIRECTORSHIPS AT DECEMBER 31, 1996
- -------------------------------------------- -----------------------------------------------
<S> <C>
JAMES E. MOORE.............................. President and Chief Executive Officer,
Director since 3/25/94 ContiFinancial Corporation (1995-Present),
Age 50 Chairman of ContiMortgage Corporation
(1988-Present) and Chairman of Triad Financial
Corporation (1996-Present). He is also a
director of the National Home Equity Mortgage
Association.
IRENE NATIVIDAD............................. Principal, Natividad & Associates, Washington,
Director since 3/25/94 D.C. and Executive Director of the Philippine
Age 48 American Foundation (1990-Present). Ms.
Natividad currently serves as the Chair of the
National Commission on Working Women.
Previously, she held the position of President
of the National Women's Political Caucus
(1985-1989). A Panelist on PBS' "To the
Contrary", a national news-analysis program,
Ms. Natividad serves on numerous Boards
including the National Museum for Women in the
Arts and the Center for Women Policy Studies.
RONALD J. THAYER............................ Department Executive, Wayne County, Office of
Director since 3/25/94 Jobs and Economic Development, Detroit, MI
Age 57 (1994- Present). Mr. Thayer served as the
Senior Vice President for Fund Development at
WTVS-TV, a public television station in
Detroit, MI (1990-1992). Mr. Thayer is also a
Principal of The Fund Raising Specialists, a
Member of the Board of Trustees of Siena
Heights College and a member of the President's
Cabinet, Executive Board of the University of
Detroit, Mercy.
</TABLE>
- ---------------
(1) Member of the Executive Committee.
MEETINGS OF THE BOARD
The Holding Company anticipates that the Holding Company Board will hold
meetings and maintain committees substantially similar to those currently
maintained by Sallie Mae.
The Sallie Mae Board of Directors conducts regular meetings on a bi-monthly
basis and special meetings as may be required from time to time. Six meetings
were held during 1996. In addition, the Executive Committee of the Board, which
is empowered, with certain exceptions, to take all such actions of the Sallie
Mae Board as may be necessary between the Sallie Mae Board's regular meetings
meets from time to time as required. The members of the Sallie Mae Board who
served during 1996 attended at least 75% of the total number of meetings of the
Sallie Mae Board and committees of which they were members in 1996.
The Sallie Mae Board uses a number of committees to assist it in the
performance of its duties. Meetings of the committees of the Sallie Mae Board
are generally held on the day prior to the regular meetings of the Sallie Mae
Board and on such other dates as may be necessary between regular meetings. The
present standing committees are the Audit Committee, the Compensation and
Personnel Committee, the Executive Committee, the External Concerns Committee,
the Finance Committee, the Nominations and Board Affairs Committee, the
Operations Committee, and the Strategic Planning Committee. The purposes of the
Audit, Compensation and Personnel, and Nominations and Board Affairs Committees,
the identity of their current members, and the number of meetings held during
1996 are set forth below.
AUDIT COMMITTEE. The Audit Committee is empowered to: (1) make
recommendations to the Board on the selection of independent auditors; (2)
review with independent auditors the scope of their examination and
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<PAGE> 84
the proposed fee; (3) review with independent auditors the results of the
examination; (4) review with management the nature and extent of all
non-audit-related services provided to Sallie Mae by the independent auditor;
(5) review the management, scope, and results of the internal audit program; and
(6) review the Employee Standards of Conduct and the Board of Directors Code of
Conduct and employee and director compliance with each.
The Sallie Mae Audit Committee held five meetings during 1996. The current
membership of the Sallie Mae Audit Committee is as follows: James E. Moore,
Chairman; Randolph H. Waterfield, Jr., Vice Chairman; James E. Brandon; David A.
Daberko; Diane S. Gilleland; and James E. Rohr. The membership of the Holding
Company Audit Committee is anticipated to be as follows: .
COMPENSATION AND PERSONNEL COMMITTEE. The Compensation and Personnel
Committee is empowered to (1) consider and make recommendations to the Board
with respect to compensation and other benefits for the Board and employees of
Sallie Mae; (2) review Sallie Mae's management resources, manpower planning,
development, selection process, and the performance of its key executives; (3)
review position evaluations and salary rates for officers; (4) review Sallie
Mae's policies relating to development and continuity of able management; and
(5) recommend to the Board a process of succession for Sallie Mae's senior
officers.
The Sallie Mae Compensation and Personnel Committee held six meetings
during 1996. The current membership of the Sallie Mae Compensation and Personnel
Committee is as follows: David A. Daberko, Chairman; Irene Natividad, Vice
Chairman; Charles L. Daley; Steven L. Shapiro; Ronald J. Thayer; and David J.
Vitale. The membership of the Holding Company Compensation and Personnel
Committee is anticipated to be as follows: .
NOMINATIONS AND BOARD AFFAIRS COMMITTEE. The Nominations and Board Affairs
Committee is empowered to: (1) identify and recommend nominees for election to
the Board; (2) identify and review the qualifications of eligible candidates for
consideration as advisory members and Board members; and (3) review the
effectiveness and composition of the Board.
The Sallie Mae Nominations and Board Affairs Committee held one meeting
during 1996. The current membership of the Sallie Mae Nominations and Board
Affairs Committee is as follows: Thomas H. Jacobsen, Chairman; Benjamin J.
Lambert, Vice Chairman; Kris E. Durmer, James E. Brandon; John W. Spiegel; and
Ronald J. Thayer. The membership of the Holding Company Nominations and Board
Affairs Committee is anticipated to be as follows: .
TRANSACTIONS WITH AFFILIATED INSTITUTIONS
Certain directors of the Company are also directors and/or executive
officers of other companies with which the Company, from time to time, engages
in business transactions. Management believes that the terms and conditions of
such transactions are no less favorable to the Company than the terms and
conditions of transactions generally entered into by the Company. The Company
does not believe that it is a party to any transactions in which a director of
the Company has a direct or indirect material interest.
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<PAGE> 85
DIRECTOR COMPENSATION
It is anticipated that the Holding Company will compensate its directors in
a manner that is substantially similar to the manner in which Sallie Mae
compensates its directors, and that following the Reorganization, the Holding
Company will become the sponsor of each of the director benefit plans. During
1996, each director of Sallie Mae, with the exception of the Chairman of the
Board, earned an annual retainer in the amount of $20,000. Each Chairman of a
standing committee 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
Sallie Mae Board and a fee of $1,500 accrued to each director for attending each
regularly scheduled committee meeting of the Sallie Mae 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 is required to
devote to the affairs of Sallie Mae, was compensated on the basis of an annual
retainer in the amount of $50,000 and a per diem in the amount of $1,750 for
each day spent on the affairs of Sallie Mae. The Chairman of the Board may
authorize additional reimbursement for directors who perform additional services
or devote unusual amounts of time to Sallie Mae's activities, which are not
covered under the normal compensation schedules.
Directors may elect to defer cash compensation under the Sallie Mae Board
of Directors' Deferred Compensation Plan and invest deferred compensation in a
cash account on which interest is accrued and/or in a Sallie Mae Common Stock
account, on which dividends and other capital adjustments are made. At least 50%
of each director's annual retainer is credited to the Board of Directors'
Deferred Compensation Plan -- Stock Account. See "Board and Management
Ownership" for stock ownership information.
Directors are provided with $50,000 of group term life insurance and are
covered by a travel insurance plan while traveling on Sallie Mae business.
Consistent with Sallie Mae's philosophy that management and the Sallie Mae
Board's compensation should be aligned with the interests of the shareholders,
effective December 31, 1995, the Sallie Mae Board of Directors' Pension Plan, a
"non-qualified" plan, providing a benefit computed on the highest consecutive
three-year average of compensation, was eliminated. Benefits accrued to
directors serving on the Board at December 31, 1995 were frozen. Further, the
Board has recommended that a substantial portion of compensation be stock-based.
Directors may participate in the Sallie Mae Employees' Stock Purchase Plan
on the same terms and conditions as employees. Directors do not receive a salary
from Sallie Mae nor do they participate in any of the other plans discussed in
the Executive Compensation section.
Under the terms of the shareholder-approved Sallie Mae Board of Directors'
Restricted Stock Plan, each director may annually receive up to a maximum of 500
shares of restricted 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 Sallie Mae 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 Shareholders of Sallie Mae, each director was awarded options
to acquire 3,000 shares of Sallie Mae Common Stock at $73.00 per share.
Beginning in 1997, each director will annually receive grants of 1,000 stock
options pursuant to the Board of Directors' Stock Option Plan. At December 31,
1996, 63,000 options were outstanding and exercisable and had a value of
$1,267,875.
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) aggregated $1,215,767.
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<PAGE> 86
EXECUTIVE OFFICERS OF THE COMPANY
NAMES AND TITLES
The executive officers of Sallie Mae at December 31, 1996, their titles,
and their years of employment with Sallie Mae are below. Their previous
experience, including principal occupations for the past five years, follows. It
is anticipated that the individuals set forth below will serve, in similar
capacities, as the executive officers of the Holding Company.
<TABLE>
<CAPTION>
YEAR
COMMENCED/
AGE AT REJOINED
NAME & TITLE 12/31/96 EMPLOYMENT
- ----------------------------------------------------------------------- -------- ----------
<S> <C> <C>
Lawrence A. Hough...................................................... 52 1973/1979
President and Chief Executive Officer
Robert D. Friedhoff.................................................... 42 1979
President, Sallie Mae Servicing Corporation
Executive Vice President, Systems and Servicing, Sallie Mae
Timothy G. Greene...................................................... 57 1973/1990
Executive Vice President and General Counsel
Lydia M. Marshall...................................................... 47 1985
Executive Vice President, Marketing
Denise B. McGlone...................................................... 45 1977/1994
Executive Vice President and Chief Financial Officer
</TABLE>
PREVIOUS EXPERIENCE
Lawrence A. Hough, President and Chief Executive Officer, was first
employed by Sallie Mae from 1973 to 1977 and rejoined Sallie Mae in 1979. He was
appointed to his present position in July 1990.
Robert D. Friedhoff, President, Sallie Mae Servicing Corporation (a
wholly-owned subsidiary of Sallie Mae) and Executive Vice President, Systems and
Servicing, Sallie Mae, was employed by Sallie Mae in February 1979. Prior to his
current appointment in December 1995, he served as Executive Vice President,
Servicing from 1993-1995. He previously served as Senior Vice President,
Servicing (1991-1993).
Timothy G. Greene, Executive Vice President and General Counsel, was first
employed by Sallie Mae from 1973 to 1979 and rejoined Sallie Mae in July 1990,
at which time he was appointed to his present position. A $500,000 loan made by
Sallie Mae to Mr. Greene in order to assist him in relocating to Washington,
D.C. to accept employment with Sallie Mae was repaid by Mr. Greene on June 30,
1996.
Lydia M. Marshall, Executive Vice President, Marketing, was employed by
Sallie Mae in July 1985. Prior to her current appointment in November 1993, she
served as Senior Vice President, Marketing from 1991 to 1993.
Denise B. McGlone, Executive Vice President and Chief Financial Officer,
was first employed by Sallie Mae from 1977 to 1983 and rejoined Sallie Mae on
January 31, 1994, at which time she was appointed to her present position. From
December 1991 through December 1993, Ms. McGlone held the position of Executive
Vice President and Global Head of Derivatives of DKB Financial Products, Inc. in
New York.
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<PAGE> 87
EXECUTIVE COMPENSATION
This section includes: (1) a report made by the Compensation and Personnel
Committee of Sallie Mae regarding executive compensation policy; (2) a summary
description in tabular form of executive compensation; (3) a summary of 1997
stock option grants; (4) a valuation of option exercises and remaining option
holdings; (5) a summary of awards under the Student Loan Marketing Association
Incentive Performance Plan (the "Incentive Performance Plan" or the "IPP"); (6)
a description of benefit plans; and (7) a comparison of stock performance to
market indices. Sallie Mae does not have any termination or change in control
agreements with its executive officers.
REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE
This report is issued by the Compensation and Personnel Committee to set
forth the Sallie Mae Board's philosophy and practice in the area of executive
compensation. Written comments by shareholders on the report are encouraged and
should be directed to the Chairman, Compensation and Personnel Committee.
POLICY. The purpose of Sallie Mae's executive compensation program is to
link compensation to the achievement of Sallie Mae's education finance program
and financial goals. These goals are to: increase the availability of education
related credit in the United States, improve the delivery of that credit, and
increase total shareholder return. Although the Holding Company Board has not
yet adopted a policy for its compensation programs, it is anticipated that the
Holding Company Board will adopt a policy substantially similar to that
currently in effect for Sallie Mae's Compensation and Personnel Committee.
Sallie Mae's experience demonstrates that its goals are best achieved
through the coordinated efforts of its entire senior management team. To create
an environment in which such coordinated efforts will occur, each component of
the executive compensation program applies to all executive officers, including
the President and Chief Executive Officer. In 1994, however, Mr. Hough suggested
that the Compensation and Personnel Committee consider awarding him a portion of
his annual bonus in restricted stock in order to further link the value of his
compensation package to the creation of shareholder value. The Committee decided
to act on Mr. Hough's suggestion and, therefore, the bonus component of Mr.
Hough's compensation (discussed below) is different from that of the other
executive officers.
The compensation program is designed to: (1) create a performance-oriented
environment by making a significant portion of annual compensation dependent on
the achievement of both annual and long-term goals; (2) align management and
shareholder interests by providing a portion of annual compensation in the form
of market-priced stock options which also provide the opportunity for management
to acquire shares of Sallie Mae's Common Stock; and (3) attract and retain key
executives. The program is reviewed at least annually to determine that it meets
the objectives set forth above.
In November 1994, to further support Sallie Mae's belief that management
ownership of Sallie Mae's Common Stock helps align management and shareholder
interests, Sallie Mae established minimum guidelines for stock ownership for all
officers of Sallie Mae. The guidelines provide that each officer should own a
specified number of shares depending on the officer's level of seniority. Each
officer is expected to increase his or her share ownership annually until the
guideline is achieved.
The stock ownership guideline for the President and Chief Executive Officer
is 30,000 shares. For each Executive Vice President the guideline is 10,000
shares. For each Vice President earning more than $140,000 in salary, the
guideline is 4,000 shares. For each Vice President earning $140,000 or less in
salary, the guideline is 2,000 shares. For each Assistant Vice President, the
guideline is 1,000 shares. See the "Board and Management Ownership" section for
stock ownership information.
Only shares owned directly or through Sallie Mae's Employees' Thrift and
Savings Plan, Supplemental Employees' Thrift and Savings Plan, and Deferred
Compensation Plan for Key Employees are considered in determining if an officer
meets the guidelines. Officers of Sallie Mae have five years within which to
meet the ownership guidelines.
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<PAGE> 88
COMPENSATION RELATED TO ACHIEVEMENT OF ANNUAL AND LONG-TERM GOALS. The
following describes each element of the executive compensation program and its
relationship to the goals described above. Also described is the relationship of
each element to the President and Chief Executive Officer's compensation for
1996.
BASE SALARY. Each executive officer's base salary takes into account the
officer's responsibility level, the officer's accomplishments in meeting that
responsibility, the leadership demonstrated by the officer, and the officer's
length of service with Sallie Mae. In determining the compensation, including
the salary for each executive officer, Sallie Mae also reviews the compensation
paid by comparable financial institutions to officers with similar
responsibilities. The companies in this group are publicly held financial
services companies with strong financial performance characteristics as
determined by shareholder return over five years and by earnings fundamentals.
The group includes banks, insurance companies, and other government-sponsored
enterprises. It is not Sallie Mae's policy to match salaries on a
dollar-for-dollar basis; however, Sallie Mae does take comparable salaries into
consideration when deciding what compensation levels are necessary to attract
and retain qualified executives. Based on the Board of Director's evaluation of
these considerations, Mr. Hough's salary increased 2.86% from 1995 to 1996.
ANNUAL BONUS. The annual bonus represents "at risk" compensation and the
Committee has determined that opportunities for increases in annual cash
compensation should be primarily reflected by the annual bonus. Each executive
officer's 1996 annual bonus is determined on the basis of the Board of
Directors' evaluation of the officer's performance in achieving certain goals
set forth in an annual plan and in meeting anticipated and unanticipated
challenges which arise during the year. The Board of Directors reviews each
officer's overall performance in the context of all of the goals and of each
year's challenges and, therefore, does not believe it appropriate to assign each
element of the annual plan a specific weight. In the case of the President and
Chief Executive Officer, the 1996 bonus was based on his planning and
implementation of successful business strategies. In evaluating his performance,
the following factors were considered: financial results, board relations,
congressional relations and team building. These factors include increased
earnings per common share, increased return on shareholder equity, asset growth,
improvements in student loan servicing quality, efforts to achieve rechartering
of Sallie Mae from a government-sponsored enterprise to state chartered
corporation on terms favorable to shareholders, and leadership in improving the
availability and quality of delivery of education credit, including efforts
related to student loan legislation. Ultimate supervisory responsibility for
employees who created a document which is the subject of a complaint filed with
the Federal Election Commission, was also considered in arriving at Mr. Hough's
bonus, as well as that of another executive officer. Based on Mr. Hough's
performance for 1996, he received a bonus of $440,000 of which $220,036 was paid
in cash and $219,964 was paid in the form of 2,263 restricted shares of Sallie
Mae Common Stock. Pursuant to the Stock Compensation Plan the restricted shares
of Sallie Mae Common Stock were valued at 90% of the closing price of the Sallie
Mae Common Stock on the NYSE on the date of grant. The restricted shares of
Sallie Mae Common Stock pay dividends and provides voting rights to the same
extent as unrestricted Sallie Mae Common Stock. From one year from the date of
grant, such restricted shares of Sallie Mae Common Stock may be forfeited, under
certain circumstances.
INCENTIVE PERFORMANCE PLAN. The Incentive Performance Plan is designed to
reward the achievement of long-term corporate goals and to create an incentive
for each executive officer and certain other senior officers of Sallie Mae to
remain employed by Sallie Mae. Under the Incentive Performance Plan, the
Compensation and Personnel Committee may establish each year corporate
performance targets to be achieved over a three-year period. At the end of each
three-year period, the level of achievement of each target is determined and,
based on the weight given to each target and the participation level of each
officer in the Incentive Performance Plan an award is made ranging from 0% to
100% of the officer's then-current salary. Payments under each plan are made in
three equal annual installments and are dependent upon the continued employment
of the executive officer, unless the officer retires from Sallie Mae, in which
case accrued payments are made.
In January of 1996, the Board of Directors made awards for the completed
1993 Plan, which contained the following weighted performance measurements: (1)
33.33% for educational credit enhancements; (2) 33.33% for total shareholder
return; and (3) 33.33% for return on equity, return on assets and earnings per
77
<PAGE> 89
share. Mr. Hough received an award of $267,750 under the 1993 Plan, payable in
three annual installments beginning in January of 1996. The amount of the award
was 22% less than the prior year, primarily as a reflection of the decrease in
the price of Sallie Mae Common Stock during 1994.
In 1996, the same performance measurements were set for the 1996 Plan as
noted above for the 1993 Plan.
STOCK OPTION PLAN. The Board of Directors strongly believes that in
addition to compensating executives for the successful financial performance of
Sallie Mae through annual bonuses and three-year incentive plans, a portion of
executive compensation should be linked to Sallie Mae Common Stock value by
granting stock options to executives. The value of the options granted is at
risk and directly tied to the increase in share price from the date of grant.
The terms of the options, granted at market price and not exercisable for a
period from 12 to 36 months and expiring in ten years, are designed to retain
key employees and to provide incentives for management to increase share price.
The number of options granted each year is based on the same factors as
discussed under "Annual Bonus" above. Previous grants of stock options are
reviewed but are not an element in determining option awards. Based on the Board
of Director's evaluation of these performance measurements, in 1996 Mr. Hough
received 30,000 stock options, exercisable at a price of $73.00 each, the then
current market price. In January of 1997, the Board of Directors awarded Mr.
Hough 27,000 stock options, exercisable at a price of $108 each.
In 1994, 1995, and 1996, Mr. Hough's cash and stock compensation consisted
of 43%, 40%, and 41% respectively, in base salary; 25%, 32%, and 34%
respectively, in annual bonus based on performance for each such year; and 32%,
28%, and 25% respectively, in payments under the Incentive Performance Plan.
Compensation and Personnel Committee
David A. Daberko, Chairman
Irene Natividad, Vice Chairman
Charles L. Daley, Member
Steven L. Shapiro, Member
Ronald J. Thayer, Member
David J. Vitale, Member
The individuals listed above constitute the current membership of the
Sallie Mae Compensation and Personnel Committee. Messrs. Daley and Shapiro
dissented from this Report of the Compensation and Personnel Committee. On March
4, 1997, a written statement was delivered to the Company on behalf of Messrs.
Daley and Shapiro setting forth the reasons of Messrs. Daley and Shapiro for so
dissenting. The statement of Messrs. Daley and Shapiro has been included in this
Proxy Statement/Prospectus at their request and is set forth in Appendix E.
The comparable financial institutions referred to in the Report of the
Compensation and Personnel Committee are a group of 20 high-performing financial
service corporations, and include Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association, which are also included in Standard &
Poor's Financial-Miscellaneous Index referred to in "EXECUTIVE
COMPENSATION -- Performance Graph."
78
<PAGE> 90
COMPENSATION TABLES
Set forth below is historical information relating to the compensation of
executive officers of Sallie Mae. It is anticipated that the Holding Company
will compensate its executive officers in a manner that is substantially similar
to the manner in which Sallie Mae compensates its executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ------------------------ ----------
SECURITIES
RESTRICTED UNDERLYING LTIP ALL OTHER
YEAR SALARY(1) BONUS(2) OTHER STOCK(3) OPTIONS(4) PAYOUT(5) COMPENSATION(6)
---- -------- -------- ----- ---------- ---------- ---------- --------------
<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 Servicing 1995 260,000 210,000 - - 18,500 96,236 15,565
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) "Salary" is the base salary earned in the current year including all salary
deferred to future years.
(2) "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.
(3) 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.
(4) "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.
(5) 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.
(6) "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.
79
<PAGE> 91
1996 OPTION GRANTS TABLE
<TABLE>
<CAPTION>
PERCENT
OF
NUMBER OF TOTAL
SECURITIES GRANTS TO
UNDERLYING EMPLOYEES VALUE AT
OPTIONS IN EXERCISE EXPIRATION GRANT
NAME POSITION GRANTED 1996(1) PRICE DATE DATE(2)
- ------------------------ ------------------------- ---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Hough....... President and CEO 30,000 9.3% $73.00 1/25/2006 $774,000
Timothy G. Greene....... EVP and General Counsel 14,000 4.3 73.00 1/25/2006 361,200
Denise B. McGlone....... EVP and CFO 14,000 4.3 73.00 1/25/2006 361,200
Robert D. Friedhoff..... EVP, Systems & Servicing 14,000 4.3 73.00 1/25/2006 361,200
Lydia M. Marshall....... EVP, Marketing 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 POSITION ACQUIRED EXERCISE UNEXERCISABLE UNEXERCISABLE
- ------------------------ ------------------------- -------- ----------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Lawrence A. Hough....... President and CEO 10,000 $ 604,500 148,250/30,000 $6,485,468/$603,750
Timothy G. Greene....... EVP and General Counsel 1,080 52,920 44,920/14,000 1,825,072/ 281,750
Denise B. McGlone....... EVP and CFO 8,500 309,812 18,500/14,000 948,312/ 281,750
Robert D. Friedhoff..... EVP, Systems & Servicing 0 0 51,000/14,000 2,176,937/ 281,750
Lydia M. Marshall....... EVP, Marketing 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 POSITION AWARDS FOR 1993 IPP(1) UNTIL MATURITY OR PAYOUT(2)
- -------------------------- ------------------------- ------------------------------- --------------------------------
<S> <C> <C> <C>
Lawrence A. Hough......... President and CEO Three installments of $89,250. Payable beginning January 1996.
Timothy G. Greene......... EVP and General Counsel Three installments of $50,150 Payable beginning January 1996.
Denise B. McGlone(3)...... EVP and CFO N/A N/A
Robert D. Friedhoff....... EVP, Systems & Servicing Three installments of $38,061. Payable beginning January 1996.
Lydia M. Marshall......... EVP, Marketing 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.
80
<PAGE> 92
DESCRIPTION OF BENEFIT PLANS
Set forth below are current benefit plans of Sallie Mae. It is anticipated
that following the Reorganization, the Holding Company will become the sponsor
of each of these benefit plans and maintain such plans in a manner substantially
similar to the manner in which Sallie Mae currently maintains such plans.
PENSION PLANS
PENSION PLAN TABLE
ANNUAL NORMAL RETIREMENT BENEFIT(1)
<TABLE>
<CAPTION>
FINAL YEARS OF SERVICE AT NORMAL RETIREMENT DATE
AVERAGE ---------------------------------------------------------------
COMPENSATION 15 20 25 30
------------ ------------ ------------ ------------ ------------
<S> <C> <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, 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.
THRIFT AND SAVINGS PLANS. The Student Loan Marketing Association
Employees' Thrift and Savings Plan (the "Thrift and Savings Plan") is available
to all employees of Sallie Mae after the completion of one year of service.
Employees participate in the Thrift and Savings Plan by contributing up to six
percent of their salaries. Sallie Mae provides a matching contribution equal to
100% of each participant's contribution.
81
<PAGE> 93
Participants are always fully vested in their own contributions to the
Thrift and Savings Plan. Participants vest in Sallie Mae's matching contribution
at the rate of 25% for each year of participation after their first year of
service and, therefore, are fully vested in the matching contributions after
five years of service. Participants may make withdrawals from the Thrift and
Savings Plan, subject to penalties in most instances, and borrow under certain
limited conditions.
The Student Loan Marketing Association Supplemental Employees' Thrift and
Savings Plan (the "Supplemental Thrift and Savings Plan") assures 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.
Salary deferrals made under the Thrift and Savings and the Supplemental
Thrift and Savings Plans by any of the five most highly-compensated executive
officers are reported under the "Salary" column of the Summary Compensation
Table. Sallie Mae contributions made under the Thrift and Savings and
Supplemental Thrift and Savings Plans on behalf of the five most highly
compensated executive officers are reported under the "All Other Compensation"
column of the Summary Compensation Table.
STOCK PURCHASE PLAN. The Employees' Stock Purchase Plan provides that all
full-time and certain part-time employees and members of the Board of Directors
may purchase shares of Sallie Mae Common Stock at the end of a two-year period.
The purchase price is equal to the fair market value of the Sallie Mae Common
Stock at the beginning of the two-year period, less 15%. Purchases are made with
funds that accumulate in a taxable, interest-bearing account funded by payments
from participating employees. Contributions to an employee's account may be made
only through after-tax payroll deductions and are limited to 10% of
compensation, but no more than $10,000. The Board authorized 1,250,000 shares of
Sallie Mae Common Stock to be issued pursuant to the Employees' Stock Purchase
Plan.
The Employees' Stock Purchase Plan is not a "qualified" stock purchase
plan. Accordingly, upon the purchase of stock, employees have taxable income to
the extent that the fair market value of the stock on the date of purchase
exceeds the purchase price. Income for any of the five most highly compensated
executive officers resulting from purchases of stock under the Employees' Stock
Purchase Plan is reported under the "All Other Compensation" column of the
Summary Compensation Table.
DEFERRED COMPENSATION PLAN FOR KEY EMPLOYEES. The Deferred Compensation
Plan for Key Employees provides that participants may elect to defer earnings
and invest the compensation in an interest-bearing cash account and/or a Sallie
Mae Common Stock account. Effective January 1, 1996, the Deferred Compensation
Plan was closed to new participants and closed to additional deferrals after
December 29, 1995. None of the five most highly compensated executive officers
participated in the Plan in 1996.
STOCK OPTION PLAN. The Stock Option Plan, effective from March 1993 to
March 1998, provides key employees an opportunity to acquire an equity interest
in Sallie Mae. The Stock Option Plan is administered by the Compensation and
Personnel Committee, none of whose members are eligible for benefits under the
Stock Option Plan.
The Stock Option Plan provides for the issuance of "non-qualified" or
"qualified" stock options at market value on the day of the grant with terms of
ten years from the date of the grant. Options must be held for a period of
between 12 and 36 months, as determined at the time the option is granted,
before the option may be exercised. The Stock Option Plan authorizes the
granting of options with respect to no more than 5,091,450 shares of Sallie Mae
Common Stock, subject to adjustments for stock splits. All options granted in
1996 were "nonqualified" options.
The Stock Option Plan includes a "reload" option feature that was approved
at the 1996 Annual Meeting of Shareholders of Sallie Mae and that is designed to
encourage officers of Sallie Mae to exercise options and to retain ownership of
the Sallie Mae Common Stock issued pursuant to such exercises.
STOCK COMPENSATION PLAN. At the 1996 Annual Meeting of Shareholders, the
Board of Directors adopted the Sallie Mae Stock Compensation Plan (the "Stock
Plan"). The purpose of the Stock Plan is to continue to promote and encourage
Sallie Mae Common Stock ownership by key employees in order to link
82
<PAGE> 94
the interests of the key employees of Sallie Mae with the interests of the
shareholders of Sallie Mae and to provide the Board of Directors a method to
compensate key employees with Sallie Mae Common Stock in lieu of a portion of
their cash compensation.
Awards will be granted, in lieu of all or part of an officer's annual
bonus, at the discretion of the Compensation and Personnel Committee, to
officers of Sallie Mae eligible to receive an annual bonus. Awards will be made,
at the discretion of the Compensation and Personnel Committee, in the form of
Sallie Mae Common Stock, restricted stock, or stock units. In its discretion,
the Committee may provide an officer with the opportunity to elect to receive an
annual bonus in cash or in restricted stock at a 10 percent discount.
PERFORMANCE GRAPH
STUDENT LOAN MARKETING ASSOCIATION
FIVE-YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P FINANCIAL-
(FISCAL YEAR COVERED) SLMA MISC.* S&P 500
<S> <C> <C> <C>
1991 100 100 100
1992 94.51 117.56 107.61
1993 63.29 140.35 118.39
1994 47.69 135.14 119.99
1995 99.93 216.44 164.92
1996 143.94 282.03 202.69
</TABLE>
<TABLE>
<CAPTION>
BASE
COMPANY/INDEX YEAR 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Sallie Mae 100.0 94.5 63.3 47.7 99.9 143.9
S&P Financial-Misc.(1)(2) 100.0 117.6 140.4 135.1 216.4 282.0
S&P 500 Comp-Ltd(2) 100.0 107.6 118.4 120.0 164.9 202.7
</TABLE>
(1) Companies included in Standard & Poor's Financial-Miscellaneous Index:
American Express, American General Finance, Dean Witter, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, Green Tree
Financial, MBIA Inc, MBNA Corporation, and Transamerica Corporation.
(2) Source: Bloomberg Comparative Return Table
83
<PAGE> 95
OWNERSHIP OF SALLIE MAE STOCK
BOARD AND MANAGEMENT OWNERSHIP OF THE COMPANY
The following table provides information regarding shares of Sallie Mae
Common Stock owned by persons who have consented to serve as Holding Company
directors, the Company's management and Sallie Mae directors at December 31,
1996, unless otherwise indicated. None of such persons nor such persons as a
group were the beneficial owner of more than 1% of the outstanding shares of
Sallie Mae Common Stock at December 31, 1996. If the Reorganization is approved,
all shares of Sallie Mae Common Stock beneficially owned by such persons shall
be converted into shares of Holding Company Common Stock.
HOLDING COMPANY
<TABLE>
<CAPTION>
TOTAL SHARES
OWNED AND MAY BE
CREDITED TO CREDITED TO ACQUIRED
BENEFIT PLAN BENEFIT PLAN WITHIN 60
OWNED(1) ACCOUNT(2) ACCOUNT(3) DAYS(4)
-------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
HOLDING COMPANY DIRECTORS
William Arceneaux........................................ 1,705 2,408 4,113 3,000
Dolores E. Cross......................................... 150 0 150 0
David A. Daberko......................................... 805 3,593 4,398 3,000
Lawrence A. Hough........................................ 137,736 6,178 143,914 178,250
Thomas H. Jacobsen....................................... 1,625 670 2,295 3,000
Bobbie Gaunt............................................. 0 0 0 0
Ann Reese................................................ 0 0 0 0
Lawrence Ricciardi....................................... 0 0 0 0
James E. Rohr............................................ 891 362 1,253 3,000
Roger Sant............................................... 0 0 0 0
Vincent Sarni............................................ 0 0 0 0
Kenneth A. Shaw.......................................... 125 831 956 0
William Edward Simms..................................... 0 0 0 0
John W. Spiegel.......................................... 592 268 860 3,000
Peter Ueberroth.......................................... 0 0 0 0
David J. Vitale.......................................... 625 12,124 12,749 3,000
HOLDING COMPANY NAMED EXECUTIVE OFFICERS (OTHER THAN
HOLDING COMPANY DIRECTORS)
Robert D. Friedhoff...................................... 8,288 206 8,494 65,000
Timothy G. Greene........................................ 6,340 2,663 9,003 58,920
Lydia M. Marshall........................................ 10,823 1,476 12,299 38,800
Denise B. McGlone........................................ 6,502 1,592 8,094 32,500
HOLDING COMPANY DIRECTORS AND NAMED EXECUTIVE OFFICERS AS
A GROUP................................................ 176,207 32,371 208,578 391,470
</TABLE>
- ---------------
(1) Consists of shares held, directly or indirectly, by the individual or a
related party, including restricted shares, and, in the case of officers,
shares credited directly to the individual's account under the Employees'
Thrift and Savings Plan. Pursuant to the Employees' Thrift and Savings Plan,
a participant has the power to direct the voting of stock held on his behalf
in the Employees' Thrift and Savings Plan Trust.
(2) Consists of shares credited under the Directors' Deferred Compensation Plan,
the Supplemental Employees' Thrift and Savings Plan, and the Deferred
Compensation Plan for Key Employees.
(3) Consists of total of columns 1 and 2.
(4) Consists of shares which may be acquired through the Stock Option Plan and
the Board of Directors' Stock Option Plan.
84
<PAGE> 96
SALLIE MAE
<TABLE>
<CAPTION>
TOTAL SHARES
OWNED AND MAY BE
CREDITED TO CREDITED TO ACQUIRED
BENEFIT PLAN BENEFIT PLAN WITHIN 60
OWNED(1) ACCOUNT(2) ACCOUNT(3) DAYS(4)
-------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
SALLIE MAE DIRECTORS
William Arceneaux........................................ 1,705 2,408 4,113 3,000
Mitchell W. Berger....................................... 617 296 913 3,000
James E. Brandon......................................... 1,475 683 2,158 3,000
David A. Daberko......................................... 805 3,593 4,398 3,000
Charles L. Daley......................................... 1,200 190 1,390 3,000
Kris E. Durmer........................................... 618 278 896 3,000
Diane S. Gilleland....................................... 618 639 1,257 3,000
Ronald F. Hunt, Esq. .................................... 2,731 879 3,610 3,000
Thomas H. Jacobsen....................................... 1,625 670 2,295 3,000
Benjamin J. Lambert...................................... 200 361 561 3,000
Albert L. Lord........................................... 35,300 379 35,679 3,000
Regina T. Montoya........................................ 618 278 896 3,000
James E. Moore........................................... 1,114 887 2,001 3,000
Irene Natividad.......................................... 618 268 886 3,000
A. Alexander Porter, Jr. ................................ 21,200 190 21,390 3,000
James E. Rohr............................................ 891 362 1,253 3,000
Steven L. Shapiro........................................ 1,200 493 1,693 3,000
John W. Spiegel.......................................... 592 268 860 3,000
Ronald J. Thayer......................................... 300 268 568 3,000
David J. Vitale.......................................... 625 12,124 12,749 3,000
Randolph H. Waterfield, Jr. ............................. 400 485 885 3,000
SALLIE MAE NAMED EXECUTIVE OFFICERS
Robert D. Friedhoff...................................... 8,288 206 8,494 65,000
Timothy G. Greene........................................ 6,340 2,663 9,003 58,920
Lawrence A. Hough........................................ 137,736 6,178 143,914 178,250
Lydia M. Marshall........................................ 10,823 1,476 12,299 38,800
Denise B. McGlone........................................ 6,502 1,592 8,094 32,500
SALLIE MAE DIRECTORS AND NAMED EXECUTIVE OFFICERS AS A
GROUP.................................................. 244,141 38,114 282,255 436,470
</TABLE>
- ---------------
(1) Consists of shares held, directly or indirectly, by the individual or a
related party, including restricted shares, and, in the case of officers,
shares credited directly to the individual's account under the Employees'
Thrift and Savings Plan. Pursuant to the Employees' Thrift and Savings Plan,
a participant has the power to direct the voting of stock held on his behalf
in the Employees' Thrift and Savings Plan Trust.
(2) Consists of shares credited under the Directors' Deferred Compensation Plan,
the Supplemental Employees' Thrift and Savings Plan, and the Deferred
Compensation Plan for Key Employees.
(3) Consists of total of columns 1 and 2.
(4) Consists of shares which may be acquired through the Stock Option Plan and
the Board of Directors' Stock Option Plan.
85
<PAGE> 97
PRINCIPAL HOLDERS
Sallie Mae believes the following institutions were beneficial owners of 5%
or more of the outstanding shares of Sallie Mae Common Stock at December 31,
1996 based upon information from such institutions and Sallie Mae's records.
<TABLE>
<CAPTION>
OWNERSHIP PERCENT AT
DECEMBER 31, 1996
PRINCIPAL HOLDERS SHARES ------------------------
- -------------------------------------------------------------- --------- (UNLESS OTHERWISE NOTED)
<S> <C> <C>
FMR Corporation............................................... 6,250,900 11.6%
The Capital Group Companies, Inc.(1).......................... 4,679,800 8.7%
Chancellor Capital............................................ 5,070,625 9.4%
Scudder Stevens & Clark....................................... 3,235,725 6.0%
Boston Partners............................................... 3,118,750 5.8%
AIM Management Group.......................................... 2,928,500 5.5%
</TABLE>
- ---------------
(1) Certain operating subsidiaries of the Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held, as of December 31, 1996, 4,679,800 shares of the issue (8.7% of the
outstanding shares of the class). Capital Guardian Trust Company, a bank,
and one of such operating companies, exercised investment discretion over
1,299,800 of said shares. Capital Research and Management Company, a
registered investment adviser had investment discretion with respect to
3,380,000 shares of the above shares.
86
<PAGE> 98
LEGAL MATTERS
The legality of the Holding Company Common Stock to be issued pursuant to
the Reorganization and certain other matters in connection with the
Reorganization will be passed upon by Timothy G. Greene, General Counsel of
Sallie Mae and of the Holding Company. Skadden, Arps, Slate, Meagher & Flom
L.L.P., Washington, D.C., will render an opinion to Sallie Mae and the Holding
Company as to certain federal income tax consequences of the Reorganization.
EXPERTS
The balance sheet of the Holding Company at February 3, 1997 and the
consolidated financial statements of Sallie Mae as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the firm as experts in accounting and auditing.
Representatives of Ernst & Young LLP are expected to attend the Special
Meeting, will have the opportunity to make a statement if they desire to do so,
and can be expected to respond to appropriate questions from shareholders
present at the Special Meeting.
SALLIE MAE ANNUAL MEETING SHAREHOLDER PROPOSALS
If the Reorganization is not consummated, an annual meeting of Sallie Mae
will be held as soon as practicable after the Special Meeting. To be included in
the proxy material for the 1997 Annual Meeting of Shareholders of Sallie Mae,
any shareholder proposal must be received by Sallie Mae no later than May 30,
1997. The submission of a shareholder proposal does not guarantee that it will
be included in such proxy material.
By Order of the Board of Directors
Ann Marie Plubell
Vice President, Associate General
Counsel and
Secretary
87
<PAGE> 99
FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SLM HOLDING CORPORATION
Report of Independent Auditors....................................................... F-2
Balance Sheet........................................................................ F-3
Notes to Balance Sheet............................................................... F-4
STUDENT LOAN MARKETING ASSOCIATION
Report of Independent Auditors....................................................... F-6
Consolidated Balance Sheets.......................................................... F-7
Consolidated Statements of Income.................................................... F-8
Consolidated Statements of Changes in Stockholders' Equity........................... F-9
Consolidated Statements of Cash Flows................................................ F-10
Notes to Consolidated Financial Statements........................................... F-11
</TABLE>
F-1
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SLM Holding Corporation
We have audited the accompanying balance sheet of SLM Holding Corporation
as of February 3, 1997. This balance sheet is the responsibility of the
management of SLM Holding Corporation. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of SLM Holding Corporation at February
3, 1997 in conformity with generally accepted accounting principles.
Washington D.C. Ernst & Young LLP
February 3, 1997
F-2
<PAGE> 101
SLM HOLDING CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
FEBRUARY 3,
1997
-----------
<S> <C>
ASSETS
Cash............................................................................. $ 1,000
========
LIABILITIES...................................................................... $ -
STOCKHOLDER'S EQUITY
Preferred stock, no par value, 20,000,000 shares authorized, none issued and
outstanding.................................................................... -
Common stock, par value $.20 per share, 250,000,000 shares authorized, 1,000
shares issued and outstanding.................................................. 200
Additional paid-in capital....................................................... 800
-----------
Total stockholder's equity....................................................... 1,000
-----------
Total liabilities and stockholder's equity....................................... $ 1,000
========
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE> 102
SLM HOLDING CORPORATION
NOTES TO BALANCE SHEET
1. ORGANIZATION AND PRIVATIZATION
SLM Holding Corporation (the "Company") was incorporated on February 3,
1997 under Delaware law. The Company is a wholly-owned subsidiary of the Student
Loan Marketing Association ("Sallie Mae" or "GSE"), a corporation chartered
under federal law. The Company was incorporated to effect the reorganization of
the business of Sallie Mae and the eventual dissolution of Sallie Mae as
described below.
Privatization
Sallie Mae is a stockholder-owned corporation which was created in 1972 as
a federally chartered government-sponsored enterprise under the Higher Education
Act of 1965 (the "Act"). The Act defines Sallie Mae's charter and limits its
corporate authority to education finance related activities, while imposing
certain obligations on Sallie Mae, including acting as a lender of last resort
to eligible borrowers under the Federal Family Education Loan Program (the
"FFELP").
On September 30, 1996, the Student Loan Marketing Association
Reorganization Act of 1996 (the "Privatization Act") was enacted. The
Privatization Act authorized the creation of a state-chartered holding company
(the "Holding Company") that can pursue new business opportunities beyond the
limited scope of the GSE's restrictive federal charter. The Holding Company
would become the parent of the GSE pursuant to a reorganization ("the
Reorganization") which must be approved by a majority vote of the GSE's
shareholders, such vote to take place on or before April 1, 1998.
A special meeting of shareholders has been called to consider and vote upon
the approval of the proposed Reorganization pursuant to a Proxy
Statement/Prospectus filed with the Securities and Exchange Commission ("SEC").
If the Reorganization is approved by the shareholders, the GSE, which will
become a wholly-owned subsidiary of the Holding Company, will be gradually
liquidated and its federal charter rescinded on or before September 30, 2008.
Pursuant to the Reorganization, each outstanding share of Sallie Mae Common
Stock will be converted into one share of Holding Company Common Stock. In
addition, Sallie Mae will transfer certain assets, including stock in certain
subsidiaries to the Holding Company or one of its non-GSE subsidiaries. As
required by the Privatization Act, all GSE employees will be transferred to one
of the Holding Company's subsidiaries. During the wind-down period, it is
expected that all Sallie Mae operations will be managed pursuant to an
arms-length service agreement with a Sallie Mae affiliate. In addition, the
Holding Company will remain a passive entity which supports the operations of
the GSE and its other subsidiaries, and all business activities would be
conducted through the GSE and by such other subsidiaries.
The Privatization Act imposes certain restrictions on intercompany
relations between Sallie Mae and its affiliates during the wind-down period. In
particular, Sallie Mae must not extend credit to, nor guarantee any debt
obligations of the Holding Company, or the Holding Company's non-GSE
subsidiaries. Furthermore, the Privatization Act mandates that transactions
between Sallie Mae and the Holding Company, including any loan servicing
arrangements, shall be on terms no less favorable to Sallie Mae than Sallie Mae
could obtain from an unrelated third party. While Sallie Mae 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 Holding
Company, which in turn may use such amounts to support its non-GSE subsidiaries.
The Sallie Mae Charter requires that Sallie Mae maintain a minimum capital ratio
of at least 2.0 percent until 2000, and at least 2.25 percent thereafter. The
Privatization Act further directs that under no circumstances shall the assets
of Sallie Mae be available or used to pay claims or debts of or incurred by the
Holding Company.
F-4
<PAGE> 103
SLM HOLDING CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
1. ORGANIZATION AND PRIVATIZATION -- (CONTINUED)
During the wind-down period following the Reorganization and prior to the
GSE's dissolution, the GSE will be restricted in the new business activities it
may undertake. Sallie Mae 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. The Holding Company generally may begin to purchase student
loans only after the GSE discontinues such activity. Sallie Mae's GSE debt
obligations that are outstanding at the time of Reorganization will continue to
be outstanding obligations of the GSE immediately after the Reorganization.
Sallie Mae will be able to continue to issue debt in the government agency
market to finance student loans and other permissible asset acquisitions,
although the maturity date of such issuances generally may not extend beyond
September 30, 2008, Sallie Mae's final dissolution date. At December 31, 1996,
Sallie Mae had $372 million in outstanding debt with maturities after September
30, 2008. Such debt will be transferred into a defeasance trust on the final
dissolution date.
The Privatization Act requires that within 60 days after the merger, the
Company must pay $5 million to the D.C. Financial Control Board for use of the
"Sallie Mae" name. In addition, the Holding Company must issue to the D.C.
Financial Control Board warrants to purchase 555,015 shares of Holding Company
Common Stock. These warrants are transferable and exercisable at any time prior
to September 30, 2008 at $72.43 per share. These provisions of the Privatization
Act were part of the terms negotiated with the Administration and Congress as
consideration for the GSE's privatization.
Beginning in fiscal 1997, and until the GSE is dissolved, Sallie Mae 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.
The transfer of subsidiaries and assets of the GSE to the Holding Company
and the related exchange of common stock between the GSE and the Holding Company
will be accounted for at historical cost similar to a pooling of interests.
Operations performed outside the GSE after the Reorganization will be subject to
state and local taxes.
If the Reorganization is not approved by shareholders certain charter
sunset provisions of the Privatization Act become applicable and will result in
the dissolution of the GSE by July 1, 2013.
2. RISKS AND UNCERTAINTIES
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
F-5
<PAGE> 104
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Student Loan Marketing Association
We have audited the accompanying consolidated balance sheets of the Student
Loan Marketing Association 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 Student
Loan Marketing Association 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 1 to the financial statements, in 1995 the Student
Loan Marketing Association changed its method of accounting for student loan
income and in 1994 for certain investments in debt and equity securities.
Washington, D.C. Ernst & Young LLP
January 13, 1997
F-6
<PAGE> 105
STUDENT LOAN MARKETING ASSOCIATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Insured student loans purchased.................................... $32,307,930 $34,336,211
Student loan participations........................................ 1,445,596 -
----------- -----------
Insured student loans.............................................. 33,753,526 34,336,211
Warehousing advances............................................... 2,789,485 3,865,093
Academic facilities financings
Bonds -- available-for-sale...................................... 934,481 710,112
Loans............................................................ 538,850 602,122
----------- -----------
Total academic facilities financings............................... 1,473,331 1,312,234
Investments
Available-for-sale............................................... 6,833,695 6,988,199
Held-to-maturity................................................. 601,887 625,856
----------- -----------
Total investments.................................................. 7,435,582 7,614,055
Cash and cash equivalents.......................................... 270,887 1,252,920
Other assets, principally accrued interest receivable.............. 1,907,079 1,621,222
----------- -----------
Total assets....................................................... $47,629,890 $50,001,735
========== ==========
LIABILITIES
Short-term borrowings.............................................. $22,156,548 $17,447,000
Long-term notes.................................................... 22,606,226 30,082,615
Other liabilities.................................................. 1,819,286 1,390,915
----------- -----------
Total liabilities.................................................. 46,582,060 48,920,530
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $50.00 per share, 5,000,000 shares
authorized and issued, 4,277,650 outstanding..................... 213,883 213,883
Common stock, par value $.20 per share, 250,000,000 shares
authorized:
65,695,571 and 124,121,770 shares issued, respectively........... 13,139 24,824
Additional paid-in capital......................................... - 537,818
Unrealized gains on investments (net of tax of $188,050 and
$199,686, respectively).......................................... 349,235 370,846
Retained earnings.................................................. 1,008,737 2,728,383
----------- -----------
Stockholders' equity before treasury stock......................... 1,584,994 3,875,754
Common stock held in treasury at cost: 12,004,976 and
66,415,524 shares, respectively.................................. 537,164 2,794,549
----------- -----------
Total stockholders' equity......................................... 1,047,830 1,081,205
----------- -----------
Total liabilities and stockholders' equity......................... $47,629,890 $50,001,735
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 106
STUDENT LOAN MARKETING ASSOCIATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Insured student loans purchased....................................... $2,586,035 $2,708,079 $2,162,149
Student loan participations........................................... 20,625 - -
---------- ---------- ----------
Insured student loans................................................. 2,606,660 2,708,079 2,162,149
Warehousing advances.................................................. 193,654 407,866 334,012
Academic facilities financings
Taxable............................................................. 52,163 54,862 52,079
Tax-exempt.......................................................... 48,262 52,859 49,576
---------- ---------- ----------
Total academic facilities financings.................................. 100,425 107,721 101,655
Investments........................................................... 542,469 697,724 499,443
---------- ---------- ----------
Total interest income................................................... 3,443,208 3,921,390 3,097,259
Interest expense
Short-term debt....................................................... 1,132,159 905,933 737,798
Long-term debt........................................................ 1,444,613 2,114,716 1,404,697
---------- ---------- ----------
Total interest expense.................................................. 2,576,772 3,020,649 2,142,495
---------- ---------- ----------
NET INTEREST INCOME..................................................... 866,436 900,741 954,764
Other income:
Gain on sale of student loans......................................... 48,981 - -
Servicing and securitization revenue.................................. 57,736 1,423 -
Gains/(losses) on sales of available for sale securities.............. 11,898 24,032 (100)
Other................................................................. 28,301 24,958 13,903
---------- ---------- ----------
Total other income...................................................... 146,916 50,413 13,803
---------- ---------- ----------
Operating expenses
Salaries and benefits................................................. 206,347 211,787 196,022
Other................................................................. 199,305 226,914 193,920
---------- ---------- ----------
Total operating expenses................................................ 405,652 438,701 389,942
---------- ---------- ----------
Income before federal income taxes, premiums on debt extinguished and
cumulative effect of the change in method of accounting for student
loan income........................................................... 607,700 512,453 578,625
---------- ---------- ----------
Federal income taxes:
Current............................................................... 207,437 141,803 178,812
Deferred.............................................................. (23,939) (540) (12,284)
---------- ---------- ----------
Total federal income taxes.............................................. 183,498 141,263 166,528
---------- ---------- ----------
Income before premiums on debt extinguished and cumulative effect of the
change in method accounting for student loan income................... 424,202 371,190 412,097
Premiums on debt extinguished, net of tax............................... (4,792) (4,911) (9,329)
---------- ---------- ----------
Income before cumulative effect of the change in method of accounting
for student loan income............................................... 419,410 366,279 402,768
Cumulative effect of the change in method of accounting for student loan
income, net of tax.................................................... - 130,148 -
---------- ---------- ----------
NET INCOME.............................................................. 419,410 496,427 402,768
Preferred stock dividends............................................... 10,694 10,694 10,694
---------- ---------- ----------
Net income attributable to common stock................................. $ 408,716 $ 485,733 $ 392,074
========== ========== ==========
Earnings per common share before premiums on debt extinguished and
cumulative effect of the change in method of accounting for student
loan income........................................................... $ 7.41 $ 5.34 $ 5.03
========== ========== ==========
Earnings per common share before cumulative effect of the change in
method of accounting for student loan income.......................... $ 7.32 $ 5.27 $ 4.91
========== ========== ==========
EARNINGS PER COMMON SHARE............................................... $ 7.32 $ 7.20 $ 4.91
========== ========== ==========
PRO FORMA AMOUNTS ASSUMING THE CHANGE IN METHOD OF ACCOUNTING FOR
STUDENT LOAN INCOME IS APPLIED RETROACTIVELY TO 1994
Net income.............................................................. $ 419,410 $ 366,279 $ 420,203
========== ========== ==========
Earnings per common share............................................... $ 7.32 $ 5.27 $ 5.13
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 107
STUDENT LOAN MARKETING ASSOCIATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance, beginning and end of year.................... $ 213,883 $ 213,883 $ 213,883
----------- ---------- ----------
COMMON STOCK:
Balance, beginning of year............................ 24,824 24,769 24,766
Issuance of common shares.......................... 115 55 3
Retirement of common shares........................ (11,800) - -
----------- ---------- ----------
Balance, end of year.................................. 13,139 24,824 24,769
----------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year............................ 537,818 524,511 523,935
Proceeds in excess of par value from issuance of
common stock..................................... 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 year.................................. - 537,818 524,511
----------- ---------- ----------
UNREALIZED GAINS ON INVESTMENTS, NET OF TAX:
Balance, beginning of year............................ 370,846 299,558 -
Unrealized gains as of January 1, 1994............. - - 304,851
Change in unrealized gains......................... (21,611) 71,288 (5,293)
----------- ---------- ----------
Balance, end of year.................................. 349,235 370,846 299,558
----------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of year............................ 2,728,383 2,342,900 2,063,772
Cumulative effect of the change in method of
accounting for student loan income, net of tax... - 130,148 -
Income before cumulative effect of the change in
method of accounting for student loan income, net
of tax........................................... 419,410 366,279 402,768
Retirement of common shares........................ (2,037,368) - -
Cash dividends:
Common stock ($1.64, $1.51 and $1.42 per share,
respectively)................................. (90,994) (100,250) (112,946)
Preferred stock.................................. (10,694) (10,694) (10,694)
----------- ---------- ----------
Balance, end of year.................................. 1,008,737 2,728,383 2,342,900
----------- ---------- ----------
COMMON STOCK HELD IN TREASURY AT COST:
Balance, beginning of year............................ 2,794,549 1,934,377 1,546,272
Repurchase of 4,589,452; 16,094,701 and 10,542,791
common shares, respectively...................... 359,914 860,172 388,105
Retirement of 59,000,000 common shares............. (2,617,299) - -
----------- ---------- ----------
Balance, end of year.................................. 537,164 2,794,549 1,934,377
----------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY.............................. $ 1,047,830 $1,081,205 $1,471,244
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 108
STUDENT LOAN MARKETING ASSOCIATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 419,410 $ 496,427 $ 402,768
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) in accrued interest
receivable............................... (11,286) (179,505) (184,021)
Increase (decrease) in accrued interest
payable.................................. (109,214) 112,133 114,310
(Increase) in other assets................. (274,572) (128,799) (86,959)
Increase in other liabilities.............. 549,221 85,883 194,243
Cumulative effect of change in accounting
method................................... - (200,227) -
Other...................................... - - 26,822
------------- ------------- -------------
Total adjustments............................. 154,149 (310,515) 64,395
------------- ------------- -------------
Net cash provided by operating activities....... 573,559 185,912 467,163
------------- ------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased............... (8,370,836) (9,379,663) (7,955,655)
Reduction of insured student loans purchased:
Installment payments....................... 3,094,937 3,452,985 3,220,233
Claims and resales......................... 1,277,400 1,161,163 1,142,350
Proceeds from securitization of student
loans.................................... 6,026,780 1,000,000 -
Participations purchased...................... (1,498,868) - -
Participation repayments...................... 53,272 - -
Warehousing advances made..................... (1,391,590) (2,250,077) (3,377,494)
Warehousing advance repayments................ 2,467,198 5,416,890 3,379,484
Academic facilities financings made........... (465,596) (122,813) (292,966)
Academic facilities financings reductions..... 302,557 379,283 103,314
Investments purchased......................... (15,966,490) (43,716,393) (87,312,581)
Proceeds from sale or maturity of
investments................................ 16,113,659 46,627,289 86,495,100
------------- ------------- -------------
Net cash provided by (used in) investing
activities.................................... 1,642,423 2,568,664 (4,598,215)
------------- ------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued.................. 267,164,206 163,805,115 118,724,135
Short-term borrowings repaid.................. (262,491,657) (166,764,320) (113,946,559)
Long-term notes issued........................ 8,304,988 12,350,217 16,317,375
Long-term notes repaid........................ (15,744,378) (12,196,436) (15,303,842)
Common stock issued........................... 30,428 13,362 579
Common stock repurchased...................... (359,914) (860,172) (388,105)
Dividends paid................................ (101,688) (110,944) (123,640)
------------- ------------- -------------
Net cash provided by (used in) financing
activities.................................... (3,198,015) (3,763,178) 5,279,943
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents................................... (982,033) (1,008,602) 1,148,891
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR.......................................... 1,252,920 2,261,522 1,112,631
------------- ------------- -------------
Cash and cash equivalents at end of year........ $ 270,887 $ 1,252,920 $ 2,261,522
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 109
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION
The Student Loan Marketing Association ("Sallie Mae" or 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 charter is subject to legislative change from time to
time. Sallie Mae is predominantly engaged in the purchase of student loans
insured under federally sponsored programs. Sallie Mae 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
On September 30, 1996, the Student Loan Marketing Association
Reorganization Act of 1996 (the "Privatization Act") was enacted. The
Privatization Act authorized the creation of a state-chartered holding company
(the "Holding Company") that can pursue new business opportunities beyond the
limited scope of the GSE's restrictive federal charter. The Holding Company
would become the parent of the GSE pursuant to a reorganization ("the
Reorganization") which must be approved by a majority vote of the GSE's
shareholders, such vote to take place on or before April 1, 1998.
A special meeting of shareholders has been called to consider and vote upon
the approval of the proposed Reorganization pursuant to a Proxy
Statement/Prospectus filed with the Securities and Exchange Commission ("SEC").
If the Reorganization is approved by the shareholders, the GSE, which will
become a wholly owned subsidiary of the Holding Company, will be gradually
liquidated and its federal charter rescinded on or before September 30, 2008.
Pursuant to the Reorganization, each outstanding share of Sallie Mae Common
Stock will be converted into one share of Holding Company Common Stock. In
addition, Sallie Mae will transfer certain assets, including stock in certain
subsidiaries, to the Holding Company's or one of its non-GSE subsidiaries. As
required by the Privatization Act all GSE employees will be transferred to the
Holding Company or one of its subsidiaries. During the wind-down period, it is
expected that all Sallie Mae operations will be managed pursuant to an
arms-length service agreement with a Sallie Mae affiliate. In addition, the
Holding Company will remain a passive entity which supports the operations of
the GSE and its other subsidiaries, and all business activities would be
conducted through the GSE and by such other subsidiaries.
The Privatization Act imposes certain restrictions on intercompany
relations between Sallie Mae and its affiliates during the wind-down period. In
particular, Sallie Mae must not extend credit to, nor guarantee any debt
obligations, of the Holding Company or the Holding Company's non-GSE
subsidiaries. Furthermore, the Privatization Act mandates that transactions
between Sallie Mae and the Holding Company, including any loan servicing
arrangements, shall be on terms no less favorable to Sallie Mae than Sallie Mae
could obtain from an unrelated third party. While Sallie Mae 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 Holding
Company, which in turn may use such amounts to support its non-GSE subsidiaries.
The Sallie Mae charter requires that Sallie Mae 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 circumstances shall the assets
of Sallie Mae be available or used to pay claims or debts of, or incurred by,
the Holding Company.
During the wind-down period following the Reorganization and prior to the
GSE's dissolution, the GSE will be restricted in the new business activities it
may undertake. Sallie Mae 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. The Holding Company generally may begin to purchase student
loans only after the GSE discontinues such activity. Sallie Mae's GSE debt
obligations that are outstanding at the time of Reorganization will continue to
be outstanding obligations of the GSE immediately
F-11
<PAGE> 110
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION -- (CONTINUED)
after the Reorganization. Sallie Mae will be able to continue to issue debt in
the government agency market to finance student loans and other permissible
asset acquisitions, although the maturity date of such issuances generally may
not extend beyond September 30, 2008, Sallie Mae's final dissolution date. At
December 31, 1996, Sallie Mae had $372 million in carrying value of outstanding
debt with maturities after September 30, 2008. Such debt will be transferred
into a defeasance trust on the final dissolution date.
The Privatization Act requires that within 60 days after the merger, the
Company must pay $5 million to the D.C. Financial Control Board for use of the
"Sallie Mae" name. In addition, the Holding Company must issue to the D.C.
Financial Control Board warrants to purchase 555,015 shares of Holding Company
Common Stock. These warrants are transferable and exercisable at any time prior
to September 30, 2008 at $72.43 per share. These provisions of the Privatization
Act were part of the terms negotiated with the Administration and Congress as
consideration for the GSE's privatization.
Beginning in fiscal 1997, and until the GSE is dissolved, Sallie Mae 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.
The transfer of subsidiaries and assets of the GSE to the Holding Company
and the related exchange of common stock between the GSE and the Holding Company
will be accounted for at historical cost similar to a pooling of interests.
Operations performed outside the GSE after the Reorganization will be subject to
state and local taxes.
If the Privatization is not approved by shareholders certain charter sunset
provisions of the Privatization Act become applicable and will result in the
dissolution of the GSE by July 1, 2013.
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
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
reflected in student loan income over the estimated remaining terms of the
loans. In 1995, Sallie Mae discontinued its accounting method of deferring
income on student loans. Effective January 1, 1995, Sallie Mae commenced
recognizing student loan income as earned. Sallie Mae believes this method of
accounting is preferable based on industry practices used for recognition of
interest income and servicing costs. 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.
F-12
<PAGE> 111
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Change in Method of Accounting for Student Loan Income
In the fourth quarter of 1995, pursuant to Sallie Mae changing its method
of accounting for student loan income effective January 1, 1995, the previously
reported three quarters of 1995 were restated to reflect the change. The effect
of the change in 1995 was to increase income before premiums on debt repurchased
by $21 million net of tax ($.30 per common share). The cumulative effect of the
change as of January 1, 1995 of $130 million, net of tax, was reported in the
Consolidated Statements of Income.
Securitizations
The Company securitizes student loans by selling selected portfolios of
such loans to trusts. Such securitizations are recorded as sales in accordance
with FAS No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse". A receivable is recorded at the time of sale equal to the present
value of the expected net cash flows from the trust. 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, Sallie Mae is entitled to the
residual earnings from the trust. After the loans are sold to trusts, Sallie Mae
continues to service them for a fee. These revenues are reflected as servicing
and securitization revenues in the Consolidated Statements of Income.
Student Loan Loss Reserves
Sallie Mae 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 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.
F-13
<PAGE> 112
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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
Sallie Mae 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 Sallie Mae to match the interest rate
characteristics of borrowings to specific assets in order to lock-in spreads.
Sallie Mae does not hold or issue interest rate swap agreements 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.
Sallie Mae'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. Sallie Mae 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
Sallie Mae 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 Sallie Mae
and its subsidiaries, after eliminating significant intercompany accounts and
transactions.
F-14
<PAGE> 113
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Reclassification
Certain prior year amounts in the Consolidated Statements of Income for the
years ended December 31, 1995 and 1994 have been reclassified to conform with
the current year's presentation.
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 June 1996, 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. In-substance defeasance transactions entered into after
December 31, 1996 will no longer receive off-balance sheet treatment. Sallie Mae
management believes the application of this Statement will have no material
impact on Sallie Mae's results of operations.
3. STUDENT LOANS
Sallie Mae purchases student loans from originating lenders, typically just
before the student leaves school and is required to begin repayment of the loan.
Sallie Mae'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"). Sallie Mae
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 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, Sallie Mae 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 $13.5 billion in exchange for upfront payments of $128
million. The upfront payments, which are recorded in other liabilities are being
amortized over the average remaining life of these contracts, which is
approximately 2 years. For the year ended December 31, 1996, the amortization of
the upfront payments increased student loan income by $23 million. For the year
ended December 31, 1996, payments under the contracts totaled $12 million.
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. The
direct lending program replaced approximately 7 percent of the FFELP
originations in the 1994-1995 academic year and under OBRA this is scheduled to
increase up to 60 percent in
F-15
<PAGE> 114
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. STUDENT LOANS -- (CONTINUED)
the 1998-1999 academic year. Management believes these changes to the student
loan delivery system along with direct lending, which reduce the pool of loans
originated by the bank-based FFELP, will have an increasing material adverse
effect on Sallie Mae's long-term earning prospects as a higher percentage of
loans subject to OBRA will be available to Sallie Mae and the full effects of
direct lending originations are factored in. OBRA also required Sallie Mae 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 purchased student loans in Sallie
Mae's portfolio was approximately 6.0 years at December 31, 1996. The following
table reflects the distribution of Sallie Mae's loan portfolio by program.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
FFELP -- Stafford.................................................. $17,292,273 $20,210,325
FFELP -- PLUS/SLS.................................................. 3,580,803 4,514,976
FFELP -- Consolidation loans....................................... 7,658,035 5,960,091
HEAL............................................................... 2,758,860 2,764,244
Privately insured.................................................. 1,017,959 886,575
----------- -----------
Student loans purchased............................................ 32,307,930 34,336,211
Participations..................................................... 1,445,596 -
----------- -----------
Total student loans................................................ $33,753,526 $34,336,211
========== ==========
</TABLE>
As of December 31, 1996, 84 percent of Sallie Mae'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 Sallie Mae owned $13.6
billion at December 31, 1996, 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,
Sallie Mae 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 Sallie Mae the unpaid principal balance and accrued
interest on the loan less risk-sharing, where applicable.
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 and reduced interest income on student loans
by $12.8 million, $15.8 million, and $16.8 million for the years ended December
31, 1996, 1995 and 1994, respectively.
F-16
<PAGE> 115
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. STUDENT LOANS -- (CONTINUED)
The following table summarizes the reserves that Sallie Mae has recorded
for estimated losses due to risk-sharing, unpaid guarantee claims and defaults
on privately insured loans.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR..................................... $60,337 $64,928 $66,814
Additions
Provisions for loan losses..................................... 29,749 800 202
Recoveries..................................................... 7,235 6,096 5,998
Deductions
Losses on loans................................................ (13,258) (11,487) (8,086)
------- ------- -------
BALANCE AT END OF THE YEAR....................................... $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 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Commercial banks............................................. $1,547,193 $2,612,125
Public sector agencies....................................... 1,126,095 985,182
Educational institutions..................................... 116,197 167,786
Thrift institutions.......................................... - 100,000
---------- ----------
$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,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Variable rate:
Treasury bill.............................................. $1,723,588 $2,138,929
LIBOR...................................................... 1,046,086 1,623,028
Fixed rate................................................... 19,811 103,136
---------- ----------
$2,789,485 $3,865,093
========= =========
</TABLE>
The average remaining term to maturity of warehousing advances was 1.0 year
as of December 31, 1996, with maturities as follows: 1997 -- $1,221,148;
1998 -- $1,232,186; 1999 -- $175,391; 2000 -- $127,863; 2001 -- $0; after
2001 -- $32,897.
F-17
<PAGE> 116
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 December
31, 1996 and 1995.
<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 December 31,
1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
LOANS 1996 1995
-------- --------
<S> <C> <C>
Fixed rate.................................................... $474,659 $489,913
Variable rate................................................. 64,191 112,209
-------- --------
Total academic facilities loans................................. $538,850 $602,122
======== ========
</TABLE>
F-18
<PAGE> 117
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. ACADEMIC FACILITIES FINANCINGS -- (CONTINUED)
The average remaining term to maturity of academic facilities financings
was 8.0 years as of December 31, 1996. The stated maturities and maturities if
accelerated to the put or call date for academic facilities bonds and loans are
shown in the following table:
<TABLE>
<CAPTION>
BONDS
---------------------
MATURITY LOANS
TO --------
STATED PUT OR STATED
YEAR OF MATURITY MATURITY CALL DATE MATURITY
------------------------------------------------------ -------- --------- --------
<S> <C> <C> <C>
1997.................................................. $ 44,078 $ 97,657 $ 8,325
1998.................................................. 77,409 127,774 14,065
1999.................................................. 43,638 57,366 45,115
2000.................................................. 78,588 98,515 17,368
2001.................................................. 87,197 107,464 22,673
2002-2006............................................. 486,168 410,945 104,872
after 2006............................................ 117,403 34,760 326,432
-------- --------- --------
$934,481 $ 934,481 $538,850
======== ======== ========
</TABLE>
6. INVESTMENTS
At 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 which approximate amortized costs, except for
U.S. Treasury securities which have an amortized cost of $809 million. 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 ($19.5 million of unrealized gains at December 31,
1996 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
F-19
<PAGE> 118
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INVESTMENTS -- (CONTINUED)
market values which approximated amortized cost. A summary of investments at
December 31, 1996 and 1995 follows:
<TABLE>
<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
========== ======== ====== ==========
</TABLE>
<TABLE>
<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>
F-20
<PAGE> 119
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INVESTMENTS -- (CONTINUED)
Sallie Mae sold available-for-sale securities with a carrying value of $4.6
billion and $6.6 billion for the years ended December 31, 1996 and 1995,
respectively. There were no sales of available-for-sale securities in 1994.
As of December 31, 1996, stated maturities and maturities if accelerated to
the put or call date for investments are shown in the following table.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
HELD-TO-MATURITY -------------------------
---------------- MATURITY TO
STATED STATED PUT OR
YEAR OF MATURITY MATURITY MATURITY CALL DATE
---------------------------------------------- ---------------- ---------- -----------
<S> <C> <C> <C>
1997.......................................... $106,823 $ 216,807 $ 275,955
1998.......................................... 12,493 278,153 278,528
1999.......................................... 9,229 532,975 488,182
2000.......................................... 102,879 142,401 150,981
2001.......................................... 4,721 1,059,148 1,073,776
2002-2006..................................... 46,058 2,534,058 2,514,787
After 2006.................................... 319,684 2,070,153 2,051,486
------------ ---------- -----------
$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
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>
YEAR ENDED DECEMBER 31, 1996
AT 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................ 1,827,643 5.28 1,960,926 5.47 5.39
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................... $22,156,548 5.67% $20,851,264 5.62% 5.43%
=========== ==== =========== ==== ====
Maximum outstanding at any month end..... $25,051,644
===========
</TABLE>
F-21
<PAGE> 120
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. SHORT-TERM BORROWINGS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
AT 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
===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
AT 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. The short-term portion of
long-term notes also included issues totaling $771 million 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, Sallie Mae 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, Sallie Mae enters into interest rate swaps
with independent parties. Under these agreements, Sallie Mae makes periodic
payments, indexed to the related asset rates, in exchange for periodic payments
which generally match Sallie Mae'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 December 31,
1996 and 1995, the weighted average interest rates and related notional amount
of derivatives at the end of the periods, and the
F-22
<PAGE> 121
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM NOTES --CONTINUED
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.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
AT 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 1998-2022.... 326,875 8.25 358,071 304,990 7.68
Dual currency, due 1998.......... 248,443 7.63 272,000 245,569 6.65
Foreign currency:
Interest bearing, due
1998-2000................... 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%
=========== ==== =========== =========== ====
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
AT 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
1998-2003................... $16,995,853 5.58% $ 5,053,732 $21,998,541 5.95%
----------- ---- ----------- ----------- ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due
1998-2018................... 11,430,127 6.70 17,050,772 12,035,074 5.99
Zero coupon, due 1998-2022.... 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
1998-2000................... 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>
F-23
<PAGE> 122
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM NOTES --CONTINUED
At December 31, 1996, Sallie Mae had outstanding long-term debt issues with
call features totaling $14.1 billion. The stated maturities and maturities if
accelerated to the call date for long-term notes are shown in the following
table:
<TABLE>
<CAPTION>
STATED MATURITY TO
YEAR OF MATURITY MATURITY CALL DATE
----------------------------------------------------------- ----------- -----------
<S> <C> <C>
1997....................................................... $ - $12,794,908
1998....................................................... 7,466,131 5,510,293
1999....................................................... 7,676,221 2,185,610
2000....................................................... 4,077,772 1,483,972
2001....................................................... 2,465,758 79,200
2002-2022.................................................. 920,344 552,243
----------- -----------
$22,606,226 $22,606,226
========== ==========
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, Sallie Mae
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>
F-24
<PAGE> 123
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM NOTES --CONTINUED
Sallie Mae issues debt with interest and/or principal payment
characteristics tied to foreign currency indices to attempt to minimize its cost
of funds. At December 31, 1996 and 1995, Sallie Mae had outstanding long-term
foreign currency notes totaling $257 million which require the payment of
principal and interest in foreign currencies, and dual currency notes totalling
$248 million 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, Sallie Mae 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, Sallie Mae enters into interest
rate swaps with independent parties. Under these agreements, Sallie Mae makes
periodic payments, indexed to the related asset rates, in exchange for periodic
payments which generally match Sallie Mae's interest obligations on fixed or
variable rate borrowings (see Note 10).
9. STUDENT LOAN SECURITIZATION
For the year ended December 31, 1996 and in October 1995, SLM Funding
Corporation, a wholly-owned special purpose finance subsidiary, purchased from
Sallie Mae and sold $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 December 31, 1996, securitized student loans
outstanding totaled $6.3 billion.
The gain recorded on a sale of the student loans is based upon the present
value of expected residual cash flows from the trust, net of the carrying value
of the portfolio of student loans. A receivable from the trust, which represents
the present value of cash expected to be received by Sallie Mae over the life of
the student loans in the trust, is recorded at the time of sale and included in
other assets. In addition to the gain on sale, Sallie Mae is entitled to
residual earnings from the trust and servicing fees for continuing to service
the loans in the trust. These earnings are recorded as servicing and
securitization revenue in the Consolidated Statements of Income.
In November 1995, the U.S. District Court for the District of Columbia
ruled, contrary to the Secretary of Education's ruling, that student loans owned
by the trusts are not subject to the 30 basis point annual offset fee. The
Department of Education appealed this decision and in January 1997, the U.S.
Court of Appeals for the District of Columbia issued a decision affirming the
District Court's ruling. However, the Court of Appeals remanded the case to the
District Court with instructions to remand to the Department of Education. It is
therefore uncertain what the final outcome of this litigation will be. If the
final outcome following the remand is that the offset fee is not applicable to
loans securitized by Sallie Mae, the gains resulting from prior securitizations
would be increased. As of December 31, 1996, the gains resulting from such
securitizations would have been increased by approximately $55 million pre-tax.
Offset fees relating to securitizations have not been paid pending final
resolution of the case. Management considers this increase in gains as a
contingent asset which will be recognized upon a favorable final ruling in this
matter. Gains on future securitizations will vary depending on the
characteristics of the loan portfolios securitized as well as the outcome of the
offset fee ruling.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative Financial Instruments Held or Issued for Purposes Other than
Trading
Sallie Mae 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
F-25
<PAGE> 124
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)
swaps, forward currency exchange agreements, options on currency exchange
agreements, options on securities and financial futures contracts.
Sallie Mae 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 December 31, 1996,
Sallie Mae 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 Sallie Mae'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
December 31, 1996 and 1995 (dollars in billions).
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------
SWAPS
------------------------------------ FOREIGN
OUTSTANDING BASIS/ CURRENCY
DEBT STANDARD REVERSE REVERSE BASIS AGREEMENTS TOTAL
----------- -------- ------- ------------- ---------- -----
<S> <C> <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
===== ===== ===== ===== ==== =====
</TABLE>
F-26
<PAGE> 125
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------
SWAPS
------------------------------------ FOREIGN
OUTSTANDING BASIS/ CURRENCY
DEBT STANDARD REVERSE REVERSE BASIS AGREEMENTS TOTAL
----------- -------- ------- ------------- ---------- -----
<S> <C> <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>
F-27
<PAGE> 126
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)
The following table summarizes the activity for Sallie Mae'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
(dollars in millions).
<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
========= ====== ========
</TABLE>
Interest Rate Swaps
Net payments related to the debt-related swaps are recorded in interest
expense. For the years ended December 31, 1996, 1995 and 1994, Sallie Mae
received net payments on all debt-related swaps reducing interest expense by
$165 million, $94 million and $262 million, respectively.
As of December 31, 1996, stated maturities of interest rate swaps and
maturities if accelerated to the put or call date, 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>
MATURITY TO
STATED PUT OR
YEAR OF MATURITY MATURITY CALL DATE
---------------------------------------------------------------- -------- -----------
<S> <C> <C>
1997............................................................ $ 7,599 $15,161
1998............................................................ 7,102 7,001
1999............................................................ 10,541 7,925
2000............................................................ 7,225 4,560
2001............................................................ 3,235 1,350
2002-2008....................................................... 1,380 1,085
-------- -----------
$ 37,082 $37,082
======= ========
</TABLE>
Foreign Currency Agreements
At December 31, 1996 and 1995, Sallie Mae had borrowings repayable in U.S.
dollars, with principal repayment obligations tied to foreign currency exchange
rates of $80 million and $235 million, respectively,
F-28
<PAGE> 127
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)
and borrowings with principal repayable in foreign currencies of $1.0 billion
and $1.0 billion, respectively. 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 December 31, 1996, Sallie Mae also had outstanding
$80 million, $1.0 billion and $80 million of notional principal in foreign
currency exchange agreements, foreign currency swaps and foreign currency
options, respectively. The following table summarizes the outstanding amount of
these borrowings and their currency translation values at December 31, 1996 and
1995, using spot rates at the respective dates (dollars in millions).
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
<S> <C> <C>
Carrying value of outstanding foreign currency debt................. $1,108 $1,249
Currency translation value of outstanding foreign currency debt..... 1,002 1,149
</TABLE>
Futures Contracts
Sallie Mae 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 Sallie Mae'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
December 31, 1996, the futures contracts sold by the Company hedged
approximately $178 million of anticipated funding. Approximately $7 million of
realized losses have been deferred at December 31, 1996 related to futures
contracts.
Derivative Financial Instruments Held or Issued for Trading Purposes
From time to time Sallie Mae 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 Sallie Mae's financial statements for years ended
December 31, 1996, 1995 and 1994. During December 1995, Sallie Mae 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 was $4 million at December 31, 1996 and immaterial at December 31,
1995.
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.
F-29
<PAGE> 128
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Student Loans
Fair value was determined by analyzing amounts which Sallie Mae 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.
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.
F-30
<PAGE> 129
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The following table summarizes the fair values of Sallie Mae's financial
assets and liabilities, including off-balance sheet financial instruments
(dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Student loans....................... $34,005 $33,754 $251 $ 34,551 $34,336 $215
Warehousing advances................ 2,793 2,790 3 3,878 3,865 13
Academic facilities financings...... 1,473 1,473 - 1,347 1,313 34
Cash and investments................ 7,706 7,706 - 8,868 8,867 1
------- -------- ----- ---------- -------- -----
Total earning assets................ 45,977 45,723 254 48,644 48,381 263
------- -------- ----- ---------- -------- -----
INTEREST BEARING LIABILITIES
Short-term borrowings............... 22,096 22,157 61 17,423 17,447 24
Long-term notes..................... 22,519 22,606 87 30,252 30,083 (169)
------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities....................... 44,615 44,763 148 47,675 47,530 (145)
------- -------- ----- ---------- -------- -----
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps................. (21) - (21) 245 - 245
Forward exchange agreements and
foreign currency swaps............ (161) - (161) (184) - (184)
Warehousing advance commitments..... - - - - - -
Academic facilities financing
commitments....................... - - - - - -
Letters of credit................... - - - - - -
----- -----
Excess of fair value over carrying
value............................. $220 $179
===== =====
</TABLE>
At 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
Sallie Mae 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 Sallie Mae 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.
Commitments outstanding are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Student loan purchase commitments.......................... $15,845,821 $14,244,234
Warehousing advance commitments............................ 2,367,288 698,019
Academic facilities financing commitments.................. 9,930 6,330
Letters of credit.......................................... 3,743,892 3,063,390
----------- -----------
$21,966,931 $18,011,973
========== ==========
</TABLE>
F-31
<PAGE> 130
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The following schedule summarizes expirations of commitments outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
ACADEMIC
STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF
PURCHASES ADVANCES FINANCINGS CREDIT
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
1997................................... $ 3,299,173 $ 348,072 $ 1,230 $ 367,829
1998................................... 1,793,359 172,647 - 1,122,724
1999................................... 4,367,745 103,609 8,700 861,630
2000................................... 272,743 34,859 - 826,690
2001................................... - - - 207,620
2002-2017.............................. 6,112,801 1,708,101 - 357,399
------------ ----------- ---------- ----------
Total............................. $ 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 Sallie Mae
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. PREFERRED STOCK
Sallie Mae'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 years ended
December 31, 1996, 1995 and 1994. The stock is redeemable, at the option of
Sallie Mae, 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 Sallie Mae's adjustable rate
cumulative preferred stock at market prices. As of December 31, 1996, Sallie Mae
had repurchased 722,350 shares at an average price of $45.23 per share,
totalling $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
December 31, 1996.
Sallie Mae has engaged in repurchases of its common stock since 1986. In
December 1996, Sallie Mae 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 December 31, 1996, Sallie Mae held as treasury stock 12
million common shares purchased at an average price of $44.75.
F-32
<PAGE> 131
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. COMMON STOCK -- (CONTINUED)
Earnings per common share are computed based on net income less dividends
on preferred stock divided by the weighted average common and common equivalent
shares outstanding for the period. Average common and common equivalent shares
outstanding for the years ended December 31, 1996, 1995 and 1994 totaled
55,811,279; 67,450,889; and 79,776,993, respectively.
15. STOCK OPTION PLANS
Sallie Mae 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. Sallie Mae'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,
-------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 1,094,975 $ 48.80 931,255 $ 54.49 698,550 $ 58.80
Granted...................... 325,545 73.08 517,800 37.15 367,150 48.03
Exercised.................... (485,363) 41.88 (223,180) 42.76 (13,445) 31.56
Canceled..................... (3,300) 73.00 (130,900) 53.52 (121,000) 62.33
--------- ------- --------- ------- -------- -------
Outstanding at end of year... 931,857 $ 60.80 1,094,975 $ 48.80 931,255 $ 54.49
======== ------- ======== ------- ======== -------
Exercisable at end of year... 609,612 $ 54.30 641,075 $ 57.09 587,855 $ 58.34
======== ------- ======== ------- ======== -------
Weighted-average fair value
of options granted during
the year................... $ 25.87 $ 10.18
------- -------
</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-$70 188,634 47.65 6.0
Above $70 564,285 72.86 7.5
------- ------------- --------
Total 931,857 $ 60.80 7.0 yrs.
======= ------------- --------
</TABLE>
Also 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. Concurrent with the adoption of the plan, 63,000 options,
which had a fair value of $25.84 per option, were granted at $73.00 per share.
As of December 31, 1996, all of the Board of Directors options remained
outstanding and had a remaining contractual life of 9.0 years.
Sallie Mae 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 years ended
December 31, 1996 and 1995, as if Sallie Mae 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-
F-33
<PAGE> 132
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. STOCK OPTION PLANS -- (CONTINUED)
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 1996 and 1995, respectively: risk-free interest rate of 5.9
percent and 7.9 percent, volatility factor of the expected market price of
Sallie Mae common stock of 29.4 percent and 28.7 percent; dividend growth rate
of 8.0 percent; vesting period of one year from date of grant; and time of
exercise-expiration date.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income...................................................... $419,410 $496,427
======== ========
Pro forma net income............................................ $413,121 $493,648
======== ========
Earnings per common share....................................... $ 7.32 $ 7.20
======== ========
Pro forma earnings per common share............................. $ 7.21 $ 7.16
======== ========
</TABLE>
16. BENEFIT PLANS
Pension Plans
Sallie Mae has a qualified noncontributory defined benefit pension 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, Sallie Mae 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 Sallie Mae'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
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
F-34
<PAGE> 133
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. BENEFIT PLANS -- (CONTINUED)
rate of return on plan assets used in determining net periodic pension cost was
8.0 percent in 1996, 1995 and 1994.
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>
Sallie Mae 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
Sallie Mae'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
Sallie Mae 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 Sallie Mae.
Sallie Mae 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.
F-35
<PAGE> 134
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. FEDERAL INCOME TAXES -- (CONTINUED)
Significant components of the company's deferred tax liabilities and assets as
of December 31, 1996 and 1995 under the liability method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Leases........................................................ $351,093 $344,438
Unrealized investment gains................................... 188,050 199,686
Other......................................................... 32,669 19,574
-------- --------
571,812 563,698
-------- --------
Deferred tax assets:
ExportSS operating costs...................................... 68,874 54,953
Student loan reserves......................................... 47,004 31,566
In-substance defeasance transactions.......................... 30,788 31,014
Asset valuation allowances.................................... 24,842 25,512
Securitization transactions................................... 13,076 -
Other......................................................... 31,211 25,522
-------- --------
215,795 168,567
-------- --------
Net deferred tax liabilities.................................... $356,017 $395,131
======== ========
</TABLE>
Sallie Mae 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.
Reconciliations of the statutory United States federal income tax rates to
Sallie Mae's effective tax rate follow:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................. 35.0% 35.0% 35.0%
Tax exempt interest and dividends received deduction............ (3.8) (6.4) (5.9)
Other, net...................................................... (1.3) (1.2) (.5)
---- ---- ----
Effective tax rate.............................................. 29.9% 27.4% 28.6%
==== ==== ====
</TABLE>
Federal income taxes paid for the years ended December 31, 1996, 1995 and
1994 were $202 million, $122 million and $188 million, respectively.
F-36
<PAGE> 135
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net interest income................................. $232,679 $219,561 $208,988 $205,208
Other income........................................ 21,754 27,899 35,211 62,052
Operating expenses.................................. 98,773 100,145 100,075 106,659
Federal income taxes................................ 47,968 44,340 42,877 48,313
-------- -------- -------- --------
Income before premiums on debt extinguished......... 107,692 102,975 101,247 112,288
Premiums on debt extinguished, net of tax........... (4,792) - - -
-------- -------- -------- --------
Net income.......................................... $102,900 $102,975 $101,247 $112,288
======== ======== ======== ========
Earnings per common share before premiums on debt
extinguished...................................... $ 1.82 $ 1.79 $ 1.79 $ 2.01
======== ======== ======== ========
Earnings per common share........................... $ 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
-------- -------- -------- --------
Income before premiums on debt extinguished and
cumulative effect of the change in method of
accounting for student loan income................ 88,794 88,022 86,567 107,807
Premiums on debt extinguished, net of tax........... - - - (4,911)
-------- -------- -------- --------
Income before cumulative effect of the change in
method of accounting for student loan income...... 88,794 88,022 86,567 102,896
Cumulative effect of the change in method of
accounting for student loan income, net of tax.... 130,148 - - -
-------- -------- -------- --------
Net income.......................................... $218,942 $ 88,022 $ 86,567 $102,896
======== ======== ======== ========
Earnings per common share before premiums on debt
extinguished and cumulative effect of the change
in method of accounting for student loan income
.................................................. $ 1.17 $ 1.20 $ 1.28 $ 1.76
======== ======== ======== ========
Earnings per common share before cumulative effect
of the change in method of accounting for student
loan income ...................................... $ 1.17 $ 1.20 $ 1.28 $ 1.67
======== ======== ======== ========
Earnings per common share........................... $ 2.95 $ 1.20 $ 1.28 $ 1.67
======== ======== ======== ========
</TABLE>
F-37
<PAGE> 136
STUDENT LOAN MARKETING ASSOCIATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION
In 1987, Sallie Mae 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. The carrying value of Sallie Mae's investment in Connie
Lee is approximately $44 million, and as of December 31, 1996, through its
ownership of preferred and common stock and through agreements with other
shareholders, Sallie Mae effectively controlled 36 percent of Connie Lee's
outstanding voting stock. There are provisions to privatize Connie Lee under
Pub. L. No. 104-208. These provisions require that Connie Lee purchase its stock
owned by the U.S. government by February 28, 1997 at a purchase price determined
by an independent appraisal. After purchasing the government's shares, Connie
Lee will convert to a private, shareholder-controlled corporation.
F-38
<PAGE> 137
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is dated as of
, 1997 among the STUDENT LOAN MARKETING ASSOCIATION, a
federally-chartered corporation ("Sallie Mae"), SLM Holding Corporation, a
Delaware corporation and a wholly-owned subsidiary of Sallie Mae ("Holding
Company") and SALLIE MAE MERGER COMPANY, a Delaware corporation and a
wholly-owned subsidiary of Holding Company ('MergerCo").
WHEREAS, Sallie Mae has an authorized capitalization consisting of:
(i) 250,000,000 shares of Common Stock, par value $.20 per share
("Sallie Mae Common Stock"), of which 53,690,595 shares were issued and
outstanding at December 31, 1996; and
(ii) 5,000,000 shares of Preferred Stock, par value $50 per share
("Sallie Mae Preferred Stock") of which 4,277,650 shares were issued and
outstanding at December 31, 1996.
WHEREAS, MergerCo has an authorized capitalization consisting of 1,000
shares of Common Stock, par value $.01 per share ("MergerCo Common Stock"), all
of which are issued and outstanding and owned beneficially and of record by
Holding Company; and
WHEREAS, Holding Company has an authorized capitalization consisting of
250,000,000 shares of Common Stock, par value $.20 per share ("Holding Company
Common Stock"), of which 1,000 shares are issued and outstanding and owned
beneficially and of record by Sallie Mae; and
WHEREAS, The Student Loan Marketing Association Reorganization Act of 1996
(the "Privatization Act") authorizes Sallie Mae to reorganize through the
formation of a state-chartered holding company that would own all issued and
outstanding Sallie Mae Common Stock; and
WHEREAS, the Boards of Directors of Sallie Mae, MergerCo and Holding
Company, deem it advisable to cause (i) the merger of MergerCo with and into
Sallie Mae with Sallie Mae as the surviving corporation (the "Merger"), (ii) the
conversion of each outstanding share of Sallie Mae Common Stock into one share
of Holding Company Common Stock and (iii) the conversion of the outstanding
shares of MergerCo into all of the issued and outstanding shares of Sallie Mae
Common Stock, all of which will then be owned by the Holding Company, and, as a
result of the Merger, Sallie Mae will become a subsidiary of the Holding Company
(collectively, the "Reorganization"), in accordance with the Privatization Act
and the Delaware General Corporation Law, as amended (the "DGCL"), and this
Agreement and have, by resolutions duly adopted, approved this Agreement and
directed that it be executed by the undersigned officers and that it be
submitted to a vote of the respective shareholders of Sallie Mae and MergerCo;
and
WHEREAS, Holding Company, as sole stockholder of MergerCo, has approved the
Agreement.
NOW THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties to this Agreement agree
that MergerCo shall merge with and into Sallie Mae and Sallie Mae shall be the
corporation surviving the Reorganization. The terms and conditions of the
Reorganization, the mode of carrying it into effect and the manner and basis of
converting shares in the Reorganization shall be as follows:
ARTICLE I
THE REORGANIZATION
At the Effective Time (as herein defined), in accordance with the
provisions of this Agreement, the Privatization Act and the DGCL, MergerCo shall
be merged with and into Sallie Mae, whereupon the separate corporate existence
of MergerCo shall cease and Sallie Mae shall continue as the surviving
corporation (the "Surviving Corporation").
A-1
<PAGE> 138
Subject to and in accordance with the provisions of this Agreement, the
parties hereto shall consummate the Reorganization by filing a certificate of
merger with the Secretary of State of the State of Delaware and making all other
filings or recordings required by the DGCL in connection with the
Reorganization. The Reorganization shall become effective at such time as the
certificate of merger is duly filed with the Secretary of State of the State of
Delaware (the "Effective Time"). The Reorganization shall have the effects set
forth in the Privatization Act and DGCL. Without limiting the generality of the
foregoing, and subject thereto and to any other applicable laws, at the
Effective Time all the properties, rights, privileges, powers and franchises of
Sallie Mae and MergerCo shall vest in the Surviving Corporation, and all debts,
liabilities, restrictions, disabilities and duties of Sallie Mae and MergersCo
shall become the debts, liabilities, restrictions, disabilities and duties of
the Surviving Corporation.
ARTICLE II
TERMS OF CONVERSION OF SHARES
At the Effective Time:
(a) Each share of Sallie Mae Common Stock issued and outstanding
immediately prior to the Effective Time shall thereupon, and without any
action on the part of the holder thereof, be converted into one validly
issued, fully paid and nonassessable share of Holding Company Common Stock.
(b) Each share of Sallie Mae Common Stock held in treasury immediately
prior to the Effective Time shall thereupon be cancelled and retired and
all rights in respect thereof shall cease.
(c) The shares of Sallie Mae Preferred Stock issued and outstanding
immediately prior to the Effective Time shall not be converted or otherwise
affected by the Reorganization, and each such share shall continue to be
issued and outstanding and to be one fully paid and nonassessable share of
the Sallie Mae Preferred Stock of the Surviving Corporation.
(d) Each share of MergerCo Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of the Surviving Corporation.
(e) Each share of Holding Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be cancelled.
ARTICLE III
CHARTER AND BYLAWS
(a) From and after the Effective Time, and until thereafter amended as
provided by law, the provisions of the Higher Education Act of 1965, as amended
(the "Sallie Mae Charter"), as in effect immediately prior to the Effective
Time, shall be and continue to be the governing statute of the Surviving
Corporation.
(b) From and after the Effective Time, the By-Laws of Sallie Mae as in
effect immediately prior to the Effective Time shall be and continue to be the
By-Laws of the Surviving Corporation until amended.
ARTICLE IV
STOCK CERTIFICATES
Following the Effective Time, each holder of an outstanding certificate or
certificates theretofore representing shares of Sallie Mae Common Stock may, but
shall not be required to, surrender the same to Holding Company for
cancellation, exchange or transfer, and each such holder or transferee thereof
will be entitled to receive a certificate or certificates representing the same
number of shares of Holding Company Common Stock as the number of shares of
Sallie Mae Common Stock previously represented by the stock certificate or
certificates so surrendered. Until so surrendered or presented for cancellation,
exchange or transfer, each outstanding certificate which, prior to the Effective
Time, represented shares of Sallie Mae Common Stock shall be deemed and treated
for all corporate purposes to represent the ownership of the same
A-2
<PAGE> 139
number of shares of Holding Company Common Stock as though such surrender for
cancellation, exchange or transfer thereof had taken place. If any certificate
representing shares of Holding Company Common Stock is to be issued in a name
other than that of the registered holder of the certificate formerly
representing shares of Sallie Mae Common Stock presented for transfer, it shall
be a condition of issuance that (a) the certificate so surrendered shall be
properly endorsed or accompanied by a stock power and shall otherwise be in
proper form for transfer and (b) the person requesting such issuance shall pay
to Holding Company's transfer agent any transfer or other taxes required by
reason of issuance of certificates representing Holding Company Common Stock in
a name other than that of the registered holder of the certificate presented, or
establish to the satisfaction of Holding Company or its registered agent that
such taxes have been paid or are not applicable. The stock transfer books for
Sallie Mae Common Stock shall be deemed to be closed at the Effective Time, and
no transfer of shares of Sallie Mae Common Stock outstanding immediately prior
to the Effective Time shall thereafter be made on such books. Following the
Effective Time, the holders of certificates representing Sallie Mae Common Stock
outstanding immediately before the Effective Time shall cease to have any rights
with respect to stock of the Surviving Corporation and their sole rights shall
be with respect to the Holding Company Common Stock into which their shares of
Sallie Mae Common Stock shall have been converted in the Reorganization.
ARTICLE V
CONDITIONS OF THE REORGANIZATION
Consummation of the Reorganization is subject to the satisfaction of each
of the following conditions:
(a) The Reorganization shall have received such approval of the
shareholders of Sallie Mae as is required by the Privatization Act.
(b) Sallie Mae shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP in form and substance reasonably satisfactory to Sallie
Mae, dated as of the Effective Time, substantially to the effect that, on
the basis of facts, representations and assumptions set forth in such
opinion which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated for U.S. federal income tax
purposes as a nonrecognition transfer of shares of Sallie Mae Common Stock
by those holders thereof to the Holding Company for shares of Holding
Company Common Stock.
(c) The shares of Holding Company Common Stock to be issued and to be
reserved for issuance as a result of the Merger shall have been approved
for listing, upon official notice of issuance, by the New York Stock
Exchange.
(d) A registration statement on Form S-4 relating to the shares of
Holding Company Common Stock to be issued or reserved for issuance as a
result of the Merger, shall be declared effective under the Securities Act
of 1933, as amended, and shall not be the subject of any "stop order."
ARTICLE VI
AMENDMENT AND WAIVER
The parties hereto, by mutual consent of their respective Boards of
Directors, may amend, modify or supplement this Agreement, or waive any
condition set forth herein, in such manner as may be agreed upon by them in
writing, at any time before or after approval of this Agreement by the
shareholders of Sallie Mae, to the extent permitted by the DGCL.
ARTICLE VII
MISCELLANEOUS
(a) This Agreement may be executed in two or more counterparts, each of
which when so executed shall be deemed to be an original, and such counterparts
shall together constitute but one and the same instrument.
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(b) The validity, execution and interpretation of this Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
Delaware, except as otherwise provided in the Privatization Act.
(c) The parties hereto shall take all such action as may be necessary or
appropriate in order to effectuate the Reorganization. In case at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement, the officers and directors of each of the
parties hereto shall take all such further action.
IN WITNESS WHEREOF, Sallie Mae, MergerCo and Holding Company, have executed
this Agreement and Plan of Reorganization by their respective duly authorized
officers as of the date first written above.
STUDENT LOAN MARKETING ASSOCIATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
SALLIE MAE MERGER COMPANY
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
SLM HOLDING CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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APPENDIX B
Set forth below is the text of certain pertinent provisions of Title VI of
U.S. Public Law 104-208, also known as the "Student Loan Marketing Association
Reorganization Act of 1996" (the "Privatization Act"). The Privatization Act has
three principal provisions relating to Sallie Mae: (1) Section 602(a) adds to
Part B of Title IV of the Higher Education Act of 1965 (the "Higher Education
Act") a new Section 440 that provides for the reorganization of the Student Loan
Marketing Association ("Sallie Mae") into a subsidiary of a new holding company;
(2) Section 602(b) amends Section 439(r) of the Higher Education Act to require
certain enhanced regulatory oversight of Sallie Mae to ensure its financial
safety and soundness; and (3) Section 602(c) adds to Section 439 of the Higher
Education Act a new subsection (s) that requires Sallie Mae to eventually
dissolve in the event Sallie Mae does not reorganize in accordance with the
provisions of the new Section 440 (added by Section 602(a)).
TITLE VI -- REORGANIZATION AND PRIVATIZATION OF
SALLIE MAE
SEC.601. SHORT TITLE.
This title may be cited as the "Student Loan Marketing Association
Reorganization Act of 1996".
SEC.602. REORGANIZATION OF THE STUDENT LOAN MARKETING ASSOCIATION THROUGH THE
FORMATION OF A HOLDING COMPANY.
Sec. 602(a) AMENDMENT. -- Part B of title IV of the Higher Education Act of
1965 (20 U.S.C. 1071 et seq.) is amended by inserting after section 439 (20
U.S.C. 1087-2) the following new section:
"SEC.440. REORGANIZATION OF THE STUDENT LOAN MARKETING ASSOCIATION THROUGH
THE FORMATION OF A HOLDING COMPANY.
"(a) ACTIONS BY THE ASSOCIATION'S BOARD OF DIRECTORS. -- The Board of
Directors of the Association shall take or cause to be taken all such
action as the Board of Directors deems necessary or appropriate to effect,
upon the shareholder approval described in subsection (b), a restructuring
of the common stock ownership of the Association, as set forth in a plan of
reorganization adopted by the Board of Directors (the terms of which shall
be consistent with this section) so that all of the outstanding common
shares of the Association shall be directly owned by a Holding Company.
Such actions may include, in the Board of Director's discretion, a merger
of a wholly-owned subsidiary of the Holding Company with and into the
Association, which would have the effect provided in the plan of
reorganization and the law of the jurisdiction in which such subsidiary is
incorporated. As part of the restructuring, the Board of Directors may
cause --
"(1) the common shares of the Association to be converted, on the
reorganization effective date, to common shares of the Holding Company
on a one for one basis, consistent with applicable State or District of
Columbia law; and
"(2) Holding Company common shares to be registered with the
Securities and Exchange Commission.
"(b) SHAREHOLDER APPROVAL. -- The plan of reorganization adopted by
the Board of Directors pursuant to subsection (a) shall be submitted to
common shareholders of the Association for their approval. The
reorganization shall occur on the reorganization effective date, provided
that the plan of reorganization has been approved by the affirmative votes,
cast in person or by proxy, of the holders of a majority of the issued and
outstanding shares of the Association common stock.
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"(c) TRANSITION. -- In the event the shareholders of the Association
approve the plan of reorganization under subsection (b), the following
provisions shall apply beginning on the reorganization effective date:
"(1) IN GENERAL. -- Except as specifically provided in this
section, until the dissolution date the Association shall continue to
have all of the rights, privileges and obligations set forth in, and
shall be subject to all of the limitations and restrictions of, section
439, and the Association shall continue to carry out the purposes of
such section. The Holding Company and any subsidiary of the Holding
Company (other than the Association) shall not be entitled to any of the
rights, privileges, and obligations, and shall not be subject to the
limitations and restrictions, applicable to the Association under
section 439, except as specifically provided in this section. The
Holding Company and any subsidiary of the Holding Company (other than
the Association or a subsidiary of the Association) shall not purchase
loans insured under this Act until such time as the Association ceases
acquiring such loans, except that the Holding Company may purchase such
loans if the Association is merely continuing to acquire loans as a
lender of last resort pursuant to section 439(q) or under an agreement
with the Secretary described in paragraph (6).
"(2) TRANSFER OF CERTAIN PROPERTY. --
"(A) IN GENERAL. -- Except as provided in this section, on the
reorganization effective date or as soon as practicable thereafter,
the Association shall use the Association's best efforts to transfer
to the Holding Company or any subsidiary of the Holding Company (or
both), as directed by the Holding Company, all real and personal
property of the Association (both tangible and intangible) other than
the remaining property. Subject to the preceding sentence, such
transferred property shall include all right, title and interest
in --
"(i) direct or indirect subsidiaries of the Association
(excluding special purpose funding companies in existence on the
date of enactment of this section and any interest in any
government-sponsored enterprise);
"(ii) contracts, leases, and other agreements of the
Association;
"(iii) licenses and other intellectual property of the
Association; and
"(iv) any other property of the Association.
"(B) CONSTRUCTION. -- Nothing in this paragraph shall be
construed to prohibit the Association from transferring remaining
property from time to time to the Holding Company or any subsidiary
of the Holding Company, subject to the provisions of paragraph (4).
"(3) TRANSFER OF PERSONNEL. -- On the reorganization effective
date, employees of the Association shall become employees of the Holding
Company (or any subsidiary of the Holding Company), and the Holding
Company (or any subsidiary of the Holding Company) shall provide all
necessary and appropriate management and operational support (including
loan servicing) to the Association, as requested by the Association. The
Association, however, may obtain such management and operational support
from persons or entities not associated with the Holding Company.
"(4) DIVIDENDS. -- The Association may pay dividends in the form of
cash or noncash distributions so long as at the time of the declaration
of such dividends, after giving effect to the payment of such dividends
as of the date of such declaration by the Board of Directors of the
Association, the Association's capital would be in compliance with the
capital standards and requirements set forth in section 439(r). If, at
any time after the reorganization effective date, the Association fails
to comply with such capital standards, the Holding Company shall
transfer with due diligence to the Association additional capital in
such amounts as are necessary to ensure that the Association again
complies with the capital standards.
"(5) CERTIFICATION PRIOR TO DIVIDEND. -- Prior to the payment of
any dividend under paragraph (4), the Association shall certify to the
Secretary of the Treasury that the payment
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of the dividend will be made in compliance with paragraph (4) and shall
provide copies of all calculations needed to make such certification.
"(6) RESTRICTIONS ON NEW BUSINESS ACTIVITY OR ACQUISITION OF ASSETS
BY ASSOCIATION. --
"(A) IN GENERAL. -- After the reorganization effective date, the
Association shall not engage in any new business activities or
acquire any additional program assets described in section 439(d)
other than in connection with --
"(i) student loan purchases through September 30, 2007;
"(ii) contractual commitments for future warehousing
advances, or pursuant to letters of credit or standby bond
purchase agreements, which are outstanding as of the
reorganization effective date;
"(iii) the Association serving as a lender-of-last-resort
pursuant to section 439(q); and
"(iv) the Association's purchase of loans insured under this
part, if the Secretary, with approval of the Secretary of the
Treasury, enters into an agreement with the Association for the
continuation or resumption of the Association's secondary market
purchase program because the Secretary determines there is
inadequate liquidity for loans made under this part.
"(B) AGREEMENT. -- The Secretary is authorized to enter into an
agreement described in clause (iv) of subparagraph (A) with the
Association covering such secondary market activities. Any agreement
entered into under such clause shall cover a period of 12 months, but
may be renewed if the Secretary determines that liquidity remains
inadequate. The fee provided under section 439(h)(7) shall not apply
to loans acquired under any such agreement with the Secretary.
"(7) ISSUANCE OF DEBT OBLIGATIONS DURING THE TRANSITION PERIOD;
ATTRIBUTES OF DEBT OBLIGATIONS. -- After the reorganization effective
date, the Association shall not issue debt obligations which mature
later than September 30, 2008, except in connection with serving as a
lender-of-last-resort pursuant to section 439(q) or with purchasing
loans under an agreement with the Secretary as described in paragraph
(6). Nothing in this section shall modify the attributes accorded the
debt obligations of the Association by section 439, regardless of
whether such debt obligations are incurred prior to, or at any time
following, the reorganization effective date or are transferred to a
trust in accordance with subsection (d).
"(8) MONITORING OF SAFETY AND SOUNDNESS. --
"(A) OBLIGATION TO OBTAIN, MAINTAIN, AND REPORT
INFORMATION. -- The Association shall obtain such information and
make and keep such records as the Secretary of the Treasury may from
time to time prescribe concerning --
"(i) the financial risk to the Association resulting from
the activities of any associated person, to the extent such
activities are reasonably likely to have a material impact on the
financial condition of the Association, including the
Association's capital ratio, the Association's liquidity, or the
Association's ability to conduct and finance the Association's
operations; and
"(ii) the Association's policies, procedures, and systems
for monitoring and controlling any such financial risk.
"(B) SUMMARY REPORTS. -- The Secretary of the Treasury may
require summary reports of the information described in subparagraph
(A) to be filed no more frequently than quarterly. If, as a result of
adverse market conditions or based on reports provided pursuant to
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this subparagraph or other available information, the Secretary of
the Treasury has concerns regarding the financial or operational
condition of the Association, the Secretary of the Treasury may,
notwithstanding the preceding sentence and subparagraph (A), require
the Association to make reports concerning the activities of any
associated person whose business activities are reasonably likely to
have a material impact on the financial or operational condition of
the Association.
"(C) SEPARATE OPERATION OF CORPORATIONS. --
"(i) IN GENERAL. -- The funds and assets of the Association
shall at all times be maintained separately from the funds and
assets of the Holding Company or any subsidiary of the Holding
Company and may be used by the Association solely to carry out
the Association's purposes and to fulfill the Association's
obligations.
"(ii) BOOKS AND RECORDS. -- The Association shall maintain
books and records that clearly reflect the assets and liabilities
of the Association, separate from the assets and liabilities of
the Holding Company or any subsidiary of the Holding Company.
"(iii) CORPORATE OFFICE. -- The Association shall maintain a
corporate office that is physically separate from any office of
the Holding Company or any subsidiary of the Holding Company.
"(iv) DIRECTOR. -- No director of the Association who is
appointed by the President pursuant to section 439(c)(1)(A) may
serve as a director of the Holding Company.
"(v) ONE OFFICER REQUIREMENT. -- At least one officer of the
Association shall be an officer solely of the Association.
"(vi) TRANSACTIONS. -- Transactions between the Association
and the Holding Company or any subsidiary of the Holding Company,
including any loan servicing arrangements, shall be on terms no
less favorable to the Association than the Association could
obtain from an unrelated third party offering comparable
services.
"(vii) CREDIT PROHIBITION. -- The Association shall not
extend credit to the Holding Company or any subsidiary of the
Holding Company nor guarantee or provide any credit enhancement
to any debt obligations of the Holding Company or any subsidiary
of the Holding Company.
"(viii) AMOUNTS COLLECTED. -- Any amounts collected on
behalf of the Association by the Holding Company or any
subsidiary of the Holding Company with respect to the assets of
the Association, pursuant to a servicing contract or other
arrangement between the Association and the Holding Company or
any subsidiary of the Holding Company, shall be collected solely
for the benefit of the Association and shall be immediately
deposited by the Holding Company or such subsidiary to an account
under the sole control of the Association.
"(D) ENCUMBRANCE OF ASSETS. -- Notwithstanding any federal or
State law, rule, or regulation, or legal or equitable principle,
doctrine, or theory to the contrary, under no circumstances shall the
assets of the Association be available or used to pay claims or debts
of or incurred by the Holding Company. Nothing in this subparagraph
shall be construed to limit the right of the Association to pay
dividends not otherwise prohibited under this subparagraph or to
limit any liability of the Holding Company explicitly provided for in
this section.
"(E) HOLDING COMPANY ACTIVITIES. -- After the reorganization
effective date and prior to the dissolution date, all business
activities of the Holding Company shall be conducted through
subsidiaries of the Holding Company.
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"(F) CONFIDENTIALITY. -- Any information provided by the
Association pursuant to this section shall be subject to the same
confidentiality obligations contained in section 439(r)(12).
"(G) DEFINITION. -- For purposes of this paragraph, the term
'associated person' means any person, other than a natural person,
who is directly or indirectly controlling, controlled by, or under
common control with, the Association.
"(9) ISSUANCE OF STOCK WARRANTS. --
"(A) IN GENERAL. -- On the reorganization effective date, the
Holding Company shall issue to the District of Columbia Financial
Responsibility and Management Assistance Authority a number of stock
warrants that is equal to one percent of the outstanding shares of
the Association, determined as of the last day of the fiscal quarter
preceding the date of enactment of this section, with each stock
warrant entitling the holder of the stock warrant to purchase from
the Holding Company one share of the registered common stock of the
Holding Company or the Holding Company's successors or assigns, at
any time on or before September 30, 2008. The exercise price for such
warrants shall be an amount equal to the average closing price of the
common stock of the Association for the 20 business days prior to the
date of enactment of this section on the exchange or market which is
then the primary exchange or market for the common stock of the
Association. The number of shares of Holding Company common stock
subject to each stock warrant and the exercise price of each stock
warrant shall be adjusted as necessary to reflect --
"(i) the conversion of Association common stock into Holding
Company common stock as part of the plan of reorganization
approved by the Association's shareholders; and
"(ii) any issuance or sale of stock (including issuance or
sale of treasury stock), stock split, recapitalization,
reorganization, or other corporate event, if agreed to by the
Secretary of the Treasury and the Association.
"(B) AUTHORITY TO SELL OR EXERCISE STOCK WARRANTS; DEPOSIT OF
PROCEEDS. -- The District of Columbia Financial Responsibility and
Management Assistance Authority is authorized to sell or exercise the
stock warrants described in subparagraph (A). The District of
Columbia Financial Responsibility and Management Assistance Authority
shall deposit into the account established under section 3(e) of the
Student Loan Marketing Association Reorganization Act of 1996 amounts
collected from the sale and proceeds resulting from the exercise of
the stock warrants pursuant to this subparagraph.
"(10) RESTRICTIONS ON TRANSFER OF ASSOCIATION SHARES AND BANKRUPTCY
OF ASSOCIATION. -- After the reorganization effective date, the Holding
Company shall not sell, pledge, or otherwise transfer the outstanding
shares of the Association, or agree to or cause the liquidation of the
Association or cause the Association to file a petition for bankruptcy
under title 11, United States Code, without prior approval of the
Secretary of the Treasury and the Secretary of Education.
"(d) TERMINATION OF THE ASSOCIATION. -- In the event the shareholders
of the Association approve a plan of reorganization under subsection (b),
the Association shall dissolve, and the Association's separate existence
shall terminate on September 30, 2008, after discharge of all outstanding
debt obligations and liquidation pursuant to this subsection. The
Association may dissolve pursuant to this subsection prior to such date by
notifying the Secretary of Education and the Secretary of the Treasury of
the Association's intention to dissolve, unless within 60 days after
receipt of such notice the Secretary of Education notifies the Association
that the Association continues to be needed to serve as a lender of last
resort pursuant to section 439(q) or continues to be needed to purchase
loans under an
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agreement with the Secretary described in subsection (c)(6). On the
dissolution date, the Association shall take the following actions:
"(1) ESTABLISHMENT OF A TRUST. -- The Association shall, under the
terms of an irrevocable trust agreement that is in form and substance
satisfactory to the Secretary of the Treasury, the Association and the
appointed trustee, irrevocably transfer all remaining obligations of the
Association to the trust and irrevocably deposit or cause to be
deposited into such trust, to be held as trust funds solely for the
benefit of holders of the remaining obligations, money or direct
noncallable obligations of the United States or any agency thereof for
which payment the full faith and credit of the United States is pledged,
maturing as to principal and interest in such amounts and at such times
as are determined by the Secretary of the Treasury to be sufficient,
without consideration of any significant reinvestment of such interest,
to pay the principal of, and interest on, the remaining obligations in
accordance with their terms. To the extent the Association cannot
provide money or qualifying obligations in the amount required, the
Holding Company shall be required to transfer money or qualifying
obligations to the trust in the amount necessary to prevent any
deficiency.
"(2) USE OF TRUST ASSETS. -- All money, obligations, or financial
assets deposited into the trust pursuant to this subsection shall be
applied by the trustee to the payment of the remaining obligations
assumed by the trust.
"(3) OBLIGATIONS NOT TRANSFERRED TO THE TRUST. -- The Association
shall make proper provision for all other obligations of the Association
not transferred to the trust, including the repurchase or redemption, or
the making of proper provision for the repurchase or redemption, of any
preferred stock of the Association outstanding. Any obligations of the
Association which cannot be fully satisfied shall become liabilities of
the Holding Company as of the date of dissolution.
"(4) TRANSFER OF REMAINING ASSETS. -- After compliance with
paragraphs (1) and (3), any remaining assets of the trust shall be
transferred to the Holding Company or any subsidiary of the Holding
Company, as directed by the Holding Company.
"(e) OPERATION OF THE HOLDING COMPANY. -- In the event the
shareholders of the Association approve the plan of reorganization under
subsection (b), the following provisions shall apply beginning on the
reorganization effective date:
"(1) HOLDING COMPANY BOARD OF DIRECTORS. -- The number of members
and composition of the Board of Directors of the Holding Company shall
be determined as set forth in the Holding Company's charter or like
instrument (as amended from time to time) or bylaws (as amended from
time to time) and as permitted under the laws of the jurisdiction of the
Holding Company's incorporation.
"(2) HOLDING COMPANY NAME. -- The names of the Holding Company and
any subsidiary of the Holding Company (other than the Association) --
"(A) may not contain the name 'Student Loan Marketing
Association'; and
"(B) may contain, to the extent permitted by applicable State or
District of Columbia law, 'Sallie Mae' or variations thereof, or such
other names as the Board of Directors of the Association or the
Holding Company deems appropriate.
"(3) USE OF SALLIE MAE NAME. -- Subject to paragraph (2), the
Association may assign to the Holding Company, or any subsidiary of the
Holding Company, the 'Sallie Mae' name as a trademark or service mark,
except that neither the Holding Company nor any subsidiary of the
Holding Company (other than the Association or any subsidiary of the
Association) may use the 'Sallie Mae' name on, or to identify the issuer
of, any debt obligation or other security offered or sold by the Holding
Company or any subsidiary of the Holding Company (other than a debt
obligation or other security issued to and held by the Holding Company
or any subsidiary of the Holding
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Company). The Association shall remit to the account established under
section 3(e) of the Student Loan Marketing Association Reorganization
Act of 1996, $5,000,000 within 60 days of the reorganization effective
date as compensation for the right to assign the 'Sallie Mae' name as a
trademark or service mark.
"(4) DISCLOSURE REQUIRED. -- Until 3 years after the dissolution
date, the Holding Company, and any subsidiary of the Holding Company
(other than the Association), shall prominently display --
"(A) in any document offering the Holding Company's securities,
a statement that the obligations of the Holding Company and any
subsidiary of the Holding Company are not guaranteed by the full
faith and credit of the United States; and
"(B) in any advertisement or promotional materials which use the
'Sallie Mae' name or mark, a statement that neither the Holding
Company nor any subsidiary of the Holding Company is a
government-sponsored enterprise or instrumentality of the United
States.
"(f) STRICT CONSTRUCTION. -- Except as specifically set forth in this
section, nothing in this section shall be construed to limit the authority
of the Association as a federally chartered corporation, or of the Holding
Company as a State or District of Columbia chartered corporation.
"(g) RIGHT TO ENFORCE. -- The Secretary of Education or the Secretary
of the Treasury, as appropriate, may request that the Attorney General
bring an action in the United States District Court for the District of
Columbia for the enforcement of any provision of this section, or may,
under the direction or control of the Attorney General, bring such an
action. Such court shall have jurisdiction and power to order and require
compliance with this section.
"(h) DEADLINE FOR REORGANIZATION EFFECTIVE DATE. -- This section shall
be of no further force and effect in the event that the reorganization
effective date does not occur on or before 18 months after the date of
enactment of this section.
"(i) DEFINITIONS. -- For purposes of this section:
"(1) ASSOCIATION. -- The term 'Association' means the Student Loan
Marketing Association.
"(2) DISSOLUTION DATE. -- The term 'dissolution date' means
September 30, 2008, or such earlier date as the Secretary of Education
permits the transfer of remaining obligations in accordance with
subsection (d).
"(3) HOLDING COMPANY. -- The term 'Holding Company' means the new
business corporation established pursuant to this section by the
Association under the laws of any State of the United States or the
District of Columbia for the purposes of the reorganization and
restructuring described in subsection (a).
"(4) REMAINING OBLIGATIONS. -- The term 'remaining obligations'
means the debt obligations of the Association outstanding as of the
dissolution date.
"(5) REMAINING PROPERTY. -- The term 'remaining property' means the
following assets and liabilities of the Association which are
outstanding as of the reorganization effective date:
"(A) Debt obligations issued by the Association.
"(B) Contracts relating to interest rate, currency, or commodity
positions or protections.
"(C) Investment securities owned by the Association.
"(D) Any instruments, assets, or agreements described in section
439(d) (including, without limitation, all student loans and
agreements relating to the purchase and sale of student loans,
forward purchase and lending commitments, warehousing advances,
academic facilities
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obligations, letters of credit, standby bond purchase agreements,
liquidity agreements, and student loan revenue bonds or other loans).
"(E) Except as specifically prohibited by this section or
section 439, any other nonmaterial assets or liabilities of the
Association which the Association's Board of Directors determines to
be necessary or appropriate to the Association's operations.
"(6) REORGANIZATION. -- The term 'reorganization' means the
restructuring event or events (including any merger event) giving effect
to the Holding Company structure described in subsection (a).
"(7) REORGANIZATION EFFECTIVE DATE. -- The term 'reorganization
effective date' means the effective date of the reorganization as
determined by the Board of Directors of the Association, which shall not
be earlier than the date that shareholder approval is obtained pursuant
to subsection (b) and shall not be later than the date that is 18 months
after the date of enactment of this section.
"(8) SUBSIDIARY. -- The term 'subsidiary' means one or more direct
or indirect subsidiaries."
Sec. 602(b) TECHNICAL AMENDMENTS. --
(1) ELIGIBLE LENDER. --
(A) AMENDMENTS TO THE HIGHER EDUCATION ACT. --
(i) DEFINITION OF ELIGIBLE LENDER. -- Section 435(d)(1)(F) of
the Higher Education Act of 1965 (20 U.S.C. 1085(d)(1)(F)) is amended
by inserting after "Student Loan Marketing Association" the
following: "or the Holding Company of the Student Loan Marketing
Association, including any subsidiary of the Holding Company, created
pursuant to section 440,".
(ii) DEFINITION OF ELIGIBLE LENDER AND FEDERAL CONSOLIDATION
LOANS. -- Sections 435(d)(1)(G) and 428C(a)(1)(A) of such Act (20
U.S.C. 1085(d)(1)(G) and 1078-3(a)(1)(A)) are each amended by
inserting after "Student Loan Marketing Association" the following:
"or the Holding Company of the Student Loan Marketing Association,
including any subsidiary of the Holding Company, created pursuant to
section 440".
(B) EFFECTIVE DATE. -- The amendments made by this paragraph shall
take effect on the reorganization effective date as defined in section
440(h) of the Higher Education Act of 1965 (as added by subsection (a)).
(2) ENFORCEMENT OF SAFETY AND SOUNDNESS REQUIREMENTS. -- Section 439(r)
of the Higher Education Act of 1965 (20 U.S.C. 1087-2(r)) is amended --
(A) in the first sentence of paragraph (12), by inserting "or the
Association's associated persons" after "by the Association";
(B) by redesignating paragraph (13) as paragraph (15); and
(C) by inserting after paragraph (12) the following new paragraph:
"(13) ENFORCEMENT OF SAFETY AND SOUNDNESS REQUIREMENTS. -- The
Secretary of Education or the Secretary of the Treasury, as
appropriate, may request that the Attorney General bring an action in
the United States District Court for the District of Columbia for the
enforcement of any provision of this section, or may, under the
direction or control of the Attorney General, bring such an action.
Such court shall have jurisdiction and power to order and require
compliance with this section.".
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(3) FINANCIAL SAFETY AND SOUNDNESS. -- Section 439(r) of the Higher
Education Act of 1965 (20 U.S.C.1087-2(r)) is further amended --
(A) in paragraph (1) --
(i) by striking "and" at the end of subparagraph (A);
(ii) by striking the period at the end of subparagraph (B) and
inserting "; and" and
(iii) by adding at the end the following new subparagraph:
"(C)(i) financial statements of the Association within 45
days of the end of each fiscal quarter; and
"(ii) reports setting forth the calculation of the capital
ratio of the Association, within 45 days of the end of each
fiscal quarter.";
(B) in paragraph (2) --
(i) by striking clauses (i) and (ii) of subparagraph (A) and
inserting the following:
"(i) appoint auditors or examiners to conduct audits of the
Association from time to time to determine the condition of the
Association for the purpose of assessing the Association's
financial safety and soundness and to determine whether the
requirements of this section and section 440 are being met; and
"(ii) obtain the services of such experts as the Secretary
of the Treasury determines necessary and appropriate, as
authorized by section 3109 of title 5, United States Code, to
assist in determining the condition of the Association for the
purpose of assessing the Association's financial safety and
soundness, and to determine whether the requirements of this
section and section 440 are being met."; and
(ii) by adding at the end of the following new subparagraph:"
(D) ANNUAL ASSESSMENT. --
"(i) IN GENERAL. -- For each fiscal year beginning on or
after October 1, 1996, the Secretary of the Treasury may
establish and collect from the Association an assessment (or
assessments) in amounts sufficient to provide for reasonable
costs and expenses of carrying out the duties of the
Secretary of the Treasury under this section and section 440
during such fiscal year. In no event may the total amount so
assessed exceed, for any fiscal year, $800,000 adjusted for
each fiscal year ending after September 30, 1997, by the
ratio of the Consumer Price Index for All Urban Consumers
(issued by the Bureau of Labor Statistics) for the final
month of the fiscal year preceding the fiscal year for which
the assessment is made to the Consumer Price Index for All
Urban Consumers for September 1997.
"(ii) DEPOSIT. -- Amounts collected from assessments
under this subparagraph shall be deposited in an account
within the Treasury of the United States as designated by the
Secretary of the Treasury for that purpose. The Secretary of
the Treasury is authorized and directed to pay out of any
funds available in such account the reasonable costs and
expenses of carrying out the duties of the Secretary of the
Treasury under this section and section 440. None of the
funds deposited into such account shall be available for any
purpose other than making payments for such costs and
expenses."; and
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(C) by inserting after paragraph (13) (as added by paragraph
(2)(C)) the following new paragraph:"
(14) ACTIONS BY SECRETARY. --
"(A) IN GENERAL. -- For any fiscal quarter ended after
January 1, 2000, the Association shall have a capital ratio of at
least 2.25 percent. The Secretary of the Treasury may, whenever
such capital ratio is not met, take any one or more of the
actions described in paragraph (7), except that --
"(i) the capital ratio to be restored pursuant to
paragraph (7)(D) shall be 2.25 percent; and
"(ii) if the relevant capital ratio is in excess of or
equal to 2 percent for such quarter, the Secretary of the
Treasury shall defer taking any of the actions set forth in
paragraph (7) until the next succeeding quarter and may then
proceed with any such action only if the capital ratio of the
Association remains below 2.25 percent.
"(B) APPLICABILITY. -- The provisions of paragraphs (4),
(5), (6), (8), (9), (10), and (11) shall be of no further
application to the Association for any period after January 1,
2000."
(4) INFORMATION REQUIRED; DIVIDENDS. -- Section 439(r) of the Higher
Education Act of 1965 (20 U.S.C. 1087-2(r)) is further amended --
(A) by adding at the end of paragraph (2) (amended in paragraph
(3)(B)(ii)) the following new subparagraph:
"(E) OBLIGATION TO OBTAIN, MAINTAIN, AND REPORT INFORMATION. --
"(i) IN GENERAL. -- The Association shall obtain such
information and make and keep such records as the Secretary of
the Treasury may from time to time prescribe concerning --
"(I) the financial risk to the Association resulting
from the activities of any associated person, to the extent
such activities are reasonably likely to have a material
impact on the financial condition of the Association,
including the Association's capital ratio, the Association's
liquidity, or the Association's ability to conduct and
finance the Association's operations; and
"(II) the Association's policies, procedures, and
systems for monitoring and controlling any such financial
risk.
"(ii) SUMMARY REPORTS. -- The Secretary of the Treasury may
require summary reports of such information to be filed no more
frequently than quarterly. If, as a result of adverse market
conditions or based on reports provided pursuant to this
subparagraph or other available information, the Secretary of the
Treasury has concerns regarding the financial or operational
condition of the Association, the Secretary of the Treasury may,
notwithstanding the preceding sentence and clause (i), require
the Association to make reports concerning the activities of any
associated person, whose business activities are reasonably
likely to have a material impact on the financial or operational
condition of the Association.
"(iii) DEFINITION. -- For purposes of this subparagraph, the
term 'associated person' means any person, other than a natural
person, directly or indirectly controlling, controlled by, or
under common control with the Association."; and
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(B) by adding at the end the following new paragraphs:
(16) DIVIDENDS. -- The Association may pay dividends in the form
of cash or noncash distributions so long as at the time of the
declaration of such dividends, after giving effect to the payment of
such dividends as of the date of such declaration by the Board of
Directors of the Association, the Association's capital would be in
compliance with the capital standards set forth in this section.
"(17) CERTIFICATION PRIOR TO PAYMENT OF DIVIDEND. -- Prior to
the payment of any dividend under paragraph (16), the Association
shall certify to the Secretary of the Treasury that the payment of
the dividend will be made in paragraph (16) and shall provide copies
of all calculations needed to make such certification."
"Sec. 602(c) SUNSET OF THE ASSOCIATION'S CHARTER IF NO REORGANIZATION PLAN
OCCURS. -- Section 439 of the Higher Education Act of 1965 (20 U.S.C. 1087-2) is
amended by adding at the end the following new subsection:
"(s) CHARTER SUNSET. --
"(1) APPLICATION OF PROVISIONS. -- This subsection applies
beginning 18 months and one day after the date of enactment of this
subsection if no reorganization of the Association occurs in accordance
with the provisions of section 440.
"(2) SUNSET PLAN. --
"(A) PLAN SUBMISSION BY THE ASSOCIATION. -- Not later than July
1, 2007, the Association shall submit to the Secretary of the
Treasury and to the Chairman and Ranking Member of the Committee on
Labor and Human Resources of the Senate and the Chairman and Ranking
Member of the Committee on Economic and Educational Opportunities of
the House of Representatives, a detailed plan for the orderly winding
up, by July 1, 2013, of business activities conducted pursuant to the
charter set forth in this section. Such plan shall --
"(i) ensure that the Association will have adequate assets
to transfer to a trust, as provided in this subsection, to ensure
full payment of remaining obligations of the Association in
accordance with the terms of such obligations;
"(ii) provide that all assets not used to pay liabilities
shall be distributed to shareholders as provided in this
subsection; and
"(iii) provide that the operations of the Association shall
remain separate and distinct from that of any entity to which the
assets of the Association are transferred;
"(B) AMENDMENT OF THE PLAN BY THE ASSOCIATION. -- The
Association shall from time to time amend such plan to reflect
changed circumstances, and submit such amendments to the Secretary of
the Treasury and to the Chairman and Ranking Minority Member of the
Committee on Labor and Human Resources of the Senate and Chairman and
Ranking Minority Member of the Committee on Economic and Educational
Opportunities of the House of Representatives. In no case may any
amendment extend the date for full implementation of the plan beyond
the dissolution date provided in paragraph (3).
"(C) PLAN MONITORING. -- The Secretary of the Treasury shall
monitor the Association's compliance with the plan and shall continue
to review the plan (including any amendments thereto).
"(D) AMENDMENT OF THE PLAN BY THE SECRETARY OF THE
TREASURY. -- The Secretary of the Treasury may require the
Association to amend the plan (including any amendments to the plan),
if the Secretary of the Treasury deems such amendments are necessary
to ensure full payment of all obligations of the Association.
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"(E) IMPLEMENTATION BY THE ASSOCIATION. -- The Association shall
promptly implement the plan (including any amendments to the plan,
whether such amendments are made by the Association or are required
to be made by the Secretary of the Treasury).
"(3) DISSOLUTION OF THE ASSOCIATION. -- The Association shall
dissolve and the Association's separate existence shall terminate on
July 1, 2013, after discharge of all outstanding debt obligations and
liquidation pursuant to this subsection. The Association may dissolve
pursuant to this subsection prior to such date by notifying the
Secretary of Education and the Secretary of the Treasury of the
Association's intention to dissolve, unless within 60 days of receipt of
such notice the Secretary of Education notifies the Association that the
Association continues to be needed to serve as a lender of last resort
pursuant to subsection (q) or continues to be needed to purchase loans
under an agreement with the Secretary described in paragraph (4)(A). On
the dissolution date, the Association shall take the following actions:
"(A) ESTABLISHMENT OF A TRUST. -- The Association shall, under
the terms of an irrevocable trust agreement in form and substance
satisfactory to the Secretary of the Treasury, the Association, and
the appointed trustee, irrevocably transfer all remaining obligations
of the Association to a trust and irrevocably deposit or cause to be
deposited into such trust, to be held as trust funds solely for the
benefit of holders of the remaining obligations, money or direct
noncallable obligations of the United States or any agency thereof
for which payment the full faith and credit of the United States is
pledged, maturing as to principal and interest in such amounts and at
such times as are determined by the Secretary of the Treasury to be
sufficient, without consideration of any significant reinvestment of
such interest, to pay the principal of, and interest on, the
remaining obligations in accordance with their terms.
"(B) USE OF TRUST ASSETS. -- All money, obligations, or
financial assets deposited into the trust pursuant to this subsection
shall be applied by the trustee to the payment of the remaining
obligations assumed by the trust. Upon the fulfillment of the
trustee's duties under the trust, any remaining assets of the trust
shall be transferred to the persons who, at the time of the
dissolution, were the shareholders of the Association, or to the
legal successors or assigns of such persons.
"(C) OBLIGATIONS NOT TRANSFERRED TO THE TRUST. -- The
Association shall make proper provision for all other obligations of
the Association, including the repurchase or redemption, or the
making of proper provision for the repurchase or redemption, of any
preferred stock of the Association outstanding.
"(D) TRANSFER OF REMAINING ASSETS. -- After compliance with
subparagraphs (A) and (C), the Association shall transfer to the
shareholders of the Association any remaining assets of the
Association.
(4) RESTRICTIONS RELATING TO WINDING UP. --
"(A) RESTRICTIONS ON NEW BUSINESS ACTIVITY OR ACQUISITION OF
ASSETS BY THE ASSOCIATION. --
"(i) IN GENERAL. -- Beginning on July 1, 2009, the
Association shall not engage in any new business activities or
acquire any additional program assets (including acquiring assets
pursuant to contractual commitments) described in subsection (d)
other than in connection with the Association --
"(I) serving as a lender of last resort pursuant to
subsection (q); and
"(II) purchasing loans insured under this part, if the
Secretary, with the approval of the Secretary of the
Treasury, enters into an agreement with the Association for
the continuation or resumption of the Association's secondary
market
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purchase program because the Secretary determines there is
inadequate liquidity for loans made under this part.
"(ii) AGREEMENT. -- The Secretary is authorized to enter
into an agreement described in subclause (II) of clause (i) with
the Association covering such secondary market activities. Any
agreement entered into under such subclause shall cover a period
of 12 months, but may be renewed if the Secretary determines that
liquidity remains inadequate. The fee provided under subsection
(h)(7) shall not apply to loans acquired under any such agreement
with the Secretary."
"(B) ISSUANCE OF DEBT OBLIGATIONS DURING THE WIND UP PERIOD;
ATTRIBUTES OF DEBT OBLIGATIONS. -- The Association shall not issue
debt obligations which mature later than July 1, 2013, except in
connection with serving as a lender of last resort pursuant to
subsection (q) or with purchasing loans under an agreement with the
Secretary as described in subparagraph (A). Nothing in this
subsection shall modify the attributes accorded the debt obligations
of the Association by this section, regardless of whether such debt
obligations are transferred to a trust in accordance with paragraph
(3).
"(C) USE OF ASSOCIATION NAME. -- The Association may not
transfer or permit the use of the name 'Student Loan Marketing
Association', 'Sallie Mae', or any variation thereof, to or by any
entity other than a subsidiary of the Association."
Sec. 602(d) REPEALS. --
(1) IN GENERAL. -- Sections 439 of the Higher Education Act of 1965
(20 U.S.C.1087-2) and 440 of such Act (as added by subsection (a) of this
section) are repealed.
(2) EFFECTIVE DATE. -- The repeals made by paragraph (1) shall be
effective one year after --
(A) the date on which all of the obligations of the trust
established under section 440(d)(1) of the Higher Education Act of 1965
(as added by subsection (a)) have been extinguished, if a reorganization
occurs in accordance with section 440 of such Act; or
(B) the date on which all of the obligations of the trust
established under subsection 439(s)(3)(A) of such Act (as added by
subsection (c)) have been extinguished, if a reorganization does not
occur in accordance with section 440 of such Act.
Sec. 602(e) ASSOCIATION NAMES. -- Upon dissolution in accordance with
section 439(s) of the Higher Education Act of 1965 (20 U.S.C. 1087-2), the names
"Student Loan Marketing Association", "Sallie Mae", and any variations thereof
may not be used by any entity engaged in any business similar to the business
conducted pursuant to section 439 of such Act (as such section was in effect on
the date of enactment of this Act) without the approval of the Secretary of the
Treasury.
Sec. 602(f) RIGHT TO ENFORCE. -- The Secretary of Education or the
Secretary of the Treasury, as appropriate, may request that the Attorney General
bring an action in the United States District Court for the District of Columbia
for the enforcement of any provision of subsection (e), or may, under the
direction or control of the Attorney General, bring such an action. Such court
shall have jurisdiction and power to order and require compliance with
subsection (e).
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APPENDIX C
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program ("FFELP") (formerly the
Guaranteed Student Loan Program ("GSLP")) under Title IV of the Higher Education
Act (the "Act") provides for loans to be made to students or parents of
dependent students enrolled in eligible institutions to finance a portion of the
costs of attending school. If a borrower defaults on a student loan, becomes
totally or permanently disabled, dies, files for bankruptcy or attends a school
that closes prior to the student earning a degree, or if the applicable
education institution falsely certifies the borrower's eligibility for a Student
Loan (collectively "insurance triggers"), the holder of the loan (which must be
an eligible lender) may file a claim with the applicable Guarantee Agency.
Provided that the loan has been properly originated and serviced, the Guarantee
Agency pays the holder all or a portion of the unpaid principal balance on the
loan as well as accrued interest. Origination and servicing requirements, as
well as procedures to cure deficiencies, are established by the U.S. Department
of Education (the "Department") and the various Guarantee Agencies.
Under the FFELP, payment of principal and interest with respect to the
student loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by the applicable Guarantee Agency. As described herein,
the guarantee agencies are entitled, subject to certain conditions, to be
reimbursed for all or a portion of Guarantee Payments they make by the
Department pursuant to a program of federal reinsurance under the Act. See
"Guarantee Agencies".
Guarantee Agencies enter into reinsurance agreements with the Secretary of
Education pursuant to which the Secretary agrees to reimburse the Guarantee
Agency for all or a portion of the amount expended by the Guarantee Agency in
discharge of its guarantee obligation with respect to default claims provided
the loans have been properly originated and serviced. Except for claims
resulting from death, disability or bankruptcy of a borrower, in which case the
Secretary pays the full amount of the claim, the amount of reinsurance depends
on the default experience of the Guarantee Agency. See " -- Federal Insurance
and Reinsurance of Guarantee Agencies".
In the event of a shortfall between the amounts of claims paid to holders
of defaulted loans and reinsurance payments from the federal government,
Guarantee Agencies pay the claims from their reserves. These reserves come from
four principal sources: insurance premiums they charge on student loans
(currently up to 1 percent of loan principal), administrative cost allowances
from the Department (payment of which is currently discretionary on the part of
the Department)(1), debt collection activities (generally, the Guarantee Agency
may retain 27 percent of its collections on defaulted student loans), and
investment income from reserve funds. Claims which a Guarantee Agency is
financially unable to pay will be paid by the Secretary or transferred to a
financially sound Guarantee Agency, if the Secretary makes the necessary
determination that the guarantor is financially unable to pay.
Several types of guaranteed student loans are currently authorized under
the Act: (i) loans to students who pass certain financial need tests
("Subsidized Stafford Loans"); (ii) loans to students who do not pass the
Stafford need tests or who need additional loans to supplement their Subsidized
Stafford Loans ("Unsubsidized Stafford Loans"); (iii) loans to parents of
students ("PLUS Loans") who are dependents and whose need exceed the financing
available from Subsidized Stafford Loans and/or Unsubsidized Stafford Loans; and
(iv) loans to consolidate the borrower's obligations under various federally
authorized student loan programs into a single loan ("Consolidation Loans").
Prior to July 1, 1994 the Act also permitted loans to graduate and professional
students and independent undergraduate students and, under certain
circumstances, dependent
- ---------------
(1) The Fiscal Year 1996 Omnibus Appropriations Act provided that for the
1995 and 1996 federal fiscal years, the Secretary must pay an administrative
cost allowance to guaranty agencies equal to .085 percent of each agency's loan
originations.
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undergraduate students who needed additional loans to supplement their
Subsidized Stafford Loans ("Supplemental Loans to Students" or "SLS Loans").
The FFELP is subject to statutory and regulatory revision from time to
time. The most recent significant revisions are contained in the Higher
Education Amendments of 1992 ("the 1992 Amendments"), the Omnibus Budget
Reconciliation Act of 1993 ("the 1993 Act") and the "Higher Education Technical
Amendments of 1993" (the "Technical Amendments"). As part of the 1992 Amendments
the name of the Guaranteed Student Loan Program was changed to the FFELP. The
1993 Act contains significant changes to the FFELP and creates a direct loan
program funded directly by the U.S. Department of Treasury (each loan under such
program, a "Federal Direct Student Loan").
Following enactment of the 1992 Amendments, Subsidized Stafford Loans,
Unsubsidized Stafford Loans, PLUS Loans and Consolidation Loans are officially
referred to as "Federal Stafford Loans," "Federal Unsubsidized Stafford Loans,"
"Federal PLUS Loans" and "Federal Consolidation Loans," respectively.
The description and summaries of the Act, the FFELP, the Guarantee
Agreements and the other statutes and regulations referred to in this Proxy
Statement/Prospectus do not purport to be comprehensive, and are qualified in
their entirety by reference to each such statute or regulation. The Act is
codified at 20 U.S.C. (LOGO) 1071 et seq., and the regulations promulgated
thereunder can be found at 34 C.F.R. Part 682. There can be no assurance that
future amendments or modifications will not materially change any of the terms
or provisions of the programs described in this Proxy Statement/Prospectus or of
the statutes and regulations implementing these programs.
LEGISLATIVE AND ADMINISTRATIVE MATTERS
The Act was amended by enactment of the 1992 Amendments, the general
provisions of which became effective on July 23, 1992 and which extend the
principal provisions of the FFELP to September 30, 1998 (or in the case of
borrowers who have received loans prior to that date, September 30, 2002, except
that authority to make Consolidation Loans expires on September 30, 1998). The
Technical Amendments became effective on December 20, 1993.
The 1993 Act, effective on August 10, 1993, implements a number of changes
to the federal guaranteed student loan programs, including imposing on lenders
or holders of guaranteed student loans certain fees, providing for 2 percent
lender risk sharing, reducing interest rates and Special Allowance Payments for
certain loans, effectively reducing the interest payable to holders of
Consolidation Loans and affecting the Department's financial assistance to
Guarantee Agencies, including by reducing the percentage of claims the
Department will reimburse Guarantee Agencies and reducing more substantially the
premiums and default collections that Guarantee Agencies are entitled to receive
and/or retain. In addition, such legislation also contemplates replacement of at
least 60 percent of the federal guaranteed student loan programs with direct
lending by the Department by the 1998-99 academic year.
ELIGIBLE LENDERS, STUDENTS AND INSTITUTIONS
Lenders eligible to make and/or hold loans under the FFELP generally
include banks, savings and loan associations, credit unions, pension funds,
insurance companies and, under certain conditions, schools and guarantee
agencies. Sallie Mae is an eligible lender for making Consolidation Loans and as
a lender of last resort and for holding FFELP loans.
A FFELP loan may be made only to qualified borrowers. Generally a qualified
borrower is an individual or parent of an individual who (a) has been accepted
for enrollment or is enrolled and is maintaining satisfactory progress at an
eligible institution, (b) is carrying or will carry at least one-half of the
normal full-time academic workload for the course of study the student is
pursuing, as determined by such institution, (c) has agreed to notify promptly
the holder of the loan of any address change and (d) meets the applicable "need"
requirements for the particular loan program. Each loan is to be evidenced by an
unsecured promissory note signed by the qualified borrower.
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Eligible institutions are post-secondary schools which meet the
requirements set forth in the Act. They include institutions of higher
education, proprietary institutions of higher education and post-secondary
vocational institutions. With specified exceptions, institutions are excluded
from consideration as eligible institutions if the institution (i) offers more
than 50 percent of its courses by correspondence; (ii) enrolls 50 percent or
more of its students in correspondence courses; (iii) has a student enrollment
in which more than 25 percent of the students are incarcerated; or (iv) has a
student enrollment in which more than 50 percent of the students are admitted
without a high school diploma or its equivalent on the basis of their ability to
benefit from the education provided (as defined by statute and regulation).
Further, schools are specifically excluded from participation if (i) the
institution has filed for bankruptcy or (ii) the institution, the owner or its
chief executive officer, has been convicted or pleaded nolo contendere or guilty
to a crime involving the acquisition, use or expenditure of federal student aid
funds, or has been judicially determined to have committed fraud involving funds
under the student aid program. In order to participate in the program, the
eligibility of a school must be approved by the Department under standards
established by regulation.
FINANCIAL NEED ANALYSIS
Student loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
borrower must undergo a need analysis, which requires the borrower to submit a
need analysis form which is forwarded to the federal central processor. The
central processor evaluates the parents' and student's financial condition under
federal guidelines and calculates the amount that the student and/or the family
is expected to contribute towards the student's cost of education (the "family
contribution"). After receiving information on the family contribution, the
institution then subtracts the family contribution from its cost of attendance
to determine the student's eligibility for grants, Subsidized Stafford Loans and
work assistance. The difference between (a) the sum of the (i) amount of grants,
(ii) the amount earned through work assistance and (iii) the amount of
Subsidized Stafford Loans for which the borrower is eligible and (b) the
student's estimated cost of attendance (the "Unmet Need") may be borrowed
through Unsubsidized Stafford Loans. Parents may finance the family contribution
amount through their own resources or through PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of student loans to
the extent necessary to ensure that such holder receives at least a specified
market interest rate of return on such loans. The rates for Special Allowance
Payments are based on formulas that differ according to the type of loan and the
date the loan was originally made or insured. A Special Allowance Payment is
made for each of the 3-month periods ending March 31, June 30, September 30, and
December 31. The Special Allowance Payments equal the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by such holder during such period multiplied by the special allowance
percentage. The special allowance percentage shall be computed by (i)
determining the average of the bond equivalent rates of 91-day Treasury bills
auctioned for such 3-month period, (ii) subtracting the applicable borrower
interest rate on such loans from such average, (iii) adding the applicable
Special Allowance Margin (defined below) to the resultant percentage, and (iv)
dividing the resultant percentage by 4.
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- --------------------------------------------- --------------------------------------------------
<S> <C>
Prior to 10/17/86............................ 3.50%
10/17/86-9/30/92............................. 3.25%
10/01/92-6/30/95............................. 3.10%
7/1/95-6/30/98............................... 2.50% (Subsidized and Unsubsidized Stafford Loans,
in school, grace or deferment)
3.10% (Subsidized and Unsubsidized Stafford Loans,
in repayment and all other loans)
</TABLE>
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Special Allowance Payments are available on variable rate PLUS Loans and
SLS Loans as described below under "PLUS and SLS Loan Programs" only to cover
any amount by which the variable rate, which is reset annually based on the
52-week Treasury Bill, would exceed the applicable maximum rate.
As part of the amendments made to the Act by the Omnibus Budget
Reconciliation Act of 1993, the method for calculating borrower interest and
special allowance payment is scheduled to be altered for loans made on or after
July 1, 1998. As of that date, the borrower interest rate on Stafford Loans and
Unsubsidized Stafford Loans will be established annually at the "bond equivalent
rate of the securities with the comparable maturity", as determined by the
Secretary of Education, plus 1.0 percent. This rate will apply for loans both
during the in-school and repayment periods. For PLUS loans, the rate will be the
same, except that 2.10 percent will be added to the rate basis. Special
allowance payments on these loans will be paid at the "bond equivalent rate of
the securities with comparable maturities" plus 1.0 percent and reset at
intervals established by the Secretary of Education. The Secretary of Education
has yet to issue formal guidance on the rate basis or on the method or timing of
special allowance payments for these loans.
ORIGINATION FEES
The eligible lender charges borrowers an origination fee, which in turn is
passed on to the federal government, on Subsidized and Unsubsidized Stafford
Loans and PLUS Loans equal to 3 percent of the principal balance of each loan.
The amount of the origination fee may be deducted from each disbursement
pursuant to a loan on a pro rata basis. No origination fee is paid on
Consolidation Loans.
Lenders must refund all origination fees attributable to a disbursement
that was returned to the lender by the school or repaid or not delivered within
120 days of the disbursement. Such origination fees must be refunded by
crediting the borrower's loan balance with the applicable lender.
STAFFORD LOANS
The Act provides for (i) federal insurance or reinsurance of Subsidized
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Subsidized Stafford Loans to be
paid by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments"), and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Subsidized Stafford Loans (collectively referred to herein
as "Federal Assistance").
Subsidized Stafford Loans are loans under the FFELP that may be made, based
on need, only to post-secondary students accepted or enrolled in good standing
at an eligible institution who are carrying at least one-half the normal
full-time course load at that institution. The Act limits the amount a student
can borrow in any academic year and the amount he or she can have outstanding in
the aggregate. The following chart sets forth the historic loan limits.
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MAXIMUM LOAN AMOUNTS
FEDERAL STAFFORD LOAN PROGRAM
<TABLE>
<CAPTION>
ALL STUDENTS(1)
--------------- INDEPENDENT STUDENTS(3)
BASE AMOUNT ------------------------
SUBSIDIZED AND ADDITIONAL
SUBSIDIZED UNSUBSIDIZED UNSUBSIDIZED
SUBSIDIZED ON OR AFTER ON OR AFTER ONLY ON OR TOTAL
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 7/7/93(2) AFTER 7/1/94 AMOUNT
- -------------------------------------- ---------- ----------- --------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year.............................. $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year.............................. $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year & above...................... $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)................... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit
Undergraduate....................... $ 12,500 $17,250 $23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)................... $ 25,000 $54,750 $65,500 $ 73,000 $138,500
</TABLE>
- ---------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount
that a student may borrow under an Unsubsidized Loan is the difference
between the combined maximum loan amount and the amount the student
received in the form of a Subsidized Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
(4) Some graduate health profession students otherwise eligible to borrow under
HEAL may be entitled to increase unsubsidized loan limits not to exceed
HEAL statutory limits for each course of study per academic year.
The interest rate paid by borrowers on a Subsidized Stafford Loan is
dependent on the date of the loan except for loans made prior to October 1,
1992, whose interest rate depends on any outstanding borrowings of that borrower
as of such date. The rate for variable rate Subsidized Stafford Loans applicable
for any 12-month period beginning on July 1 and ending on June 30, is determined
on the preceding June 1 and is equal to the lesser of (a) the applicable Maximum
Rate or, (b) the sum of (i) the bond equivalent rate of 91-day Treasury bills
auctioned at the final auction held prior to such June 1, and (ii) the
applicable Interest Rate Margin.
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<PAGE> 159
SUBSIDIZED STAFFORD LOANS
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT BORROWER RATE MAXIMUM RATE INTEREST RATE MARGIN
- ------------------------------ -------------------- -------------------- --------------------
<S> <C> <C> <C>
09/13/83-06/30/88............. 8% 8.00%
07/01/88-09/30/92............. 8% for 48 months; 8.00% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury +
Interest Rate Margin
10/01/92-06/30/94............. 91-Day Treasury + 9.00% 3.10%
Interest Rate Margin
07/01/94-06/30/95............. 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98............. 91-Day Treasury + 8.25% 2.50% (in school,
Interest Rate Margin grace, or deferment)
3.10% (in repayment)
After 07/01/98................ The bond equivalent 8.25% 1.0%
rate of the
securities with a
comparable maturity
as established by
the Secretary +
Interest Rate Margin
</TABLE>
The Technical Amendments provide that, for fixed rate loans made on or
after July 23, 1992 and for certain loans made to new borrowers on or after July
1, 1988, the lender must convert the loan to a variable rate loan capped at the
interest rate existing prior to the conversion. This conversion must have been
completed by January 1, 1995.
Holders of Subsidized Stafford Loans are eligible to receive Special
Allowance Payments. The Department is responsible for paying interest on
Subsidized Stafford Loans while the borrower is a qualified student, during a
grace period or during certain deferment periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Subsidized Stafford Loans in the
amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any deferment periods. The Act provides that
the owner of an eligible Subsidized Stafford Loan shall be deemed to have a
contractual right against the United States to receive Interest Subsidy Payments
(and Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act and continued eligibility of such
loan for federal reinsurance.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after the end of any given calendar quarter
(provided that the applicable claim form is properly filed with the Department),
although there can be no assurance that such payments will in fact be received
from the Department within that period.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan
typically does not commence while a student remains a qualified student, but
generally begins upon expiration of the applicable grace period, as described
below. Any borrower may voluntarily prepay without premium or penalty any loan
and in connection therewith may waive any grace period or deferment period. In
general, each loan must be scheduled for repayment over a period of not more
than ten years after the commencement of repayment. The Act currently requires
minimum annual payments of $600 including principal and interest, unless the
borrower and the lender agree to lesser payments. As of July 1, 1995, lenders
are required to offer borrowers a choice among standard, graduated and
income-sensitive repayment schedules. These repayment options must be offered to
all new borrowers who enter repayment on or after July 1, 1995. If a borrower
fails to elect a
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<PAGE> 160
particular repayment schedule or fails to submit the documentation necessary for
the option the borrower chooses, the standard repayment schedule is used.
Repayment of principal on a Subsidized Stafford Loan must generally
commence following a period of (a) not less than 9 months or more than 12 months
(with respect to loans for which the applicable interest rate is 7 percent per
annum) and (b) not more than 6 months (with respect to loans for which the
applicable interest rate is 9 percent per annum or 8 percent per annum and for
loans to first time borrowers on or after July 1, 1988) after the borrower
ceases to pursue at least a half-time course of study (a "Grace Period").
However, during certain other periods (each a "Deferment Period") and subject to
certain conditions, no principal repayments need be made, including periods when
the student has returned to an eligible educational institution on a full-time
(or in certain cases half time) basis or is pursuing studies pursuant to an
approved graduate fellowship program, or when the student is a member of the
Armed Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer
Service Act of 1973, or when the borrower is temporarily or totally disabled, or
periods during which the borrower may defer principal payments because of
temporary financial hardship. For new borrowers to whom loans are first
disbursed on or after July 1, 1993, payment of principal may be deferred only
while the borrower is at least a half-time student or is in an approved graduate
fellowship program or is enrolled in a rehabilitation program, or when the
borrower is seeking but unable to find full-time employment, or when for any
reason the lender determines that payment of principal will cause the borrower
economic hardship; in the case of unemployment or economic hardship the
deferment is subject to a maximum deferment period of three years. The 1992
Amendments also require forbearance of loans in certain circumstances and permit
forbearance of loans in certain other circumstances (each such period, a
"Forbearance Period").
The Unsubsidized Stafford Loan program created under the 1992 Amendments is
designed for students who do not qualify for Subsidized Stafford Loans and for
independent graduate and professional students whose Unmet Need exceeds what
they can borrow under the Subsidized Stafford Loan Program. The basic
requirements for Unsubsidized Stafford Loans are essentially the same as those
for the Subsidized Stafford Loans, including with respect to provisions
governing the interest rate, the annual loan limits and the Special Allowance
Payments. The terms of the Unsubsidized Stafford Loans, however, differ in some
respects. The federal government does not make Interest Subsidy Payments on
Unsubsidized Stafford Loans. The borrower must either pay interest on a periodic
basis beginning 60 days after the time the loan is disbursed or capitalize the
interest that accrues until repayment begins. Effective July 1, 1994, the
maximum insurance premium was set at 1 percent. Subject to the same loan limits
established for Subsidized Stafford Loans, the student may borrow up to the
amount of such student's Unmet Need. Lenders are authorized to make Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
PLUS AND SLS LOAN PROGRAMS
The Act also provides for the PLUS Program. The Act authorizes PLUS Loans
to be made to parents of eligible dependent students. The 1993 Act eliminated
the SLS Program after July 1, 1994.
The PLUS program permits parents of dependent students to borrow an amount
equal to each student's Unmet Need. Under the former SLS program, independent
graduate or professional school students and certain dependent undergraduate
students were permitted to borrow subject to the same loan limitations.
The first payment of principal and interest is due within 60 days of full
disbursement of the loan except for borrowers eligible for deferment who may
defer principal and interest payments while eligible for deferment; deferred
interest is then capitalized periodically or at the end of the deferment period
under specific arrangements with the borrower. The maximum repayment term is 10
years. PLUS and SLS loans carry no in-school interest subsidy.
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made or disbursed. Some PLUS or SLS loans carry a
variable rate. The rate varies annually for each 12-month period beginning on
July 1 and ending on June 30. The variable rate is determined on the preceding
June 1 and is equal to the lesser of (a) the applicable Maximum Rate or (b) the
sum of (i) the bond
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<PAGE> 161
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1, and (ii) the applicable Interest Rate Margin as set forth
below.
PLUS/SLS LOANS
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT BORROWER RATE MAXIMUM RATE INTEREST RATE MARGIN
- ----------------------------------------- -------------------- ------------ --------------------
<S> <C> <C> <C>
Prior to 10/01/81........................ 9% 9%
10/01/81-10/31/82........................ 14% 14%
11/01/82-06/30/87........................ 12% 12%
07/01/87-09/30/92........................ 52-Week Treasury + 12% 3.25%
Interest Rate Margin
10/01/92-06/30/94........................ 52-Week Treasury + PLUS 10% 3.10%
Interest Rate Margin SLS 11%
After 06/30/94
(SLS repealed 07/01/94)................ 52-Week Treasury + 9% 3.10%
Interest Rate Margin
</TABLE>
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1, and (ii) the Interest Rate Margin, exceeds (b) the Maximum
Rate.
THE CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which certain borrowers may consolidate
their various student loans into Consolidation Loans which will be insured and
reinsured to the same extent as other loans made under the FFELP. Under this
program, a lender may make a Consolidation Loan only if (a) such lender holds
one of the borrower's outstanding student loans that is selected for
consolidation, or (b) the borrower has unsuccessfully sought a Consolidation
Loan from the holders of the Student Loans selected for consolidation.
Consolidation Loans are made in an amount sufficient to pay outstanding
principal and accrued unpaid interest and late charges on all FFELP loans, as
well as loans made pursuant to various other federal student loan programs,
which were selected by the borrower for consolidation. The unpaid principal
balance of a Consolidation Loan made prior to July 1, 1994 bears interest at a
rate not less than 9 percent. The interest rate on a Consolidation Loan made on
or after July 1, 1994 is equal to the weighted average of the interest rates on
the loans selected for consolidation, rounded upward to the nearest whole
percent. The holder of a Consolidation Loan made on or after October 1, 1993
must pay the Secretary a monthly rebate fee calculated on an annual basis equal
to 1.05 percent of the principal plus accrued unpaid interest on any such loan.
The repayment term under a Consolidation Loan varies depending upon the
aggregate amount of the loans being consolidated. In no case may the repayment
term exceed 30 years. A Consolidation Loan is evidenced by an unsecured
promissory note and entitles the borrower to prepay the loan, in whole or in
part, without penalty.
GUARANTEE AGENCIES
The Act authorizes Guarantee Agencies to support education financing and
credit needs of students at post-secondary schools. Under various programs
throughout the United States, Guarantee Agencies insure student loans. The
Guarantee Agencies are reinsured by the federal government for 80 percent to 100
percent of claims paid, depending on their claims experience for loans disbursed
prior to October 1, 1993 and for 78 percent to 98 percent of claims paid for
loans disbursed on or after October 1, 1993.
Guarantee Agencies collect a one-time insurance fee of up to 1 percent of
the principal amount of each loan, other than Consolidation Loans, that the
agency guarantees.
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<PAGE> 162
The Guarantee Agencies generally guarantee loans for students attending
institutions in their particular state or region or for residents of their
particular state or region attending schools in another state. Certain Guarantee
Agencies have been designated as the Guarantee Agency for more than one state.
Some Guarantee Agencies contract with other entities to administer their
guarantee agency programs.
FEDERAL INSURANCE AND REINSURANCE OF GUARANTEE AGENCIES
A student loan is considered to be in default for purposes of the Act when
the borrower fails to make an installment payment when due, or to comply with
other terms of the loan, and if the failure persists for 180 days in the case of
a loan repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments.
If the loan is guaranteed by a Guarantee Agency, the eligible lender is
reimbursed by the Guarantee Agency for 100 percent (98 percent for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
loan plus accrued interest on any loan defaulted so long as the eligible lender
has properly originated and serviced such loan. Under certain circumstances a
loan deemed ineligible for reimbursement may be restored to eligibility.
Under the Act, the Department enters into a reinsurance agreement with each
Guarantee Agency, which provides for federal reinsurance of amounts paid to
eligible lenders by the Guarantee Agency. Pursuant to such agreements, the
Department agrees to reimburse a Guarantee Agency for 100 percent of the amounts
expended in connection with a claim resulting from the death, bankruptcy, or
total and permanent disability of a borrower, the death of a student whose
parent is the borrower of a PLUS Loan, or claims by borrowers who received loans
on or after January 1, 1986 and who are unable to complete the programs in which
they are enrolled due to school closure, or borrowers whose borrowing
eligibility was falsely certified by the eligible institution; such claims are
not included in calculating a Guaranty Agency's claims experience for federal
reinsurance purposes, as set forth below. The Department is also required to
repay the unpaid balance of any loan if collection is stayed under the
Bankruptcy Code, and is authorized to acquire the loans of borrowers who are at
high risk of default and who request an alternative repayment option from the
Department.
With respect to FFELP loans in default, the Department is required to pay
the applicable Guarantee Agency a certain percentage ("Reinsurance Rate") of the
amount such agency paid pursuant to default claims filed by the lender on a
reinsured loan. The amount of such Reinsurance Rate is subject to specified
reductions when the total reinsurance claims paid by the Department to a
Guarantee Agency during a fiscal year equals or exceeds 5 percent of the
aggregate original principal amount of FFELP loans guaranteed by such agency
that are in repayment on the last day of the prior fiscal year. Accordingly, the
amount of the reinsurance payment received by the Guarantee Agency may vary. The
Reinsurance Rates are set forth in the following table.
<TABLE>
<CAPTION>
GUARANTEE AGENCY'S
CLAIMS EXPERIENCE APPLICABLE REINSURANCE RATE
- --------------------------------------------- ---------------------------------------------------
<S> <C>
0% up to 5%.................................. 98% (100% for loans disbursed before Oct. 1, 1993)
5% up to 9%.................................. 88% (90% for loans disbursed before Oct. 1, 1993)
9% and over.................................. 78% (80% for loans disbursed before Oct. 1, 1993)
</TABLE>
- ---------------
The claims experience is not cumulative. Rather, the claims experience for
any given Guarantee Agency is determined solely on the basis of claims for any
one federal fiscal year compared with the original principal amount of loans in
repayment at the beginning of that year.
The 1992 Amendments addressed industry concerns regarding the Department's
commitment to providing support in the event of Guarantee Agency failures.
Pursuant to the 1992 Amendments, Guarantee Agencies are required to maintain
specified reserve fund levels. Such levels are defined as 0.5 percent of the
total attributable amount of all outstanding loans guaranteed by the agency for
the fiscal year of the agency that begins in 1993, 0.7 percent for the agency's
fiscal year beginning in 1994, 0.9 percent for the agency's fiscal year
beginning in 1995, and 1.1 percent for the agency's fiscal year beginning on or
after January 1, 1996.
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<PAGE> 163
If (i) the Guarantee Agency fails to achieve the minimum reserve level in any
two consecutive years, (ii) the Guarantee Agency's federal reimbursements are
reduced to 80 percent (or 78 percent after October 1, 1993) or (iii) the
Department determines the Guarantee Agency's administrative or financial
condition jeopardizes its continued ability to perform its responsibilities, the
Department must require the Guarantee Agency to submit and implement a
management plan to address the deficiencies. The Department may terminate the
Guarantee Agency's agreements with the Department if the Guarantee Agency fails
to submit the required plan, or fails to improve its administrative or financial
condition substantially, or if the Department determines the Guarantee Agency is
in danger of financial collapse. In such event, the Department is authorized to
undertake specified actions to assure the continued payment of claims, including
making advances to guarantee agencies to cover immediate cash needs,
transferring of guarantees to another Guarantee Agency, or transfer of
guarantees to the Department itself.
The Act provides that, subject to compliance with the Act, the full faith
and credit of the United States is pledged to the payment of federal reinsurance
claims. It further provides that Guarantee Agencies are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantee Agency is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until such time as the obligations are transferred to a new Guarantee
Agency capable of meeting such obligations or until a successor Guarantee Agency
assumes such obligations. There can be no assurance that the Department would
under any given circumstances assume such obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantee Agency or by making a determination that such
Guarantee Agency is unable to meet its guarantee obligations.
Lastly, the 1993 Act provides the Secretary of Education with broad
authority to manage the finances and affairs of Guarantee Agencies. In general,
the Act provides that agency reserve funds are federal property and may be taken
by the Secretary if he determines such action is in the best interests of the
loan program. Also, the Secretary has broad authority to terminate a Guarantee
Agency's reinsurance agreement with the Department.
Within each fiscal year, the applicable Reinsurance Rate steps down
incrementally with respect to claims made only after the claims experience
thresholds are reached.
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<PAGE> 164
APPENDIX D
STATEMENT OF DISSENTING DIRECTORS
The following statement has been included at the written request of the
directors listed below and represents solely their views.
STATEMENT OF MESSRS. BRANDON, DALEY, HUNT, LAMBERT, LORD, PORTER,
SHAPIRO AND WATERFIELD FOR INCLUSION IN THE FORM S-4
Messrs. Brandon, Daley, Hunt, Lambert, Lord, Porter, Shapiro and Waterfield
(the "Majority of Elected Directors") voted against the Reorganization and the
other items that were submitted to a single vote by the Board of Directors. The
determination of the Majority of Elected Directors to vote against the
Reorganization was based on their belief that (i) management has not presented a
concrete business plan for the Holding Company, and (ii) the Reorganization
unnecessarily impairs stockholders' control over the corporation in both the
near- and long-term. In reaching this determination, the Majority of Elected
Directors considered the following material factors:
1. The belief that management has not presented a credible business
plan, or otherwise demonstrated the ability, to leverage Sallie Mae's
strengths in order to increase profit margins after privatization, as
exhibited by management's concessions when renegotiating the Company's
business relationship with The Chase Manhattan Bank.
2. The failure of management to present specific new substantive
business ventures for the Holding Company following privatization.
3. The fact that the Reorganization alters the composition of the
board of directors without allowing a stockholder vote on the Holding
Company board. A proposal presented by Mr. Brandon to have a separate vote
of stockholders on the election of the initial board of directors of the
Holding Company was not included on the agenda for the Special Meeting of
Stockholders.
4. The fact that the Nominations Committee of the Sallie Mae Board of
Directors (with Messrs. Brandon and Lambert dissenting) voted against a
proposal that the initial Holding Company board of directors consist of the
current fourteen stockholder-elected directors of Sallie Mae until
stockholders are provided the opportunity to vote on their successors. In
addition, the Majority of Elected Directors were effectively prevented from
evaluating the merit of seven individuals who were first proposed to the
Nominations Committee as potential directors of the Holding Company on the
day before the Board of Directors voted on the Reorganization.
5. The determination that the Reorganization will insulate the Holding
Company board of directors from accountability to stockholders by providing
for a classified board under which only one-third of the directors will be
subject to election in any one year, whereas currently two-thirds of Sallie
Mae's directors are subject to annual election, and by failing to provide
for a stockholder vote on the Holding Company board of directors in 1997.
6. The determination that the Certificate of Incorporation and Bylaws
of the Holding Company contain provisions that can entrench and insulate
management and omit other provisions that would protect stockholders'
rights, such as a provision proposed by Mr. Brandon that would restrict the
Holding Company's ability to adopt a stockholders rights plan ("poison
pill") without a stockholder vote.
7. The determination that there is sufficient time for an alternative
plan of reorganization containing provisions enhancing management and board
accountability to stockholders to be presented to stockholders for a vote
well in advance of the time that the "sunset" provisions of the
Privatization Act are triggered.
In voting against the Reorganization on the bases set forth above, the
Majority of Elected Directors have not determined that privatization is
undesirable, but instead believe that privatization on the terms contained in
the terms of the Reorganization advocated by management is not in the best
interests of Sallie Mae's stockholders.
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<PAGE> 165
APPENDIX E
DISSENT TO THE REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE
The following statement has been included at the written request of the
directors listed below and represents solely their views.
Messrs. Daley and Shapiro voted against the executive officer bonus and
stock option awards that were approved by the Compensation and Personnel
Committee (the "Committee"). This statement summarizes the reasons they dissent
from the Report on Executive Compensation submitted by the Committee.
GENERAL POLICY. At Sallie Mae, a majority of executive officers'
compensation is based on the Committee's subjective evaluations. While peer
company compensation data is compiled and distributed to Committee members, for
1996 neither base salaries nor overall compensation levels were targeted to
those of peer companies, and the Committee did not assign a specified weight to
any particular factor considered in setting annual bonuses and annual stock
option grants. For the reasons discussed below, Messrs. Daley and Shapiro
believe that the Committee's subjective evaluations of performance resulted in
1996 compensation being excessive relative to the Company's performance.
ANNUAL BONUS. Messrs. Daley and Shapiro believe that a true "at risk" bonus
system should result in bonuses that vary based on performance. They believe
that 1996 bonuses do not sufficiently reflect such a link. In reaching this
conclusion, Messrs. Daley and Shapiro noted that Sallie Mae's performance in
1996 had both positive and negative aspects. They believe that management cannot
claim credit for some of the factors that resulted in positive performance, such
as the influence that the Company's stock repurchase program, a generally
improved political environment and a strong stock market had on the Company's
stock price increase. In contrast, they believe that performance in areas where
management had more direct control and responsibility was not satisfactory. In
reaching this conclusion, Messrs. Daley and Shapiro noted that in three
significant areas management failed to exceed or even achieve stated objectives.
Student loan purchase volume was below planned levels without a significant
increase in yield. Importantly, both the amount of student loans originated from
the ExportSS product and the number of ExportSS lending clients declined.
Additionally, operating expenses exceeded management's plan and, after
accounting for the elimination of expenses as a result of the Company's
disposition of its CyberMark venture, continued at levels that Messrs. Daley and
Shapiro believe to be above what reasonably should be expected.
STOCK OPTIONS. Sallie Mae grants stock options in January of each year,
after evaluating performance for the previous year. Thus, the number of options
reported in the Summary Compensation Table and the Option Grants Table as having
been granted in 1996 relates to 1995 performance. Options granted in January
1997 after the Committee's evaluation of 1996 performance are not reflected in
those tables.
Messrs. Daley and Shapiro believe that the Company's option grant activity
is not guided by a formal methodology. Messrs. Daley and Shapiro believe that
three factors should be considered in determining the size of option grants: (1)
corporate performance, (2) the size and value of previous years' option grants,
and (3) the extent to which optionees have retained shares issued upon the
exercise of previously granted options. Based on these considerations, Messrs.
Daley and Shapiro believe that the Committee's January 1997 option grants to
executive officers were too large. In reaching this conclusion, they considered
the performance issues discussed above under "Annual Bonus" and the fact that
the approximately 40% increase in the Company's stock price between January 1996
and January 1997 resulted in a January 1997 option having a significantly higher
value than the January 1996 option grant.
CEO COMPENSATION. Messrs. Daley and Shapiro voted in favor of an increase
in Mr. Hough's salary because of the modest size of the increase. However, the
chairman of the Committee has stated that he believes Mr. Hough's salary is
relatively low and that the Committee will address this in the coming year.
Messrs. Daley and Shapiro do not believe that the CEO's salary is relatively
low.
For 1996, the Committee established a $500,000 bonus for Mr. Hough, which
it then reduced to $440,000 to reflect the recommendation of the Board's Audit
Committee. Specifically, following an internal inquiry into the source of a
document which is the subject of a complaint filed with the Federal Election
Commission involving the Company, the Audit Committee suggested that the
Compensation Committee take into
E-1
<PAGE> 166
consideration the Audit Committee's findings relative to Mr. Hough's supervisory
responsibility when considering Mr. Hough's 1996 compensation. The 1996 bonus
established by the Committee for Mr. Hough, even after the purported reduction
described above, resulted in a 1996 annual bonus (cash and restricted stock)
equal to approximately 81% of Mr. Hough's 1996 base salary, compared to a 1995
bonus equal to approximately 80% of Mr. Hough's 1995 base salary.
Messrs. Daley and Shapiro do not believe that the Committee's actions
resulted in an appropriate reduction in Mr. Hough's compensation given the Audit
Committee's findings, and do not believe that the Company's operating results
justify a bonus of the magnitude granted to Mr. Hough. They also do not believe
that the other factors considered by the Committee -- board relations,
congressional relations and team building -- offset the Company's operating
performance so as to justify Mr. Hough's bonus. As to board relations, they
believe that Mr. Hough failed to respond to requests and concerns raised by
eight directors (including themselves) who were nominated by The Committee to
Restore Value at Sallie Mae and first elected to the board by stockholders in
1995. As to Congressional relations, Messrs. Daley and Shapiro believe that the
incident leading to the filing of a complaint with the Federal Election
Commission referred to above damaged the Company's relationship with the Clinton
Administration and with some in Congress. In particular, they believe that
following that incident, the relationship of presidentially appointed directors
were a more important factor than Mr. Hough's congressional relations in
obtaining passage of privatization legislation. Messrs. Daley and Shapiro
believe that "team building" is too subjective a criteria to be afforded much
weight in awarding bonuses.
Finally, in determining to vote against the bonus awarded to Mr. Hough,
Messrs. Daley and Shapiro noted that the chairman of the Committee requested
Committee members to consider Mr. Hough's establishment and execution of a
longer term strategy in evaluating his performance. Messrs. Daley and Shapiro
view privatization as a means to implementing a business strategy, and do not
view Congressional passage of privatization legislation as a strategy in itself.
They believe that Mr. Hough has not presented to the Board any significant
strategy for taking advantage of privatization to enhance the value of
stockholders' investment in the Company. Accordingly, they do not believe that
Mr. Hough has performed strongly under this criteria.
In consideration of all of the foregoing, Messrs. Daley and Shapiro believe
that a lower annual bonus award would have been more appropriate for the
Company's CEO.
Messrs. Daley and Shapiro believe that the 27,000 share option grant
awarded to Mr. Hough in January 1997 -- following a 30,000 share option grant
for Mr. Hough in January 1996 -- is excessive. Their determination is based on
the same factors discussed above regarding Mr. Hough's annual bonus, as well as
their view as to valuation factors that they believe should be considered in
granting options, as discussed above in this dissent under "Stock Options."
E-2
<PAGE> 167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ---------------------------------------------------------------------------------
<C> <C> <S>
*2 -- Agreement and Plan of Reorganization dated as of , 1997, by and
among the Student Loan Marketing Association ("Sallie Mae"), SLM Holding
Corporation ("Registrant"), and Sallie Mae Merger Company ("MergerCo") (Appendix
A to the Proxy Statement/Prospectus contained in this Registration Statement)
*3.1 -- Form of Amended and Restated Certificate of Incorporation of Registrant
**3.2 -- By-Laws of Registrant
*4 -- Reference is made to Article Fourth of the Form of Amended and Restated
Certificate of Incorporation of Registrant (Exhibit 3.1 herein)
***5 -- Opinion of Timothy G. Greene, Executive Vice President and General Counsel, as to
the legality of the securities being registered
***8 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters
**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
***23.2 -- Consents of Persons Who Have Agreed to Serve as Directors of the Holding Company
Board
*27 -- Financial Data Schedule
**99.1 -- Charter of Sallie Mae
**99.2 -- By-Laws of Sallie Mae
</TABLE>
- ---------------
* Filed herewith.
II-1
<PAGE> 168
** Previously filed.
*** To be filed by an amendment to this Registration Statement.
(b) Financial statement schedules required by Regulation S-X and Item
14(e), Item 17(a) or Item 17(b)(9) of S-4 -- None
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment 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.
(3) 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 Act 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 its 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 Act and will be governed by the final
adjudication of such issue.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-2
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement, as amended to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Washington, District of Columbia, on March 25, 1997.
SLM Holding Corporation
By: /s/ LAWRENCE A. HOUGH
------------------------------------
Lawrence A. Hough
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement, as amended has been signed by the following persons
in the capacities and on the dates indicated.
/s/ LAWRENCE A. HOUGH
- ----------------------------------------------------
Lawrence A. Hough
President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ DENISE B. MCGLONE
- ----------------------------------------------------
Denise B. McGlone
Chief Financial Officer
(Principal Financial Officer)
/s/ MARK G. OVEREND
- ----------------------------------------------------
Mark G. Overend
Controller
(Principal Accounting Officer)
II-3
<PAGE> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
NUMBERING
EXHIBIT NO. SYSTEM
- ----------- ---------
<C> <C> <S> <C>
*2 -- Agreement and Plan of Reorganization dated as of ,
1997, by and among the Student Loan Marketing Association ("Sallie
Mae"), SLM Holding Corporation ("Registrant"), and Sallie Mae Merger
Company ("MergerCo") (Appendix A to the Proxy Statement/Prospectus
contained in this Registration Statement)............................
*3.1 -- Form of Amended and Restated Certificate of Incorporation of
Registrant...........................................................
**3.2 -- By-Laws of Registrant................................................
*4 -- Reference is made to Article Fourth of the Form of Amended and
Restated Certificate of Incorporation of Registrant (Exhibit 3.1
herein)..............................................................
***5 -- Opinion of Timothy G. Greene, Executive Vice President and General
Counsel, as to the legality of the securities being registered.......
***8 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax
matters..............................................................
**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.........................................
***23.2 -- Consent of persons who have agreed to serve as Directors of the
Holding Company Board................................................
*27 -- Financial Data Schedule..............................................
**99.1 -- Charter of Sallie Mae................................................
**99.2 -- By-Laws of Sallie Mae................................................
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by an amendment to this Registration Statement.
<PAGE> 171
PROXY
TIME SENSITIVE
STUDENT LOAN MARKETING ASSOCIATION
SOLICITED ON BEHALF OF THE MAJORITY OF THE BOARD OF DIRECTORS OF THE
STUDENT LOAN MARKETING ASSOCIATION FOR THE
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD MAY 15, 1997
The undersigned hereby constitutes and appoints David J. Vitale and Regina T.
Montoya, and each or any of them, as true and lawful agents and proxies with
full power of substitution in each to represent and to vote all the shares of
Sallie Mae Common Stock held of record by the undersigned at the close of
business on March 17, 1997 at the Special Meeting of Shareholders of the
Student Loan Marketing Association to be held on Thursday, May 15, 1997, at
.m., Eastern Standard Time, at the Ritz-Carlton, Tysons Corner, 1700 Tysons
Blvd., McLean, VA 22102, and at any adjournments thereof and to vote upon any
other business as may properly come before said Special Meeting or any
adjournment thereof, hereby revoking any proxy heretofore given.
You are encouraged to specify your choice by marking the appropriate box on the
reverse side of this card. If you sign and return this card but do not mark any
boxes, your shares of Sallie Mae Common Stock will be voted for the proposal to
approve and adopt the Reorganization Agreement as more fully described in the
accompanying Proxy Statement/Prospectus dated , 1997. The persons
listed above cannot vote your shares of Sallie Mae Common Stock unless you sign
and return this card.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
SEE REVERSE SIDE
<PAGE> 172
THE MAJORITY OF THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR:
/x/ Please mark
your votes
as this
The proposal to approve and adopt the Agreement FOR AGAINST ABSTAIN
and Plan of Reorganization. The Agreement and / / / / / /
Plan of Reorganization provides for the
Reorganization of the Student Loan Marketing
Association into a subsidiary of a new holding
company and the conversion of each outstanding
share of Sallie Mae Common Stock into one share
of Holding Company Common Stock. The Holding
Company will be governed by the provisions of
the Holding Company Charter and By-Laws
described in, and managed by a Board of
Directors composed of the individuals identified
in, the accompanying Proxy Statement/Prospectus.
PLEASE MARK BOX
BELOW IF
SHAREHOLDER WILL BE
ATTENDING THE
SPECIAL MEETING
/ /
NOTE: Receipt is hereby acknowledged of the Notice of
Special Meeting and the accompanying Proxy
Statement/Prospectus. This Proxy revokes all proxies
previously given by the undersigned with respect to all
shares of Sallie Mae Common Stock as to which the
undersigned has voting power. This Proxy when properly
executed by the undersigned, will be voted in the manner
directed. If the votes are not directed otherwise, this
Proxy will be voted for approval and adoption of the
Agreement and Plan of Reorganization. A majority (or if
only one, then that one) of the proxies or substitutes
acting at the Special Meeting, or at any adjournment,
thereof may exercise the powers conferred by this Proxy.
Signature Signature Date
------------------------- ---------------- --------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
<PAGE> 1
EXHIBIT 3.1
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 Two Hundred Seventy Million (270,000,000) shares of
capital stock, consisting of (i) Two Hundred Fifty Million (250,000,000) shares
of common stock, par value $.20 per share (the "Common Stock"), and (ii) Twenty
Million (20,000,000) shares of preferred stock (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.
(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 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
<PAGE> 2
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. Subject to the requirements of
applicable law, the Corporation shall have the power to purchase any shares of
any class of stock herein or hereafter authorized from such persons, and for
such consideration, as the Board of Directors shall from time to time, in its
discretion, determine, whether or not less consideration could be paid upon the
purchase of the same number of shares of another class, and as otherwise
permitted by law.
FIFTH: The name and mailing address of the Sole Incorporator is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
- ------------------ --------------------------------
<S> <C>
Timothy G. Greene 1050 Thomas Jefferson St., N.W.
Washington, D.C. 20007
</TABLE>
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:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
(2) (a) The number of directors of the Corporation shall initially be
16, and thereafter shall be such number as from time to time is fixed by
resolution of the Board of Directors, provided that the number of directors
shall not be less than nine nor more than 19.
(b) A director shall hold office until the next annual meeting of
stockholders of the Corporation and until his or her successor shall be
elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office.
(c) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors may be filled by
stockholders of the Corporation at any annual meeting or at a special
meeting called for that purpose or by a majority of the Board of
Directors then in office, even if less than a quorum, or by a sole
remaining director. Subject to the rights, if any, of the holders of
shares of Preferred Stock then outstanding, any or all of the directors
of the Corporation may be removed from office at any time only by the
affirmative vote of the holders of at least a majority of the voting
power of the Corporation's then outstanding capital stock entitled to
vote at an election of directors. 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.
(3) 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.
2
<PAGE> 3
(4) 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 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.
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: No action by shareholders shall be valid unless taken at a duly
constituted meeting pursuant to the terms of the By-Laws of the Corporation and
no action may be taken by stockholders by written consent without a meeting.
NINTH: 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. In furtherance and not in
limitation of the powers conferred upon it by the laws of the State of Delaware,
the Board of Directors shall have the power to adopt, amend, alter or repeal the
Corporation's By-Laws. The affirmative vote of at least a majority of the entire
Board of Directors shall be required to adopt, amend, alter or repeal the
Corporation's By-Laws.
3
<PAGE> 1
EXHIBIT 10.4
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
I. PURPOSE
The purpose of the Incentive Performance Plan (the "Plan") is
to assist the Student Loan Marketing Association (the "Corporation" or
"Sallie Mae") in attracting, motivating and retaining executives who
are responsible for the attainment of the Corporation's future growth
and success by rewarding them for achieving long-term financial
results.
II. DEFINITIONS
Unless the context otherwise requires, the following
definitions are applicable throughout the Plan:
1. "Board" means the Board of Directors of the Student Loan
Marketing Association.
2. "Committee" means the Compensation and Personnel Committee of
the Board.
3. "Common Stock" means the common stock of the Corporation.
4. "Fiscal Year" means the twelve-month period used as the annual
accounting period by the Corporation.
5. "Subsidiary" means any wholly- or majority-owned subsidiary of
the Corporation.
6. "Participant" means any full-time officer of the Corporation
at the level of Senior Vice President or above or any Chief
Executive Officer of a Subsidiary to whom an award may be made
under this Plan.
7. "Administrative Guidelines" means those provisions adopted by
the Committee, as they shall be amended from time to time,
which shall govern the Plan's operation.
8. "Actual Award" means the dollar amount, determined according
to Section IV of this Plan, which becomes payable upon the
completion of a Program, as defined below.
9. "Program Formula" means the business criteria that have been
established by the Committee as the objectives for corporate
performance and the maximum percentage of salary that a
Participant may be awarded for the achievement of each Program
Target, as defined below, established for each business
criterion. The applicable business criteria are attached
hereto and made a part of this Plan as Exhibit A.
10. "Program" means the three consecutive Fiscal Years designated
by the Committee under which Actual Awards may be earned by
Participants to the extent that predetermined Program Targets
are achieved under the Program Formula during the
corresponding Program, as defined below.
11. "Program Target" means appropriate measures of performance and
levels of attainment established for each business criterion
under the Program Formula and used to determine the
Participants' Actual Awards.
III. PROGRAM ESTABLISHMENT
Prior to the beginning of each Program, the Compensation and
Personnel Committee, subject to approval by the Board, shall establish
Program Targets to be achieved under the Program Formula applicable to
the
<PAGE> 2
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
PAGE 2
Corporation or a Subsidiary. The Program Targets shall include a
schedule relating accomplishment of Program Targets to the Actual
Awards that may be earned by Participants.
The Committee shall designate the Participants within each
Program. The Committee may add new Participants to a Program after
its commencement and Actual Awards for such new Participants shall be
determined upon a pro rata basis, based on the number of months of
service under a Program.
IV. DETERMINATION OF ACTUAL AWARD
At the completion of a Program, or at such other time as
specified in the Administrative Guidelines, the Committee shall
calculate each Participant's Actual Award for the Program by
multiplying the annual salary of the Participant as of the last day of
the Program by the percentage representing the degree of attainment of
the Program Targets. An Actual Award for any Participant shall not
exceed 100 percent of the Corporation's Chief Executive Officer's
salary at the end of the Program. For purposes of calculating an
Actual Award, annual increases of such salary in excess of 10 percent
shall not be taken into account.
If a Participant becomes disabled during a Program under the
terms of the applicable long-term disability plan in effect at that
time, retires during a Program, at an early, normal or postponed
retirement date, or is granted a leave of absence during a Program, a
Participant shall receive a pro rata Actual Award determined according
to the Plan, multiplied by a fraction, the numerator of which shall be
the total months of the Participant's active employment during the
Program and the denominator of which shall be the total months of the
Program's duration. The Actual Award for such Participants shall be
determined after the Program runs its full course and shall be paid in
full immediately.
If a Participant dies during a Program, the Actual Award for
any Participant who has died during any Program shall be determined by
the Committee's assessment of the degree to which the Program Targets
are likely to be achieved by the end of the Program. The Actual Award
so determined shall be multiplied by a fraction, the numerator of
which shall be the total months of the Participant's active employment
during the Program and the denominator of which shall be the total
months of the Program's duration. In the case of death, the annual
salary of the Participant as of the date of his or her death shall be
used in determining the amount of the Actual Award.
Participants who otherwise terminate their employment, or
whose employment is otherwise terminated, shall be ineligible to
receive any Actual Awards for Programs that conclude after the
Participant's termination date.
For purposes of determining Actual Awards for Participants who
are employees of both the Corporation and a Subsidiary, the above
rules shall apply upon the disability, retirement, leave of absence or
termination of employment from both the Corporation and the
Subsidiary.
V. DISTRIBUTION OF ACTUAL AWARDS
Payments of Actual Awards shall be made according to the
following schedule:
1. one-third as soon as practicable after the completion
of a Program;
2. one-third at the beginning of the Fiscal Year
following the Fiscal Year in which the payment under
(a) above was made; and
<PAGE> 3
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
PAGE 3
3. one-third at the beginning of the Fiscal Year
following the Fiscal Year in which the payment under
(b) above was made.
If a Participant, subsequent to an Actual Award but prior to
the payment of such award in full:
1. dies;
2. becomes disabled under the terms of the applicable
long-term disability plan in effect at that time; or
3. retires at an early, normal or postponed retirement
date under the applicable retirement procedures in
effect at that time,
then the remaining amount of the Actual Award then unpaid shall be
paid immediately to the Participant or his or her estate.
If a Participant is granted a leave of absence prior to
payment in full of his or her Actual Award, the next scheduled payment
of the Actual Award shall be delayed from its regular payment date by
an amount of time equal to the leave of absence, and the next payment,
if any, shall be made one calendar year thereafter, and so forth until
paid in full.
Participants who otherwise terminate their employment or whose
employment is terminated prior to the payment of their Actual Awards
in full shall be entitled to an immediate pro rata payment of the next
scheduled payment of their Actual Award, but shall be entitled to no
further payments. The final payment for such a terminated employee
shall be determined by multiplying a fraction, the numerator of which
shall be the number of months which have elapsed during the Fiscal
Year in which termination occurs and the denominator of which shall be
12, by the dollar amount of the next scheduled payment.
For purposes of payments of Actual Awards to Participants who
are employees of both the Corporation and a Subsidiary, the above
rules shall apply upon the disability, retirement, leave of absence or
termination of employment from both the Corporation and the
Subsidiary.
Before each payment of the Actual Award, a Participant shall
elect, on a form supplied by the Committee, to receive such payment in
any combination of the following two forms of payment:
1. Cash, or
2. Whole shares of Common Stock and cash for fractional shares.
The conversion of the portion of the payment of the Actual
Award that will be paid in shares of Common Stock shall be
based on the current market value of a share of Common Stock.
The current market value shall be the closing price of the
Common Stock on the day immediately preceding the date of the
payment of the Actual Award.
VI. ADJUSTMENT OF PERFORMANCE TARGETS
The Board may, during a Program and consistent with applicable
tax law governing the deduction of compensation paid under the Plan,
make such adjustments as it may deem appropriate to reflect any
significant changes that may have occurred during such Program in
accounting practices, tax laws or other laws or regulations that alter
or affect the computation of the measures of financial performance
used for the calculation of Actual Awards.
<PAGE> 4
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
PAGE 4
VII. OTHER CONDITIONS
No person shall have any claim or right to participate in a
Program or to receive Actual Awards under this Plan. Neither a
Participant in a Program nor his heirs or legal representatives shall
have any right or interest in an Actual Award until an award thereof
shall have been determined in accordance with Section IV hereof.
It is a condition of this Plan, and all rights of each
Participant shall be subject thereto, that no right or interest of any
Participant shall be assignable or transferable, in whole or in part,
either directly or by operation of law or otherwise, including, but
not by way of limitation, execution, lien, garnishment, attachment,
pledge, bankruptcy or in any other manner; except that any such right
shall be transferable to the Participant's heirs or estate in the
event of the Participant's death. No such right or interest of any
Participant shall be liable for, or subject to, any obligation or
liability of such Participant. In the event of a Participant's death,
any Actual Awards not yet paid shall be made in cash or Common Stock.
Neither this Plan, nor any action taken hereunder, shall be
construed as giving to any employee the right to be retained in the
employ of the Corporation or a Subsidiary.
The Corporation shall deduct from awards distributed any
Federal, state or local taxes required by law to be withheld from such
awards.
VIII. STOCK SUBJECT TO THE PLAN
Shares that may be issued under the Plan shall be the Common
Stock, $0.20 par value, of the Corporation. The aggregate number of
shares of Common Stock that may be granted is 200,000. Such shares
may be previously issued shares reacquired by the Corporation or
authorized but unissued shares.
IX. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If there is a change in the number or kind of outstanding
shares of the Corporation's Common Stock by reason of legislative
action, a stock dividend, stock split, recapitalization, merger,
consolidation, combination or other similar event, appropriate
adjustments shall be made by the Compensation and Personnel Committee
to the number and kind of shares that may be granted under the Plan.
X. AMENDMENT
The Board shall have the right to amend, suspend or terminate
this Plan at any time; provided, however, that no such action shall
change any Program Target that the Board has fixed for any Program
(except for changes pursuant to Section VI), nor deprive any
Participant of his or her contractual right to any Actual Award that
has been awarded to him or her as to any Program, provided that all
requirements necessary to the actual payment of such award have been
fulfilled. Plan amendments shall be subject to shareholder approval
as required by applicable law.
XI. ADMINISTRATION
The Plan shall be administered by the Committee, which shall
have sole power to:
1. Determine whether to establish a Program and, if such a
Program is established, to determine the Participants therein.
<PAGE> 5
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
PAGE 5
2. Calculate and approve the amount of Actual Awards.
3. Construe and interpret the Plan, and make and amend such
Administrative Guidelines as the Committee may deem desirable.
Actions, determinations and decisions of the Committee with
respect to the Plan, the designation of Participants therein, the
determination of Actual Awards thereunder, and the administration
thereof, shall be final, conclusive and binding upon all parties
concerned, including the Corporation, its shareholders and any
employee of the Corporation.
XII. EFFECTIVE DATE
The Plan became effective as of January 1, 1983 and was
restated effective January 1, 1986. The effective date of this Plan
as restated here in its entirety is May 26, 1994.
IN WITNESS THEREOF, Student Loan Marketing Association has
caused this instrument to be duly executed in its name and on its
behalf this ______ day of _______________, 1994
STUDENT LOAN MARKETING ASSOCIATION
-----------------------------------
Timothy G. Greene,
Executive Vice President and
General Counsel
<PAGE> 6
EXHIBIT A
TO
STUDENT LOAN MARKETING ASSOCIATION
INCENTIVE PERFORMANCE PLAN
BUSINESS CRITERIA FOR SALLIE MAE
For the Corporation, the business criteria for establishing a Program
Formula may include one or more of the following: total shareholder return,
return on assets, return on equity, earnings per share, and education mission
enhancements.
BUSINESS CRITERIA FOR CYBERMARK, INC., A WHOLLY-OWNED SUBSIDIARY OF SALLIE MAE
For Cybermark, Inc., the business criteria for establishing a Program
Formula may include one or more of the following: return on capital, increases
in revenues, and number of product placements, including pilot projects.
<PAGE> 1
EXHIBIT 10.5
STUDENT LOAN MARKETING ASSOCIATION
STOCK COMPENSATION PLAN
Section 1. Purpose
The purpose of this Plan is to provide equity-based compensation to
officers of the Company who are eligible for compensation payments under the
Profit Incentive Plan.
Section 2. Definitions
(a) Award refers to Unrestricted Stock, Restricted Stock, or Stock Units
granted pursuant to the terms and conditions of the Plan.
(b) Board of Directors refers to the board of directors of the Student
Loan Marketing Association, except that after a reorganization to
privatize the Student Loan Marketing Association described in
section 8(b) of the Plan, it shall mean the board of directors of a
state-chartered holding company that is the single shareholder of
the Student Loan Marketing Association.
(c) Company refers to the Student Loan Marketing Association, except
that after a reorganization to privatize the Student Loan Marketing
Association described in section 8(b) of the Plan, it shall mean the
state-chartered holding company that is the single shareholder of
the Student Loan Marketing Association and any other entity that is
designated by the Board of Directors and, with respect to the
state-chartered holding company, is a corporation that is a member
of the controlled group (within the meaning of section 1563(a) of
the Internal Revenue Code).
(d) Committee refers to the Compensation and Personnel Committee of the
Board of Directors which administers the Plan and the members of
which are "disinterested persons" within the meaning of Rule 16b-3
promulgated under the Securities and Exchange Act of 1934.
(e) Grantee refers to an officer of the Company to whom an Award is made
under the Plan.
(f) Profit Incentive Plan refers to the Student Loan Marketing
Association Profit Incentive Plan, including any successor plan.
(g) Plan refers to the Student Loan Marketing Association Stock
Compensation Plan set forth in this document, as amended from time
to time, and any rules or regulations established by the Committee
in the course of administering the Plan.
(h) Restricted Stock refers to an Award under section 5 of the Plan
transferring shares of Stock to the grantee that remain forfeitable
until the Grantee completes a specified period of employment with
the Company or until the occurrence or nonoccurrence of such other
event specified in the Award.
(i) Stock refers to the Common Stock of the Student Loan Marketing
Association, except that after a reorganization to privatize the
Student Loan Marketing Association described in section 8(b) of the
Plan, it shall mean the Common Stock of the state-chartered holding
company that is the single shareholder of the Student Loan Marketing
Association.
(j) Stock Units refers to an Award under section 7 of the Plan in which
the Grantee is credited with one or more units each of which are
equivalent to a share of Stock and, as specified in the Award, are
payable at a specified time either in cash or by the transfer of
equivalent shares of Stock.
<PAGE> 2
(k) Unrestricted Stock refers to an Award under section 6 of the Plan
transferring shares of Stock to the grantee that are nonforfeitable.
Section 3. Shares of Stock Subject to Awards
The total number of shares of Stock available under the Plan for Awards
shall consist of 150,000 shares, subject to the adjustments specified in
section 8 of the Plan. Stock transferred pursuant to an Award shall reduce the
total number of shares of Stock available under the Plan. The total number of
shares available under the Plan shall be increased by the number of shares of
Stock that are forfeited and by the equivalent number of shares of any Stock
Units that are paid in cash.
Section 4. Granting of Awards and Administration of Plan
(a) The Committee shall determine and designate from time to time the
officers of the Company who are to be granted Awards and the number
of shares of Stock to be transferred pursuant to an Award, subject
to the limitation of section 3. Awards shall be made only to the
extent that an officer is eligible to receive compensation under the
Profit Incentive Plan and in lieu of all or part of cash
compensation payable under such plan, as specified by the Committee.
(b) In its discretion, the Committee may provide an officer with an
opportunity to elect to receive compensation under the Performance
Incentive Plan in the form of a Restricted Stock Award in lieu of a
cash payment. If an officer makes such an election, the number of
shares of stock transferred pursuant to the Restricted Stock Award
shall be determined as if the fair market value of the stock were
only ninety percent of the fair market value as of the date of
transfer. Elections shall be made available to an officer only in
the calendar year prior to the year in which the officer's
compensation under the Profit Incentive Plan is ascertainable and
payable.
(c) The Committee shall evidence each Award by a writing provided to the
Grantee that specifies whether the Award is Restricted Stock,
Unrestricted Stock, or Stock Units, the number of shares subject to
the Award, and other terms and conditions of the Award.
(d) The Committee shall have the authority to interpret the Plan; to
prescribe, amend, and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of Awards; to waive any
terms or conditions applicable to an Award, including conditions of
forfeiture; and to make any other determination necessary or
advisable for the administration of the Plan. The Committee shall
have sole discretion to resolve any controversy or claim arising
under the Plan or an Award.
Section 5. Restricted Stock
(a) An Award of Restricted Stock shall cause a transfer of Stock to the
Grantee as of the date of the Award, but the Stock transferred shall
be subject to such forfeiture provisions that are specified under
the terms of the Award.
(b) The Grantee of an Award of Restricted Stock shall have the rights
and privileges of a stockholder with respect to Stock specified in
the Award, subject to the limitations otherwise set forth in the
Plan, including the right to vote such shares and the right to be
paid currently any cash or stock dividends with respect to the
Stock.
(c) Upon the transfer of Stock to a Grantee under a Restricted Stock
Award, the Grantee shall be entered on the books and records of the
Company as the holder of such shares, but a stock certificate or
other indicia of ownership shall not be delivered to the Grantee
until such time that the Stock is no longer
<PAGE> 3
forfeitable. Upon the lapse of any condition of forfeiture, the
certificate or other indicia of ownership shall be delivered to the
Grantee as soon as practicable.
(d) Notwithstanding any other provision of the Plan, the Stock
transferred under any Award of Restricted Stock shall not be subject
to forfeiture if, prior to the satisfaction of all forfeiture
conditions, (1) the Grantee dies; (2) the Grantee becomes eligible
for payments under another plan, program or arrangement sponsored by
the Company on account of the Grantee's permanent disability; (3)
the Grantee is involuntarily terminated (but not including
involuntary terminations for malfeasance in the course of the
Grantee's duties of employment or the Grantee's commission of a
criminal act); or (4) the Grantee retires from employment on or
after reaching what is then defined as the normal retirement age
under the Student Loan Marketing Association Employees' Pension Plan
or a successor tax-qualified retirement plan.
Section 6. Unrestricted Stock
An Award of Unrestricted Stock shall cause a transfer of Stock to the
Grantee as of the date of the Award. Stock transferred pursuant to an Award
of Unrestricted Stock shall not be subject to any condition of forfeiture.
As soon as practicable after an Award is made, the Grantee shall receive a
stock certificate or other indicia of ownership.
Section 7. Stock Units
(a) An Award of Stock Units shall give the Grantee the right to a future
transfer of Stock or payment of equivalent cash, as specified under
the terms of the Award. The number of Stock Units shall be increased
on account of any dividends paid on Stock during the period after an
Award is made and prior to the payment of cash or transfer of Stock
under the Award.
(b) In the discretion of the Committee, an Award of Stock Units may be
subject to any conditions of forfeiture that may be applied to
Awards of Restricted Stock, but such conditions shall be waived if,
prior to their satisfaction, an event occurs described in Section
5(d) of the Plan.
(c) An Award of Stock Units shall not give the Grantee any beneficial
ownership in Stock prior to a transfer of Stock to the Grantee under
the terms of the Award. An Award of Stock Units shall constitute
unfunded deferred compensation. No separate fund shall be
established or other segregation of assets made to assure payment of
any Awards of Stock Units. Prior to payment or transfer of Stock, a
Grantee of an Award of Stock Units shall have no rights greater than
an unsecured general creditor of the Company.
(d) A Grantee of an Award of Stock Units shall have the right to elect
to receive payments of cash or transfers of Stock (whichever is
applicable) in annual installments of up to ten years in lieu of a
single payment or transfer, provided that such election is filed
with the Committee at least 12 months prior to the date that the
Grantee is eligible for any payment or transfer of Stock under the
Award.
Section 8. Changes in Capitalization Including Privatization
(a) The Committee may make adjustments to the number and class of shares
of stock available under the Plan and outstanding Awards to prevent
dilution or enlargement of rights, including adjustments appropriate
to reflect stock dividends, split-ups, recapitalization, mergers,
consolidations, combinations or exchanges of shares, separations,
reorganizations, liquidations, and the like.
<PAGE> 4
(b) The Committee's authority under section 8(a) of the Plan shall
include any adjustments made necessary or appropriate to the Plan
and outstanding Awards on account of a reorganization to convert the
Student Loan Marketing Association from a federally-chartered
government sponsored enterprise to a wholly-owned subsidiary of a
state-chartered holding company, including substituting shares of
Common Stock in the Student Loan Marketing Association made
available under the Plan with shares of a state-chartered holding
company.
Section 9. Amendment or Termination of Plan
The Board of Directors, or the Committee with the approval of the Board of
Directors, may at any time alter, amend, suspend, discontinue, or terminate
this Plan; provided, however, that such action shall not adversely affect the
rights of Grantees to Awards previously granted under the Plan and that no
amendment shall be made without the approval of the stockholders of the Company
that increases the maximum number of shares that may be transferred pursuant to
Awards under the Plan or that materially increases the benefit accruing to
Grantees.
Section 10. General Provisions
(a) At any time that an Award of Restricted Stock is subject to a
condition of forfeiture, or at any time prior to the transfer of
Stock or payment of equivalent cash under an Award of Stock Units,
such Awards shall not be subject to anticipation, sale, assignment,
pledge, encumbrance, or charge, except by will or operation of law.
(b) The granting of an Award under the Plan shall not give the Grantee
any right to future employment with the Company and shall have no
effect on the terms of any Grantee's employment with the Company.
(c) Notwithstanding any other provisions of the Plan, prior to or
concurrent with the payment of any cash to a Grantee or the delivery
of any certificate or indicia of ownership in Stock, the Committee
may, in its discretion, require that the Grantee pay or cause to be
paid any amount necessary to satisfy applicable federal, state, or
local taxes. In addition, prior to the delivery of any certificate
or indicia of ownership in Stock, the Committee, in its discretion,
may require (1) the listing or approval for listing of such shares
on any securities exchange that is the principal market for such
shares; (2) the registration or other qualification of such shares
under any state, federal or local law; or (3) the consent of any
state, federal or local agency.
(d) The Committee may issue or transfer Stock (or pay cash, if
applicable) under any Award to any entity of the Company that is the
employer of a Grantee on the condition or understanding that such
entity shall transfer shares (or pay cash, if applicable) to the
Grantee in accordance with the terms of the Award.
Section 11. Governing Law
The terms of the Plan and Awards granted hereunder shall be governed by the
laws of the District of Columbia.
<PAGE> 5
Section 12. Effective Date
The terms of the Plan shall be effective on January 1, 1996, as approved by
the shareholders of the Student Loan Marketing Association at the May 16, 1996
meeting of shareholders.
IN WITNESS WHEREOF, Student Loan Marketing Association has caused this
instrument to be duly executed in its name and on its behalf on this 16th day
of May, 1996.
STUDENT LOAN MARKETING ASSOCIATION
-----------------------------------
Timothy G. Greene, Executive
Vice President and General Counsel
<PAGE> 1
EXHIBIT 10.6
STUDENT LOAN MARKETING ASSOCIATION
1993-1998 STOCK OPTION PLAN
I. PURPOSE
The purposes of the Student Loan Marketing Association 1993-1998 Stock
Option Plan (the "Plan") are to: (1) closely associate the interests of the
management of the Student Loan Marketing Association and its subsidiaries and
affiliates (collectively referred to as the "Corporation") with the
shareholders by reinforcing the relationship between participants' rewards and
shareholder gains; (2) provide management with an equity ownership in the
Corporation commensurate with corporate performance, as reflected in increased
shareholder value; (3) maintain competitive compensation levels; and (4)
provide an incentive to management for continuous employment with the
Corporation.
II. ADMINISTRATION
(a) The Plan shall be administered by the Compensation and
Personnel Committee ("Committee") of the Board of Directors of
the Corporation ("Board"). In addition to its duties with
respect to the Plan stated elsewhere in the Plan, the
Committee shall have full authority, consistent with the Plan,
to interpret the Plan, to promulgate such rules and
regulations with respect to the Plan as it deems desirable, to
delegate its responsibilities hereunder to appropriate persons
and to make all other determinations necessary or desirable
for the administration of the Plan. All decisions,
determinations and interpretations of the Committee shall be
binding upon all persons.
(b) Stock options granted pursuant to the Plan ("Options") shall
be either incentive stock options ("ISOs") intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonqualified stock options ("NSOs")
not intended to qualify under Code Section 422. References in
this Plan to Options shall include both ISOs and NSOs.
(c) The Committee shall administer the Plan in a manner necessary
to establish and maintain the Options intended to constitute
ISOs as ISOs, and the Options intended to constitute NSOs as
NSOs. However, the Corporation makes no representation that
the Options designated as ISOs and the Options designated as
NSOs will qualify at the time of grant as ISOs and NSOs,
respectively, or will continue to qualify as ISOs and NSOs,
respectively. Nor does the Corporation make any representation
concerning the tax consequences to an employee upon receipt or
exercise of any Option hereunder or the subsequent sale of
Common Stock acquired thereunder.
(d) The Committee shall administer and maintain the Plan in the
manner necessary for Options granted to any "covered employee"
to qualify as performance-based compensation arrangements
within the meaning of Code section 162(m), and the Regulations
thereunder, including the limitation that the Committee be
comprised of "outside" directors.
III. SHARES SUBJECT TO THE PLAN
Shares that may be issued under the Plan shall be the Common Stock,
$0.20 par value, of the Corporation ("Common Stock"). The aggregate number of
shares of Common Stock which may be delivered on exercise of the Options is
5,091,450. Such shares may be previously issued shares reacquired by the
Corporation or authorized but unissued shares. If any Option expires,
terminates or is canceled for any reason, without having been exercised in
full, the shares covered by the unexercised portion of such Option shall again
be available for Options, within the limit specified above. Notwithstanding the
above, during any calendar year beginning on or after January 1, 1997, no
participant shall be granted Options for more than 150,000 shares, including
Reload Options granted pursuant to Article VIII, and including any Options that
expire, terminate, or are canceled.
<PAGE> 2
IV. PARTICIPANTS
The Committee shall determine the class of key employees of the
Corporation and its subsidiary corporations, which shall be eligible for
participation in the Plan and shall from time to time in its discretion select
from among them those to whom Options shall be granted ("Participants"). Also,
the Committee may grant options to key individuals who have accepted offers of
employment with the Corporation.
V. GRANTS OF OPTIONS
(a) The Committee shall in its discretion determine the time or
times when Options shall be granted and the number of shares
of Common Stock to be subject to each Option, except that no
Option may be granted after March 18, 1998.
(b) The Committee may in its discretion grant either ISOs, NSOs or
a combination of both.
(c) At any given time, a share of Common Stock may be subject to
only one of the two types of Options that may be issued under
the Plan.
(d) With respect to ISOs granted under the Plan, the aggregate
fair market value (determined as of the date the Option is
granted) of the Common Stock with respect to which ISOs are
exercisable for the first time by the Participant during any
calendar year under all stock option plans of the Corporation
and its Subsidiaries shall not exceed $100,000.
Notwithstanding the provisions for acceleration of the date an
Option is first exercisable in Article VII and Article IX, in
no event shall the date that an ISO is first exercisable be
accelerated under this Plan if the acceleration would cause an
ISO of a Participant to exceed the limit set forth in this
paragraph.
(e) No Option intended to constitute an ISO shall be granted to an
employee who, at the time the Option is granted, owns (within
the meaning of Section 422(b)(6) of the Code) Common Stock
possessing more than 10 percent of the total combined voting
power of all classes of stock of the Corporation or any of its
subsidiaries.
(f) Each Option shall be evidenced by a written instrument which
shall (1) state the terms and conditions of the Option in
accordance with the Plan; and (2) contain such additional
provisions as may be required under applicable laws,
regulations, and rules or otherwise appropriate.
VI. OPTION PRICE
The purchase price of a share of Common Stock subject to an Option
shall be, subject to adjustment pursuant to Article XVI, an amount equal to the
fair market value of the Common Stock on the day the Option is granted. The
fair market value shall be the closing price at which the Common Stock traded
on the day the Option is granted.
VII. OPTION PERIOD; EXERCISE RIGHTS
(a) Each Option shall be for a term as the Committee shall
determine, but not more than 10 years from the date it is
granted, and shall be subject to earlier termination as
provided in Article IX.
(b) Options granted may not be exercised in whole or in part
during the designated holding period for such Option, except
as may be authorized by the Committee in its sole discretion.
The designated holding period for an Option shall be a period
of months, not less than twelve and not more than thirty-six,
beginning with the date on which the Option is granted; such
number of months shall be determined by the Committee at the
time that such Option is granted.
<PAGE> 3
VIII. RELOAD OPTIONS
(a) Authorization and Grant of Reload Options. Concurrently with
or subsequent to the award of Options to any Participant in
the Plan, the Committee may authorize reload options to
purchase for cash or shares a number of shares of Common Stock
("Reload Options"). To the extent authorized by the Committee,
the number of Reload Options shall equal:
(i) the number of shares of Common Stock used to exercise
the underlying Stock Options (either shares
previously owned or shares acquired pursuant to the
exercise of the underlying option and sold in order
to exercise e.g., such as in a so-called "cashless
exercise" ); and
(ii) the number of shares of Common Stock used to satisfy
any tax withholding incident to the exercise of the
underlying Stock Options.
The date of grant of the Reload Option shall be the date the
underlying Option is exercised.
(b) Reload Option. Each Stock Option Agreement shall state whether
the Committee has authorized Reload Options with respect to
the underlying Stock Options. Upon the exercise of an
underlying Stock Option, the Reload Option will be evidenced
by a written instrument in accordance with paragraph (f) of
Article V.
(c) Reload Option Price. The option price per share of Common
Stock deliverable upon the exercise of a Reload Option shall
be the fair market value of a share of Common Stock on the
date the Reload Option is granted.
(d) Term and Exercise of Reload Options. Each Reload Option is
fully exercisable twelve months from the date of grant. The
term of each Reload Option shall be equal to the remaining
option term of the underlying Stock Option.
(e) Holding Period Requirement and One Reload Limit. In addition
to any other terms and conditions the Committee deems
appropriate, the Reload Option shall be subject to the
following terms: (i) the exercisability of a Reload Option
grant is conditioned upon the Participant holding the stock
acquired by the exercise of the underlying Option for a period
of twelve months from the date the Reload Option was granted;
if the Participant fails to comply with this holding
requirement, the Reload Option grant will be cancelled, and
(ii) Reload Options will not be granted upon the exercise of a
Reload Option.
(f) Termination of Employment. No Reload Options shall be granted
to optionees when Stock Options are exercised pursuant to the
terms of this Plan following termination of the optionee's
employment.
(g) Reload Options shall not reduce the aggregate number of shares
authorized under this Plan.
(h) The effective date of this Article VIII is January 25, 1996.
Reload Options shall not be granted for any Stock Options
granted prior to January 25, 1996.
IX. EXERCISE RIGHTS UPON TERMINATION OF EMPLOYMENT
(a) If a Participant terminates service on account of becoming
disabled, the Participant may exercise the Option in whole or
in part within one year after the date of disability, but in
no event later than the date on which it would have expired if
the Participant had not become disabled.
For this purpose, a Participant shall be deemed to be disabled if he
or she is determined to be disabled for purposes of meeting any insurance
requirements under policies provided by the Corporation.
<PAGE> 4
(b) If a Participant dies during a period in which he or she is
entitled to exercise an Option (including the periods referred
to in paragraphs (a) and (d) of this Article) the Option may
be exercised at any time within its remaining term as shall be
prescribed in the option instrument, but in no event later
than the date on which it would have expired if the
Participant had lived, or one year after the optionee's death,
whichever date is earlier, by the Participant's executor or
administrator or by any person or persons who shall have
acquired the Option directly from the Participant by bequest
or inheritance. The Option may be exercised in whole or in
part.
(c) If a Participant's employment with the Corporation or a
subsidiary shall be terminated for cause, he or she shall
forfeit any and all outstanding option rights and such rights
shall be deemed to have lapsed for purposes hereof as of the
date of the Participant's termination of service.
(d) If a Participant ceases to be employed by the Corporation or a
subsidiary for any reason other than disability, death or
termination for cause during a period in which he or she is
entitled to exercise an Option, the Participant's Option shall
terminate three months after the date of such cessation of
employment, but in no event later than the date on which it
would have expired if such cessation of employment had not
occurred. During such period the Option may be exercised only
to the extent that the Participant was entitled to do so at
the date of cessation of employment unless the Committee, in
its sole discretion, permits exercise of the Option to a
greater extent. The employment of a Participant shall not be
deemed to have ceased upon his or her absence from the
Corporation or a subsidiary on a leave of absence granted in
accordance with the usual procedures of the Corporation or
such subsidiary.
(e) No acceleration of the exercise date of an ISO shall occur
pursuant to this Article if such earlier exercise would cause
an ISO to violate paragraph (d) of Article V.
X. METHOD OF EXERCISE
(a) Each exercise of an Option shall be by written notice to the
Secretary of the Corporation, stating the number of shares to
be purchased. An Option may be exercised in whole or in part;
provided, however, that an Option may not be exercised as to
less than 25 shares at any one time, except with respect to
the remaining shares then purchasable under the Option, if
less than 25 shares. Fractional shares of Common Stock will
not be issued. The Committee may prescribe rules limiting the
frequency of exercise of Options.
(b) The purchase price of Common Stock being purchased shall be
paid in full at the time the Option is exercised. Such payment
may be made, at the election of the person exercising the
Option:
(i) in cash;
(ii) by delivery of Common Stock then owned by such
person, having a fair market value, as determined
under Article VI hereof, equal to such purchase
price; or
(iii) partly in cash and partly in Common Stock having a
fair market value as determined under Article VI.
(c) A Participant or other person entitled to exercise an Option
shall not be entitled to any rights as a shareholder of the
Corporation with respect to any shares covered by such Option
until such shares shall have been registered on the transfer
books of the Corporation in the name of such person.
<PAGE> 5
XI. WITHHOLDING TAXES
Whenever the Corporation proposes or is required to issue or transfer
shares of Common Stock under the Plan, the Corporation shall have the right to
require the grantee to remit to the Corporation an amount sufficient to satisfy
any Federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares. Alternatively,
the Corporation may issue or transfer such shares of Common Stock net of the
number of shares sufficient to satisfy the withholding tax requirements. For
withholding tax purposes, the shares of Common Stock shall be valued on the
date the withholding obligation is incurred.
XII. NONTRANSFERABILITY OF OPTIONS
Each Option shall be nonassignable and nontransferable by the
Participant other than by will or the laws of descent and distribution. Each
Option shall be exercisable during the Participant's lifetime only by the
Participant.
XIII. REPURCHASE OF SHARES BY CORPORATION
The Corporation is under no obligation to repurchase Common Stock
acquired pursuant to the exercise of an Option hereunder.
XIV. USE OF PROCEEDS
The proceeds received by the Corporation from the sale by it of shares
of Common Stock to persons exercising Options pursuant to the Plan will be used
for the general purposes of the Corporation.
XV. LAWS AND REGULATIONS
The Plan, the grant and exercise of Options, and the obligation of the
Corporation to sell and deliver shares of Common Stock upon exercise of Options
shall be subject to all applicable laws, regulations, and rules.
XVI. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If there is a change in the number or kind of outstanding shares of
the Corporation's Common Stock by reason of legislative action, a stock
dividend, stock split, recapitalization, merger, consolidation, combination or
other similar event, appropriate adjustments shall be made by the Committee to
the number and kind of shares subject to the Plan, the number and kind of
shares under Options then outstanding, the maximum number of shares available
for Options, the Option price and other relevant provisions, to the extent that
the Committee, in its sole discretion, determines that such change makes such
adjustments necessary or equitable.
XVII. NO EMPLOYMENT RIGHTS
Nothing in the Plan shall confer upon any employee of the Corporation
or of a subsidiary any right to continued employment, or interfere with the
right of the Corporation or a subsidiary to terminate his or her employment at
any time, for any reason.
<PAGE> 6
XVIII. TERMINATION; AMENDMENTS
(a) The Board may at any time terminate the Plan.
(b) The Board may at any time or times amend the Plan, or amend
any outstanding Option or Options, for the purpose of
satisfying the requirements of any changes in applicable laws
or regulations or for any other purpose which at the time may
be permitted by law. In the event that applicable rules or
regulations are promulgated by the Internal Revenue Service
which permit the acceleration of the date an Option is first
exercisable without violating the $100,000 limit described in
paragraph (d) of Article V, the Committee is authorized to act
for the Board in amending the Plan to permit acceleration in
conformity with such rules or regulations.
(c) Except as provided in Article XVI, no such amendment shall,
without the approval of the shareholders of the Corporation:
(i) increase the maximum number of shares of Common Stock
for which Options may be granted under the Plan;
(ii) reduce the price at which Options may be granted
below the price provided for in Article VI;
(iii) reduce the Option price of outstanding Options;
(iv) extend the period during which Options may be
granted;
(v) extend the period during which an outstanding Option
may be exercised;
(vi) materially increase in any other way the benefits
accruing to Participants; or
(vii) change the class of persons eligible to be
Participants.
(d) Nothing contained in this Plan shall be construed to prevent
the Corporation or any subsidiary from taking any corporate
action which is deemed by the Corporation or any such
subsidiary to be appropriate or in its best interest, whether
or not such action would have an adverse effect on the Plan or
any award made under the Plan. No employee, beneficiary, or
other person shall have any claim against the Corporation or
any subsidiary as a result of any such action.
XIX. INDEMNIFICATION OF COMMITTEE AND BOARD
The Corporation may, consistent with applicable law, indemnify members
of the Committee against any liability, loss or other financial consequence
suffered by them with respect to any act or omission of the Committee or its
members relating to the Plan to the same extent and subject to the same
conditions as specified in the indemnity provisions contained in the By-Laws
and Regulations of the Student Loan Marketing Association.
<PAGE> 7
XX. EFFECTIVE DATE
The original effective date of this Plan is March 18, 1983. The Plan
has been amended from time to time, and, prior to this restatement, the plan
was last restated in its entirety on March 18, 1993. The Plan is restated
herein as of January 25, 1996, as approved by the shareholders of the Student
Loan Marketing Association at the May 16, 1996 Annual Meeting of Shareholders.
IN WITNESS WHEREOF, Student Loan Marketing Association has caused this
instrument to be duly executed in its name and on its behalf on this 16th day
of May, 1996.
STUDENT LOAN MARKETING ASSOCIATION
-------------------------------------
Timothy G. Greene, Executive
Vice President and General Counsel
<PAGE> 1
EXHIBIT 10.7
Student Loan Marketing Association
Supplemental Pension Plan
1. Purpose and Effective Date
1.1 Purpose. The purpose of the Student Loan Marketing Association
Supplemental Pension Plan is to provide supplementary pension
benefits based on certain bonuses and deferred compensation earned
by those employees who are or who become eligible for benefits
from the Student Loan Marketing Association Employees' Pension
Plan, in addition to providing benefits to those employees whose
benefits under the Student Loan Marketing Association Employees'
Pension Plan are reduced as a result of the limitations imposed by
sections 401(a)(17) and 415 of the Internal Revenue Code. The
Supplemental Pension Plan is intended to qualify as a plan
maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly
compensated employees within the meaning of Sections 201(2),
301(a)(3) and 401(a)(1) of Title I of the Employee Retirement
Income Security Act of 1974, as amended. It is intended that the
Supplemental Pension Plan remain at all times an unfunded and
unsecured obligation of the Corporation.
1.2 Effective Date. The Effective Date of the Plan is January 1,
1983. Pursuant to action of the Board of Directors on September
22, 1989, and November 17, 1989, the Plan was amended and restated
effective November 17, 1989. Pursuant to action of the Board of
Directors on September 18, 1992, the Plan is amended and restated
effective September 18, 1992.
2. Definitions
2.1 "Board of Directors" or "Board" means the Board of Directors of
the Student Loan Marketing Association.
2.2 "Code" means the Internal Revenue Code of 1986, as amended, and
including any regulations, rulings or procedures issued
thereunder.
2.3 "Pension Plan Committee" or "Committee" means the Pension Plan
Committee as defined in the Pension Plan.
Page 1 Restated Effective
September 18, 1992
<PAGE> 2
2.4 "Corporation" means the Student Loan Marketing Association (or any
other person, firm, or corporation which may succeed to the
business of the Student Loan Marketing Association by merger,
consolidation or otherwise, and which, by appropriate action,
shall adopt the Plan) or any wholly- or majority-owned subsidiary
of the Student Loan Marketing Association (or such successor),
which adopts the Plan and becomes a party to it with the approval
of the Board.
2.5 "Participant" means any employee of the Corporation who is covered
under the Plan as provided in Section 3 and whose membership has
not ceased as provided in Section 3.2.
2.6 "Pension Plan" means the Student Loan Marketing Association
Employees' Pension Plan as amended from time to time.
2.7 "Supplemental Plan" or "Plan" means the Student Loan Marketing
Association Supplemental Pension Plan.
2.8 "Salary Compensation" has the same meaning as "Compensation" in
the Pension Plan, except that any base salary that is deferred
under a non-qualified deferred compensation plan is included in
Salary Compensation for the calendar year that the salary is
earned.
2.9 "Average Salary Compensation" has the same meaning as "Average
Compensation" in the Pension Plan except that the definition of
Salary Compensation is substituted for Compensation.
2.10 "Bonus Compensation" means bonuses paid during the calendar year
under the Student Loan Marketing Association Profit Incentive
Plan, up to 35 percent of Salary Compensation for the prior
calendar year; provided however, that if a Participant has not
been eligible for at least three bonuses from the Profit Incentive
Plan, bonuses paid shall include those paid under the Student Loan
Marketing Association Employee Bonus Plan and the Student Loan
Marketing Association Non-Officer Bonus Program. Such bonuses
that are deferred under a non-qualified deferred compensation plan
shall be taken into account in the year that they would have been
paid, but for their deferral.
2.11 "Average Bonus Compensation" has the same meaning as "Average
Compensation" in the Pension Plan, except that Bonus Compensation
is substituted for Compensation and bonuses paid in the Plan Year
in which a Participant ceases participation in the Plan are taken
into account.
Page 2 Restated Effective
September 18, 1992
<PAGE> 3
2.12 "Total Average Compensation" means the sum of Average Salary
Compensation and Average Bonus Compensation.
Wherever used in this instrument, a masculine pronoun shall be deemed to
include the masculine and feminine gender, a singular word shall be deemed to
include the singular and plural, and a plural word shall be deemed to include
the singular and plural in all cases where the context requires.
3. Eligibility
3.1 Eligibility. Those employees of the Corporation who are
participants in the Pension Plan and who are designated by the
President and Chief Executive Officer as Participants in the
Supplemental Pension Plan shall become Participants in the Plan.
3.2 Termination of Participation. Each Participant shall remain a
Participant until he ceases to be both an employee of the Student
Loan Marketing Association and a Participant (as defined in the
Pension Plan) in the Pension Plan.
4. Amount and Payment of Benefits
4.1 Amount of Benefit. The monthly benefit payable to a terminated or
retired Participant (or his spouse or beneficiary) from the Plan
shall be determined as of the date he ceases to be a Participant
in the Plan and shall be the difference between (a) the monthly
benefit which would have been paid from the Pension Plan if the
limitations of sections 401(a)(17) and 415 of the Code were not
imposed on the Pension Plan and if the definition of Total Average
Compensation was substituted for the definition of Average
Compensation in the Pension Plan and (b) the benefit that would be
payable from the Pension Plan commencing on the same date and in
the same form as the benefit from the Supplemental Plan. For
those Participants who were also Participants in the Pension Plan
as of December 31, 1988, the Pension Plan formula shall be the
formula in effect on December 31, 1988, for purposes of
calculating the benefit in (a) above or the formula in effect at
the time of the Participant's termination, whichever produces the
greater benefit.
For those Participants who were also participants in the Pension
Plan as of December 31, 1991, the early retirement factors shall
be the Pension Plan's early retirement factor in effect on
December 30, 1991, for purposes of calculating the benefit in (a)
above or the Pension Plan's early retirement factors in effect at
the time of the Participant's termination, which ever produces the
greater benefit.
Page 3 Restated Effective
September 18, 1992
<PAGE> 4
For purposes of making the calculations hereunder, the benefit
shall be adjusted and/or reduced as appropriate to reflect early
retirement, payment options, suspension of benefits upon
re-employment, no re-instatement of Credited Service (as defined
in the Pension Plan) upon re-employment after the receipt of a
lump sum payment, etc., and the dollar limitation on lump sum
payments in Section 6.04 of the Pension Plan shall not apply.
Unless he elects otherwise, in the manner prescribed by the
Committee, a Participant's beneficiary, if any, shall be deemed to
be the same person(s) and/or trust(s) as designated by the
Participant under the Pension Plan.
4.2 Form of Benefit. At the election of the Participant, the benefit
calculated under Section 4.1 shall be paid in either (1) a lump
sum, or (2) any of the annuity options that are available under
the Pension Plan. The lump sum will be calculated according to
Section 6.04 of the Pension Plan.
If a Participant fails to make an election, his benefit shall be
paid in the same manner that his benefit under the Pension Plan is
paid.
The Surviving Spouse Benefit, as defined in Article 8 of the
Pension Plan, shall be paid in the same form as it is paid under
the Pension Plan.
4.3 Time of Payment of Benefit. At the election of the Participant,
the benefit shall begin (1) as soon as administratively possible
after separation from service, however if a Participant separates
from service prior to attaining age 50, the benefit shall not be
paid until the first day of the calendar month coincident with or
next following the Participant's 50th birthday or (2) at the same
time that the benefit begins under the Pension Plan.
If a Participant fails to make an election, his benefits shall
begin at the same time that benefits begin under the Pension Plan.
The Surviving Spouse Benefit, as defined in Article 8 of the
Pension Plan, shall be paid at the same time as it is paid under
the Pension Plan.
4.4 Timing of Elections. A Participant may change the first election
made under Sections 4.2 or 4.3 at any time; provided however, that
a subsequent election will not be effective unless it is received
by the Corporation at least 12 months prior to the date that a
Participant separates from service. Notwithstanding the foregoing,
in the case of a Participant who was a Participant on September
18, 1992 (the date as of which the Plan was restated) and who
separates from service within 12 months of the date the
Participant was first notified of the right to
Page 4 Restated Effective
September 18, 1992
<PAGE> 5
make an election under this Section, an election which is made
within 30 days of the date the Participant was first notified of
the right to make an election under this Section shall become
effective without regard to the 12-month requirement of the
preceding sentence. An election that is in effect (as provided
herein) on the date that the Participant separates from service
shall be irrevocable, except to the extent that the form of
benefit payment is made, without regard to the Participant's
election, in a lump sum.
4.5 Payment of Benefit. The Corporation shall deduct from the benefit
paid under the Plan any federal, state or local taxes required by
law to be withheld from such benefit.
4.6 Effect on Other Plans. Unless expressly provided, no amounts
payable hereunder shall be deemed to be compensation for purposes
of computing benefits payable under any other plan of compensation
or benefit by the Corporation.
5. Tax Determinations
Notwithstanding any other provision, in the event of a determination, as
defined in section 1313(a) of the Internal Revenue Code, that any
Participant is subject to federal income taxation on amounts deferred under
this Plan, the amounts that are includable in the Participant's federal
gross income shall be distributed to such Participant upon the receipt by
the Corporation of notice of such determination.
6. Committee
The Supplemental Pension Plan shall be administered by the Committee, which
shall have full power, discretion and authority to interpret, construe and
administer the Supplemental Pension Plan and any part thereof, and the
Committee's interpretation and construction hereof, and actions thereunder,
shall be binding on all persons for all purposes. The Committee may employ
legal counsel, consultants, actuaries and agents as it may deem desirable
in the administration of the Supplemental Pension Plan and may rely on the
opinion of such counsel or the computations of such consultants. The
Committee shall provide for the keeping of detailed, written minutes of its
actions.
Page 5 Restated Effective
September 18, 1992
<PAGE> 6
7. Interests Not Transferable
The interest of any Participant, the Participant's spouse or the
Participant's beneficiary or beneficiaries under the Supplemental Pension
Plan is not subject to the claims of creditors and may not be voluntarily
or involuntarily sold, transferred, assigned, alienated or encumbered.
8. Amendment and Termination
The Supplemental Pension Plan may at any time be amended,
suspended or terminated, in whole or in part, by the Corporation. No such
action shall adversely affect the contractual promise of the Corporation to
pay to the Participant the amount accrued under the Supplemental Pension
Plan as of the date of such action, as determined by the Committee.
9. Limitation of Responsibility
Neither the establishment of the Supplemental Pension Plan, any
modifications thereof, nor the payment of any amounts under the
Supplemental Pension Plan shall be construed as giving to any employee or
other person any legal or equitable right against the Corporation, the
Board of Directors of the Corporation, the Committee, or any officer or
employee thereof, except as herein provided.
Nothing in the Supplemental Pension Plan shall confer upon any employee of
the Corporation any right to continued employment, or interfere with the
right of the Corporation to terminate his or her employment at any time,
for any reason.
10. Indemnity
The Corporation may, consistent with applicable law,
indemnify members of the Committee from any liability, loss or other
financial consequence with respect to any act or omission relating to the
Supplemental Pension Plan to the same extent and subject to the same
conditions as specified in the indemnity provisions contained in the
By-Laws and Regulations of the Student Loan Marketing Association.
Page 6 Restated Effective
September 18, 1992
<PAGE> 7
11. Claims for Benefits Under this Plan
In general, distributions under the Supplemental Plan are automatic and no
claim for benefits need be filed. However, a Participant may submit a
claim for benefits under this Plan in writing to the Committee. If such
claim for benefits is wholly or partially denied, the Committee shall,
within a reasonable period of time, but no later than 90 days after receipt
of the written claim, notify the Participant of the denial of the claim.
Such notice of denial: (1) shall be in writing, (2) shall be written in a
manner calculated to be understood by the Participant, and (3) shall
contain (a) the specific reason or reasons for denial of the claim; (b) a
specific reference to the pertinent Supplemental Plan provisions upon which
the denial is based; (c) a description of any additional material or
information necessary for the Participant to perfect the claim; and (d) an
explanation of the Supplemental Plan's claims review procedure. This 90
day period may be extended if circumstances require additional time, but in
no event shall the extension period be more than 90 days. The Participant
shall be notified of the extension before the end of the initial 90 day
period.
Within 60 days of the Participant's receipt of the written notice of denial
of the claim, or such later time as shall be deemed reasonable under the
circumstances, or if the claim has not been granted within a reasonable
period of time, the Participant may file a written request with the
Committee asking that it conduct a full and fair review of the denial of
the Participant's claim for benefits. Such review may include the holding
of a hearing if deemed necessary by the reviewing party. In connection
with the Participant's appeal of the denial of his benefit, the Participant
may review pertinent documents and may submit issues and comments in
writing.
The Committee shall deliver to the Participant a written decision on the
claim promptly, but not later than 60 days after the receipt of the
Participant's request for review, except that if there are special
circumstances (such as the need to hold a hearing) which require an
extension of time for processing, the 60 day period shall be extended to
120 days. Such decision shall: (1) be written in a manner calculated to
be understood by the Participant, (2) include specific reasons for the
decision, and (3) contain specific references to the pertinent Plan
provisions upon which the decision is based.
12. Miscellaneous
12.1 Creditor Status of Participants. In the event that any
Participant or other person acquires a right to receive payments
from the Corporation under the Supplemental Pension Plan such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
Page 7 Restated Effective
September 18, 1992
<PAGE> 8
12.2 Facility of Payment. If it shall be found that (a) a person
entitled to receive any payment under the Plan is physically or
mentally incompetent to receive such payment and to give a valid
release therefore, and (b) another person or an institution is
then maintaining or has custody of such person, and no guardian,
committee, or other representative of the estate of such person
has been duly appointed by a court of competent jurisdiction, the
payment may be made to such other person or institution referred
to in (b) above, and the release of such other person or
institution shall be a valid and complete discharge for the
payment.
12.3 Notice of Address. Each person entitled to benefits under the
Plan must file with the Committee, in writing, his post office
address and each change of post office address. Any communication,
statement, or notice addressed to such person at such address
shall be deemed sufficient for all purposes of the Plan, and there
shall be no obligation on the part of the Corporation or the
Committee to search for or to ascertain the location of such
person.
12.4 Data. Each person entitled to benefits under the Plan must
furnish to the Committee such documents, evidence, or other
information as the Committee considers necessary or desirable for
the purposes of administering the Plan or to protect the Plan.
The Committee shall be entitled to rely on representations made by
Participants, spouses and beneficiaries with respect to age,
marital status and other personal facts, unless it knows said
representations are false.
IN WITNESS WHEREOF, Student Loan Marketing Association has caused
this instrument to be duly executed in its name and on its behalf on the ____
day of ______________, 1993.
STUDENT LOAN MARKETING ASSOCIATION
By:
----------------------------------
Timothy G. Greene, Executive Vice
President and General Counsel
Page 8 Restated Effective
September 18, 1992
<PAGE> 1
EXHIBIT 10.8
SUPPLEMENTAL SLMA EMPLOYEES'
THRIFT & SAVINGS PLAN
1. PURPOSE
The Student Loan Marketing Association's Supplemental SLMA Employees'
Thrift & Savings Plan (the "Supplemental Thrift & Savings Plan" or
"Supplemental Plan") provides supplementary benefits to certain designated
Employees who are or who become eligible for benefits under the SLMA Employees'
Thrift & Savings Plan (the "Thrift & Savings Plan"). The Supplemental Thrift &
Savings Plan is intended to qualify as a plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees within the meaning of Sections 201(2), 301(a)(3)
and 401(a)(1) of Title I of the Employee Retirement Income Security Act of
1974, as amended. It is intended that the Supplemental Thrift & Savings Plan
remain at all times an unfunded plan.
2. DEFINITIONS
Except as otherwise indicated in this Section, or as may be clearly
required by the context, capitalized terms that are used in this Supplemental
Plan shall have the same meaning as assigned to them in the Thrift & Savings
Plan.
2.1 "Code" means the Internal Revenue Code of 1986, as amended, and
includes any regulations, rulings or procedures issued thereunder.
2.2 "Committee" means the Thrift & Savings Plan Committee as defined
in the Thrift & Savings Plan.
<PAGE> 2
2.3 "Corporation" means the Student Loan Marketing Association, or
any other person, firm or corporation which may succeed to the business of the
Student Loan Marketing Association by merger, consolidation or otherwise, and
which, by appropriate action, shall adopt the Supplemental Thrift & Savings
Plan, or any wholly-owned subsidiary of the Student Loan Marketing Association
(or such successor), which adopts the Supplemental Thrift & Savings Plan and
becomes a party to it with the approval of the Board of Directors.
2.4 "Employee" means any Employee of the Corporation who is eligible
to participate in the Thrift & Savings Plan and is covered under the
Supplemental Thrift & Savings Plan.
2.5 "Thrift & Savings Plan" means the SLMA Employees' Thrift &
Savings Plan as amended from time to time.
3. EFFECTIVE DATE
The effective date of the Supplemental Thrift & Savings Plan is
January 1, 1983. By action of the Board of Directors on May 22, 1987, the Plan
was amended and restated, effective as of January 1, 1987. By action of Board
of Directors on July 21, 1989, the Plan was amended and restated in its
entirety effective January 1, 1989.
4. COVERAGE
Those individuals who are participants in the Thrift & Savings Plan
and whose contributions, or contributions on their behalf, to such Plan may be
limited as a result of the limitations imposed by sections 402, 401(k)(3), and
415(c)(1) of the Internal Revenue Code and further, who are designated by the
President and Chief Executive Officer, shall be covered
2
<PAGE> 3
Employees, eligible to participate in the Supplemental Plan. Covered Employees
will be so advised and an account established in their names on the books of
the Corporation (Employee Supplemental Thrift & Savings Plan Account).
5. COMPUTATION AND PAYMENT OF SUPPLEMENTARY PLAN BENEFITS
5.1 As described below, the covered Employee's Supplemental Thrift &
Savings Plan Account shall consist of the Deferred Salary Subaccount and the
Imputed Annual Additions Subaccount. Imputed Earnings shall be allocated to
each Subaccount as provided in Section 5.4.
5.2 Deferred Salary is that percentage of Compensation which a
covered Employee elects to defer under the Supplemental Thrift & Savings Plan.
Such an election is applicable only with respect to as yet unearned amounts of
Compensation and, once made, is irrevocable with respect to amounts deferred.
Subject to such other rules as the Committee may prescribe, an Employee's
election to defer a percentage of his Compensation under the Supplemental Plan
shall be made, changed, or suspended, on a prospective basis, at such time and
in such manner as elections are made with regard to Employer Basic
Contributions under the Thrift & Savings Plan. In no event shall the
percentage of Compensation deferred as Deferred Salary under the Supplemental
Plan, for any calendar year, exceed 6 percent of the Employee's Compensation
for that year, less the percentage of Compensation deferred for that year under
the Thrift & Savings Plan as Employer Basic Contributions.
Amounts of Deferred Salary shall be credited to an Employee's
Supplemental Thrift & Savings Plan Deferred Salary Subaccount at the same time
that such amounts would have been
3
<PAGE> 4
credited to the Employer Basic Contribution Account had they been treated as
Employer Basic Contributions under the Thrift & Savings Plan. Notwithstanding
the foregoing, effective January 1, 1989, a covered Employee shall be permitted
to defer amounts of Deferred Salary under this Section 5.2 for a calendar year
only if: (a) the Employee has deferred the maximum amount of Employer Basic
Contributions under Section 402 of the Code to the Thrift & Savings Plan, or
(b) the Employee has deferred the maximum amount of Employer Basic
Contributions under Section 401(k)(3) to the Thrift & Savings Plan, as
determined by the plan administrator of the Thrift & Savings Plan, or c)
contributions on behalf of the Employee to the Thrift & Savings Plan have
reached the maximum amount under Section 415(c)(1), whichever limit is
applicable. These restrictions in specific, and the terms of the Plan in
general, shall be interpreted by the Committee in such a way as to ensure that
the Supplemental Plan does not violate the prohibitions of Section 401(k)(4)(A)
of the Code.
5.3 Imputed Annual Additions shall consist of the following amounts:
(a) For each dollar of Deferred Salary credited to the
Employee's Supplemental Thrift & Savings Plan Deferred Salary
Subaccount under this Supplemental Plan, there shall be credited to
the Employee's Supplemental Thrift & Savings Plan Imputed Annual
Additions Subaccount an Imputed Annual Addition equal in amount to the
Employer Matching Contribution that would have been made under the
Thrift & Savings Plan had the Deferred Salary amounts been contributed
to the Thrift & Savings Plan as Employer Basic Contributions, and had
dollar limit of Code Section 402(g), the nondiscrimination limitations
of Code
4
<PAGE> 5
Section 401(k) and (m), the limit of Code Section 415(c)(1), or any
other similar restriction not applied to the Thrift & Savings Plan.
(b) Once an Employee has, during a calendar year, deferred at
least the maximum amount prescribed for such year pursuant to Section
402(g) of the Code as Employer Basic Contributions to the Thrift &
Savings Plan, or, effective January 1, the 1988, as Employer Basic
Contributions to the Thrift & Savings Plan, Deferred Salary to the
Supplemental Plan, or some combination of both, the Employee shall not
be required to make any further deferrals under the Supplemental Plan
in order to be credited with Imputed Annual Additions for that year.
Notwithstanding the foregoing, effective January 1, 1989, the
foregoing condition shall be satisfied only if an Employee has, during
a calendar year, deferred the maximum amount allowed for such year as
Employer Basic Contributions to the Thrift & Savings Plan pursuant to
Section 401(k)(3), Section 402(g), or Section 415(c)(1) of the Code.
In the event the preceding condition is satisfied, if the amount of
the Employee's Deferred Salary falls short of the maximum permitted
under Section 5.2, an Imputed Annual Addition shall be credited to the
Employee's Supplemental Thrift & Savings Plan Imputed Annual Additions
Subaccount for that year equal to the additional amount that would
have been credited under paragraph (a) if the Employee had elected to
defer the amount of Deferred Salary equal to the shortfall. Solely
for purposes of determining the amount of Imputed Annual Additions
under the prior sentence, the rate at which
5
<PAGE> 6
such Deferred Salary shortfall is deemed to be credited in that
calendar year shall be determined by reference to the deferral
percentage that was last in effect for that Employee under the
Supplemental Plan during that year, or if no Salary Deferrals were
made in such year, the deferral percentage last in effect for the
Employee under the Thrift & Savings Plan. In no event shall an
Employee be credited under both this paragraph (b) and paragraph (a)
for Imputed Annual Additions with respect to the same amount of
Deferred Salary.
The Employee's Supplemental Thrift & Savings Plan Imputed Annual
Additions Subaccount shall be credited with Imputed Annual Additions at the
same times that such amounts would have been credited under the Thrift &
Savings Plan if they had been Employer Matching Contributions, and the Deferred
Salary giving rise to such amounts had been Employer Basic Contributions under
the Thrift & Savings Plan.
5.4 In general, the amount of Imputed Earnings shall reflect the
investment performance of the Thrift & Savings Plan, as if Salary Deferrals and
Imputed Annual Additions were invested in the investment funds under the Thrift
& Savings Plan. Imputed Earnings on an Employee's Supplemental Thrift & Savings
Account shall be credited or charged (if negative) as follows:
(a) As a general rule, an Employee's Supplemental Thrift &
Savings Plan Account shall be deemed credited in the same proportions
and to the same funds as his Thrift & Savings Plan Employee Account,
and, specifically, his Imputed Earnings shall be calculated based on
the investment performance of the Employee's Thrift & Savings Plan
Employee Account. Notwithstanding the
6
<PAGE> 7
foregoing, however, at the same times as allowed under the Thrift &
Savings Plan, and subject to the same rules, the Employee may request
that his Supplemental Thrift & Savings Account be deemed to be
credited for these purposes to the investment funds then offered under
the Thrift & Savings Plan in accordance with the Employee's specific
direction. In such event, the Employee's directions for the
"investment" of his Supplemental Thrift & Savings Account shall be
subject to restrictions similar to those on investment and
reinvestment that apply under the Thrift & Savings Plan. The
Corporation may refuse to follow an Employee's "investment" direction
on a prospective basis or refuse to continue to calculate the amount
of Imputed Earnings based on the investment performance of the
Employee's Thrift & Savings Plan Employee Account; in either case,
subsequent Imputed Earnings shall be based on the rate of return
afforded by 90-day Treasury bills. In no event shall amounts credited
to the Employee's Supplemental Thrift & Savings Account be subject to
loans.
(b) Imputed Earnings shall be credited and charged to the
Employee's Supplemental Thrift & Savings Plan Subaccounts at the same
time and at the same rate as credits or charges are made to Employee
Accounts under the Thrift & Savings Plan. As of each Valuation Date,
Imputed Earnings shall be allocated proportionately to the Employee's
Deferred Salary Subaccount and the Employee's Imputed Annual Additions
Subaccount, based on the values credited to such Subaccounts as of the
last preceding Valuation Date.
7
<PAGE> 8
5.5 An Employee shall at all times be fully vested in the amount
credited to his Deferred Salary Subaccount. An Employee shall be vested in
that portion of the amount credited to his Imputed Annual Additions Subaccount
that corresponds to his vesting percentage under the Thrift & Savings Plan.
Distribution of such vested amounts shall be made in accordance with the
following rules:
(a) benefits from the Supplemental Thrift & Savings Plan
shall be paid in a lump sum, based on the value of the vested portion
of the Employee's Supplemental Thrift & Savings Plan Account as
determined in accordance with Sections 5.2, 5.3, and 5.4 above.
Payment shall be in the form of cash, or a combination of cash and
non-voting common stock of the Student Loan Marketing Association, as
requested by the Employee, subject to such rules as the Committee may
prescribe. Payment shall be made as soon as practicable following the
quarterly Stock Valuation Date or December 31 coinciding with or next
following the Employee's termination of service for retirement or
otherwise, disability, or death. The amount of the distribution shall
be the value of the nonforfeitable portion of the amount credited to
the Employee's Supplemental Thrift & Savings Plan Account as of the
applicable date above and conversion of such value into non-voting
common stock of the Student Loan Marketing Association shall be based
on the stock value as of such applicable date.
(b) In the event of a substantial, unforeseen hardship, an
Employee, or if applicable, a beneficiary who succeeds to the
Employee's interest in the Plan
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<PAGE> 9
following the Employee's death, may submit to the Committee a request
for an early distribution. Such request shall be in writing and shall
advise the Committee of the circumstances of the hardship. The
Committee, in its sole discretion, may agree to accelerate the
distribution of all or part of the Employee's vested portion of his
Supplemental Thrift & Savings Plan Account. Should the Committee
agree, such an early distribution shall be made as soon as practicable
after the Valuation Date immediately following the date on which the
Committee agreed to the early distribution. For these purposes, the
value of the vested portion of the Employee's Supplemental Thrift &
Savings Plan Account shall be determined as of the Valuation Date
specified above. Any part of the Employee's Supplemental Thrift &
Savings Plan Account that is vested and that is not distributed under
this early distribution provision shall be distributed in accordance
with the general distribution rule in this Plan. In addition, a
distribution of Deferred Salary under this provision shall not deprive
the Employee (or his beneficiary, if applicable) of any credit that
otherwise would have been provided under Section 5.3 with respect to
such Deferred Salary.
For purposes of this paragraph (b), a substantial unforeseen
hardship is a severe financial hardship resulting from extraordinary
and unforeseeable circumstances arising as a result of one or more
recent events beyond the control of the Employee or beneficiary, if
applicable. To the extent such hardship is or may be relieved: (1)
through reimbursement or compensation by insurance or
9
<PAGE> 10
otherwise, (2) by liquidation of assets, to the extent the liquidation
of such assets would not in itself cause severe financial hardship,
and (3) by cessation of deferrals under the Plan, early distribution
may not be made. Distributions of amounts because of an unforeseen
hardship may only be permitted to the extent reasonably necessary to
satisfy the hardship. Examples of what are not considered to be
unforeseeable hardships include the need to send an Employee's child
to college or the desire to purchase a home.
(c) Payment shall be made to the Employee, or in the event of
his death, his beneficiary. In no event may the Employee or, if
applicable, the beneficiary, elect to defer receipt of payment under
this Supplemental Thrift & Savings Plan once such payment is due.
Additionally, except as provided in paragraph (b) above, no amounts
credited to said Account shall be subject to withdrawal while the
Employee continues as an officer or Employee of the Corporation.
Amounts payable hereunder shall be reduced by all amounts required to
be withheld under appropriate State or Federal law.
5.6 The Employee shall not be credited with any Deferred Salary or
Imputed Annual Additions under the Supplemental Thrift & Savings Plan during
periods when a contribution could not be made under the Thrift & Savings Plan
because the Employee was suspended from participation in the Thrift & Savings
Plan or to the extent that, pursuant to applicable rules and regulations of the
Internal Revenue Service, such amounts may not be credited under the
Supplemental Plan because of a hardship distribution under the Thrift & Savings
Plan.
10
<PAGE> 11
Additionally, the Employee shall not be credited with any Imputed Annual
Additions under the Supplemental Plan during periods when the Corporation did
not make contributions to the Employee's Employer Matching Account under the
Thrift & Savings Plan by operation of the provisions of the Thrift & Savings
Plan, or for periods when the Employee could have contributed to the Thrift &
Savings Plan but decided not to.
5.7 For purposes of this Supplemental Thrift & Savings Plan, the
Employee's beneficiary shall be deemed to be the same person(s) as designated
by the Employee under the Thrift & Savings Plan unless the Employee elects
otherwise by designating a different person or persons on such form and in such
manner as the Committee may specify.
5.8 Unless expressly provided, no amounts payable hereunder shall be
deemed to be compensation for purposes of computing benefits payable under any
other plan of compensation or benefit by the Corporation.
6. SOURCE OF PAYMENT
All benefits under the Supplemental Thrift & Savings Plan shall be
paid from the general treasury of the Corporation, and no special or separate
fund shall be established or other segregation of assets made to assure such
payments. Nothing contained in the Supplemental Thrift & Savings Plan shall
create a trust of any kind. In the event that any Employee or other person
acquires a right to receive payments from the Corporation under the
Supplemental Thrift & Savings Plan, such right shall be no greater than the
right of any unsecured general creditor of the Corporation.
11
<PAGE> 12
7. TAX PAYMENTS
With respect to the amount of Supplemental Plan benefits credited to
an Employee as of May 22, 1987, the Corporation agrees to pay the Employee an
amount equal to the difference between the Federal income taxes due on such
amount when distributed under this Supplemental Thrift & Savings Plan and the
Federal income taxes which would have been due if such amount had been paid
from the tax-qualified Thrift & Savings Plan. For purposes of computing the
payment due under this Section, it shall be assumed that any distribution of
the May 22, 1987, amount is made on top of all other income received by the
Employee during the taxable year of distribution. The Corporation also agrees
to pay any additional Federal income taxes which may be due as the result of
the agreement to pay the tax hereunder, so that the taxpayer will be in the
same position in which he/she would have been had the distribution been made
from a tax-qualified plan. This Section shall not apply with respect to
Supplemental Plan benefits credited after May 22, 1987, (i.e., any credits to
the Employee's Supplemental Thrift & Savings Plan Account, including any
credits attributable to Imputed Earnings, after May 22, 1987).
8. COMMITTEE
The Supplemental Thrift & Savings Plan shall be administered by the
Committee, which shall have full power, discretion and authority to interpret,
construe and administer the Supplemental Thrift & Savings Plan and any part
thereof, and the Committee's interpretation and construction hereof, and
actions thereunder, shall be binding on all persons for all purposes. The
Committee may employ legal counsel, consultants, actuaries and agents as it may
deem desirable in the administration of the Supplemental Thrift & Savings Plan
and may rely on the opinion of
12
<PAGE> 13
such counsel or the computations of such consultants. The Committee shall
provide for the keeping of detailed, written minutes of its actions.
9. INTERESTS NOT TRANSFERABLE
The interest of any Employee, the Employee's spouse or the Employee's
beneficiary or beneficiaries under the Supplemental Thrift & Savings Plan is
not subject to the claims of creditors and may not be voluntarily or
involuntarily sold, transferred, assigned, alienated or encumbered.
10. AMENDMENT AND TERMINATION
The Supplemental Thrift & Savings Plan may at any time be amended,
suspended or terminated, in whole or in part, by the Corporation. No such
action shall adversely affect the contractual promise of the Corporation to pay
to the Employee the amount accrued under the Supplemental Thrift & Savings Plan
as of the date of such action, as determined by the Committee. Notwithstanding
the foregoing, the Supplemental Plan may at any time be amended in such a way
as is necessary to ensure that the requirements of Section 401(k)(4)(A) of the
Code are satisfied so that the qualified status of the Thrift & Savings Plan is
preserved.
11. LIMITATION OF RESPONSIBILITY
Neither the establishment of the Supplemental Thrift & Savings Plan,
any modifications thereof, nor the payment of any amounts under the
Supplemental Thrift & Savings Plan shall be construed as giving to any Employee
or other person any legal or equitable right against the Corporation, the Board
of Directors of the Corporation, the Committee, or any officer or
13
<PAGE> 14
Employee thereof, except as herein provided.
Nothing in the Supplemental Thrift & Savings Plan shall confer upon
any employee of the Corporation any right to continued employment, or interfere
with the right of the Corporation to terminate his or her employment at any
time, for any reason.
12. INDEMNITY
The Corporation may, consistent with applicable law, indemnify members
of the Committee from any liability, loss or other financial consequence with
respect to any act or omission relating to the Supplemental Thrift & Savings
Plan to the same extent and subject to the same conditions as specified in the
indemnity provisions contained in the By-Laws and Regulations of the Student
Loan Marketing Association.
13. CLAIMS FOR BENEFITS UNDER THIS PLAN
In general, distributions under the Supplemental Plan are automatic
and no claim for benefits need be filed. However, an Employee may submit a
claim for benefits under this Plan in writing to the Committee. If such claim
for benefits is wholly or partially denied, the Committee shall, within a
reasonable period of time, but no later than 90 days after receipt of the
written claim, notify the Employee of the denial of the claim. Such notice of
denial: (1) shall be in writing, (2) shall be written in a manner calculated
to be understood by the Employee, and (3) shall contain (a) the specific reason
or reasons for denial of the claim; (b) a specific reference to the pertinent
Supplemental Plan provisions upon whic//h the denial is based; (c) a
description of any additional material or information necessary for the
Employee to perfect the claim; and (d) an
14
<PAGE> 15
explanation of the Supplemental Plan's claims review procedure. This 90-day
period may be extended if circumstances require additional time, but in no
event shall the extension period be more than 90 days. The Employee shall be
notified of the extension before the end of the initial 90-day period.
Within 60 days of the Employee's receipt of the written notice of
denial of the claim, or such later time as shall be deemed reasonable under the
circumstances, or if the claim has not been granted within a reasonable period
of time, the Employee may file a written request with the Committee asking that
it conduct a full and fair review of the denial of the Employee's claim for
benefits. Such review may include the holding of a hearing if deemed necessary
by the reviewing party. In connection with the Employee's appeal of the denial
of his benefit, the Employee may review pertinent documents and may submit
issues and comments in writing.
The Committee shall deliver to the Employee a written decision on the
claim promptly, but not later than 60 days after the receipt of the Employee's
request for review, except that if there are special circumstances (such as the
need to hold a hearing) which require an extension of time for processing, the
60-day period shall be extended to 120 days. Such decision shall: (1) be
written in a manner calculated to be understood by the Employee, (2) include
specific reasons for the decision, and (3) contain specific references to the
pertinent Plan provisions upon which the decision is based.
14. MISCELLANEOUS
14.1 Facility of Payment. If it shall be found that (a) a person
entitled to receive any
15
<PAGE> 16
payment under the Plan is physically or mentally incompetent to receive such
payment and to give a valid release therefore, and (b) another person or an
institution is then maintaining or has custody of such person, and no guardian,
committee, or other representative of the estate of such person has been duly
appointed by a court of competent jurisdiction, the payment may be made to such
other person or institution referred to in (b) above, and the release of such
other person or institution shall be a valid and complete discharge for the
payment.
14.2 Notice of Address. Each person entitled to benefits under the
Plan must file with the Committee, in writing, his post office address and each
change of post office address. Any communication, statement, or notice
addressed to such person at such address shall be deemed sufficient for all
purposes of the Plan, and there shall be no obligation on the part of the
Corporation or the Committee to search for or to ascertain the location of such
person.
14.3 Data. Each person entitled to benefits under the Plan must
furnish to the Committee such documents, evidence, or other information as the
Committee considers necessary or desirable for the purposes of administering
the Plan or to protect the Plan. The Committee shall be entitled to rely on
representations made by Employees, spouses and beneficiaries with respect to
age, marital status and other personal facts, unless it knows said
representations are false.
14.4 Tax Determinations. Notwithstanding any other provision to the
contrary herein, in the event of a determination, as defined in section 1313(a)
of the Internal Revenue Code, that any Employee is subject to Federal income
taxation on amounts deferred under this Plan, the amounts that are includable
in the Employee's federal gross income shall be distributed to such Employee
upon the receipt by the Corporation of notice of such determination.
16
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 to the Registration Statement (Form S-4 No. 333-21217) and
related Prospectus of SLM Holding Corporation for the registration of 54,600,000
shares of its common stock and to the use of our report dated February 3, 1997,
with respect to the balance sheet as of February 3, 1997 of SLM Holding
Corporation and our report dated January 13, 1997 with respect to the
consolidated financial statements of the Student Loan Marketing Association for
the year ended December 31, 1996 included in the Prospectus and Registration
Statement filed with the Securities and Exchange Commission.
Washington, D.C. /s/ Ernst & Young LLP
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 51,387
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 219,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,768,176
<INVESTMENTS-CARRYING> 601,887
<INVESTMENTS-MARKET> 601,745
<LOANS> 37,081,861
<ALLOWANCE> 84,063
<TOTAL-ASSETS> 47,629,890
<DEPOSITS> 0
<SHORT-TERM> 22,156,548
<LIABILITIES-OTHER> 1,819,286
<LONG-TERM> 22,606,226
0
213,883
<COMMON> 13,139
<OTHER-SE> 820,808
<TOTAL-LIABILITIES-AND-EQUITY> 47,629,890
<INTEREST-LOAN> 2,846,701
<INTEREST-INVEST> 596,507
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,443,208
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<INTEREST-EXPENSE> 2,576,772
<INTEREST-INCOME-NET> 866,436
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<EXPENSE-OTHER> 405,652
<INCOME-PRETAX> 607,700
<INCOME-PRE-EXTRAORDINARY> 424,202
<EXTRAORDINARY> (4,792)
<CHANGES> 0
<NET-INCOME> 419,410
<EPS-PRIMARY> 7.32
<EPS-DILUTED> 7.32
<YIELD-ACTUAL> 1.90
<LOANS-NON> 63,000
<LOANS-PAST> 63,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 63,000
<ALLOWANCE-OPEN> 60,337
<CHARGE-OFFS> 13,258
<RECOVERIES> 7,235
<ALLOWANCE-CLOSE> 84,063
<ALLOWANCE-DOMESTIC> 84,063
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
