<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission File Number: 001-13251
------------------------
USA EDUCATION, INC.
(formerly SLM Holding Corporation)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2013874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11600 SALLIE MAE DRIVE, RESTON, VIRGINIA 20193
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (703) 810-3000
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JUNE 30, 2000
----- ----------------------------
<S> <C>
Common Stock, $.20 par value 155,203,848 shares
</TABLE>
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--------------------------------------------------------------------------------
<PAGE>
USA EDUCATION, INC.
FORM 10-Q
INDEX
JUNE 30, 2000
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 31
Item 2. Changes in Securities............................. 31
Item 3. Defaults Upon Senior Securities................... 31
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 31
Item 5. Other Information................................. 32
Item 6. Exhibits and Reports on Form 8-K.................. 32
SIGNATURES.................................................. 33
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USA EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Student loans............................................... $31,436,870 $33,808,867
Warehousing advances........................................ 680,351 1,042,695
Academic facilities financings
Bonds--available-for-sale................................. 597,030 640,498
Loans..................................................... 365,150 387,267
----------- -----------
Total academic facilities financings.................. 962,180 1,027,765
Investments
Available-for-sale........................................ 3,066,533 4,396,776
Held-to-maturity.......................................... 821,821 788,180
----------- -----------
Total investments..................................... 3,888,354 5,184,956
Cash and cash equivalents................................... 256,779 589,750
Other assets, principally accrued interest receivable....... 2,324,952 2,370,751
----------- -----------
Total assets.......................................... $39,549,486 $44,024,784
=========== ===========
LIABILITIES
Short-term borrowings....................................... $30,981,289 $37,491,251
Long-term notes............................................. 6,281,722 4,496,267
Other liabilities........................................... 1,134,581 982,469
----------- -----------
Total liabilities......................................... 38,397,592 42,969,987
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY............................. 213,883 213,883
STOCKHOLDERS' EQUITY
Preferred stock, par value $.20 per share, 20,000,000 shares
authorized: 3,300,000 and 3,300,000 shares, respectively,
issued at stated value of $50 per share................... 165,000 165,000
Common stock, par value $.20 per share, 250,000,000 shares
authorized: 186,266,879 and 186,069,619 shares issued,
respectively.............................................. 37,253 37,214
Additional paid-in capital.................................. 52,742 62,827
Unrealized gains on investments (net of tax of $159,050 and
$160,319, respectively)................................... 295,378 297,735
Retained earnings........................................... 1,680,283 1,462,034
----------- -----------
Stockholders' equity before treasury stock.................. 2,230,656 2,024,810
Common stock held in treasury at cost: 31,063,031 and
28,493,072 shares, respectively........................... 1,292,645 1,183,896
----------- -----------
Total stockholders' equity.............................. 938,011 840,914
----------- -----------
Total liabilities and stockholders' equity.............. $39,549,486 $44,024,784
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
USA EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Student loans............................................. $634,465 $570,742 $1,302,122 $1,092,148
Warehousing advances...................................... 11,156 18,403 27,855 40,259
Academic facilities financings:
Taxable................................................. 11,135 10,196 20,029 20,089
Tax-exempt.............................................. 7,925 8,867 16,200 18,126
-------- -------- ---------- ----------
Total academic facilities financings...................... 19,060 19,063 36,229 38,215
Investments............................................... 142,367 50,019 260,558 102,970
-------- -------- ---------- ----------
Total interest income....................................... 807,048 658,227 1,626,764 1,273,592
Interest expense:
Short-term debt........................................... 543,945 402,922 1,117,001 757,713
Long-term debt............................................ 101,462 82,599 186,253 185,521
-------- -------- ---------- ----------
Total interest expense...................................... 645,407 485,521 1,303,254 943,234
-------- -------- ---------- ----------
Net interest income......................................... 161,641 172,706 323,510 330,358
Less: provision for losses.................................. 7,900 13,029 17,338 20,665
-------- -------- ---------- ----------
Net interest income after provision for losses.............. 153,741 159,677 306,172 309,693
-------- -------- ---------- ----------
Other income:
Gains on student loan securitizations..................... 26,024 7,913 68,354 7,913
Servicing and securitization revenue...................... 68,548 80,762 130,667 166,633
Gains on sales of securities.............................. 790 1,090 43,792 1,073
Other..................................................... 29,952 21,866 58,092 42,651
-------- -------- ---------- ----------
Total other income........................................ 125,314 111,631 300,905 218,270
Operating expenses:
Salaries and benefits..................................... 47,347 44,950 101,218 89,110
Other..................................................... 47,697 41,460 90,064 83,568
-------- -------- ---------- ----------
Total operating expenses.................................... 95,044 86,410 191,282 172,678
-------- -------- ---------- ----------
Income before income taxes and minority interest in net
earnings of subsidiary.................................... 184,011 184,898 415,795 355,285
-------- -------- ---------- ----------
Income taxes:
Current................................................... 66,327 46,114 207,689 163,069
Deferred.................................................. (5,483) 12,447 (71,384) (50,603)
-------- -------- ---------- ----------
Total income taxes.......................................... 60,844 58,561 136,305 112,466
Minority interest in net earnings of subsidiary............. 2,673 2,674 5,347 5,347
-------- -------- ---------- ----------
Net income.................................................. 120,494 123,663 274,143 237,472
Preferred stock dividends................................... 2,886 -- 5,793 --
-------- -------- ---------- ----------
Net income attributable to common stock..................... $117,608 $123,663 $ 268,350 $ 237,472
======== ======== ========== ==========
Basic earnings per share.................................... $ .75 $ .77 $ 1.71 $ 1.46
======== ======== ========== ==========
Average common shares outstanding........................... 156,090 161,344 156,643 162,249
======== ======== ========== ==========
Diluted earnings per share.................................. $ .73 $ .76 $ 1.66 $ 1.44
======== ======== ========== ==========
Average common and common equivalent shares outstanding..... 161,969 163,803 162,113 164,736
======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
USA EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK SHARES ADDITIONAL
STOCK ---------------------------------------- PREFERRED COMMON PAID-IN
SHARES ISSUED TREASURY OUTSTANDING STOCK STOCK CAPITAL
--------- ----------- ----------- ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1999......... -- 184,773,592 (21,896,197) 162,877,395 $ -- $36,955 $ 34,100
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................
Comprehensive income............
Cash dividends:
Common stock ($.15 per
share)......................
Issuance of common shares....... 202,519 202,519 40 7,076
Premiums on equity forward
purchase contracts............ (6,212)
Repurchase of common shares..... (2,172,006) (2,172,006)
--------- ----------- ----------- ------------ -------- ------- ----------
BALANCE AT JUNE 30, 1999.......... -- 184,976,111 (24,068,203) 160,907,908 $ -- $36,995 $ 34,964
========= =========== =========== ============ ======== ======= ==========
BALANCE AT MARCH 31, 2000......... 3,300,000 186,237,095 (29,632,909) 156,604,186 $165,000 $37,247 $ 60,740
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................
Comprehensive income............
Cash dividends:
Common stock ($.16 per
share)......................
Preferred stock ($.88 per
share)......................
Issuance of common shares....... 29,784 50,000 79,784 6 1,247
Premiums on equity forward
purchase contracts............ (9,245)
Repurchase of common shares..... (1,480,122) (1,480,122)
--------- ----------- ----------- ------------ -------- ------- ----------
BALANCE AT JUNE 30, 2000.......... 3,300,000 186,266,879 (31,063,031) 155,203,848 $165,000 $37,253 $ 52,742
========= =========== =========== ============ ======== ======= ==========
<CAPTION>
UNREALIZED
GAINS
(LOSSES) TOTAL
ON RETAINED TREASURY STOCKHOLDERS'
INVESTMENTS EARNINGS STOCK EQUITY
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1999......... $343,402 $1,149,720 $ (903,827) $ 660,350
Comprehensive income:
Net income.................... 123,663 123,663
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ (12,429) (12,429)
---------
Comprehensive income............ 111,234
Cash dividends:
Common stock ($.15 per
share)...................... (24,105) (24,105)
Issuance of common shares....... 7,116
Premiums on equity forward
purchase contracts............ (6,212)
Repurchase of common shares..... (89,000) (89,000)
-------- ---------- ----------- ---------
BALANCE AT JUNE 30, 1999.......... $330,973 $1,249,278 $ (992,827) $ 659,383
======== ========== =========== =========
BALANCE AT MARCH 31, 2000......... $295,371 $1,587,637 $(1,233,469) $ 912,526
Comprehensive income:
Net income.................... 120,494 120,494
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ 7 7
---------
Comprehensive income............ 120,501
Cash dividends:
Common stock ($.16 per
share)...................... (24,962) (24,962)
Preferred stock ($.88 per
share)...................... (2,886) (2,886)
Issuance of common shares....... 2,366 3,619
Premiums on equity forward
purchase contracts............ (9,245)
Repurchase of common shares..... (61,542) (61,542)
-------- ---------- ----------- ---------
BALANCE AT JUNE 30, 2000.......... $295,378 $1,680,283 $(1,292,645) $ 938,011
======== ========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
USA EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK SHARES ADDITIONAL
STOCK ---------------------------------------- PREFERRED COMMON PAID-IN
SHARES ISSUED TREASURY OUTSTANDING STOCK STOCK CAPITAL
--------- ----------- ----------- ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998...... -- 184,453,866 (20,327,213) 164,126,653 $ -- $36,891 $ 26,871
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Unrealized gains (losses) on
investments, net of tax.....
Comprehensive income............
Cash dividends:...............
Common stock ($.30 per share)...
Issuance of common shares....... 522,245 522,245 104 17,797
Tax benefit related to employee
stock option and purchase
plan.......................... 2,497
Premiums on equity forward
purchase contracts............ (12,201)
Repurchase of common shares..... (3,740,990) (3,740,990)
--------- ----------- ----------- ------------ -------- ------- ----------
BALANCE AT JUNE 30, 1999.......... -- 184,976,111 (24,068,203) 160,907,908 $ -- $36,995 $ 34,964
========= =========== =========== ============ ======== ======= ==========
BALANCE AT DECEMBER 31, 1999...... 3,300,000 186,069,619 (28,493,072) 157,576,547 $165,000 $37,214 $ 62,827
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments, net
of tax......................
Comprehensive income............
Cash dividends:
Common stock ($.32 per
share)......................
Preferred stock ($1.76 per
share)......................
Issuance of common shares....... 197,260 50,000 247,260 39 8,894
Premiums on equity forward
purchase contracts............ (18,979)
Repurchase of common shares..... (2,619,959) (2,619,959)
--------- ----------- ----------- ------------ -------- ------- ----------
BALANCE AT JUNE 30, 2000.......... 3,300,000 186,266,879 (31,063,031) 155,203,848 $165,000 $37,253 $ 52,742
========= =========== =========== ============ ======== ======= ==========
<CAPTION>
UNREALIZED
GAINS
(LOSSES) TOTAL
ON RETAINED TREASURY STOCKHOLDERS'
INVESTMENTS EARNINGS STOCK EQUITY
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998...... $371,739 $1,060,334 $ (842,209) $ 653,626
Comprehensive income:
Net income.................... 237,472 237,472
Other comprehensive income,
net of tax:
Unrealized gains (losses) on
investments, net of tax..... (40,766) (40,766)
---------
Comprehensive income............ 196,706
Cash dividends:...............
Common stock ($.30 per share)... (48,528) (48,528)
Issuance of common shares....... 17,901
Tax benefit related to employee
stock option and purchase
plan.......................... 2,497
Premiums on equity forward
purchase contracts............ (12,201)
Repurchase of common shares..... (150,618) (150,618)
-------- ---------- ----------- ---------
BALANCE AT JUNE 30, 1999.......... $330,973 $1,249,278 $ (992,827) $ 659,383
======== ========== =========== =========
BALANCE AT DECEMBER 31, 1999...... $297,735 $1,462,034 $(1,183,896) $ 840,914
Comprehensive income:
Net income.................... 274,143 274,143
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments, net
of tax...................... (2,357) (2,357)
---------
Comprehensive income............ 271,786
Cash dividends:
Common stock ($.32 per
share)...................... (50,101) (50,101)
Preferred stock ($1.76 per
share)...................... (5,793) (5,793)
Issuance of common shares....... 2,366 11,299
Premiums on equity forward
purchase contracts............ (18,979)
Repurchase of common shares..... (111,115) (111,115)
-------- ---------- ----------- ---------
BALANCE AT JUNE 30, 2000.......... $295,378 $1,680,283 $(1,292,645) $ 938,011
======== ========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
USA EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 274,143 $ 237,472
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on student loan securitizations..................... (68,354) (7,913)
Gains on sales of securities.............................. (43,792) (1,073)
Provision for losses...................................... 17,338 20,665
Decrease (increase) in accrued interest receivable........ 27,206 (88,721)
Increase (decrease) in accrued interest payable........... 6,857 (15,309)
(Increase) decrease in other assets....................... (2,781) 31,908
Increase in other liabilities............................. 146,523 120,086
------------- -------------
Total adjustments......................................... 82,997 59,643
------------- -------------
Net cash provided by operating activities................... 357,140 297,115
------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased............................. (5,558,685) (6,451,143)
Reduction of insured student loans purchased:
Installment payments...................................... 1,046,026 1,632,028
Claims and resales........................................ 250,775 270,064
Proceeds from securitization of student loans............. 6,627,425 1,014,982
Proceeds from sales of student loans...................... 124,225 --
Warehousing advances made................................... (436,588) (314,279)
Warehousing advance repayments.............................. 798,932 657,555
Academic facilities financings made......................... (10,000) (29,987)
Academic facilities financings reductions................... 72,650 86,546
Investments purchased....................................... (17,641,361) (6,168,361)
Proceeds from sale or maturity of investments............... 18,935,686 6,575,217
------------- -------------
Net cash provided by (used in) investing activities......... 4,209,085 (2,727,378)
------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued................................ 328,090,112 269,023,264
Short-term borrowings repaid................................ (331,465,504) (266,841,347)
Long-term notes issued...................................... 5,549,013 6,422,085
Long-term notes repaid...................................... (6,898,128) (6,043,709)
Equity forward contracts and stock issued................... (7,680) 8,197
Common stock repurchased.................................... (111,115) (150,618)
Common dividends paid....................................... (50,101) (48,528)
Preferred dividends paid.................................... (5,793) --
------------- -------------
Net cash (used in) provided by financing activities......... (4,899,196) 2,369,344
------------- -------------
Net decrease in cash and cash equivalents................... (332,971) (60,919)
Cash and cash equivalents at beginning of period............ 589,750 115,912
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 256,779 $ 54,993
============= =============
Cash disbursements made for:
Interest.................................................. $ 1,181,659 $ 828,418
============= =============
Income taxes.............................................. $ 50,000 $ 163,500
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
USA EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 2000 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 IS UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of USA
Education, Inc. (the "Company"), formerly SLM Holding Corporation, have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Operating results for the three and six
months ended June 30, 2000 are not necessarily indicative of the results for the
year ending December 31, 2000.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which requires that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS 133, as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement No. 133," and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," is effective for the Company's
financial statements beginning January 1, 2001. SFAS 133, as amended, requires
that changes in the derivative instrument's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for derivative financial instruments that qualify as fair value
hedges allows a derivative instrument's gains and losses to offset related fair
value changes on the hedged item in the income statement. Derivative financial
instruments that qualify as cashflow hedges are reported as adjustments to
stockholders' equity as a component of other comprehensive income and require
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. SFAS 133 could result in
increased period to period volatility in reported net income. Management is
continuing to assess the potential impact of SFAS 133 on the Company's reported
results of operations and financial position. The Company will implement the new
standard in the first quarter of the year 2001.
On March 16, 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-7 ("EITF No. 00-7"), "Application of Issue No. 96-13, 'Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock,' to Equity Derivative Instruments That Contain Certain
Provisions That Require Net Cash Settlement If Certain Events Occur." The EITF
announced a consensus that any equity derivative contract that could require net
cash settlement (as defined in Issue No. 96-13) must be accounted for as an
asset or liability and cannot be included in the permanent equity of the
Company. In addition, any equity derivative contracts that could require
physical settlement by a cash payment to the counterparty in exchange for the
issuer's shares, must be accounted for as temporary equity as defined by the SEC
under Accounting Series Release (ASR)
8
<PAGE>
USA EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 2000 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 IS UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
No. 268, "Presentation in Financial Statements of 'Redeemable Preferred
Stocks.' " EITF No. 00-7 is effective immediately for all new contracts entered
into after March 16, 2000. For contracts in effect as of March 16, 2000, EITF
No. 00-7's effective date is delayed until December 31, 2000 in order to allow
companies to amend existing contracts. The EITF met on July 19, 2000 to discuss
various issues and questions concerning EITF No. 00-7. Following that meeting,
the EITF issued EITF Issue No. 00-19 ("EITF No. 00-19"), "Determination of
Whether Share Settlement is within the Control of the Issuer for Purposes of
Applying Issue No. 96-13." The primary focus of EITF No. 00-19 would be to
ensure that the counterparty to the contract receives the same choices as any
other common equity holder. While the EITF did not reach a conclusion on this
issue, they did tentatively extend the effective date for EITF No. 00-7 to
June 30, 2001, for contracts in effect as of March 16, 2000.
The Company currently accounts for its equity forward contracts through
equity in accordance with EITF Issue No. 96-13. The Company intends to amend all
equity forward contracts in place at March 16, 2000 to satisfy the requirements
of EITF No. 00-7 and EITF No. 00-19 to allow accounting through permanent
equity. There can be no assurance, however, that the Company will be successful
in its efforts to amend its equity forward contracts. Under such circumstances,
or in the event that the Company is unable to terminate such positions, EITF
No. 00-7 and EITF No. 00-19 could materially adversely affect the Company's
capital position as well as its reported earnings. Management is continuing to
assess the potential impact of EITF No. 00-7 and EITF No. 00-19 on the Company's
reported results of operations and financial position. As of June 30, 2000, the
Company had not entered into any new contracts after March 16, 2000.
3. ALLOWANCE FOR LOSSES
The following table summarizes changes in the allowance for losses for the
three and six months ended June 30, 2000 and 1999, respectively. Certain
reclassifications have been made to the balances as of June 30, 1999 to be
consistent with classifications adopted for June 30, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD...................... $300,054 $298,136 $303,743 $293,185
Additions
Provisions for losses............................. 7,900 13,029 17,338 20,665
Recoveries........................................ 631 1,429 3,386 2,161
Deductions
Reductions for sales of student loans............. (4,960) (1,067) (12,969) (1,067)
Write-offs........................................ (12,870) (12,823) (20,743) (16,240)
-------- -------- -------- --------
BALANCE AT END OF PERIOD............................ $290,755 $298,704 $290,755 $298,704
======== ======== ======== ========
</TABLE>
9
<PAGE>
USA EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 2000 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 IS UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. STUDENT LOAN SECURITIZATION
For the three months ended June 30, 2000 and 1999, the Company securitized
$2.5 billion and $1.0 billion, respectively, of student loans and recorded
pre-tax gains of $26 million and $8 million, respectively. For the six months
ended June 30, 2000 and 1999, the Company securitized $6.5 billion and
$1.0 billion, respectively, of student loans and recorded pre-tax gains of
$68 million and $8 million, respectively. At June 30, 2000 and December 31,
1999, securitized student loans outstanding totaled $24.5 billion and
$19.5 billion, respectively.
5. COMMON STOCK
Basic earnings per share are calculated using the weighted average number of
shares of common stock outstanding during each period. Diluted earnings per
share reflect the potential dilutive effect of additional common shares that are
issuable upon exercise of outstanding stock options and warrants, determined by
the treasury stock method, and equity forwards, determined by the reverse
treasury stock method, as follows:
<TABLE>
<CAPTION>
NET INCOME
ATTRIBUTABLE
TO COMMON AVERAGE EARNINGS
STOCK SHARES PER SHARE
------------ --------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Basic earnings per share.................................... $ 117,608 156,090 $.75
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 5,879 (.02)
--------- ------- ----
Diluted earnings per share.................................. $ 117,608 161,969 $.73
========= ======= ====
THREE MONTHS ENDED JUNE 30, 1999
Basic earnings per share.................................... $ 123,663 161,344 $.77
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,459 (.01)
--------- ------- ----
Diluted earnings per share.................................. $ 123,663 163,803 $.76
========= ======= ====
</TABLE>
<TABLE>
<CAPTION>
NET INCOME
ATTRIBUTABLE
TO COMMON AVERAGE EARNINGS
STOCK SHARES PER SHARE
------------ --------- ---------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
Basic earnings per share.................................... $268,350 156,643 $1.71
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 5,470 (.05)
-------- ------- -----
Diluted earnings per share.................................. $268,350 162,113 $1.66
======== ======= =====
SIX MONTHS ENDED JUNE 30, 1999
Basic earnings per share.................................... $237,472 162,249 $1.46
Dilutive effect of stock options, warrants, and equity
forwards.................................................. -- 2,487 (.02)
-------- ------- -----
Diluted earnings per share.................................. $237,472 164,736 $1.44
======== ======= =====
</TABLE>
10
<PAGE>
USA EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 2000 AND FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 IS UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. SUBSEQUENT EVENTS
Effective as of July 7, 2000, the Company completed the acquisition of
Student Loan Funding Resources, Inc. ("SLFR") from the Thomas J. Conlan
Education Foundation for $117 million in cash. SLFR is the eighth largest holder
of federal student loans in the nation with a $3 billion portfolio.
Effective as of July 31, 2000, the Company completed the acquisition of the
guarantee servicing, student loan servicing and secondary market operations of
USA Group, Inc. The Company did not acquire the operations of the sellers'
affiliates, USA Group Funds, Inc. and Secondary Market Services--Hawaii. The
acquisition price was $770 million in cash and stock.
Also effective as of July 31, 2000, SLM Holding Corporation was renamed USA
Education, Inc. The Company's New York Stock Exchange ticker symbol remained
"SLM."
On August 11, 2000, President Clinton announced three proposals concerning
student loans. The first proposal would forgive up to $5,000 in both Federal
Family Education Loan Program loans and Federal Direct Student Loans for
teachers who teach in needy schools for five consecutive years. At least one of
the years in the classroom must have begun after September 1998. The program
would take effect July 1, 2001. The second proposal would grant students and
parents who hold Federal Direct Student Loans an immediate rebate on their
interest equal to 1.5% of the loan. To retain this benefit, the students or
parents must make the first 12 payments on time. The third proposal would reduce
the interest rate by .80% on Federal Direct Consolidation Loans for borrowers
who consolidate their loans in the direct student loan program. To retain this
benefit, the students must also make the first 12 payments on time. The
availability of the reduced borrower interest rates on Federal Direct
Consolidation Loans may increase the likelihood that a Federal Family Education
Loan Program loan managed by the Company will be prepaid from the proceeds of
such loans. While the Company intends to monitor the impact of these proposals
on the Company's results of operations, at this time, based upon experience with
like proposals, the Company believes that the financial impact to the Company
resulting from these proposals will not be materially adverse.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
SLM HOLDING CORPORATION ("SLM HOLDING") WAS FORMED ON FEBRUARY 3, 1997 AS A
WHOLLY OWNED SUBSIDIARY OF THE STUDENT LOAN MARKETING ASSOCIATION (THE "GSE").
ON AUGUST 7, 1997, PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVATIZATION ACT") AND APPROVAL BY
SHAREHOLDERS OF AN AGREEMENT AND PLAN OF REORGANIZATION, THE GSE WAS REORGANIZED
INTO A SUBSIDIARY OF SLM HOLDING (THE "REORGANIZATION"). EFFECTIVE AS OF
JULY 31, 2000, SLM HOLDING CORPORATION WAS RENAMED USA EDUCATION, INC. UPON THE
COMPLETION OF THE ACQUISITION OF THE GUARANTEE SERVICING, STUDENT LOAN SERVICING
AND SECONDARY MARKET OPERATIONS OF USA GROUP, INC. ("USA GROUP"). THE COMPANY
DID NOT ACQUIRE THE OPERATIONS OF THE SELLERS' AFFILIATES, USA GROUP
FUNDS, INC. AND SECONDARY MARKET SERVICES--HAWAII. USA EDUCATION, INC. IS A
HOLDING COMPANY THAT OPERATES THROUGH A NUMBER OF SUBSIDIARIES INCLUDING THE
GSE. REFERENCES HEREIN TO THE "COMPANY" REFER TO THE GSE AND ITS SUBSIDIARIES
FOR PERIODS PRIOR TO THE REORGANIZATION AND TO USA EDUCATION, INC. AND ITS
SUBSIDIARIES FOR PERIODS AFTER THE REORGANIZATION.
The Company is the nation's largest private source of financing and
servicing for education loans in the United States, primarily through its
participation in the Federal Family Education Loan Program ("FFELP"), formerly
the Guaranteed Student Loan Program. The Company's products and services include
student loan purchases and commitments to purchase student loans, as well as
operational support to originators of student loans and to post-secondary
education institutions and other education-related financial services. The
Company also originates, purchases and holds unguaranteed private loans.
The following Management's Discussion and Analysis contains forward-looking
statements and information that are based on management's current expectations
as of the date of this document. Discussions that utilize the words "intends,"
"anticipate," "believe," "estimate" and "expect" and similar expressions, as
they relate to the Company's management, are intended to identify forward-
looking statements. Such forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause the actual results
of the Company to be materially different from those reflected in such
forward-looking statements. Such factors include, among others, changes in the
terms of student loans and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from changes in such laws
and regulations, which may reduce the volume, average term and costs of yields
on student loans under the FFELP or result in loans being originated or
refinanced under non-FFELP programs or may affect the terms upon which banks and
others agree to sell FFELP loans to the Company. The Company could also be
affected by changes in the demand for educational financing and consumer lending
or in financing preferences of lenders, educational institutions, students and
their families; and changes in the general interest rate environment and in the
securitization markets for education loans, which may increase the costs or
limit the availability of financings necessary to initiate, purchase or carry
education loans.
Set forth below is Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company for the three and six months
ended June 30, 2000 and 1999. This section should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1997-99 presented in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
All dollar amounts are in millions, except per share amounts or as otherwise
noted.
12
<PAGE>
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED INCREASE ENDED INCREASE
JUNE 30, (DECREASE) JUNE 30, (DECREASE)
------------------- ------------------- ------------------- -------------------
2000 1999 $ % 2000 1999 $ %
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income.................. $162 $173 $ (11) (6)% $ 323 $ 331 $ (8) (2)%
Less: provision for losses........... 8 13 (5) (39) 17 21 (4) (16)
---- ---- ----- --- ----- ----- ----- ---
Net interest income after provision
for losses......................... 154 160 (6) (4) 306 310 (4) (1)
Gains on student loan
securitizations.................... 26 8 18 229 68 8 60 764
Servicing and securitization
revenue............................ 69 81 (12) (15) 131 167 (36) (22)
Other income......................... 30 22 8 34 102 42 60 133
Operating expenses................... 95 86 9 10 191 173 18 11
Income taxes......................... 61 58 3 4 136 112 24 21
Minority interest in net earnings of
subsidiary......................... 3 3 -- -- 6 5 1 --
---- ---- ----- --- ----- ----- ----- ---
Net income........................... 120 124 (4) (3) 274 237 37 15
Preferred dividends.................. 3 -- 3 100 6 -- 6 100
---- ---- ----- --- ----- ----- ----- ---
Net income attributable to common
stock.............................. $117 $124 $ (7) (5)% $ 268 $ 237 $ 31 13%
==== ==== ===== === ===== ===== ===== ===
Basic earnings per share............. $.75 $.77 $(.02) (2)% $1.71 $1.46 $ .25 17%
==== ==== ===== === ===== ===== ===== ===
Diluted earnings per share........... $.73 $.76 $(.03) (4)% $1.66 $1.44 $ .22 15%
==== ==== ===== === ===== ===== ===== ===
Dividends per share.................. $.16 $.15 $ .01 7 % $ .32 $ .30 $ .02 7%
==== ==== ===== === ===== ===== ===== ===
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
JUNE 30, DECEMBER 31, -------------------
2000 1999 $ %
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
ASSETS
Student loans........................................... $31,437 $33,809 $(2,372) (7)%
Warehousing advances.................................... 680 1,043 (363) (35)
Academic facilities financings.......................... 962 1,028 (66) (6)
Cash and investments.................................... 4,145 5,775 (1,630) (28)
Other assets............................................ 2,326 2,370 (44) (2)
------- ------- ------- ---
Total assets............................................ $39,550 $44,025 $(4,475) (10)%
======= ======= ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................................... $30,981 $37,491 $(6,510) (17)%
Long-term notes......................................... 6,282 4,496 1,786 40
Other liabilities....................................... 1,135 983 152 15
------- ------- ------- ---
Total liabilities....................................... 38,398 42,970 (4,572) (11)
------- ------- ------- ---
Minority interest in subsidiary......................... 214 214 - -
Stockholders' equity before treasury stock.............. 2,231 2,025 206 10
Common stock held in treasury at cost................... 1,293 1,184 109 9
------- ------- ------- ---
Total stockholders' equity.............................. 938 841 97 12
------- ------- ------- ---
Total liabilities and stockholders' equity.............. $39,550 $44,025 $(4,475) (10)%
======= ======= ======= ===
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
EARNINGS SUMMARY
For the three months ended June 30, 2000, the Company's "core cash basis"
net income was $116 million ($.70 diluted earnings per share), versus "core cash
basis" net income of $96 million ($.58 diluted earnings per share) in the second
quarter of 1999. For the six months ended June 30, 2000, the Company's "core
cash basis" net income was $224 million ($1.34 diluted earnings per share)
versus $188 million ($1.14 diluted earnings per share) for the six months ended
June 30, 1999. "Core cash basis" results measure only the recurring earnings of
the Company. Accordingly, securitization transactions are treated as financings,
not sales, and thereby gains on such sales are eliminated. In addition, the
effect of floor revenue and certain one-time gains on sales of investment
securities and student loans are also excluded from net income calculated in
accordance with generally accepted accounting principles ("GAAP"). See
"Pro-forma Statements of Income" for a detailed discussion of "core cash basis"
net income.
The increase in "core cash basis" net income in the second quarter of 2000
versus the second quarter of 1999 is mainly due to the $6.6 billion increase in
the average balance of the Company's managed portfolio of student loans
partially offset by higher funding costs. For the six months ended June 30,
2000, the increase in "core cash basis" net income versus the year-ago period is
mainly due to the $6.7 billion increase in the average balance of the Company's
managed portfolio of student loans, partially offset by higher funding costs.
For the three months ended June 30, 2000, the Company's GAAP net income was
$120 million ($.73 diluted earnings per share), versus GAAP net income of
$124 million ($.76 diluted earnings per share) in the second quarter of 1999.
The decrease in GAAP net income in the second quarter of 2000 versus the
year-ago quarter is mainly due to a decrease in after-tax floor revenue of
$16 million, lower after-tax servicing and securitization revenue of
$8 million, and higher funding costs, partially offset by an increase in
after-tax securitization gains of $12 million. For the six months ended
June 30, 2000, the Company's GAAP net income was $274 million ($1.66 diluted
earnings per share), versus GAAP net income of $237 million ($1.44 diluted
earnings per share) for the six months ended June 30, 1999. The increase in
year-to-date 2000 GAAP net income versus year-to-date 1999 GAAP net income is
due to a $1.9 billion increase in the average balance of the Company's
on-balance sheet portfolio of student loans, an increase of $39 million in
after-tax securitization gains, and an increase of $28 million in after-tax
gains on sales of investment securities. The increase in GAAP net income for the
first six months of 2000 versus the year-ago period is partially offset by a
decrease in after-tax floor revenue of $28 million, lower after-tax servicing
and securitization revenue of $23 million, and higher funding costs.
For the six months ended June 30, 2000, the Company repurchased 2.6 million
common shares through its share repurchase program, leaving outstanding shares
at 155 million at June 30, 2000.
NET INTEREST INCOME
Net interest income is derived largely from the Company's portfolio of
student loans that remain on-balance sheet. Additional information regarding the
return on the Company's student loan portfolio is set forth under "Student
Loans--Student Loan Spread Analysis."
Taxable equivalent net interest income for the three months ended June 30,
2000 versus the three months ended June 30, 1999 decreased by $11 million while
the net interest margin decreased by .27 percent. The $19 million decrease in
taxable equivalent net interest income attributable to the change in rates for
the three months ended June 30, 2000 versus the three months ended June 30, 1999
was principally due to the decrease in floor revenue and the student loan spread
(discussed in more
14
<PAGE>
detail below). The decrease in taxable equivalent net interest income was
partially offset by the $5.1 billion increase in the average balance of
investments over the year-ago quarter.
Taxable equivalent net interest income for the six months ended June 30,
2000 versus the six months ended June 30, 1999 decreased by $5 million while the
net interest margin decreased by .27 percent. The $42 million decrease in
taxable equivalent net interest income attributable to the change in rates for
the six months ended June 30, 2000 versus the six months ended June 30, 1999 was
principally due to the decrease in floor revenue and the student loan spread
(discussed in more detail below), partially offset by the $4.4 billion increase
in the average balance of investments over the year-ago period.
TAXABLE EQUIVALENT NET INTEREST INCOME
The amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED INCREASE ENDED INCREASE
JUNE 30, (DECREASE) JUNE 30, (DECREASE)
------------------- ------------------- ------------------- -------------------
2000 1999 $ % 2000 1999 $ %
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Student loans........................ $634 $571 $ 63 11% $1,302 $1,092 $210 19%
Warehousing advances................. 11 18 (7) (39) 28 40 (12) (31)
Academic facilities financings....... 19 19 -- -- 36 38 (2) (5)
Investments.......................... 143 50 93 185 261 103 158 153
Taxable equivalent adjustment........ 8 8 -- (1) 17 16 1 10
---- ---- ---- --- ------ ------ ---- ---
Total taxable equivalent interest
income............................... 815 666 149 22 1,644 1,289 355 28
Interest expense....................... 645 485 160 33 1,303 943 360 38
---- ---- ---- --- ------ ------ ---- ---
Taxable equivalent net interest
income............................... $170 $181 $(11) (6)% $ 341 $ 346 $ (5) (2)%
==== ==== ==== === ====== ====== ==== ===
</TABLE>
15
<PAGE>
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans....................... $31,272 8.16% $31,868 7.18% $32,519 8.05% $30,662 7.18%
Warehousing advances................ 653 6.87 1,328 5.56 829 6.75 1,446 5.61
Academic facilities financings...... 1,010 9.29 1,165 8.20 1,030 8.78 1,185 8.17
Investments......................... 8,453 6.94 3,383 6.31 7,898 6.85 3,546 6.19
------- ---- ------- ---- ------- ---- ------- ----
Total interest earning assets......... 41,388 7.92% 37,744 7.08% 42,276 7.82% 36,839 7.06%
==== ==== ==== ====
Non-interest earning assets........... 2,127 1,894 2,249 2,003
------- ------- ------- -------
Total assets.......................... $43,515 $39,638 $44,525 $38,842
======= ======= ======= =======
AVERAGE LIABILITIES AND STOCKHOLDERS'
EQUITY
Six month floating rate notes....... $ 4,393 6.35% $ 4,832 5.16% $ 4,654 6.33% $ 4,466 5.20%
Other short-term borrowings......... 30,306 6.30 26,972 5.07 31,680 6.16 25,648 5.05
Long-term notes..................... 6,450 6.33 5,986 5.53 5,860 6.39 6,868 5.45
------- ---- ------- ---- ------- ---- ------- ----
Total interest bearing liabilities.... 41,149 6.31% 37,790 5.15% 42,194 6.21% 36,982 5.14%
==== ==== ==== ====
Non-interest bearing liabilities...... 1,425 1,206 1,423 1,220
Stockholders' equity.................. 941 642 908 640
------- ------- ------- -------
Total liabilities and stockholders'
equity............................ $43,515 $39,638 $44,525 $38,842
======= ======= ======= =======
Net interest margin................... 1.65% 1.92% 1.62% 1.89%
==== ==== ==== ====
</TABLE>
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TAXABLE ATTRIBUTABLE TO
EQUIVALENT CHANGE IN
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- -------- --------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE
MONTHS ENDED JUNE 30, 1999
Taxable equivalent interest income.............. $149 $ 89 $60
Interest expense................................ 160 108 52
---- ---- ---
Taxable equivalent net interest income.......... $(11) $(19) $ 8
==== ==== ===
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
INCREASE (DECREASE)
TAXABLE ATTRIBUTABLE TO
EQUIVALENT CHANGE IN
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- -------- --------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS
ENDED JUNE 30, 1999
Taxable equivalent interest income.............. $355 $156 $199
Interest expense................................ 360 198 162
---- ---- ----
Taxable equivalent net interest income.......... $ (5) $(42) $ 37
==== ==== ====
</TABLE>
STUDENT LOANS
STUDENT LOAN SPREAD ANALYSIS
The following table analyzes the reported earnings from student loans both
on-balance sheet and those off-balance sheet in securitization trusts. The line
captioned "Adjusted student loan yields" reflects contractual student loan
yields adjusted for the amortization of premiums paid to purchase loan
portfolios and the estimated costs of borrower benefits as required by GAAP. For
student loans off-balance sheet, the Company will continue to earn servicing fee
revenues over the life of the securitized student loan portfolios. The
off-balance sheet information presented in "Securitization Program--Servicing
and Securitization Revenue" analyzes the on-going servicing revenue and residual
interest earned on the securitized portfolios of student loans. For an analysis
of the Company's student loan spread for the entire portfolio of managed student
loans on a similar basis to the on-balance sheet analysis see "'Core Cash Basis'
Student Loan Spread and Net Interest Income."
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields........................... 8.56% 7.53% 8.44% 7.54%
Consolidated loan rebate fees.......................... (.27) (.21) (.26) (.22)
Offset fees............................................ (.13) (.14) (.13) (.14)
------- ------- ------- -------
Student loan income.................................... 8.16 7.18 8.05 7.18
Cost of funds.......................................... (6.25) (5.12) (6.18) (5.10)
------- ------- ------- -------
Student loan spread.................................... 1.91% 2.06% 1.87% 2.08%
======= ======= ======= =======
OFF-BALANCE SHEET
Servicing and securitization revenue................... 1.14% 1.90% 1.18% 1.93%
======= ======= ======= =======
AVERAGE BALANCES
Student loans.......................................... $31,272 $31,868 $32,519 $30,662
Securitized loans...................................... 24,248 17,080 22,288 17,431
------- ------- ------- -------
Managed student loans.................................. $55,520 $48,948 $54,807 $48,093
======= ======= ======= =======
</TABLE>
The Company's portfolio of student loans originated under the FFELP has a
variety of unique interest rate characteristics. The Company generally earns
interest at the greater of the borrower's rate or a floating rate determined by
reference to the average of the weekly auctions of 91-day Treasury bills by the
government, plus a fixed spread which is dependent upon when the loan was
originated. If the floating rate exceeds the borrower rate, the Department of
Education makes a payment directly to the Company based upon the special
allowance payment ("SAP") formula established under the Higher Education Act. If
the floating rate is less than the rate the borrower is obligated to pay, the
Company simply earns interest at the borrower rate. In all cases, the rate a
borrower is obligated to pay sets a
17
<PAGE>
minimum rate for determining the yield the Company earns on a loan. The
borrowers' interest rates are either fixed to term or are reset annually on
July 1 of each year depending on when the loan was originated.
The Company generally finances its student loan portfolio with floating rate
debt tied to the average of the 91-day Treasury bill auctions, either directly
or through the use of derivative financial instruments, intended to mimic the
interest rate characteristics of the student loans. Such borrowings float over
all interest rate ranges. As a result, in periods of declining interest rates,
the portfolio of managed student loans may be earning at the borrower rate while
the Company's funding costs (exclusive of fluctuations in funding spreads)
generally continue to decline along with Treasury bill rates. When this happens,
the difference between the interest earned from the rate paid by the borrower
and the interest that would have been earned under the SAP formula is referred
to as "floor revenue." For loans where the borrower's interest rate is fixed to
term, declining interest rates may benefit the spread earned on student loans
for extended periods of time. For loans where the borrower's interest rate is
reset annually, any benefit of a declining interest rate environment will only
enhance student loan spreads through the next annual reset of the borrower's
interest rates, which occurs on July 1 of each year.
Due to the continued rise in Treasury bill rates since the second quarter of
1999, the Company earned floor revenue of $0.6 million in the second quarter of
2000 versus $25 million of such earnings in the year-ago quarter. The floor
revenue earned in the second quarter of 2000 was attributable to student loans
whose minimum borrower rates adjust annually on July 1, while in the second
quarter of 1999, $15 million of the floor revenue earned was from student loans
whose borrower rates are fixed to term, and $10 million was from student loans
whose borrower rates reset annually. The reduction in floor revenue decreased
the second quarter 2000 on-balance sheet student loan spread by 31 basis points
versus the year-ago quarter. For the six months ended June 30, 2000, the Company
earned floor revenue of $3 million of which $2 million was attributable to
student loans whose minimum borrower rates are fixed to term and $1 million was
attributable to student loans whose minimum borrower rates adjust annually on
July 1. For the six months ended June 30, 1999, the Company earned floor revenue
of $46 million, of which $28 million was attributable to student loans whose
minimum borrower rates are fixed to term and $18 million was attributable to
student loans whose minimum borrower rates adjust annually on July 1. The
reduction in floor revenue decreased the year-to-date 2000 on-balance sheet
student loan spread by 28 basis points versus the year-ago period.
The Company's match funding of its student loan portfolio on a managed basis
affects servicing and securitization revenue in the opposite direction from its
effect on the on-balance sheet student loan spread. Specifically, the Company's
on-balance sheet use of funding indexed to the July 1999 reset of the 52-week
Treasury bill to fund off-balance sheet PLUS student loans decreased servicing
and securitization revenue by $18 million for the six months ended June 30, 2000
versus the prior year due to the rise in Treasury bill rates which increased
off-balance sheet funding costs for debt indexed to the 91-day Treasury bill and
funding PLUS loans. The opposite effect occurs on-balance sheet as the Company
uses the excess of off-balance sheet 91-day Treasury bill funding to fund
on-balance sheet student loans indexed to the 91-day Treasury bill.
The following table analyzes the ability of the FFELP student loans in the
Company's managed student loan portfolio to earn at the minimum borrower
interest rate at June 30, 2000 and 1999, based on the last Treasury bill
auctions of June 2000 and June 1999 for fixed rate loans (5.84 percent and
18
<PAGE>
4.89 percent, respectively), and based on the last Treasury bill auctions of May
2000 and May 1999 for variable rate loans (5.89 percent and 4.62 percent,
respectively).
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------------------------ ------------------------------
FIXED VARIABLE TOTAL FIXED VARIABLE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Student loans eligible to earn at the minimum borrower
rate................................................ $13.3 $30.5 $43.8 $12.5 $ 27.9 $ 40.4
Less notional amount of floor interest contracts...... (4.3) (1.4) (5.7) (3.8) (16.7) (20.5)
----- ----- ----- ----- ------ ------
Net student loans eligible to earn at the minimum
borrower rate....................................... $ 9.0 $29.1 $38.1 $ 8.7 $ 11.2 $ 19.9
===== ===== ===== ===== ====== ======
Net student loans earning at the minimum borrower
rate................................................ $ 2.0 $ -- $ 2.0 $ 5.7 $ 11.1 $ 16.8
===== ===== ===== ===== ====== ======
</TABLE>
STUDENT LOAN FLOOR REVENUE CONTRACTS
For the three months ended June 30, 2000 and 1999, the amortization of the
upfront payments received from the sale of Floor Revenue Contracts on the
Company's on-balance sheet student loans with fixed borrower rates was $4
million and $5 million, respectively, and for Floor Revenue Contracts with
annually reset borrower rates was $0.6 million and $12 million, respectively.
For the six months ended June 30, 2000 and 1999, the amortization of the upfront
payments received from the sale of Floor Revenue Contracts on the Company's
on-balance sheet student loans with fixed borrower rates was $9 million and $11
million, respectively, and for Floor Revenue Contracts with annually reset
borrower rates was $1 million and $20 million, respectively.
At June 30, 2000, unamortized payments received from the sale of Floor
Revenue Contracts totaled $15 million, all of which related to contracts on
fixed rate loans. At June 30, 2000, the Company had $4.3 billion of outstanding
fixed borrower rate Floor Revenue Contracts which had expiration dates through
the year 2003, and $1.4 billion of annually reset borrower rate contracts which
expired on July 1, 2000.
ON-BALANCE SHEET FUNDING COSTS
The Company's borrowings are generally variable rate indexed principally to
the 91-day Treasury bill rate. The following table summarizes the average
balance of on-balance sheet debt (by index, after giving effect to the impact of
interest rate swaps) for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury bill, principally
91-day....................... $32,597 6.35% $28,466 5.18% $33,118 6.25% $28,496 5.14%
LIBOR.......................... 1,415 6.24 2,517 4.86 1,591 6.12 2,529 4.92
Discount notes................. 3,795 6.18 4,924 4.76 4,221 5.92 4,062 4.78
Fixed.......................... 1,409 5.98 868 6.03 1,416 5.98 871 6.07
Zero coupon.................... 169 11.17 151 11.14 167 11.17 149 11.14
Commercial paper............... 963 6.65 -- -- 955 6.45 -- --
Other.......................... 801 6.19 864 4.74 726 5.88 875 4.75
------- ----- ------- ----- ------- ----- ------- -----
Total.......................... $41,149 6.31% $37,790 5.15% $42,194 6.21% $36,982 5.14%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
19
<PAGE>
The following table details the spreads for the Company's Treasury bill
indexed borrowings and London Interbank Offered Rate ("LIBOR") indexed
borrowings:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
INDEXED BORROWINGS 2000 1999 2000 1999
------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
TREASURY BILL
Weighted average Treasury bill......... 5.84% 4.71% 5.72% 4.70%
Borrowing spread....................... .51 .47 .53 .44
---- ---- ---- ----
Weighted average borrowing rate........ 6.35% 5.18% 6.25% 5.14%
==== ==== ==== ====
LIBOR
Weighted average LIBOR................. 6.48% 5.08% 6.34% 5.16%
Borrowing spread....................... (.24) (.22) (.22) (.24)
---- ---- ---- ----
Weighted average borrowing rate........ 6.24% 4.86% 6.12% 4.92%
==== ==== ==== ====
</TABLE>
SECURITIZATION PROGRAM
During the second quarter of 2000, the Company completed a securitization
transaction in which a total of $2.5 billion of student loans were sold to a
special purpose finance subsidiary and by that subsidiary to a trust that issued
asset-backed securities to fund the student loans to term. For the six months
ended June 30, 2000, the Company securitized a total of $6.5 billion of student
loans in three separate transactions.
During the second quarter of 1999, the Company re-entered the securitization
market and securitized $1.0 billion of student loans, after not having completed
a securitization transaction from August 1998 through the first quarter of 1999
due to adverse market conditions following the Russian bond default.
GAINS ON STUDENT LOAN SECURITIZATIONS
For the three months ended June 30, 2000 the Company recorded a pre-tax
securitization gain of $26 million, which was 1.03 percent of the portfolio
securitized, versus a pre-tax securitization gain of $8 million, which was
0.79 percent of the portfolio securitized in the first quarter of 1999. The
increase in the 2000 second quarter securitization gain as a percentage of the
portfolio securitized versus the year-ago quarter is mainly due to lower
financing spreads. For the six months ended June 30, 2000, the Company recorded
pre-tax securitization gains of $68 million, which was 1.05 percent of the
portfolios securitized. Gains on future securitizations will continue to vary
depending on the size and the loan characteristics of the loan portfolios
securitized and the funding costs prevailing in the securitization debt markets
at the time of each transaction.
SERVICING AND SECURITIZATION REVENUE
The following table summarizes the components of servicing and
securitization revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Servicing revenue less amortization of servicing asset...... $54 $38 $ 99 $ 78
Securitization revenue...................................... 15 43 32 89
--- --- ---- ----
Total servicing and securitization revenue.................. $69 $81 $131 $167
=== === ==== ====
</TABLE>
In the three and six months ended June 30, 2000, servicing and
securitization revenue was 1.14 percent and 1.18 percent, respectively, of
average securitized loans versus 1.90 percent and
20
<PAGE>
1.93 percent, respectively, in the corresponding year-ago periods. The decrease
in servicing and securitization revenue as a percentage of the average balance
of securitized student loans in the three and six months ended 2000 versus the
corresponding year-ago periods is mainly due to the impact of the rise in
Treasury bill rates since the second half of 1999, which decreased floor
revenues from student loans in the trusts by $18 million and $38 million,
respectively.
OTHER INCOME
Other income, exclusive of gains on student loan securitizations and
servicing and securitization revenue, totaled $31 million and $23 million for
the three months ended June 30, 2000 and 1999, respectively, and $102 million
and $44 million for the six months ended June 30, 2000 and 1999, respectively.
Other income mainly includes late fees earned on student loans, gains and losses
on sales of investment securities, revenue received from servicing third party
portfolios of student loans and commitment fees for letters of credit. The
increase in other income for the second quarter of 2000 versus the second
quarter of 1999 is mainly due to an increase in third party servicing fees of
$3 million, and an increase in late fees of $3 million. The increase in other
income for the six months ended June 30, 2000 versus the six months ended
June 30, 1999 is mainly due to $43 million of gains on sales of investment
securities, $6 million additional late fee revenue, and a $5 million increase in
third party servicing fees.
OPERATING EXPENSES
The following table summarizes the components of operating expenses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Servicing and acquisition expenses.......... $59 $59 $119 $123
General and administrative expenses......... 36 27 72 50
--- --- ---- ----
Total operating expenses.................... $95 $86 $191 $173
=== === ==== ====
</TABLE>
Operating expenses include costs to service the Company's managed student loan
portfolio, operational costs incurred in the process of acquiring student loan
portfolios and general and administrative expenses. Operating expenses for the
three months ended June 30, 2000 and 1999 were $95 million and $86 million,
respectively. Total operating expenses as a percentage of average managed
student loans were 69 percent and 71 percent for the three months ended
June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and
1999, total operating expenses were $191 million and $173 million, respectively,
or as a percentage of managed student loans .70 percent and .71 percent,
respectively. The increase in operating expenses for the three and six months
ended June 30, 2000 over the corresponding year-ago periods was mainly due to
expenses related to Nellie Mae, which the Company acquired in the third quarter
of 1999, and to expenses of new business initiatives, specifically, SLM
Financial, SLM Solutions, and E-commerce initiatives.
STUDENT LOAN PURCHASES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ExportSS, origination and servicing clients..... $1,700 $2,528 $3,608 $4,736
Other commitment clients........................ 528 289 811 605
Spot purchases.................................. 56 34 210 61
Consolidations.................................. 159 391 367 542
Other........................................... 265 249 563 507
------ ------ ------ ------
Total........................................... $2,708 $3,491 $5,559 $6,451
====== ====== ====== ======
</TABLE>
21
<PAGE>
For the three months ended June 30, 2000, the Company purchased
$2.7 billion of student loans compared with $3.5 billion in the year-ago period.
For the six months ended June 30, 2000, the Company purchased $5.6 billion of
student loans compared with $6.5 billion in the year-ago period. In the fourth
quarter of 1998, the Company restructured its joint venture with Chase Manhattan
Bank ("Chase") and now purchases all loans originated by Chase. The purchases in
the first half of 1999 include $1.6 billion of loans from the joint venture that
were previously owned by Chase.
In the second quarter of 2000, the Company's controlled channels of loan
originations totaled $0.7 billion versus $0.5 billion in the year-ago quarter.
The pipeline of loans currently serviced and committed for purchase by the
Company was $2.6 billion at June 30, 2000 versus $3.1 billion at June 30, 1999.
The Department of Education offers existing FFELP borrowers the opportunity
to refinance FFELP loans into Federal Direct Student Loan Program ("FDSLP")
consolidation loans. During the three months ended June 30, 2000 and 1999,
approximately $141 million and $287 million, respectively, of the Company's
managed student loans were accepted for refinancing into the FDSLP. During the
six months ended June 30, 2000 and 1999, approximately $217 million and
$599 million, respectively, of the Company's managed student loans were accepted
for refinancing into the FDSLP. The relatively high balance in the six months
ended June 30, 1999 was the result of legislation passed in 1998 that allowed
borrowers to submit applications by January 31, 1999 for consolidated student
loans under the FDSLP at advantageous interest rates.
The following table summarizes the activity in the Company's managed
portfolio of student loans for the three and six months ended June 30, 2000 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BEGINNING BALANCE....................... $54,736 $47,654 $53,276 $46,342
Purchases............................... 2,708 3,491 5,559 6,451
Capitalized interest on securitized
loans................................. 133 78 271 167
Repayments, claims, other............... (1,268) (1,316) (2,572) (2,616)
Loan sales.............................. (88) - (126) -
Loans consolidated from SLMH............ (272) (391) (459) (828)
------- ------- ------- -------
Ending balance.......................... $55,949 $49,516 $55,949 $49,516
======= ======= ======= =======
</TABLE>
PRO-FORMA STATEMENTS OF INCOME
Under GAAP, the Company's securitization transactions have been treated as
sales. At the time of sale, in accordance with Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), the Company records a gain equal to the present
value of the estimated future net cash flows from the portfolio of loans sold.
Interest earned on the interest residual and fees earned for servicing the loan
portfolios are recognized over the life of the securitization transaction as
servicing and securitization revenue. Under SFAS 125, income recognition is
effectively accelerated through the recognition of a gain at the time of sale
while the ultimate realization of such income remains dependent on the actual
performance, over time, of the loans that were securitized.
Management believes that in addition to results of operations as reported in
accordance with GAAP, another important performance measure is pro-forma results
of operations under the assumption that the securitization transactions are
financings and that the securitized student loans were not sold. The pro-forma
results of operations also exclude the effect of floor revenue and certain
one-time gains on sales of investment securities and student loans. The
following pro-forma statements of income present the Company's results of
operations under the assumption that the securitization
22
<PAGE>
transactions are financings and that the securitized student loans were not
sold. As such, no gain on sale or subsequent servicing and securitization
revenue is recognized. Instead, the earnings of the student loans in the trusts
and related financing costs are reflected over the life of the underlying pool
of loans. The effect of floor revenue and certain one-time gains on sales of
investment securities and student loans are also excluded from net income.
Management refers to these pro-forma results as "core cash basis" statements of
income. Management monitors the periodic "core cash basis" earnings of the
Company's managed student loan portfolio and believes that they assist in a
better understanding of the Company's student loan business.
The following table presents the "core cash basis" statements of income and
reconciliations to GAAP net income as reflected in the Company's consolidated
statements of income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
"CORE CASH BASIS" STATEMENTS OF INCOME:
Interest income:
Insured student loans.............................. $ 1,131 $ 848 $ 2,208 $ 1,659
Advances/Facilities/Investments.................... 175 88 328 183
------- ----- ------- -------
Total interest income................................ 1,306 936 2,536 1,842
Interest expense..................................... (1,050) (713) (2,036) (1,405)
------- ----- ------- -------
Net interest income.................................. 256 223 500 437
Less: provision for losses........................... 14 17 28 29
------- ----- ------- -------
Net interest income after provision for losses....... 242 206 472 408
------- ----- ------- -------
Other Income:
Gains on student loan securitizations.............. -- -- -- --
Servicing and securitization revenue............... -- -- -- --
Gains on sales of securities....................... 1 1 1 --
Other.............................................. 29 21 57 43
------- ----- ------- -------
Total other income................................... 30 22 58 43
Total operating expenses............................. 95 86 191 173
------- ----- ------- -------
Income before taxes and minority interest in earnings
of subsidiary...................................... 177 142 339 278
Income taxes......................................... 59 43 110 85
Minority interest in earnings of subsidiary.......... 2 3 5 5
------- ----- ------- -------
"Core cash basis" net income......................... $ 116 $ 96 $ 224 $ 188
Preferred dividends.................................. 3 -- 6 --
======= ===== ======= =======
"Core cash basis" net income attributable to common
stock.............................................. $ 113 $ 96 $ 218 $ 188
======= ===== ======= =======
"Core cash basis" diluted earnings per share......... $ .70 $ .58 $ 1.34 $ 1.14
======= ===== ======= =======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
RECONCILIATION OF GAAP NET INCOME TO "CORE CASH BASIS"
NET INCOME:
GAAP net income........................................ $ 120 $ 124 $ 274 $ 237
------- ----- ------- -------
"Cash basis" adjustments:
Gains on student loan securitizations................ (26) (8) (68) (8)
Servicing and securitization revenue................. (69) (81) (131) (167)
Net interest income.................................. 94 93 178 190
Provision for losses................................. (6) (4) (11) (8)
------- ----- ------- -------
Total "cash basis" adjustments......................... (7) -- (32) 7
Net tax effect (A)..................................... 3 -- 11 (2)
------- ----- ------- -------
"Cash basis" net income................................ 116 124 253 242
------- ----- ------- -------
"Core cash basis" adjustments:
Floor revenue........................................ -- (43) (2) (83)
Gains/losses on sales of securities.................. -- -- (43) --
------- ----- ------- -------
Total "core cash basis" adjustments.................... -- (43) (45) (83)
Net tax effect (A)..................................... -- 15 16 29
------- ----- ------- -------
"Core cash basis" net income........................... $ 116 $ 96 $ 224 $ 188
======= ===== ======= =======
</TABLE>
------------------------
(A) Such tax effect is based upon the Company's marginal tax rate for the
respective period.
"CORE CASH BASIS" STUDENT LOAN SPREAD AND NET INTEREST INCOME
The following table analyzes the reported earnings from the Company's
portfolio of managed student loans, which includes those on-balance sheet and
those off-balance sheet in securitization trusts. The line captioned "Cash basis
adjusted student loan yields" reflects contractual student loan yields adjusted
for the amortization of premiums paid to purchase loan portfolios and the
estimated costs of borrower benefits.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
"Cash basis" adjusted student loan yields............... 8.44% 7.54% 8.36% 7.55%
Consolidated loan rebate fees........................... (.17) (.15) (.17) (.15)
Offset fees............................................. (.07) (.09) (.08) (.09)
------- ------- ------- -------
Student loan income..................................... 8.20 7.30 8.11 7.31
Cost of funds........................................... (6.43) (5.18) (6.33) (5.17)
------- ------- ------- -------
"Cash basis" student loan spread........................ 1.77% 2.12% 1.78% 2.14%
======= ======= ======= =======
"Core cash basis" student loan spread................... 1.76% 1.77% 1.77% 1.79%
======= ======= ======= =======
AVERAGE BALANCES
Managed student loans................................... $55,520 $48,948 $54,807 $48,093
======= ======= ======= =======
</TABLE>
The Company earns interest at the greater of the borrower's rate or a
floating rate determined by reference to the average of the weekly auctions of
the 91-day Treasury bills by the government, plus a fixed spread, which is
dependent upon when the loan was originated. In all cases, the rate the borrower
pays sets a minimum rate for determining the yield the Company earns on the
loan. The Company generally finances its student loan portfolio with floating
rate debt tied to the average of the 91-day
24
<PAGE>
Treasury bill auctions, either directly or through the use of derivative
financial instruments, to mimic the interest rate characteristics of the student
loans. Such borrowings, however, generally do not have minimum rates. As a
result, in periods of declining interest rates, the portfolio of managed student
loans may be earning at the minimum borrower rate while the Company's funding
costs (exclusive of funding spreads) will generally decline along with Treasury
bill rates. For loans in which the borrower's interest rate is fixed to term,
declining interest rates may benefit the spread earned on student loans for
extended periods of time. For loans in which the borrower's interest rate is
reset annually, any benefit of a low interest rate environment will only enhance
student loan spreads through the next annual reset of the borrowers interest
rates, which occurs on July 1 of each year. Due to the continued rise in
Treasury bill rates since the second quarter of 1999, the Company earned only
$0.6 million from student loans earning at the minimum borrower rate in the
second quarter of 2000 versus $43 million of such earnings in the year-ago
quarter. The negative impact of the rise in Treasury bill rates on student loans
earning at the minimum borrower rate decreased the "cash basis" student loan
spread by 35 basis points versus the year-ago quarter. These earnings have been
excluded from student loan income to calculate the "core cash basis" student
loan spread.
For the three and six months ended June 30, 2000, the amortization of the
upfront payments received from the sale of Floor Revenue Contracts with annually
reset borrower rates was $0.6 million and $1 million, respectively, versus
$14 million and $23 million, respectively, for the three and six months ended
June 30, 1999. At June 30, 2000, the unamortized balance of upfront payments
received from the sale of fixed borrower rate Floor Revenue Contracts totaled
$15 million. There was no unamortized balance of upfront payments received on
annually reset borrower rate contracts.
In the three months ended June 30, 2000, "core cash basis" net interest
income was $256 million compared with $223 million in the year-ago period. In
the six months ended June 30, 2000, "core cash basis" net interest income was
$500 million compared with $437 million in the year-ago period. The increase in
"core cash basis" net interest income earned in the three and six months ended
June 30, 2000 versus the year-ago periods was due to the increase in the average
balance of managed student loans, and the increase in student loans as a
percentage of average earning assets.
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 33 percent for the three and six months ended
June 30, 2000 versus 32 percent for the three and six month ended June 30, 1999.
The GSE is exempt from all state, local and District of Columbia income,
franchise, sales and use, personal property and other taxes, except for real
property taxes. However, this tax exemption applies only to the GSE and does not
apply to USA Education, Inc. or its other operating subsidiaries that are
subject to taxation at the state and local level. State taxes were immaterial in
the three and six months ended June 30, 2000 and 1999 as the majority of the
Company's business activities were conducted in the GSE.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are to fund the Company's
operations, the purchases of student loans and the repayment of its debt
obligations while continuing to meet the GSE's statutory capital adequacy ratio
test. The Company's primary sources of liquidity are through debt issuances by
its GSE subsidiary, off-balance sheet financings through securitizations,
borrowings under its commercial paper program, and cash generated by its
subsidiaries' operations and distributed as dividends to the Company.
25
<PAGE>
The Company's unsecured financing requirements are driven by three principal
factors: refinancing of existing liabilities as they mature; financing of
student loan portfolio growth; and the Company's level of securitization
activity. The lingering effects of the August 1998 Russian bond default have
caused funding spreads on both the Company's unsecured debt and its asset-backed
securities to remain wider than in recent years. Market conditions for Treasury
bill indexed debt improved in the first six months of 2000 and the Company has
begun to lengthen the term of its GSE debt.
In the first six months of 2000, the Company completed three securitization
transactions totaling $6.5 billion in student loans and issued $6.1 billion in
LIBOR-based asset-backed securities. The Company manages the resulting
off-balance sheet basis risk with on-balance sheet financing and derivative
instruments, principally basis swaps and Eurodollar futures.
During the first six months of 2000, the Company used the net proceeds from
student loan securitizations of $6.6 billion, net proceeds from the sale or
maturity of investments of $1.3 billion, and repayments and claim payments on
student loans of $1.3 billion to purchase student loans of $5.6 billion, to
reduce total debt by $4.7 billion, and to repurchase $111 million of the
Company's common stock.
Operating activities provided net cash inflows of $357 million in the first
six months of 2000, an increase of $60 million from the net cash inflows of
$297 million in the corresponding year-ago period.
During the first six months of 2000, the Company issued $5.5 billion of
long-term notes to refund maturing and repurchased obligations. At June 30,
2000, the Company had $6.3 billion of outstanding long-term debt issues of which
$611 million had stated maturities that could be accelerated through call
provisions. The Company uses interest rate and foreign currency swaps
(collateralized where appropriate), purchases of U.S. Treasury securities and
other hedging techniques to reduce its exposure to interest rate and currency
fluctuations that arise from its financing activities and to match the variable
interest rate characteristics of its earning assets. (See "Interest Rate Risk
Management.")
On January 1, 2000 the GSE's minimum required statutory capital adequacy
ratio was increased from 2.00 percent to 2.25 percent. At June 30, 2000, the GSE
was in compliance with the new ratio with a statutory capital adequacy ratio,
after the effect of the dividends to be paid in the third quarter of 2000, of
2.37 percent.
INTEREST RATE RISK MANAGEMENT
INTEREST RATE GAP ANALYSIS
The Company's principal objective in financing its operations is to minimize
its sensitivity to changing interest rates by matching the interest rate
characteristics of its borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate managed 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. The Company also uses interest rate
cap agreements, foreign currency swaps, options on securities, and financial
futures contracts to further reduce interest rate risk and foreign currency
exposure on certain of its borrowings. Investments are 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 addition to term match funding, the Company's asset-backed securities
generally match the interest rate characteristics of the majority of the student
loans in the trusts by being indexed to the 91-day Treasury bill. However, at
June 30, 2000, there were approximately $3 billion of PLUS student loans
outstanding in the trusts, which have interest rates that reset annually based
on the final auction of 52-week Treasury bills before each July 1. In addition,
at June 30, 2000 there were approximately $10 billion of LIBOR-based
asset-backed securities in the trusts, which have interest rates that generally
26
<PAGE>
reset quarterly. The Company manages this basis risk through its on-balance
sheet financing and hedging activities.
In the table below the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. The following gap analysis
reflects rate-sensitive positions at June 30, 2000 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............................ $ 31,437 $ -- $ -- $ -- $ -- $ --
Warehousing advances..................... 666 -- -- -- 1 13
Academic facilities financings........... 6 11 54 85 325 481
Cash and investments..................... 2,265 12 21 55 98 1,694
Other assets............................. 25 30 60 97 313 1,801
-------- ------- ------- ----- ----- -------
Total assets........................... 34,399 53 135 237 737 3,989
-------- ------- ------- ----- ----- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.................... 27,251 2,458 1,272 -- -- --
Long-term notes.......................... 4,586 -- -- 799 325 572
Other liabilities........................ -- -- -- -- -- 1,135
Minority interest in subsidiary.......... -- -- -- -- -- 214
Stockholders' equity..................... -- -- -- -- -- 938
-------- ------- ------- ----- ----- -------
Total liabilities and stockholders'
equity............................... 31,837 2,458 1,272 799 325 2,859
-------- ------- ------- ----- ----- -------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps...................... (3,542) 2,712 1,260 550 (10) (970)
-------- ------- ------- ----- ----- -------
Total off-balance sheet financial
instruments............................ (3,542) 2,712 1,260 550 (10) (970)
-------- ------- ------- ----- ----- -------
Period gap............................... $ (980) $ 307 $ 123 $ (12) $ 402 $ 160
======== ======= ======= ===== ===== =======
Cumulative gap........................... $ (980) $ (673) $ (550) $(562) $(160) $ --
======== ======= ======= ===== ===== =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities......... 108.0% .9% 5.9% 17.5% 130.5% 382.5%
======== ======= ======= ===== ===== =======
Ratio of cumulative gap to total
assets................................. 2.5% 1.7% 1.4% 1.4% .4% --%
======== ======= ======= ===== ===== =======
</TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
The effect of short-term movements in interest rates on the Company's
results of operations and financial position has been limited through the
Company's risk management activities. The Company performed a sensitivity
analysis to determine the effect of a hypothetical increase in market interest
rates of 10 percent on the Company's variable rate assets and liabilities and a
hypothetical 10 percent increase in spreads to their underlying index. Based on
this analysis, there has not been a material change in market risk from
December 31, 1999 as reported in the Company's Form 10-K.
27
<PAGE>
AVERAGE TERMS TO MATURITY
The following table reflects the average terms to maturity for the Company's
earning assets and liabilities at June 30, 2000 (in years):
<TABLE>
<CAPTION>
ON- OFF-
BALANCE BALANCE
SHEET SHEET MANAGED
-------- -------- --------
<S> <C> <C> <C>
EARNING ASSETS
Student loans...................................... 7.3 4.2 5.9
Warehousing advances............................... 6.0 -- 6.0
Academic facilities financings..................... 6.9 -- 6.9
Cash and investments............................... 6.5 -- 6.5
--- --- ---
Total earning assets............................... 7.2 4.2 6.0
--- --- ---
BORROWINGS
Short-term borrowings.............................. .3 -- .3
Long-term borrowings............................... 2.9 4.2 4.0
--- --- ---
Total borrowings................................... .7 4.2 2.1
=== === ===
</TABLE>
In the above table, Treasury receipts and variable rate asset-backed
securities, although generally liquid in nature, extend the weighted average
remaining term to maturity of cash and investments to 6.5 years. As student
loans are securitized, the need for long-term on-balance sheet financing will
decrease.
COMMON STOCK
The Company continues to reduce its investment portfolio and to reduce the
portfolio of other non-student loan earning assets using the released capital to
repurchase the Company's common stock. The Company repurchased 2.6 million
shares of common stock during the six months ended June 30, 2000, lowering
outstanding shares to 155 million at June 30, 2000. At June 30, 2000, the total
common shares that could potentially be acquired over the next five years under
outstanding equity forward contracts was 21 million, and the Company has
remaining authority to enter into additional share repurchases and equity
forward contracts for 1.9 million shares.
28
<PAGE>
The following table summarizes the Company's common share repurchase and
equity forward activity for the three and six months ended June 30, 2000 and
1999. (All amounts in the tables are common shares in millions.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common shares repurchased:
Open market............................................. -- .7 .1 .9
Equity forwards......................................... 1.4 1.5 2.5 2.9
------ ------ ------ ------
Total shares repurchased.................................. 1.4 2.2 2.6 3.8
====== ====== ====== ======
Average purchase price per share.......................... $41.83 $40.84 $42.66 $40.19
====== ====== ====== ======
Equity forward contracts:
Outstanding at beginning of period........................ 22.0 20.6 21.4 20.5
New contracts............................................. -- 1.5 1.7 3.0
Exercises................................................. (1.4) (1.5) (2.5) (2.9)
------ ------ ------ ------
Outstanding at end of period.............................. 20.6 20.6 20.6 20.6
====== ====== ====== ======
Board of director authority remaining at end of period.... 1.9 8.8 1.9 8.8
====== ====== ====== ======
</TABLE>
As of June 30, 2000, the expiration dates and range of purchase prices for
outstanding equity forward contracts are as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------
OUTSTANDING RANGE OF MARKET
YEAR OF MATURITY CONTRACTS PRICES
---------------- ----------- -------------------
<S> <C> <C>
2001........................................................ 8.7 32.11-46.68
2002........................................................ 5.0 41.01-46.23
2003........................................................ 4.0 41.20-47.50
2004........................................................ 1.7 36.04-45.62
2005........................................................ 1.2 30.00-36.04
----
Total....................................................... 20.6
====
</TABLE>
OTHER RELATED EVENTS AND INFORMATION
OTHER DEVELOPMENTS
Effective as of July 7, 2000, the Company completed the acquisition of
Student Loan Funding Resources, Inc. ("SLFR") from the Thomas J. Conlan
Education Foundation for $117 million in cash. SLFR is the eighth largest holder
of federal student loans in the nation with a $3 billion portfolio.
Effective as of July 31, 2000, the Company completed the acquisition of the
guarantee servicing, student loan servicing and secondary market operations of
USA Group, Inc. The Company did not acquire the operations of the sellers'
affiliates, USA Group Funds, Inc. and Secondary Market Services--Hawaii. The
acquisition price was $770 million in cash and stock.
Also effective as of July 31, 2000, SLM Holding Corporation was renamed USA
Education, Inc. The Company's New York Stock Exchange ticker symbol remained
"SLM."
On August 11, 2000, President Clinton announced three proposals concerning
student loans. The first proposal would forgive up to $5,000 in both Federal
Family Education Loan Program loans and Federal Direct Student Loans for
teachers who teach in needy schools for five consecutive years. At
29
<PAGE>
least one of the years in the classroom must have begun after September 1998.
The program would take effect July 1, 2001. The second proposal would grant
students and parents who hold Federal Direct Student Loans an immediate rebate
on their interest equal to 1.5% of the loan. To retain this benefit, the
students or parents must make the first 12 payments on time. The third proposal
would reduce the interest rate by .80% on Federal Direct Consolidation Loans for
borrowers who consolidate their loans in the direct student loan program. To
retain this benefit, the students must also make the first 12 payments on time.
The availability of the reduced borrower interest rates on Federal Direct
Consolidation Loans may increase the likelihood that a Federal Family Education
Loan Program loan managed by the Company will be prepaid from the proceeds of
such loans. While the Company intends to monitor the impact of these proposals
on the Company's results of operations, at this time, based upon experience with
like proposals, the Company believes that the financial impact to the Company
resulting from these proposals will not be materially adverse.
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Nothing to report.
ITEM 2. CHANGES IN SECURITIES.
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting of shareholders held on May 18, 2000, the
following proposals were approved by the margins indicated:
1. To amend the Certificate of Incorporation to change the size of the Board of
Directors and to permit the Board of Directors to fill director vacancies.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
VOTES FOR VOTES AGAINST ABSTAIN
----------- ------------- --------
<S> <C> <C> <C>
111,927,260 1,476,416 557,798
</TABLE>
2. To elect 17 directors to serve on the Company's Board of Directors for
one-year terms or until their successors are elected and qualified.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------
VOTES FOR VOTES WITHHELD
----------- --------------
<S> <C> <C>
James E. Brandon, Esq....................................... 135,941,643 1,076,640
Charles L. Daley............................................ 135,941,672 1,076,411
William M. Diefenderfer, III................................ 136,002,387 1,015,696
Richard Dooley.............................................. 135,893,472 1,124,611
Edward A. Fox............................................... 135,994,169 1,023,914
Diane Suitt Gilleland....................................... 135,942,197 1,075,886
Ann Torre Grant............................................. 135,999,820 1,018,263
Ronald F. Hunt, Esq......................................... 136,000,019 1,018,064
Benjamin J. Lambert, III.................................... 135,992,657 1,025,426
Albert L. Lord.............................................. 135,992,136 1,025,947
Marie V. McDemmond.......................................... 135,942,572 1,075,511
Barry A. Munitz............................................. 135,999,285 1,018,798
J. Bonnie Newman............................................ 135,979,490 1,038,049
A. Alexander Porter, Jr..................................... 136,001,349 1,016,734
Wolfgang Schoellkopf........................................ 135,942,197 1,075,886
Steven L. Shapiro........................................... 135,993,786 1,024,297
Randolph H. Waterfield, Jr.................................. 135,995,133 1,022,950
</TABLE>
3. To amend the Company's Directors Stock Plan (the "Directors Stock Plan") to
increase the number of shares authorized under the Directors Stock Plan and
to change the calculation of remaining authorized shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
VOTES FOR VOTES AGAINST ABSTAIN
----------- ------------- --------
<S> <C> <C> <C>
123,969,879 12,530,551 517,553
</TABLE>
31
<PAGE>
4. To amend the Company's Management Incentive Plan (the "Management Incentive
Plan") to increase the number of shares authorized under the Management
Incentive Plan and to change the calculation of remaining authorized shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
VOTES FOR VOTES AGAINST ABSTAIN
----------- ------------- --------
<S> <C> <C> <C>
123,360,658 13,117,091 540,334
</TABLE>
5. To ratify the appointment of Arthur Andersen LLP as independent auditors for
1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
VOTES FOR VOTES AGAINST ABSTAIN
----------- ------------- --------
<S> <C> <C> <C>
136,326,403 236,631 455,049
</TABLE>
ITEM 5. OTHER INFORMATION.
In connection with the Company's acquisition of substantially all of the
assets of USA Group, Inc., James C. Lintzenich became a member of the Company's
executive management team. Mr. Lintzenich was appointed to serve as president
and chief operating officer. He formerly was the vice chairman and chief
executive officer of USA Group. Also Thomas J. Fitzpatrick was named to serve as
president and chief marketing and administrative officer of the Company. He
formerly was an executive vice president of the Company. Both Mr. Fitzpatrick
and Mr. Lintzenich will join the Company's Board of Directors.
Also joining the Company's Board of Directors, effective as of July 31,
2000, were Earl A. Goode and Barry L. Williams. Mr. Goode retired as the
president of GTE Information Services and GTE Directories Corp., Mr. Williams is
president of Williams Pacific Ventures, Inc. Resigning from the Board were James
E. Brandon, Richard Dooley, Marie V. McDemmond, J. Bonnie Newman and Randolph H.
Waterfield.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.2 Amended Bylaws of the Company.
27 Financial Data Schedule.
99.1 Purchase Agreement.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
June 30, 2000 or thereafter:
On June 19, 2000, the Company filed a Current Report on Form 8-K reporting
that it has entered into a definitive purchase agreement with USA Group, Inc.,
USA Group Loan Services, Inc., and USA Group Guarantee Services, Inc. to
purchase substantially all of the guarantee servicing, student loan servicing
and secondary market operations of the sellers.
On June 22, 2000, the Company filed a Current Report on Form 8-K containing
a summary of the terms of the transaction under which the Company agreed to
acquire substantially all of the assets of the USA Group, Inc.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
USA EDUCATION, INC.
(Registrant)
By: /s/ JOHN F. REMONDI
-----------------------------------------
John F. Remondi
SENIOR VICE PRESIDENT, FINANCE
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
</TABLE>
Date: August 14, 2000
33
