<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1427135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 WASHINGTON BLVD. 06901
STAMFORD, CONNECTICUT (Zip Code)
(Address of principal executive offices)
(203) 975-6292
(Registrant's telephone number, including area code)
------------------
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
--- ---
On November 5, 1999, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
<PAGE> 2
Form 10-Q
Part I Financial Information
<TABLE>
<CAPTION>
Page
Item 1 - Financial Statements
<S> <C> <C>
Statements of Income (Unaudited) for the Three and Nine Month Periods
Ended September 30, 1999 and 1998 ............................................... 3
Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998 ...... 4
Statements of Cash Flows (Unaudited) for the Nine Month Periods Ended
September 30, 1999 and 1998 .................................................... 5
Notes to Financial Statements (Unaudited) ....................................... 6-9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 10-15
Part II Other Information
Item 1 - Legal Proceedings ..................................................................... 16
Item 6 - Exhibits and Reports on Form 8-K ....................................................... 16
Signature................................................................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
REVENUE
<S> <C> <C> <C> <C>
Interest income $173,997 $161,633 $518,045 $481,172
Interest expense 122,815 114,713 352,415 339,783
------------- ------------- ------------- --------------
Net interest income 51,182 46,920 165,630 141,389
Provision for loan losses 703 721 2,765 2,403
------------- ------------- ------------- --------------
Net interest income after provision for loan losses 50,479 46,199 162,865 138,986
Fee and other income 891 785 2,484 1,563
------------- ------------- ------------- --------------
Total revenue, net $51,370 $46,984 $165,349 $140,549
------------- ------------- ------------- --------------
OPERATING EXPENSES
Salaries and employee benefits $ 5,569 $ 7,746 $15,895 $24,965
Other expenses 12,187 11,724 37,383 30,015
------------- ------------- ------------- --------------
Total operating expenses $17,756 $19,470 $53,278 $54,980
------------- ------------- ------------- --------------
Income before income taxes $33,614 $27,514 $112,071 $85,569
Income taxes 14,001 11,473 46,682 35,274
------------- ------------- ------------- --------------
NET INCOME $19,613 $16,041 $65,389 $50,295
============= ============= ============= ==============
DIVIDENDS DECLARED $12,000 $ 3,000 $27,000 $ 9,000
============= ============= ============= ==============
BASIC and DILUTED EARNINGS PER COMMON SHARE -
(based on 20 million average shares outstanding) $ 0.98 $ 0.80 $ 3.27 $ 2.51
============= ============= ============= ==============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.60 $ 0.15 $ 1.35 $ 0.45
============= ============= ============= ==============
OPERATING RATIOS
Net interest margin 2.19% 2.29% 2.44% 2.36%
Operating expense as a percentage of
average insured student loans 0.76% 0.95% 0.79% 0.92%
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
-------------------- ---------------------
ASSETS
<S> <C> <C>
Insured student loans $10,045,804 $ 8,636,343
Allowance for loan losses 2,858 2,370
-------------------- ---------------------
Insured student loans, net 10,042,946 8,633,973
Cash 218 37
Deferred tax benefits 25,323 31,936
Other assets 299,993 237,196
-------------------- ---------------------
Total Assets $10,368,480 $ 8,903,142
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 9,656,008 $ 3,908,046
Long-term notes 57,000 4,310,000
Payable to principal stockholder 12,116 13,957
Restructuring liabilities 2,274 7,611
Other liabilities 138,020 198,997
-------------------- ---------------------
Total Liabilities 9,865,418 8,438,611
-------------------- ---------------------
Common stock 200 200
Additional paid-in capital 134,522 134,380
Retained earnings 368,340 329,951
-------------------- ---------------------
Total Stockholders' Equity 503,062 464,531
-------------------- ---------------------
Total Liabilities and Stockholders' Equity $10,368,480 $ 8,903,142
==================== =====================
AVERAGE INSURED STUDENT LOANS $ 9,063,087 $ 8,111,639
==================== =====================
(year-to-date)
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 65,389 $ 50,295
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 7,416 4,263
Provision for loan losses 2,765 2,403
Deferred tax provision 6,613 5,095
Increase in accrued interest receivable (53,936) (36,535)
Increase in other assets (8,621) (2,919)
(Decrease) increase in other liabilities (62,675) 55,640
Decrease in restructuring liabilities (5,337) (1,898)
---------------- ----------------
Net cash (used in) provided by operating activities (48,386) 76,344
---------------- ----------------
Cash flows from investing activities:
Disbursements of loans (1,505,123) (1,401,518)
Repayment of loans 780,854 729,262
Purchase of loans (913,657) (78,646)
Sale of loans 218,902 48,396
Capital expenditures on furniture and equipment (371) (470)
---------------- ----------------
Net cash used in investing activities (1,419,395) (702,976)
---------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 5,747,962 (509,332)
Proceeds from long-term borrowings 259,000 2,018,000
Repayment of long-term debt (4,512,000) (875,000)
Dividends paid to stockholders (27,000) (9,000)
---------------- ----------------
Net cash provided by financing activities 1,467,962 624,668
---------------- ----------------
Net increase (decrease) in cash 181 (1,964)
Cash - beginning of period 37 2,108
---------------- ----------------
Cash - end of period $ 218 $ 144
================ ================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 395,958 $ 280,309
Income taxes $ 35,568 $ 30,875
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of September 30, 1999 and for the three and nine-month
periods ended September 30, 1999 and 1998 includes all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary to fairly state the Company's financial
position and results of operations in conformity with generally
accepted accounting principles ("GAAP"). The accompanying financial
statements should be read in conjunction with the financial statements
and related notes included in the Company's 1998 Annual Report and
Form 10-K.
2. USE OF ESTIMATES
In preparing the financial statements in conformity with GAAP,
management has used a number of estimates and assumptions relating to
the reporting of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and assumptions.
3. COMMITMENTS AND CONTINGENCIES
REGULATORY IMPACTS
The Company's loan portfolio is primarily comprised of loans
originated under the Federal Family Education Loan ("FFEL") program.
Since 1992, a series of amendments to the Higher Education Act of 1965
(the "Act"), which governs the FFEL program, have increased costs and
reduced interest payments to lenders. These legislative changes have
progressively reduced the net interest margin of the Company's
portfolio.
The 1993 amendments to the Act also introduced a competitor program,
the Federal Direct Student Loan program ("direct lending"), in which
private lenders such as the Company do not participate. Direct lending
currently accounts for approximately one-third of the student loans
originated under federally sponsored programs.
4. RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring
plan to realign its business and processing structure. The
restructuring plan included the outsourcing of various parts of the
Company's operations, which had been based in the Company's Pittsford,
New York office, to affiliated companies. The restructuring plan was
designed to take advantage of the larger economies of scale and more
global operating systems configurations being employed by those
affiliates. The Company has retained
6
<PAGE> 7
approximately 200 Pittsford-based employees, primarily in the
technology and accounting functions, and employs approximately 100
employees in administration, finance, marketing, sales and other
activities in Stamford, Connecticut and in field locations throughout
the United States.
In connection with the restructuring plan, the Company recorded a $20.5
million pre-tax charge in the fourth quarter of 1997, including $16.2
million relating to estimated severance benefits, $2.8 million relating
to furniture and equipment write-downs and $1.5 million relating to
other estimated exit costs. Additional costs, including $4 million of
transition costs incurred in the first three quarters of 1999 (of which
$0.4 million was incurred in the third quarter), did not qualify for
recognition in the initial $20.5 million charge and were expensed as
incurred.
Based on revised utilization projections, $7.5 million and $1.5
million in reserve releases were recognized in 1998 and the second
quarter of 1999, respectively, as an offset to operating expenses in
those periods. The reserve releases resulted from revaluations of the
reserve, resulting primarily from a decision to retain approximately
200 Pittsford-based employees and the migration of other employees to
the Stamford facility, as well as more employee attrition than
expected prior to eligibility for severance benefits.
Of the remaining $11.5 million restructuring reserve,$9.2 million has
been used through September 30, 1999, including $0.8 million used
during the third quarter of 1999 for severance and outplacement costs.
The total overall $9.2 million usage includes $2.8 million in furniture
and equipment write-downs, $5.0 million in severance and outplacement
costs paid to the approximately 385 employees on job discontinuance and
$1.4 million in other exit costs. The Company's restructuring plan is
substantially complete at this time with most of the $2.3 million
reserve balance at September 30, 1999 designated for the approximately
75 terminated employees still receiving severance benefits. The
remainder of the reserve will be used for the estimated 30 employees
yet to be placed on job discontinuance. Approximately 5 staff
reductions were made in the third quarter of 1999, bringing the 1999
year-to-date total to 10.
The expectations of the Company relating to the restructuring plan are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 10.
5. RELATED PARTY TRANSACTIONS
Citibank (New York State) ("CNYS"), a wholly-owned subsidiary of
Citicorp and Citigroup Inc., owns 80% of the outstanding common stock
of the Company. A number of significant transactions are carried out
between the Company on the one hand and Citigroup Inc. and its
affiliates on the other hand. At September 30, 1999, the Company had
outstanding short-term and long-term borrowings with CNYS of $ 9.7
billion and $0.06 billion, respectively, compared to $3.9 billion and
$4.3 billion, respectively, at December 31, 1998. For the three and
nine-month periods ended September 30, 1999, the Company incurred
$122.8 million and $354.3 million, respectively, in interest expense
payable to CNYS and its affiliates, compared to $114.7 million and
$339.8 million, respectively, in interest expenses payable to CNYS and
its affiliates for the same periods in 1998. In addition, Citigroup
Inc. and its subsidiaries engage in other transactions and servicing
activities with the Company, including cash management, data
processing, income tax payments, loan servicing, employee benefits and
facilities management. Management believes that the terms of these
transactions are, in the aggregate, no less favorable to the Company
than those which could be obtained from unaffiliated parties.
7
<PAGE> 8
6. INTEREST RATE SWAP AGREEMENTS
The Company, from time to time, enters into interest rate swap
agreements with related and third parties solely to hedge interest
rate exposure on certain interest bearing liabilities. The swap
agreements are intended to reduce the risk caused by differences
between borrowing and lending rates. Entering into swap agreements to
pay interest based on the interest rate characteristics of the
Company's assets and to receive interest based on the characteristics
of the Company's liabilities effectively limits the risk of potential
interest rate variability. The Company records interest receivable or
payable on its swap agreements as adjustments to interest expense.
Historically, most of the Company's interest rate swap agreements have
been entered into with Citibank, N.A., an affiliate of CNYS.
At September 30, 1999, the Company had no interest rate swap
agreements outstanding. This was due to the attainment of its desired
funding structure at September 30, 1999, at which time the significant
portion of its outstanding debt was short-term.
For the third quarter of 1999, the Company had less than $0.1 million
of interest expense related to swap agreements, compared to a $0.6
million reduction in interest expense during the same period of 1998.
For the first nine months of 1999, the Company reduced interest expense
by $3.1 million as a result of interest rate swap agreements, while for
the same period in 1998 the Company incurred $0.5 million of interest
expense.
7. SHORT AND LONG-TERM BORROWINGS
Effective October 1, 1999, an amendment to the Company's existing
Omnibus Credit Agreement with CNYS was put into place which increased
the maximum credit available to the Company to $10.75 billion. The
amendment did not significantly change any of the terms of the
previously existing agreements.
During the third quarter of 1999, a significant portion of long-term
notes was repaid and replaced with new short-term borrowings in order
to better match the interest rates the Company pays on its short-term
borrowings with the short-term interest rates it earns on its FFEL
program portfolio, without entering into interest rate swap agreements.
The particular tranche, index, reset frequency, and maturity of any of
the Company's borrowings may vary from time to time depending on market
conditions and the composition of the student loan portfolio.
In the first nine months of 1999, short-term debt increased by $5.7
billion to $9.7 billion. Also, long-term borrowings of $4.5 billion
were repaid during that period and $0.3 billion in new borrowings were
made.
8
<PAGE> 9
8. SUBSEQUENT EVENTS
CNYS, a wholly-owned subsidiary of Citicorp and Citigroup Inc. owns 80%
of the Company's outstanding 20 million shares of common stock. On
October 21, 1999, Citigroup announced its intent to acquire by
merger the remaining four million shares of the Company's common stock
that it does not already own for $45 per share in cash. The stock
acquisition is subject to the approval of the Company's board of
directors and the owners of at least two thirds of the shares of the
Company's common stock not beneficially owned by Citigroup. The
transaction is also subject to customary regulatory approvals.
Following the public announcement of Citigroup's proposal to acquire
the 20% of the Company's stock that Citigroup does not already
beneficially own, in October 1999 six putative class action complaints
were filed in Delaware Chancery Court against the Company and its
directors (as well as Citigroup and certain subsidiaries). One of those
six complaints has been voluntarily dismissed without prejudice; of the
remaining five complaints, only one has been served on defendants
(Kenneth Steiner v. Student Loan Corp., et al.)
Plaintiffs allege that because Citigroup holds a majority
position in the Company, there have been no steps taken to ascertain
the Company's true value through competitive bidding or other "open
market mechanism." The plaintiff in one action (Alan Kahn v.
Citigroup Inc., et al.) makes the further allegation that defendants
engaged in a series of self-dealing transactions that artificially
depressed the Company's stock price.
The purported class actions seek to enjoin the consummation of
Citigroup's offer, or, in the event the proposed transaction is
consummated, to rescind the transaction and recover monetary damages
caused by defendants' alleged breach of fiduciary duties.
The Company believes that the lawsuits are without merit and intends
to contest them vigorously. At this time the Company cannot predict
the outcome of the lawsuits or estimate amounts of damage awards, if
any.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Student Loan Corporation's (the "Company's") actual
results may differ materially from those suggested by the forward-looking
statements, which are typically identified by the words or phrases "believe,"
"expect," "anticipate," "intend", "estimate," "may increase," "may result in,"
and similar expressions or future or conditional verbs such as "will", "should",
"would" and "could". These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: the effects of
future legislative changes; actual credit losses experienced by the Company in
future periods compared to the estimates used in calculating reserves;
fluctuations in the interest rates paid by the Company for its funding and
received on its loan portfolio and the success of the Company's interest rate
risk management policies; the successful resolution of legal proceedings; the
ability of the Company and third party vendors to modify computer systems for
the year 2000 date conversion in a timely manner; the ability of the Company
generally to achieve anticipated levels of cost-savings relating to its
restructuring plan; as well as general economic conditions, including the
performance of financial markets and the passage of regulatory changes.
RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring plan to
realign its business and processing structure. The restructuring plan included
the outsourcing of various parts of the Company's operations, which had been
based in the Company's Pittsford, New York office, to affiliated companies,
utilizing the larger economies of scale and more global operating systems
configurations being employed by those affiliates. The Company has retained
approximately 200 Pittsford-based employees, primarily in the technology and
accounting functions, and employs approximately 100 employees in administration,
finance, marketing, sales and other activities in Stamford, Connecticut and in
field locations throughout the United States.
In connection with the restructuring plan, the Company recorded a $20.5 million
pre-tax charge in the fourth quarter of 1997, including $16.2 million relating
to estimated severance benefits, $2.8 million relating to furniture and
equipment write-downs and $1.5 million relating to other estimated exit costs.
Additional costs, including $4 million of transition costs incurred in the first
three quarters of 1999 (of which $0.4 million was incurred in the third
quarter), did not qualify for recognition in the initial $20.5 million charge
and were expensed as incurred.
Based on revised utilization projections, $7.5 million and $1.5 million in
reserve releases were recognized in 1998 and the second quarter of 1999,
respectively, as an offset to operating expenses in those periods. The reserve
releases resulted from revaluations of the reserve, resulting primarily from a
decision to retain approximately 200 Pittsford-based employees and the
migration of other employees to the Stamford facility, as well as more
employee attrition than expected prior to eligibility for severance benefits.
Of the remaining $11.5 million restructuring reserve, $9.2 million has been used
through September 30, 1999, including $0.8 million used during the third quarter
of 1999 for severance and out-placement costs. The total $9.2 million usage
includes $2.8 million in furniture and equipment write-downs, $5.0 million in
severance and outplacement costs paid to the approximately 385 employees on job
discontinuance, and $1.4 million in other exit costs. The Company's
restructuring plan is substantially complete at this time with most of the $2.3
million reserve balance at September 30, 1999 designated for the approximately
75 terminated employees still receiving severance benefits. The remainder of the
reserve will be used for the estimated 30 employees yet to be placed on job
discontinuance.
10
<PAGE> 11
Approximately 5 staff reductions were made in the third quarter of 1999,
bringing the 1999 year-to-date total to 185.
The expectations of the Company relating to the restructuring plan are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 10.
SUBSEQUENT EVENTS
CNYS, a wholly-owned subsidiary of Citicorp and Citigroup Inc. owns 80% of the
Company's outstanding 20 million shares of common stock. On October 21, 1999,
Citigroup announced its intent to acquire by merger the remaining four million
shares of the Company's common stock that it does not already own for $45 per
share in cash. The stock acquisition is subject to the approval of the Company's
board of directors and the owners of at least two thirds of the shares of the
Company's common stock not beneficially owned by Citigroup. The transaction is
also subject to customary regulatory approvals.
Following the public announcement of Citigroup's proposal to acquire the 20% of
the Company's stock that Citigroup does not already beneficially own, in October
1999 six putative class action complaints were filed in Delaware Chancery Court
against the Company and its directors (as well as Citigroup and certain
subsidiaries). One of those six complaints has been voluntarily dismissed
without prejudice; of the remaining five complaints, only one has been served on
defendants (Kenneth Steiner v. Student Loan Corp., et al.)
Plaintiffs allege that because Citigroup holds a majority position in the
Company, there have been no steps taken to ascertain the Company's true value
through competitive bidding or other "open market mechanism." The plaintiff in
one action (Alan Kahn v. Citigroup Inc., et al.) makes the further allegation
that defendants engaged in a series of self-dealing transactions that
artificially depressed the Company's stock price.
The purported class actions seek to enjoin the consummation of Citigroup's
offer, or, in the event the proposed transaction is consummated, to rescind the
transaction and recover monetary damages caused by defendants' alleged breach of
fiduciary duties.
The Company believes that the lawsuits are without merit and intends to contest
them vigorously. At this time the Company cannot predict the outcome of the
lawsuits or estimate amounts of damage awards, if any.
FINANCIAL CONDITION
During the nine months ended September 30, 1999, the net insured student loan
portfolio of the Company grew by $1,409.0 million (16%) from the balance at
December 31, 1998. This growth was the result of loan disbursements totaling
$1,505.1 million and loan purchases of $913.7 million in the first nine months
of 1999, partially offset by $218.9 million in loan sales and $780.9 million in
loan reductions (attributable to repayments and claims paid by guarantors), and
other adjustments of $10.0 million. This compares to loan disbursements of
$1,401.5 million, loan purchases of $78.6 million, loan sales of $48.4 million,
loan reductions of $729.3 million, and other adjustments of $6.5 million in the
first nine months of 1998. The increase in loan purchases for the first three
quarters of 1999 compared to the same period in 1998 is primarily attributable
to the Company's ongoing loan portfolio acquisition efforts as well as a
significant increase in new CNYS CitiAssist loans, which were purchased by the
Company shortly after origination. The increase in loan sales for the first nine
months of 1999 compared to the same period last year is primarily due to
increases in the volume of the federal direct student loan consolidation
program.
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<PAGE> 12
The Company's loan disbursements and new CitiAssist loan commitments for the
first nine months of 1999 of $1,724.1 million were $196.0 million (13%) more
than those made in the same period of 1998. This increase is attributable
primarily to large increases in new CitiAssist loan commitments and Federal
Family Education Loan ("FFEL") program disbursements. During the first nine
months of 1999, new CitiAssist loan commitments increased to $219.0 million, a
$92.4 million (73%) increase from the same period last year. FFEL program
disbursements of $1,298.0 million in the first nine months of 1999 is $89.4
million (7% ) higher than the $1,208.6 million disbursed during the same period
of 1998. This $89.4 million increase in FFEL program disbursements does not
include originations made under the Federal Loan Consolidation program.
Consolidation loan originations of $207.1 million for the first three quarters
of 1999 have increased $14.2 million (7%) compared to the same period of 1998.
During the first three quarters of 1999, the Company made $396.0 million in
interest payments, principally to CNYS or one of its affiliates, compared to
$280.3 million for the same period in 1998. The difference is due to changes in
both the size of the borrowings and interest rates, as well as timing of
interest payments. The Company paid $35.6 million in income taxes during the
first three quarters of 1999, compared to $30.9 million for the same period last
year. The difference in the amount of taxes paid is primarily due to timing
differences in making intercompany tax payments, and does not reflect any
significant changes in applicable income tax rates.
Other assets increased $62.8 million (26%) from December 31, 1998, principally
as a result of additional interest receivable attributable to growth in the
student loan portfolio and timing of interest receipts. Other liabilities,
principally comprised of accrued interest and income taxes payable, decreased
$61.0 million (31%) from December 31, 1998, primarily due to timing differences
in making intercompany interest and tax payments.
Effective October 1, 1999, an amendment to the Company's existing Omnibus Credit
Agreement with CNYS was put into place which increased the maximum credit
available to the Company to $10.75 billion. The amendment did not significantly
change any of the terms of the previously existing agreements.
During the third quarter of 1999, a significant portion of long-term notes was
repaid and replaced with new short-term borrowings in order to better match the
interest rates the Company pays on its short-term borrowings with the short-term
interest rates it earns on its FFEL program portfolio, without entering into
interest rate swap agreements. The particular tranche, index, reset frequency,
and maturity of any of the Company's borrowings may vary from time to time
depending on market conditions and the composition of the student loan
portfolio.
In the first nine months of 1999, short-term debt increased by $5.7 billion to
$9.7 billion. Also, long-term borrowings of $4.5 billion were repaid during that
period and $0.3 billion in new borrowings were made.
The Company paid a quarterly dividend of $0.60 per common share on September 1,
1999. The Board of Directors declared a regular quarterly dividend on the
Company's common stock of $0.60 per share to be paid December 1, 1999 to
stockholders of record on November 15, 1999.
12
<PAGE> 13
MARKET RISK
The Company's primary market risk exposure is to movements in U.S. dollar
interest rates. Market risk is measured using various tools, including
Earnings-at-Risk which reflects repricing gaps in the position as well as
implicit options positions embedded in the loan portfolio. The Company prepares
Earnings-at-Risk calculations to measure the discounted pre-tax earnings impact
of a two standard deviation shift in short-term interest rates over the
four-week period required to defease the position. As of September 30, 1999 the
rate shift over the defeasance period applied to the interest rate yield curve
for purposes of calculating Earnings-at-Risk was 45 basis points. The following
table illustrates that, as of September 30, 1999, a 45 basis point increase in
the U.S. dollar yield curve would have a potential positive impact on the
Company's pretax earnings of approximately $8.42 million in the next twelve
months, and a potential negative impact of approximately $2.03 million for the
total five-year period 2000-2004. A two standard deviation decrease in U.S.
dollar interest rates would have a potential positive impact on the Company's
pretax earnings of approximately $0.02 million in the next twelve months, and
approximately $13.98 million positive impact for the five-year period 2000-2004.
<TABLE>
<CAPTION>
Earnings-at-Risk (on pre-tax earnings)
(Dollars in millions) 2000 2001 2002 2003 2004 Total
<S> <C> <C> <C> <C> <C> <C>
Two standard deviation increase $8.42 ($2.67) ($2.97) ($2.60) ($2.21) ($2.03)
Two standard deviation decrease $0.02 $3.70 $3.90 $3.43 $2.93 $13.98
</TABLE>
The Company, through its Asset/Liability Management Committee, actively manages
the risks embedded in the Company's positions and sets Earnings-at-Risk limits,
and takes appropriate actions if interest rates move against the existing
structure.
YEAR 2000
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of time-sensitive computer systems to correctly interpret dates in the year 2000
and beyond. The Company has assessed and has substantially completed
modifications to its computer systems and business processes to provide for
their continuing functionality after the current year, and is also assessing the
readiness of third parties with which it interfaces.
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. The inability of systems to recognize
properly the year 2000 could result in major systems failure or miscalculations
that would disrupt the Company's ability to meet its customer and other
obligations on a timely basis, and the Company has engaged in a process of
identifying, assessing, and modifying its computer programs to address this
issue. As part of year 2000 compliance work, systems are subjected to a
validation process that tests modified programs before they can be used in
production.
The pre-tax cost associated with all of the required modifications and
conversions is expected to total approximately $5.2 million through 1999, funded
through a combination of a reprioritization of technology development
initiatives and incremental costs and is being expensed as incurred. Of the
total, approximately $4.7 million has been incurred through September 30, 1999,
including $1.5 million for the first nine months of 1999 (of which approximately
$0.5 million was incurred in the third quarter).
13
<PAGE> 14
Substantially all of the required modification and internal testing work has
been completed, including modification of all critical systems, and the Company
continues to make satisfactory progress towards full completion of its year 2000
program. The remainder of 1999 will be spent primarily addressing completion of
the remaining production assurance testing.
The Company's year 2000 program has addressed other issues, including
replacement of certain business applications and compliance of end-user
computing applications, networks, data center, desktops, facilities, business
processes, and external providers. Substantially all of the investigation and
necessary remediation of these matters have been completed and substantially all
are considered compliant.
The Company has also completed testing of interfaces that exist with third
parties, including customers, counterparties and its utility infrastructure.
Unreadiness by these parties would expose the Company to the potential for loss
and impairment of business processes and activities. While these parties are
generally engaged in efforts intended to address and resolve their year 2000
issues on a timely basis, it is possible that a series of failures by third
parties could have a material adverse effect on the Company's results of
operations in future periods.
The Company has created contingency plans intended to address perceived risks
associated with its year 2000 effort. These activities include business
resumption planning to address the possibility of systems failure, and market
resumption planning to address the possibility of the failure of systems or
processes outside the Company's control. The Company has created a command
center to manage the year 2000 date change and is coordinating its efforts with
Citigroup to ensure that any year 2000 issues are timely reported and resolved.
Contingency planning and preparations for the management of the date change will
continue through 1999. Notwithstanding these activities, the failure of efforts
to address, in a timely manner, the year 2000 issue, could have a material
adverse effect on the Company's results of operations in future periods.
The expectations of the Company with respect to remediation of year 2000 issues
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 10.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999
Net income was $19.6 million ($0.98 basic and diluted earnings per share) for
the third quarter of 1999. This was an increase of $3.6 million (22%) from
earnings for the same period last year. The increase in net income was primarily
attributable to higher interest income generated by a $1.7 billion increase in
the loan portfolio from the balance at September 30, 1998.
The net interest margin for the third quarter of 1999 was 2.19%, 0.10% lower
than the 2.29% margin for the third quarter of 1998. The decline in the margin
for the third quarter of 1999 was primarily attributable to less favorable
funding spreads compared to those received during the same period last year.
Funding spreads are not expected to improve during the remainder of 1999 as
current variable rate funding arrangements are available at less attractive
rates, compared to last year. Also contributing to the margin decline was the
lower overall interest rate spreads on FFEL program loans originated after 1998
as new loans with lower interest spreads are originated and older more
profitable loans are repaid.
14
<PAGE> 15
Total operating expenses for the third quarter of 1999 decreased $1.7 million
(9%) from the same period last year, attributable primarily to a one-time $1.6
million cost incurred in 1998 to migrate certain of the Company's operating
units to other Citigroup locations. Also, operating expenses as a percentage of
average insured student loans improved 0.19% to 0.76% from the third quarter of
1998 expense ratio of 0.95%. The improvement in the expense ratio is primarily
attributable to efficiencies in administrative and operational expenses.
Return on equity was 15.4% for the third quarter of 1999, 0.8% higher than the
14.6% return for the same period of 1998. The increase was attributed to higher
1999 earnings.
Nine Months Ended September 30, 1999
The Company earned net income of $65.4 million ($3.27 basic earnings per share)
for the nine months ended September 30, 1999, an increase of $15.1 million (30%)
from the first three quarters of 1998. The increase was primarily due to higher
interest income resulting from a significant increase in the loan portfolio and
better interest rate spreads between lending and borrowing rates for most of the
period.
Total operating expenses for the first nine months of 1999 were $53.3 million,
down $1.7 million (3%) from the same period last year, primarily due to a
one-time $1.6 million cost incurred in 1998 to migrate certain of the Company's
operating units to other Citigroup locations. Operating expenses as a percentage
of average insured student loans for the first nine months of 1998 decreased to
0.79%, an improvement of 0.13% compared to the first nine months of 1998,
primarily attributable to efficiencies in administrative and operational
expenses.
The provision for loan losses was $2.8 million, $0.4 million (15%) higher for
the first nine months of 1999 than that reported for the same period last year.
The increase reflects the risk sharing loss estimates on greater potential
future default claims as a result of growth in the portion of the portfolio that
is subject to the 2% risk sharing provisions of the Federal Higher Education Act
of 1965, as amended.
The Company's effective tax rate was approximately 41.7% for the first nine
months of 1999, compared to 41.2% for the same period in 1998.
REGULATORY IMPACTS
The Company's loan portfolio is primarily comprised of loans originated under
the FFEL program. Since 1992, a series of amendments to the Act, which governs
the FFEL program, has increased costs and reduced interest payments to lenders.
These legislative changes have progressively reduced the net interest margin of
the Company's portfolio.
The 1993 amendments to the Act also introduced a competitor program, the Federal
Direct Student Loan program ("direct lending"), in which private lenders such as
the Company do not participate. Direct lending currently accounts for
approximately one-third of the student loans originated under federally
sponsored programs, approximately the same as the prior two years.
Since 1994, the Company has aggressively pursued both new and existing marketing
programs, expanded its guarantor relationships and sought new ways to meet the
education finance needs of schools and students, including the implementation of
loan programs, such as the Company's CitiAssist product, that are not dependent
on Federal funding, guarantees and authorization.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the
Company is a party or to which any of their property is subject.
Following the public announcement of Citigroup's proposal to acquire
the 20% of the Company's stock that Citigroup does not already
beneficially own, in October 1999 six putative class action complaints
were filed in Delaware Chancery Court against the Company and its
directors (as well as Citigroup and certain subsidiaries). One of those
six complaints has been voluntarily dismissed without prejudice; of the
remaining five complaints, only one has been served on defendants
(Kenneth Steiner v. Student Loan Corp., et al.)
Plaintiffs allege that because Citigroup holds a majority
position in the Company, there have been no steps taken to ascertain
the Company's true value through competitive bidding or other "open
market mechanism." The plaintiff in one action (Alan Kahn v. Citigroup
Inc., et al.) makes the further allegation that defendants engaged in
a series of self-dealing tranactions that artificially depressed the
Company's stock price.
The purported class actions seek to enjoin the consummation of
Citigroup's offer, or, in the event the proposed transaction is
consummated, to rescind the transaction and recover monetary damages
caused by defendants' alleged breach of fiduciary duties.
The Company believes that the lawsuits are without merit and intends to
contest them vigorously. In that connection, in November 1999 the
Company and several other defendants moved to dismiss the Steiner
complaint for failure to state a claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.8 (g)Amendment to Omnibus Credit Agreement, dated March 1, 1997,
between the Company and Citibank (New York State)
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the third quarter of 1999;
however, on October 21, 1999, the Company filed a Current Report on
Form 8-K, dated October 21, 1999, reporting under Item 5 thereof that
Citigroup had proposed to acquire the outstanding shares of the Company
not beneficially owned by Citigroup.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 12, 1999
The Student Loan Corporation
By /s/ Yiannis Zographakis
----------------------------------
Yiannis Zographakis
Vice President and
Chief Financial Officer
17
<PAGE> 1
AMENDMENT AGREEMENT
This Agreement dated as of October 1, 1999 shall amend the Omnibus Credit
Agreement dated as of March 1, 1997 between Citibank (New York State) (the
"Lender") and The Student Loan Corporation (the "Borrower"), as amended
(collectively the "Omnibus Agreement")
Whereas, Lender and Borrower increased the maximum allowable advances under the
Omnibus Agreement to $10 Billion by amendment to the Omnibus Agreement dated
February 26, 1998; and
Whereas, Lender and Borrower desire to increase the maximum allowable advances
under the terms of the Omnibus Agreement, as amended.
Now therefore, in consideration of the mutual covenants and agreements contained
herein, the parties agree as follows:
1. The Omnibus Agreement shall be amended by the addition of a new Part I.
1 c. as follows:
PART I.
1.
c. CNYS and STU agree that the maximum allowable advances under
this Omnibus Credit Agreement shall be equal to
$10,750,000,000 notwithstanding any prior limitations on such
maximum allowable advances. This maximum limitation shall
remain in effect until December 31, 1999 after which the
maximum limitation will revert to the prior maximum limitation
of $10 Billion.
2. The Omnibus Agreement shall be amended by the addition of a new Part
VIII. As follows:
PART VIII.
TRANCHE H
(A TERM NOTE CREDIT FACILITY)
28. Lender agrees to lend to Borrower an amount equal up to the
available credit provided in the Omnibus Agreement in the form
of one or more term loans with a maturity date of no later
than December 31, 2002.
29. Any advances under this Term Note Credit Facility shall be
evidenced by one or more promissory notes in the form of
Exhibit H. For floating rate loans, interest shall be due and
payable on the respective repricing date(s) until maturity (or
the next business day if such date is not a business day) on
the advance at an annual
<PAGE> 2
interest rate equal to the LIBOR rate for the corresponding
repricing term plus a spread to be agreed upon. For fixed rate
loans, interest shall be due and payable on the first day of
each calendar quarter or repricing period as indicated in the
note evidencing the advance (or the next business day if such
date is not a business day) on the advance at an annual
interest rate equal to the LIBOR rate for the fixed period
until the maturity date plus a spread to be agreed upon.
30. Borrower shall have no right to repay the advance made under
this Fixed Rate Single Term Loan Facility.
3. Except as modified herein, all other terms and conditions of the
Omnibus Agreement shall remain in full force and effect.
CITIBANK (NEW YORK STATE)
BY_______________________________________
THE STUDENT LOAN CORPORATION
BY_______________________________________
<PAGE> 3
EXHIBIT H
PROMISSORY NOTE
(A TERM NOTE FACILITY)
(TERM NOTE - FLOATING RATE)
FOR VALUE RECEIVED, The Student Loan Corporation (the "Borrower") promises to
pay to Citibank (New York State) (the "Lender") the principal amount of
US$________________ (the "advance") on ____________________ (the "maturity
date") together with all accrued interest to the date of payment but in no event
later than December 31, 2002. Interest shall be due and payable on each
repricing date and on the maturity date. In the event that such payment date is
not a business day, payment shall be made on the next following business day.
The interest rate shall be established on this date (the "value date") and on
the first day (each a "repricing date") of each ______________________________
thereafter (each a "repricing term") until maturity. Borrower promises to pay
interest on the principal amount advanced on each repricing date until maturity
at an annual interest rate equal to _____________ LIBOR (determined using the
actual number of days outstanding and a year of 360 days).
The Borrower shall have no right to prepay the advance prior to maturity.
This Promissory Note is issued pursuant to an Omnibus Credit Agreement dated as
of March 1, 1997, as amended, between the Lender and Borrower (the "Loan
Agreement") and is entitled to the benefits of and is subject to the terms
contained in the Loan Agreement as the same may be amended and modified from
time to time. The provisions of the Loan Agreement are hereby incorporated in
this Promissory Note to the same extent as if set forth at length herein.
IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be executed in
its behalf by its officer thereunto duly authorized as of the ______ day of
________________, 1999.
THE STUDENT LOAN CORPORATION
BY:__________________________
NAME:________________________
TITLE:_______________________
<PAGE> 4
EXHIBIT H
PROMISSORY NOTE
(A TERM NOTE FACILITY)
(TERM NOTE - FIXED RATE)
FOR VALUE RECEIVED, The Student Loan Corporation (the "Borrower") promises to
pay to Citibank (New York State) (the "Lender") the principal amount of
US$____________________ (the "advance") on ____________________ (the "maturity
date") together with all accrued interest to the date of payment but in no event
later than December 31, 2002. Interest shall be due and payable on the first day
of each calendar quarter and on the maturity date. In the event that such
payment date is not a business day, payment shall be made on the next following
business day.
The interest rate shall be established on this date (the "value date"). Borrower
promises to pay interest on the principal amount advanced on the first day of
each quarter (or some other period) and at the maturity date at an annual
interest rate equal to _____________ LIBOR on this date.
The Borrower shall have no right to prepay the advance prior to maturity.
This Promissory Note is issued pursuant to an Omnibus Credit Agreement dated as
of March 1, 1997, as amended, between the Lender and Borrower (the "Loan
Agreement") and is entitled to the benefits of and is subject to the terms
contained in the Loan Agreement as the same may be amended and modified from
time to time. The provisions of the Loan Agreement are hereby incorporated in
this Promissory Note to the same extent as if set forth at length herein.
IN WITNESS WHEREOF, Borrower has caused this Promissory Note to be executed in
its behalf by its officer thereunto duly authorized as of the ______ day of
________________, 1999.
THE STUDENT LOAN CORPORATION
BY:__________________________
NAME:________________________
TITLE:_______________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STUDENT
LOAN CORPORATION CURRENT REPORT ON FORM 10-Q FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 218
<SECURITIES> 0
<RECEIVABLES> 10,045,804
<ALLOWANCES> 2,858
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,540
<DEPRECIATION> 9,823
<TOTAL-ASSETS> 10,368,480
<CURRENT-LIABILITIES> 0
<BONDS> 57,000
0
0
<COMMON> 200
<OTHER-SE> 134,522
<TOTAL-LIABILITY-AND-EQUITY> 10,368,480
<SALES> 518,045
<TOTAL-REVENUES> 520,529
<CGS> 352,415
<TOTAL-COSTS> 352,415
<OTHER-EXPENSES> 53,278
<LOSS-PROVISION> 2,765
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 112,071
<INCOME-TAX> 46,682
<INCOME-CONTINUING> 65,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,389
<EPS-BASIC> 3.27
<EPS-DILUTED> 3.27
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