SECURITIES AND EXCHANGE COMMISSION
Pre-Effective
Nelnet, Inc.
Nebraska | 6141 | 84-0748903 | ||
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification No.) |
121 South 13th Street, Suite 201
Terry J. Heimes
Copies to:
Gerald S. Tanenbaum, Esq.
Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005 Telephone: (212) 701-3000 Facsimile: (212) 269-5420 |
Daniel F. Kaplan, Esq.
Perry, Guthery, Haase & Gessford, P.C., L.L.O. 233 South 13th Street, Suite 1400 Lincoln, Nebraska 68508 Telephone: (402) 476-9200 Facsimile: (402) 476-0094 |
Luciana Fato, Esq.
Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telephone: (212) 450-4000 Facsimile: (212) 450-3800 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum | Proposed Maximum | |||||||
Title of Each Class of Securities | Amount to be | Offering Price | Aggregate Offering | Amount of | ||||
to be Registered | Registered | Per Unit | Price | Registration Fee(1) | ||||
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Class A common stock, par value $0.01 per share | 9,200,000 shares | $20.00 | $184,000,000 | $14,886 | ||||
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(1) Previously paid.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Information contained herein is
subject to completion or amendment. A registration statement
relating to these securities has been filed with the Securities
and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any state
in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws
of any such state.
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Subject to completion, dated November 24, 2003
Nelnet, Inc. is selling all of the shares of Class A common stock in this offering. This is the initial public offering of our Class A common stock. The estimated initial public offering price is between $18.00 and $20.00 per share.
Prior to this offering, there has been no public market for our Class A common stock. We have applied to list shares of our Class A common stock on the New York Stock Exchange under the symbol NNI.
Each share of Class A common stock has one vote and each share of Class B common stock has ten votes. Following this offering, Michael S. Dunlap and Stephen F. Butterfield, our Co-Chief Executive Officers, persons related to them and trusts in which they have beneficial interests will beneficially own Class A and Class B common stock representing 88.4% of the combined voting power of our common stock, and will control substantially all matters requiring approval by our shareholders.
Investing in our Class A common stock involves risks. See Risk Factors beginning on page 9.
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Per share | Total | |||||||
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Initial public offering price
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$ | $ | ||||||
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Underwriting discounts
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$ | $ | ||||||
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Proceeds to Nelnet, before expenses
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$ | $ | ||||||
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We have granted the underwriters an option for a period of 30 days to purchase up to 1,200,000 additional shares of our Class A common stock on the same terms and conditions set forth above to cover overallotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of Class A common stock to investors on December , 2003.
JPMorgan | Banc of America Securities LLC |
Credit Suisse First Boston | Morgan Stanley |
December , 2003
TABLE OF CONTENTS
You should rely only on the information contained
in this prospectus. We have not authorized anyone to provide you
with information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy,
shares of our Class A common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of our Class A common stock.
No action is being taken in any jurisdiction
outside the United States to permit a public offering of the
Class A common stock or possession or distribution of this
prospectus in that jurisdiction. Persons who come into
possession of this prospectus in jurisdictions outside the
United States are required to inform themselves about and to
observe any restrictions as to this offering and the
distribution of this prospectus applicable to those
jurisdictions.
The product and service names and logos used in
this prospectus are service marks/trademarks or registered
service marks/trademarks of Nelnet or its affiliates. Nelnet,
Ntrust, Ngenius, Nteract, Nservice, Nelnet Notes and @theU are
service marks of Nelnet, Inc. Other products, services and
company names mentioned in this prospectus are the service
marks/trademarks of their respective owners.
Page
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F-1
A-1
PROSPECTUS SUMMARY
In this prospectus, unless the context
requires otherwise, Nelnet, we,
us and our refer to Nelnet, Inc., a
Nebraska corporation, and its subsidiaries, and not to the
underwriters. A detailed description of the Federal Family
Education Loan Program appears in Annex A to this
prospectus.
This summary highlights selected information
contained elsewhere in this prospectus. This summary does not
contain all the information you should consider before investing
in shares of our Class A common stock. You should read this
entire prospectus carefully, including Risk Factors
and our financial statements and the related notes, before
making an investment decision.
Nelnet, Inc.
We are a vertically integrated education finance
company, with over $11 billion in total assets, making us
one of the leading education finance companies in the country.
We are focused on providing quality products and services to
participants in the education finance process. Headquartered in
Lincoln, Nebraska, we originate, hold and service student loans,
principally loans originated under the Federal Family Education
Loan Program, which we refer to as the FFEL Program or FFELP.
The FFEL Program is a federal program which provides for direct
federal insurance of student loans made by private lenders as
well as reinsurance of student loans guaranteed by guaranty
agencies. For 2002, we were the fourth largest holder and second
largest servicer of FFELP loans. In addition, we, together with
our branding partners, originated and acquired approximately
$3.2 billion of student loans in the nine months ended
September 30, 2003 and $2.7 billion of student loans
in 2002, making us a leading originator and acquirer of student
loans.
We offer a broad range of financial services and
technology-based products, including student loan origination
and lending, student loan and guarantee servicing and a suite of
software solutions. Our products are designed to simplify the
student loan process by automating financial aid delivery, loan
processing and funds disbursement. Our infrastructure,
technological expertise and breadth of product and service
offerings connect the key constituents of the student loan
process, including lenders, financial aid officers, guaranty
agencies, governmental agencies, student and parent borrowers,
servicers and the capital markets, thereby streamlining the
education finance process.
Our business is comprised of four primary product
and service offerings:
Under generally accepted accounting principles,
we have two reportable operating segments: asset management and
student loan servicing. Our guarantee servicing and servicing
software offerings are not considered separate reportable
operating segments and are combined in our other segment. In the
nine months ended September 30, 2003, our asset management,
student loan servicing and other segments generated 50.8%, 40.1%
and 9.1%, respectively, of our total segment revenues and 73.2%,
23.3% and 3.5%, respectively, of our segment net income.
We originate and acquire student loans through a
variety of methods, or channels, including:
1
In addition, we acquire student loans through
spot purchases and whole-company acquisitions, which accounted
for 9.7% and 18.1% of the student loans we originated and
acquired in the nine months ended September 30, 2003 and in
2002, respectively.
Of the $3.2 billion and $2.7 billion in
student loans we originated and acquired in the nine months
ended September 30, 2003 and in 2002, respectively,
$1.5 billion and $859 million, respectively, were
loans consolidated through our direct channel. Student loans
that we originate through our direct channel are our most
profitable student loans because they typically cost us less
than loans acquired through our other channels and remain in our
portfolio for a longer period of time. As of September 30,
2003, our student loan portfolio was $10.1 billion.
Our earnings and earnings growth are directly
affected by the size of our portfolio of student loans, the
interest rate characteristics of our portfolio, the costs
associated with financing and managing our portfolio and the
costs associated with origination and acquisition of the student
loans in the portfolio. We generate the majority of our earnings
from the spread between the yield we receive on our student loan
portfolio and the cost of funding these loans. While the spread
may vary due to fluctuations in interest rates, special
allowance payments from the federal government ensure that we
receive a minimum yield on our student loans, so long as certain
requirements are met. For the nine months ended
September 30, 2003, we generated net interest income of
$133.8 million, total other income, including loan
servicing income, of $83.8 million and net income of
$16.8 million. In 2002, we generated net interest income of
$190.9 million, total other income, including loan
servicing income, of $125.2 million and net income of
$48.5 million.
We currently service more than $18 billion
in FFELP loans, which makes us the second largest servicer of
FFELP loans, according to Student Loan Servicing Alliance, or
SLSA, statistics. Our software is also used by third parties to
service an additional $27 billion in student loans. In
addition, we currently provide servicing support to guaranty
agencies on a total of $20 billion of FFELP loans.
Servicing support includes functions such as system software,
hardware and telecommunication support, borrower and loan
updates, default aversion tracking services, claim processing
services and post-default collection services. We provide
student loan servicing and origination functions either directly
or indirectly to more than 1.7 million borrowers at
hundreds of colleges and universities through our proprietary
software products and outsourcing functions. We protect our
proprietary software products through copyrights, trade secrets
and contractual agreements.
The cost of funding our student loan portfolio is
determined by the costs of borrowings under our operating lines
of credit, secured warehouse financings and asset-backed
securitizations. We currently have $65 million in operating
lines of credit and a $35 million commercial paper
facility. We are also in the process of increasing our operating
lines of credit by an additional $30 million. In addition,
we have obtained financing through asset-backed commercial paper
conduit warehouse programs and the issuance of variable-rate and
fixed-rate, taxable and tax-exempt bonds, including asset-backed
securities. For the majority of our long-term financing needs,
we rely on asset-backed securitization transactions. We
completed three securitization transactions totaling
$2.9 billion in the nine months ended September 30,
2003, three securitization transactions totaling
$2.8 billion in 2002 and five securitization transactions
totaling $1.3 billion in 2001. As a result of the increase
in the size of these securitization transactions, we have
achieved increased economies of scale in connection with our
costs of financing.
2
We have entered into a series of agreements with
Union Bank and Trust Company, or Union Bank, including
transactions to sell interests in student loans to Union Bank in
its capacity as trustee, to purchase student loans from Union
Bank, to provide student loan servicing to Union Bank, to
sublease real estate from Union Bank and to provide consulting
services to and receive consulting services from Union Bank.
Michael S. Dunlap, our Co-Chief Executive Officer, owns an
indirect interest in Union Bank and serves as its non-executive
chairman. In the nine months ended September 30, 2003,
and in 2002, 2001 and 2000, approximately 19%, 14%, 15% and 68%,
respectively, of the principal amount of the student loans added
to our portfolio were acquired from Union Bank as part of our
branding partner channel, a portion of which loans were
originated by Union Bank and a portion of which were originated
by third parties. To the extent Union Bank were to experience
problems, it could have a material adverse effect on us.
Student Loan Industry
Since the creation of the federal student loan
programs, hundreds of billions of dollars in federal student
loans have financed the higher education of millions of students
at thousands of schools across the United States. More students
and families depend on federal student loans to cover the costs
of post-secondary education than any other single source of
financial aid, and the demand for student loans is expected to
grow along with the cost of a college education. According to
U.S. Department of Education or, DOE, projections, annual
gross federal student loan volume is expected to increase from
$45.4 billion in federal fiscal year 2002 to
$71.8 billion in federal fiscal year 2009, excluding
consolidation loan volume.
We have more than $11 billion in total
assets, which places us, in terms of total student loan related
assets, among the top four education finance companies in the
United States. Of the $25.9 billion in FFELP loan
originations by private lenders and the federal government in
2000, the combined figures for our own originations as well as
origination rights acquired by us from Union Bank totaled
$629.2 million.
Competitive Strengths
The following competitive strengths distinguish
us in the education finance industry:
3
Strategy
We intend to achieve our corporate objective of
furthering our leadership position in the student loan industry
by executing the following strategies:
Potential Acquisitions
We have entered into an agreement with a lender
to acquire a portion of its portfolio of FFELP loans, as well as
interests in other FFELP loans of that lender. It is anticipated
that the outstanding principal and accrued interest on the FFELP
loans and interests to be acquired will be financed initially
through one of our warehouse line facilities, and ultimately
through a long-term securitization. It also is anticipated that
a significant portion of the purchase price of the interests
will be funded through the issuance of debt securities of a
consolidated student lending subsidiary. We currently estimate
that the cash cost to us at
4
Risk Factors
You should consider the risks that we face in
evaluating an investment in our Class A common stock. Among
these risks are:
With respect to the first risk factor mentioned
above, we expect debate on reauthorization of the Higher
Education Act to increase substantially in the first quarter of
2004, and to focus on issues such as interest rates paid on
FFELP loans and lifting restrictions on consolidations of loans.
Legislative proposals include initiatives to reward schools for
participating in the William D. Ford Federal Direct Loan
Program, or the FDL Program, and to reduce income on FFELP
loans. Legislation has also been proposed to make FFELP loans
subject to reconsolidation or refinancing at any time at a fixed
rate. These proposed changes, if adopted, could present material
increases in competition by the FDL Program, could make loans in
our portfolio more vulnerable to consolidation by others and
could lower our return on individual loans.
For additional information regarding the risks
that we face, see Risk Factors.
Our principal executive offices are located at
121 South 13th Street, Suite 201, Lincoln,
Nebraska 68508, and our telephone number is (402) 458-2370.
Our web site is
www.nelnet.net
. Information contained on
our web site is not a part of this prospectus.
5
Asset management, including student loan
originations and
acquisitions
provides
student loan sales, marketing, origination, acquisition and
portfolio management.
Student loan
servicing
provides
student loan servicing for our portfolio and for third parties.
Guarantee
servicing
provides
software systems and sub-servicing to guaranty agencies.
Servicing
software
provides
student loan servicing software internally and to third-party
student loan holders and servicers.
our direct channel, in which we originate student
loans in one of our brand names directly to student and parent
borrowers, which accounted for 52.2% and 40.7% of the student
loans we originated and acquired in the nine months ended
September 30, 2003 and in 2002, respectively;
our branding partner channel, in which we acquire
student loans from lenders to whom we provide marketing and
origination services, which accounted for 22.8% and 19.5% of the
student loans we originated and acquired in the nine months
ended September 30, 2003 and in 2002, respectively; and
our forward flow channel, in which we acquire
student loans from lenders to whom we provide origination
services, but provide no marketing services, or who have agreed
to sell loans to us under forward sale commitments, which
accounted for 15.3% and 21.7% of the student loans we originated
and acquired in the nine months ended September 30, 2003
and in 2002, respectively.
We are a focused leader with a vertically
integrated platform.
We provide
school financial aid offices and students with a comprehensive,
full-service student lending package (Stafford, PLUS,
consolidation and private loans), loan and guarantee servicing
and loan servicing software. In doing so, we maintain a strong
position and expertise in each of our product and service
offerings and are well positioned to capitalize on industry
growth.
We have established a high-quality loan
portfolio through our concentration on FFELP
loans.
As of September 30,
2003, more than 99% of our student loan portfolio consisted of
FFELP loans, which carry at least a 98% federal guarantee on
principal and accrued interest.
We enjoy strong relationships with student
loan market constituents.
We have
established long-term strategic relationships with school
financial aid offices and with eligible lenders that direct
committed portions of their originations to us. The effort and
cost to establish and maintain these relationships, as well as
the low turnover of selected providers, act as a barrier to
entry for competitors.
We have benefited from access to
cost-effective financings.
Our
$2 billion loan warehousing capacity allows us to pool
student loans in order to aggregate sufficient volume for
cost-effective long-term financing and to time securitization
market conditions effectively. As a result, our securitizations
routinely price in line with our largest competitor within the
student loan industry.
We have built a leading, cost-competitive
servicing platform with a focus on asset
protection.
Our student loan
servicing platform, which facilitates interaction with
borrowers, is critical to our success as a lender in the student
loan marketplace. The quality of our servicing capability is
also a key factor in preserving the federal guarantee on our
FFELP loans. The quality of our servicing operation is best
demonstrated by our low initial claim reject rate due to
servicer error, which was 0.25% in 2002.
Our comprehensive suite of software
products enables us to carry our brand forward to the key
constituents of the student loan
market.
Our products include an
Internet-based financial aid delivery and management system, an
Internet-based loan origination system and a centralized
disbursement agent service. Our open architecture
origination products afford schools the flexibility to work with
multiple lenders.
We are run by a management team with
significant operating and acquisition
experience.
Our senior management
employees have, on average, been with us or one of our
predecessor companies for over ten years. We have a track record
of successfully integrating the companies that we have acquired
and retaining key employees. As a result, we have a management
team with significant experience and knowledge in both student
loan operations and portfolio and company acquisitions.
Establish and maintain leadership in all
our product and service offerings by utilizing our
technology.
Schools, lenders,
guaranty agencies and borrowers in todays student loan
industry demand cutting edge, state-of-the-art technology to
streamline the burdensome and time consuming processes of
originating, servicing and administering student loans. We
believe that the technology products that we provide position us
to become a preferred provider for participants in the student
loan industry and that their expanded utilization will promote
our originations and acquisitions. We will continue to invest,
develop and upgrade our technology to help solidify our
leadership position and further penetrate our potential market.
Focus on increasing our organic growth
while maintaining a low-cost
infrastructure.
We believe there
is continued opportunity for significant growth in light of the
DOEs projected growth rates for the student loan industry.
To increase our organic growth, we have expanded our sales and
marketing force to promote FFELP loan origination and
consolidation efforts. We believe the infrastructure we have
developed has positioned us to continue to achieve economies of
scale and be a low-cost provider to our customers. In this
regard, we decreased our operating expenses as a percentage of
average student loans from 0.78% in 1998 to 0.54% in 2002.
Strengthen existing relationships while
establishing new ones.
We have
extensive customer relationships with schools and lenders
throughout the United States. We will continue to focus on
expanding the loan volume associated with these existing
relationships, while establishing new ones through our sales
force.
Continue our commitment to highly focused
and disciplined loan origination and acquisition
practices.
We will continue to
pursue our conservative approach to asset quality by
concentrating on originating, acquiring and holding federally
guaranteed loans through the FFEL Program, while maintaining a
disciplined underwriting approach to private loans.
Opportunistically make company and
portfolio acquisitions.
Although
we have reached a point in our development where we offer a
comprehensive set of products and services essential to our
vertically integrated business model, we will still consider
acquisitions of both individual companies and loan portfolios
that we believe have the potential to enhance long-term
shareholder value.
potential adverse changes that may be enacted in
connection with the reauthorization of the Higher Education Act
of 1965, as amended, which together with the regulations
thereunder we refer to as the Higher Education Act, which is
scheduled to expire in September 2004, or the possibility that
this Act may not be reauthorized at all;
the fact that we operate in a highly competitive
industry and compete directly against large and well-financed
competitors;
that our failure to comply with governmental
regulations and guaranty agency rules could result in the loss
of the federal guarantees of our FFELP loans;
interest rate sensitivity of our balance sheet
arising from variations in maturities, timing of reset of
interest rates and variation of indices of our assets and
liabilities;
transactions with affiliates, such as Union Bank,
and potential conflicts of interest, such as those potentially
created by virtue of the relationship between our Co-Chief
Executive Officer, Michael S. Dunlap, and Union Bank, of which
Mr. Dunlap serves as a director and a non-executive
chairman, and the holding company of Union Bank, Farmers &
Merchants Investment Inc., of which Mr. Dunlap serves as
president and a director and of which Mr. Dunlap owns or
controls approximately 38.4% of the outstanding voting stock; and
that, immediately after this offering, our
executive officers, directors and principal shareholders will
beneficially own an aggregate of 71.0% of our common stock and
possess 91.4% of the combined voting power of our common stock,
and our Co-Chief Executive Officers, persons related to them and
trusts in which they have beneficial interests will beneficially
own an aggregate of 60.7% of our common stock and possess 88.4%
of the combined voting power of our common stock, and will be
able to control substantially all corporate decisions, including
the election of directors and other matters requiring
shareholder approval.
The Offering
Unless specifically stated otherwise, the
information in this prospectus:
6
Class A common stock offered by Nelnet
8,000,000 shares
Common stock to be outstanding after this
offering:
Class A common
stock
39,015,034 shares
Class B common
stock
14,023,454 shares
Total
53,038,488 shares
Use of proceeds
To originate and acquire interests in student
loans, potentially including up to approximately
$55 million to fund a portion of the acquisitions described
in Potential Acquisitions, repay any
revolving credit indebtedness outstanding at the closing of this
offering and for general corporate purposes, including capital
expenditures, working capital and possible acquisitions of
complementary businesses or assets. See Use of
Proceeds.
Voting rights
Each share of Class A common stock has one
vote and each share of Class B common stock has ten votes
on all matters to be voted upon by our shareholders. In the
event at any time the shares of Class B common stock
outstanding constitute less than 50% of the Class B common
stock outstanding on the date hereof, each remaining share of
Class B common stock outstanding shall automatically be
converted into one share of Class A common stock. See
Description of Capital Stock Common
Stock.
Dividend policy
Nelnet does not anticipate paying any cash
dividends on its common stock.
New York Stock Exchange symbol
NNI.
assumes no exercise of the underwriters
overallotment option of 1,200,000 shares;
assumes an initial public offering price of
$19.00 per share, the midpoint of the estimated initial
public offering price range indicated on the front cover of this
prospectus; and
reflects our recapitalization described below
under the heading Description of Capital Stock
Recapitalization and a subsequent reduction in the number
of authorized shares of Class B common stock.
Summary Consolidated Financial Data
You should read the summary consolidated
financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and the related notes included elsewhere in this
prospectus. We derived the financial data as of
December 31, 2002 and 2001 and for the years ended
December 31, 2002, 2001 and 2000 from our audited financial
statements included elsewhere in this prospectus. We derived the
financial data as of December 31, 2000 from our audited
financial statements not included in this prospectus. We derived
the financial data as of September 30, 2003 and for the
nine months ended September 30, 2003 and 2002 from our
unaudited financial statements included elsewhere in this
prospectus. Results for interim periods are not necessarily
indicative of results to be expected during the remainder of the
fiscal year or for any future periods. The as adjusted balance
sheet data set forth below have been adjusted to give effect to
the sale of 8,000,000 shares of our Class A common
stock in this offering and the use of $30 million of the
net proceeds from this offering to repay revolving credit
indebtedness. See Capitalization.
7
8
Nine months ended September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(dollars in thousands, except per share data)
$
133,827
$
156,296
$
190,900
$
114,565
$
64,853
8,875
3,319
5,587
3,925
1,370
124,952
152,977
185,313
110,640
63,483
74,470
80,189
103,899
93,172
66,015
13,988
15,129
21,909
7,713
8,431
(4,632
)
(579
)
(579
)
(2,962
)
178,827
172,928
234,701
195,438
131,196
29,951
74,788
75,841
13,125
6,733
16,771
47,853
48,538
7,147
4,520
$
0.37
$
1.06
$
1.08
$
0.16
$
0.11
45,019,823
44,971,290
44,971,290
44,331,490
41,187,230
$
3,173,325
$
2,113,134
$
2,665,786
$
1,448,607
$
1,027,498
$
9,432,513
$
8,056,047
$
8,171,898
$
5,135,227
$
3,388,156
$
18,341,409
$
17,393,686
$
17,863,210
$
16,585,295
$
11,971,095
1.76
%
2.38
%
2.15
%
2.09
%
1.76
%
0.21
%
0.70
%
0.52
%
0.12
%
0.12
%
17.8
%
67.1
%
49.2
%
11.7
%
8.2
%
0.073
%
0.036
%
0.047
%
0.042
%
0.055
%
As of September 30, 2003
As of December 31,
Actual
As adjusted
2002
2001
2000
(in thousands)
$
34,650
$
142,010
$
40,155
$
36,440
$
23,263
10,059,920
10,059,020
8,559,420
7,423,872
3,585,943
11,152,997
11,260,357
9,766,583
8,134,560
4,021,948
10,892,347
10,862,347
9,447,682
7,926,362
3,934,130
131,222
268,582
109,122
63,186
54,161
(a)
Initial loans originated and acquired through
various channels, including originations through our direct
channel and acquisitions through our branding partner channel,
our forward flow channel and the secondary market.
(b)
Net interest margin is computed by dividing net
interest income by the sum of average student loans and the
average balance of other interest earning assets.
RISK FACTORS
You should carefully consider the following
risk factors and all other information contained in this
prospectus before investing in shares of our Class A common
stock. Investing in our Class A common stock involves a
high degree of risk. If any of the following risks actually
occurs, our business, financial condition and results of
operations could be materially and adversely affected. In that
event, the trading price of our Class A common stock could
decline and you may lose part or all of your
investment.
Risks Related to Our Business and
Industry
Our principal business is comprised of
originating, acquiring, holding and servicing student loans made
and guaranteed pursuant to the FFEL Program, which was created
by the Higher Education Act. Most significant aspects of our
lines of business are governed by the Higher Education Act. We
are also subject to rules and regulations of the agencies that
act as guarantors of the student loans, known as guaranty
agencies. In addition, we are subject to certain federal and
state banking laws, regulations and examinations.
Our private loan portfolio is also subject to
federal and state consumer protection laws and regulations,
including state usury laws and related regulations and the
Federal Truth in Lending Act. These laws and regulations impose
substantial requirements upon lenders and servicers involved in
consumer finance. Failure to comply with these laws and
regulations could result in our liability to borrowers, the
imposition of civil penalties and potential class action suits.
Our failure to comply with regulatory regimes
described above may arise from:
Such failure to comply, irrespective of the
reason, could subject us to loss of the federal guarantee on
FFELP loans, costs of curing servicing deficiencies or remedial
servicing, suspension or termination of our right to participate
in the FFEL Program or to participate as a servicer, negative
publicity and potential legal claims or actions brought by our
servicing customers and borrowers.
We must meet various requirements in order to
maintain the federal guarantee on our FFELP loans. These
requirements establish servicing requirements and procedural
guidelines and specify school and borrower eligibility criteria.
The federal guarantee on our FFELP loans is conditioned on
compliance with origination, servicing and collection standards
set by the DOE and guaranty agencies. FFELP loans that are not
originated, disbursed or serviced in accordance with DOE
regulations risk loss of their guarantee, in full or in part. If
we experience a high rate of servicing deficiencies or costs
associated with remedial servicing, and if we are unsuccessful
in curing such deficiencies, the eventual losses on the loans
that are not cured could be material.
A guaranty agency may reject a loan for claim
payment due to a violation of FFEL Program due diligence
collection and servicing requirements. In addition, a guaranty
agency may reject claims under other circumstances, including,
for example, if a claim is not timely filed or adequate
documentation is not maintained. Once a loan ceases to be
guaranteed, it is ineligible for federal interest subsidies and
special allowance payments. If a loan is rejected for claim
payment by a guaranty agency, we continue to pursue the borrower
for payment and/or institute a process to reinstate the
guarantee.
9
Rejections of claims as to portions of interest
may be made by guaranty agencies for certain violations of the
due diligence collection and servicing requirements, even though
the remainder of a claim may be paid. Examples of errors that
cause claim rejections include isolated missed collection calls
or failures to send collection letters as required.
School eligibility requirements, which include
default rate limits, have been implemented by the DOE. In order
to maintain eligibility in the FFEL Program, schools must
maintain default rates below specified levels, and both guaranty
agencies and lenders are required to ensure that loans are made
to students attending schools that meet default criteria.
If we fail to comply with any of the above
requirements, we could incur penalties or lose the federal
guarantee on some or all of our FFELP loans. Our actual loss
experience on denied guarantee claims historically has not been
material to our operations, but the impact on us could become
material if losses were to increase substantially in future
periods. During the last three fiscal years, our actual loss on
denied guarantee claims did not exceed 0.004%.
The Higher Education Act generally prohibits a
lender from providing inducements to educational institutions or
individuals in order to secure applicants for FFELP loans. We
have entered into arrangements with various schools pursuant to
which the schools become lenders of FFELP loans to graduate
students, and we provide origination services, servicing and
funding to the schools with respect to such loans. A similar
school-as-lender arrangement that Sallie Mae
previously had in place was challenged by the DOE, but a federal
court decision determined that the arrangement fell within
parameters of regulatory guidelines established by the DOE.
Sallie Mae also has come under scrutiny as a result of recent
charges that it makes private loans available to students of a
school only if the school, in return, promises to leave the FDL
Program and market FFELP loans to its students. The DOE has
stated that private loans are legal and permissible if offered
simply as a benefit to schools. We offer private loans to
student borrowers on a regular basis, but we do so without
requiring anything in return from the schools that these
borrowers attend. In addition, as pronouncements from the DOE
permit de minimus gifts in connection with advertising FFELP
loans, we entertain financial aid officers from schools at
student loan industry conferences and functions from time to
time and sponsor promotional events such as lunches and golf
outings from time to time. If the DOE were to change its
position on any of these matters, this could potentially result
in the DOE imposing sanctions upon us and could negatively
impact our business.
We have also entered into various agreements to
acquire marketing lists of prospective FFELP loan borrowers from
sources such as college alumni associations. We pay to acquire
these lists and for the completed applications for loans
resulting therefrom. We believe that such arrangements are
permissible and do not violate restrictions on inducements, as
they fit within a regulatory exception recognized by the DOE for
generalized marketing and advertising activities. The DOE has
provided informal guidance to us that such arrangements do not
raise any improper inducement issues, since such arrangements
fall within the generalized marketing exception. If the DOE were
to change its position, this could hurt our reputation and could
potentially result in the DOE imposing sanctions on us. These
sanctions could negatively impact our business.
Pursuant to the terms of the Higher Education
Act, the FFEL Program is periodically amended, and the Higher
Education Act must be reauthorized by Congress every five years
in order to prevent sunset of that Act. Changes in the Higher
Education Act made in the two most recent reauthorizations have
included reductions in student loan yields paid to lenders,
increased fees paid by lenders and a decreased level of federal
guarantee. Future changes could result in further negative
impacts on our business. Moreover, there can be no assurance
that the provisions of the Higher Education Act, which is
scheduled to expire on September 30, 2004, will be
reauthorized. While Congress has consistently extended the
10
In addition, funds for payment of interest
subsidies and other payments under the FFEL Program are subject
to annual budgetary appropriation by Congress. In recent years,
federal budget legislation has contained provisions that have
restricted payments made under the FFEL Program to achieve
reductions in federal spending. Future legislation may adversely
affect expenditures by the DOE and the financial condition of
guaranty agencies.
Senator Edward M. Kennedy has introduced
legislation, to which we refer as the Kennedy Bill, proposing a
number of initiatives aimed at supporting the FDL Program to the
detriment of the FFEL Program. The Kennedy Bill proposes to
enable all graduates to refinance their FFELP loans at a fixed
rate and proposes to pay schools as a reward for choosing to
participate in the FDL Program. The Kennedy Bill also proposes
to eliminate variable rate floor income as well as the 9.5%
floor interest rate on loans financed with funds from pre-1993
tax-exempt financings. If the Kennedy Bill in its current form
were to be enacted, this would have a material negative impact
on us. Senator John Edwards has advocated elimination of the
FFEL Program in its entirety, which also would have a material
negative impact on us.
Efforts are underway to pass legislation which
would permit borrowers holding consolidation loans made under
the Higher Education Act to refinance their loans under the FFEL
Program multiple times, rather than only once, which would open
approximately 43% of our student loan portfolio to further
refinancing. Similar legislation may also abolish the so-called
single holder rule, which restricts the ability of other lenders
to consolidate student loans away from a lender that owns all of
a particular borrowers loans. This would put approximately
one-third of our non-consolidated portfolio at risk of being
consolidated away by our competitors. In addition, if
legislation is enacted to allow variable-rate consolidation
loans or to extend the term of Stafford loans, we may experience
a decrease in our consolidation loan opportunities. Accordingly,
any of these legislative changes could have a material adverse
impact upon us. In addition, the DOE oversees and implements the
Higher Education Act and periodically issues regulations and
interpretations of that Act. Changes in such regulations and
interpretations could negatively impact our business.
Variation
in the maturities, timing of rate reset and variation of indices
of our assets and liabilities may pose risks to
us.
Because we generate the majority of our earnings
from the spread between the yield we receive on our portfolio of
student loans and the cost of financing these loans, the
interest rate sensitivity of our balance sheet could have a
material effect on our results of operations. The majority of
our student loans have variable rate characteristics in interest
rate environments where the special allowance payment formula
exceeds the borrower rate. Some of our student loans, primarily
consolidation loans, include fixed-rate components depending
upon loan terms and the rate reset provisions set by the DOE. We
have financed the majority of our student loan portfolio with
variable-rate debt. Absent utilization of derivative instruments
to match the interest rate characteristics and duration of the
assets and liabilities, fluctuations in the interest rate
environment will affect our results of operations. Such
fluctuations may be adverse and may be material.
In the current low interest rate environment, our
FFELP loan portfolio is yielding excess income due to the
reduction in the interest rates on the variable-rate liabilities
financing student loans at a fixed borrower rate. Absent the use
of derivative instruments, a rise in interest rates will have an
adverse effect on earnings and fair values due to interest
margin compression caused by increasing financing costs, until
such time as that the FFELP loans earn interest at a variable
rate in accordance with the special allowance payment formula.
In higher interest rate environments, where the interest rate
rises above the borrower rate and fixed-rate loans become
variable, the impact of the rate fluctuations is reduced.
Loans that reset annually on each July 1 can
generate excess spread income as compared to the rate based on
11
Due to the variability in duration of our assets
and varying market conditions, we do not attempt to perfectly
match the interest rate characteristics of our entire loan
portfolio with the underlying debt instruments. At
September 30, 2003, approximately 48.5% of our assets was
earning interest at the current fixed rate, while only 9.1% of
the liabilities used to finance those assets was set at fixed
rates. This mismatch in duration and interest rate
characteristics could have a negative impact on our results of
operations. We have employed various derivative instruments to
somewhat offset this mismatch. For the nine months ended
September 30, 2003, an increase in short-term rates of 100
basis points would decrease our earnings per share by
approximately $0.20 while a corresponding decrease in short-term
interest rates of 100 basis points would increase our earnings
per share by approximately $0.23. Changes in interest rates, the
composition of our student loan portfolio and derivative
instruments will impact the effect of interest rates on our
earnings, and we cannot predict any such impact with any level
of certainty.
Market
risks to which we are subject may have an adverse impact upon
our business and operations.
Our primary market risk exposure arises from
fluctuations in our borrowing and lending rates, the spread
between which could be impacted by shifts in market interest
rates. The borrower rates on our FFELP loans are generally reset
by the DOE each July 1st based on a formula determined by the
date of the origination of the loan, with the exception of rates
on consolidation loans which are fixed to term. The interest
rate we actually receive on our FFELP loans is the greater of
the borrower rate and a rate determined by a formula based on a
spread to either the 91-day Treasury Bill index or the 90-day
commercial paper index, depending on when the loans were
originated and the current repayment status of the loans.
We issue asset-backed securities, both fixed- and
variable-rate, to fund our student loan assets. The
variable-rate debt is generally indexed to 90-day LIBOR or set
by auction. The income generated by our student loan assets is
generally driven by different short-term indices than our
liabilities, which creates interest rate risk for us. We have
historically borne this risk internally through the net spread
on our portfolio while continuing to monitor our interest rate
risk.
When we utilize derivative instruments, we
utilize them to manage our interest rate sensitivity. Although
we do not use derivative instruments for speculative purposes,
our derivative instruments may not meet the criteria set forth
in Statement of Financial Accounting Standards, or SFAS,
No. 133,
Accounting for Derivatives Instruments and
Hedging Activities
which would allow us to offset the
changes in fair value of the derivative instrument against the
effects of the changes in the hedged item in the statement of
income. The derivative instruments we use are typically in the
form of interest rate swaps and interest rate caps. Interest
rate swaps effectively change variable-rate debt obligations
either to fixed-rate debt obligations or to variable-rate debt
obligations based on a different index. Interest rate caps
effectively limit the maximum interest on variable-rate debt
obligations. Developing an effective strategy for dealing with
movements in interest rates is complex, and no strategy can
completely insulate us from risks associated with such
fluctuations. In addition, a counterparty to a derivative
instrument could default on its obligation thereby exposing us
to credit risk. Further, we may have to repay certain costs,
such as transaction fees or brokerage costs, if a derivative
instrument is terminated by us. Finally, our interest rate risk
management
12
During 2001, we entered into an interest rate
swap arrangement with a notional amount of $500 million.
This swap was adjusted to fair value in our statements of
income, resulting in a $579,000 loss in 2002 and a
$3.0 million loss in 2001. This swap expired in June 2002.
The only derivative instruments entered into in 2002 were
embedded credit enhancement products within our securitization
transactions. In the third quarter of 2003, we entered into
various interest rate swap agreements, a basis swap and a cap
contract with an aggregate notional amount of $3.5 billion.
Our primary funding needs are those required to
finance our student loan portfolio and satisfy our cash
requirements for new student loan originations and acquisitions,
operating expenses and technological development. Our operating
and warehouse financings are substantially provided by third
parties, over which we have no control. Unavailability of such
financing sources may subject us to the risk that we may be
unable to meet our financial commitments to creditors, branding
partners, forward flow lenders or borrowers when due unless we
find alternative funding mechanisms.
We rely upon conduit warehouse loan financing
vehicles to support our funding needs on a short-term basis.
There can be no assurance that we will be able to maintain such
warehouse financing in the future. We currently have four such
conduit facilities in place, with various maturity dates.
Currently, the aggregate short-term commitment amount from our
conduit lenders is over $2 billion. There can be no
assurance that we will be able to maintain such conduit
facilities, find alternative funding or increase the commitment
level of such facilities, if necessary. The term of each conduit
facility is less than one year, and each facility is renewable
at the option of the lender and may be terminated at any time
for cause. While our conduit facilities have historically been
renewed for successive terms, there can be no assurance that
this will continue in the future. Our general operating lines of
credit are also for terms of less than one year each, are
renewable at the option of the lenders and may be terminated at
any time for cause.
We have historically relied upon, and expect to
continue to rely upon, asset-backed securitizations as our most
significant source of funding for student loans on a long-term
basis. Approximately $8.6 billion of our student loans were
funded by long-term asset backed securitizations as of
September 30, 2003, and approximately $7.1 billion of
our student loans were funded by asset-backed securitizations as
of December 31, 2002. The net cash flow we receive from the
securitized student loans generally represents the excess
amounts, if any, generated by the underlying student loans over
the amounts required to be paid to the bondholders, after
deducting servicing fees and any other expenses relating to the
securitizations. In addition, some of the residual interests in
these securitizations have been pledged to secure additional
bond obligations. Our rights to cash flow from securitized
student loans are subordinate to bondholder interests and these
loans may fail to generate any cash flow beyond what is due to
pay bondholders.
The interest rates on certain of our asset-backed
securities are set and periodically reset via a dutch
auction utilizing remarketing agents for varying intervals
ranging from seven to 91 days. Investors and potential
investors submit orders through a broker-dealer as to the
principal amount of notes they wish to buy, hold or sell at
various interest rates. The broker-dealers submit their
clients orders to the auction agent or remarketing agent,
who determines the interest rate for the upcoming period. If
there are insufficient potential bid orders to purchase all of
the notes offered for sale or being repriced, we could be
subject to
13
Rising interest rates existing at the time our
asset-backed securities are remarketed may cause other competing
investments to become more attractive to investors than our
securities, which may decrease our liquidity. We periodically
utilize a variety of derivative instruments in order to protect
against changing interest rate environments. To the extent that
anticipated changes in interest rates differ from actual changes
in interest rates, these derivative instruments may not operate
as effective hedges.
More than 99% of our student loan portfolio as of
September 30, 2003 was comprised of FFELP loans. These
loans benefit from a federal guarantee of between 98% and 100%
of their principal balance and accrued interest. We bear full
risk of losses experienced with respect to the unguaranteed
portion of the student loans.
Losses on our private loans will be borne by us,
with the exception of certain privately insured loans. Privately
insured loans constitute a minority of our private loan
portfolio. The loan loss pattern on our private loan portfolio
is not as developed as that on our FFELP loan portfolio. As of
September 30, 2003, the aggregate principal balance of
private loans comprised less than 1% of our entire student loan
portfolio; however, it is expected to increase to between 1% and
2% over the next three years. There can be no assurance that
this percentage will not further increase over the long term.
The performance of student loans in our portfolio
is affected by the economy, and a prolonged economic downturn
may have an adverse effect on the credit performance of these
loans. While we have provided allowances estimated to cover
losses that may be experienced in both our student loans that
are federally guaranteed under the FFEL Program as well as our
private loan portfolio, there can be no assurance that such
allowances will be sufficient to cover actual losses in the
future.
A deterioration in the financial status of a
guaranty agency and its ability to honor guarantee claims on
defaulted student loans could result in a failure of that
guaranty agency to make its guarantee payments in a timely
manner, if at all. The financial condition of a guaranty agency
can be adversely affected if it submits a large number of
reimbursement claims to the DOE, which results in a reduction of
the amount of reimbursement that the DOE is obligated to pay the
guaranty agency. The DOE may also require a guaranty agency to
return its reserve funds to the DOE upon a finding that the
reserves are unnecessary for the guaranty agency to pay its
FFELP expenses or to serve the best interests of the FFEL
Program.
If the DOE has determined that a guaranty agency
is unable to meet its guarantee obligations, the loan holder may
submit claims directly to the DOE, and the DOE is required to
pay the full guarantee claim. However, the DOEs obligation
to pay guarantee claims directly in this fashion is contingent
upon the DOE making the determination that a guaranty agency is
unable to meet its guarantee obligations. The DOE may not ever
make this determination with respect to a guaranty agency and,
even if the DOE does make this determination, payment of the
guarantee claims may not be made in a timely manner, which could
result in our experiencing cash shortfalls.
In connection with our securitizations, we
periodically utilize credit enhancements or other support
agreements such as letters of credit, bond insurance and
interest rate swap agreements. We utilize these credit
enhancement agreements in order to improve the marketability of
certain of our asset-backed securities when such enhancements
will lower our over-all costs with respect to these securities.
We cannot assure performance of the counterparties to these
various agreements, and failure of such counterparties to
perform their obligations under these agreements could impair
the viability of our underlying debt or securitization
structures, which in turn could adversely impact our results of
operations and financial condition.
14
In 1992, Congress created the William D. Ford
Federal Direct Loan Program, which we refer to as the FDL
Program or the FDLP. Under the FDL Program, the DOE makes loans
directly to student borrowers through the educational
institutions they attend. The volume of student loans made under
the FFEL Program and available for us to originate or acquire
may be reduced to the extent loans are made to students under
the FDL Program. In addition, if the FDL Program expands, to the
extent the volume of loans serviced by us is reduced, we may
experience reduced economies of scale, which could adversely
affect our earnings. Loan volume reductions could further reduce
amounts received by the guaranty agencies available to pay
claims on defaulted student loans.
In the FFELP market, we face significant
competition from SLM Corporation, the parent company of Sallie
Mae. SLM Corporation services nearly half of all outstanding
FFELP loans and is the largest holder of student loans, with a
portfolio of approximately $70 billion. We also face
intense competition from other existing lenders and servicers.
As we expand our student loan origination and acquisition
activities, that expansion may result in increased competition
with some of our servicing customers. This has in the past
resulted in servicing customers terminating their contractual
relationships with us, and we could in the future lose more
servicing customers as a result. As we seek to further expand
our business, we will face numerous other competitors, many of
which will be well established in the markets we seek to
penetrate. Some of our competitors are much larger than we are,
have better name recognition than we do and have greater
financial and other resources than we do. In addition, several
of our competitors have large market capitalizations or cash
reserves and are better positioned to acquire companies or
portfolios in order to gain market share than we are.
Furthermore, many of the institutions with which we compete have
significantly more equity relative to their asset bases than we
do. Consequently, such competitors may have more flexibility to
address the risks inherent in the student loan business.
Finally, some of our competitors are tax-exempt organizations
which do not pay federal or state income taxes and which
generally receive floor income on certain tax-exempt obligations
on a greater percentage of their student loan portfolio than we
do because they have financed a greater percentage of their
student loans with tax-exempt obligations issued prior to
October 1, 1993 than we have. These factors could give our
competitors a strategic advantage.
Pursuant to the Higher Education Act, borrowers
may prepay loans made under the FFEL Program at any time.
Prepayments may result from consolidating student loans, which
tends to occur more frequently in low interest rate
environments, from borrower defaults, which will result in the
receipt of a guarantee payment, and from voluntary full or
partial prepayments, among other things. High prepayment rates
will have the most impact on our asset-backed securitization
transactions priced in relation to LIBOR. At September 30,
2003, we had four transactions outstanding totaling
approximately $3.4 billion which had experienced cumulative
prepayment rates of 15.2% to 22.1%, respectively. At
December 31, 2002, we had two transactions outstanding
totaling approximately $2.0 billion which had experienced
cumulative prepayment rates of 14.3% and 15.9%, respectively.
The rate of prepayments of student loans may be influenced by a
variety of economic, social and other factors affecting
borrowers, including interest rates and the availability of
alternative financing. Our profits could be adversely affected
by higher prepayments, which would reduce the amount of interest
we receive and expose us to reinvestment risk.
Our portfolio of FFELP loans is subject to
refinancing through the use of consolidation loans, which are
expressly permitted by the Higher Education Act. Consolidation
loan activity may result in three detrimental effects on us.
First, when we consolidate loans already held by us, the new
consolidation loans have a lower yield than the loans being
refinanced due to the statutorily mandated consolidation loan
rebate fee of 1.05% per year. Although consolidation loans
generally feature higher average balances, longer average lives
and slightly higher special allowance payments, such attributes
may not be sufficient to counterbalance the cost of the rebate
fees. Second, and more significantly, we may lose student loans
in
15
Our student loan originations generally are
limited to students attending eligible educational institutions
in the United States. Volumes of originations are greater at
some schools than others, and our ability to remain an active
lender at a particular school with concentrated volumes is
subject to a variety of risks, including the fact that each
school has the option to remove us from its preferred
lender list or to add other lenders to its preferred
lender list, the risk that a school may enter the FDL
Program or the risk that a school may begin making student loans
itself. We acquire student loans through forward flow
commitments with other student loan lenders, but each of these
commitments has a finite term. There can be no assurance that
these lenders will renew or extend their existing forward flow
commitments on terms that are favorable to us, if at all,
following their expiration.
In addition, as of September 30, 2003,
approximately 52% of the loans we serviced were owned by third
parties. To the extent that our third-party servicing clients
reduce the volume of student loans that we process on their
behalf, our income would be reduced, and, to the extent the
related costs could not be reduced correspondingly, our net
income could be materially adversely affected. Such volume
reductions occur for a variety of reasons, including if our
third-party servicing clients commence or increase internal
servicing activities, shift volume to another service provider,
perhaps because such other service provider does not compete
with the client in student loan originations and acquisitions or
exit the FFEL Program completely.
Student loans originated or acquired with the
proceeds of tax-exempt obligations issued prior to
October 1, 1993, as well as student loans acquired with the
sale proceeds of those student loans, receive only a portion of
the special allowance payment which they would otherwise be
entitled to receive, but are guaranteed a minimum rate of return
of 9.5% per year, less the applicable interest rate for the
student loan.
As of September 30, 2003, approximately
$1.7 billion of our student loan portfolio was comprised of
loans which are currently or were previously financed with the
proceeds of tax-exempt obligations issued prior to
October 1, 1993. Based upon provisions of the Higher
Education Act and related interpretations by the DOE, we believe
that, for each of these student loans, we will receive partial
special allowance payments, subject to the 9.5% minimum rate of
return. However, the DOE may change its regulations or its
interpretations of existing regulations, or the Higher Education
Act may be amended, to eliminate this special allowance payment
treatment. In this event, we would receive regular special
allowance payments, but with no minimum rate of return.
In the current low interest rate environment, we
generally receive partial special allowance payments and the
minimum 9.5% rate of return with respect to our eligible student
loans originated or acquired with qualifying tax-exempt
proceeds. In a higher interest rate environment, however, the
regular special allowance payments on loans not originated or
acquired with qualifying tax-exempt proceeds may exceed the
total subsidy to holders of eligible loans originated or
acquired with qualifying tax-exempt proceeds. Thus, in a higher
interest rate environment, these loans could have an adverse
effect upon our earnings.
16
Our servicing and operating processes are highly
dependent upon our information technology system infrastructure,
and we face the risk of business disruption if failures in our
information systems occur, which could have a material impact
upon our business and operations. We depend heavily on our own
computer-based data processing systems in servicing both our own
student loans and those of third-party servicing customers. On
January 1, 2002, we converted the great majority of the
student loans we service to a computer hardware and software
platform developed and maintained by an affiliated company. In
November 2002, we converted our remaining approximately
$3 billion of student loans to this same computer hardware
and software platform. Problems or errors of which we are not
currently aware may have occurred in connection with this
conversion, and problems or errors may occur in the future in
connection with the conversion of newly originated and acquired
loans to our platform. If servicing errors do occur, they may
result in a loss of the federal guarantee on the FFELP loans
that we service or in a failure to collect amounts due on the
student loans that we service. In addition, although we
regularly back up our data and maintain detailed disaster
recovery plans, we do not maintain fully redundant information
systems. A major physical disaster or other calamity that causes
significant damage to our information systems could adversely
affect our business. Additionally, loss of our information
systems for a sustained period of time could have a negative
impact on our performance and ultimately on our cash flow in the
event we were unable to process borrower payments.
We have entered into certain contractual
arrangements with entities controlled by Michael S. Dunlap, our
Chairman and Co-Chief Executive Officer and one of our principal
shareholders, and members of his family and, to a lesser extent,
with entities in which other directors and members of management
hold equity interests or board or management positions. Such
arrangements constitute a significant portion of our business
and include, among other things:
These arrangements may present potential
conflicts of interest.
Many of these arrangements are with Union Bank in
which Michael S. Dunlap owns an indirect interest and of which
he serves as non-executive chairman. Union Bank is a significant
source of student loans to us and a significant servicing
customer of ours.
In the nine months ended September 30, 2003
and in 2002, approximately 19% and 14%, respectively, of the
principal amount of the student loans added to our portfolio
were acquired from Union Bank, a portion of which loans were
originated by Union Bank and portion of which were originated by
third parties. We believe that the acquisitions were made on
terms similar to those made from unrelated entities. We intend
to maintain our relationship with Union Bank, which we believe
provides substantial benefits to us, although there can be no
assurance that all transactions in which we engage with Union
Bank are, or in the future will be, on terms that are no less
favorable than we could obtain from an unrelated third party.
For information on affiliated transactions, see Related
Party Transactions.
The ability of Union Bank to continue to do
business with us will depend on the development of Union
Banks own business, financial condition and results of
operations, which will be affected by competitive and other
factors beyond our control or knowledge. Because Union Bank is a
privately held company, an investor in our Class A common stock
might have little advance warning of problems
17
A corporation is considered to be a
personal holding company under the
U.S. Internal Revenue Code of 1986, as amended, which we
refer to as the Code, if (1) at least 60% of its adjusted
ordinary gross income is personal holding company
income (generally, passive income) and (2) at any
time during the last half of the taxable year more than half, by
value, of its stock is owned by five or fewer individuals, as
determined under attribution rules of the Code. If both of these
tests are met, a personal holding company is subject to an
additional tax on its undistributed personal holding company
income, currently at a 15% rate. Before this offering, more than
half the value of our stock was held by five or fewer
individuals, and immediately after this offering, we expect that
this will continue to be the case. In June 2003, we submitted a
request for a private letter ruling from the Internal Revenue
Service seeking a determination that our federally guaranteed
student loans qualify as assets of a lending or finance
business, as defined in the Code. Such a determination
would have enabled us to establish that a company holding such
loans does not constitute a personal holding company. Based on
its historical practice of not issuing private letter rulings
concerning matters that it considers to be primarily factual,
the Internal Revenue Service has indicated that it will not
issue the requested ruling, taking no position on the merits of
the legal issue. So long as more than half of our value
continues to be held by five or fewer individuals, if it were to
be determined that some portion of our federally guaranteed
student loans does not qualify as assets of a lending or
finance business, as defined in the Code, we could become
subject to personal holding company tax on our undistributed
personal holding company income. We continue to believe that
neither Nelnet, Inc. nor any of its subsidiaries is a personal
holding company. However, even if it were to be determined that
any of such entities is a personal holding company, we believe
that by utilizing intercompany distributions we can eliminate or
substantially eliminate our exposure to personal holding company
tax for at least 2003, 2004 and 2005, although we cannot assure
you that this will be the case.
Our direct marketing operations are or may become
subject to various federal and state do not call
list requirements. The Federal Trade Commission has recently
amended its rules to provide for a national do not
call registry. Under these new federal regulations, which
are currently being challenged in court, consumers may have
their phone numbers added to the national do not
call registry. Generally, we will be prohibited from
calling anyone on that registry. In September 2003,
telemarketers will have access to the registry and will be
required to compare their call lists against the national
do not call registry at least once every
90 days. We also will be required to pay a fee to access
the registry on a quarterly basis. Enforcement of the do
not call provisions will begin in the fall of 2003, and
the rule provides for fines of up to $11,000 per violation and
other possible penalties. This rule may restrict our ability to
market effectively our products and services to new customers.
Furthermore, compliance with this new rule may prove difficult,
and we may incur penalties for improperly conducting our
marketing activities.
Our inability to maintain strong relationships
with significant schools, branding partners, servicing
customers, guaranty agencies and software licensees could result
in loss of:
18
We cannot assure you that our forward flow
channel lenders or our branding partners will continue their
relationships with us. Loss of a strong relationship, like that
with a significant branding partner such as Union Bank, or with
schools such as the University of Phoenix and Nova Southeastern
University from which we directly or indirectly acquire a
significant volume of student loans, could result in an adverse
effect on our business. For example, Nova Southeastern
University, from which we purchased FFELP loans (through its
relationship with Union Bank) which comprised approximately 5.9%
of our total student loan volume in the nine months ended
September 30, 2003 and 7.4% in 2002, has informed us and
Union Bank, the direct acquirer of the student loans, of its
intent not to renew its sale commitment starting January 2007,
in order to make a request for a proposal to potential
purchasers.
Risks Related to This Offering
The market price of our Class A common stock
could decline as a result of sales of substantial amounts of our
Class A common stock in the public market after this
offering, or the perception that these sales could occur. In
addition, these factors could make it more difficult for us to
raise funds through future equity offerings. There will be
39,015,034 shares of our Class A common stock and
14,023,454 shares of our Class B common stock, which are
convertible on a one-for-one basis into shares of Class A
common stock, outstanding immediately after this offering.
All of the shares of our Class A common
stock sold in this offering will be freely transferable by
persons other than our affiliates without restriction or further
registration under the Securities Act of 1933. Substantially all
of the remaining shares of our Class A common stock,
including shares of Class A common stock issued upon
conversion of shares of Class B common stock, will be
eligible for immediate sale in the public market pursuant to
Rule 144 under the Securities Act of 1933 (other than
shares of common stock held by our affiliates which will be
subject to volume limitations) subject to 180-day lock-up
agreements with the underwriters and to our share retention
policy. See Description of Capital Stock Share
Retention Policy and Shares Eligible for Future
Sale Sales of Restricted Shares and
Lock-up Agreements.
We and our executive officers and directors and
all of our shareholders have entered into 180-day lock-up
agreements with the underwriters. The lock-up agreements
prohibit each of us from selling or otherwise disposing of
shares of common stock except in limited circumstances. The
lock-up agreements are only contractual agreements, and J.P.
Morgan Securities Inc. and Banc of America Securities LLC, at
their discretion, can waive the restrictions of any lock-up
agreement at an earlier time without prior notice or
announcement and allow any of us to sell shares of common stock.
If the restrictions in the lock-up agreement are waived, shares
of our Class A common stock will be available for sale into
the public market, subject to applicable securities laws and our
share retention policy, which could reduce the market price for
shares of our Class A common stock. Our share retention
policy prevents, subject to some exceptions, our officers or the
officers of any of our direct or indirect subsidiaries at or
above the level of executive director, defined for purposes of
this policy as Executives, from selling or otherwise disposing
of a number of shares of common stock in any calendar year in
excess of one-third of the number of shares of common stock
beneficially owned by such Executive on the first day of the
calendar year. See Description of Capital
Stock Share Retention Policy and Shares
Eligible for Future Sale Sales of Restricted
Shares.
Michael S. Dunlap, Stephen F. Butterfield and
persons related to them and trusts in which they have beneficial
interests have the right, subject to limitations, to make two
written demands of Nelnet for registration with the Securities
and Exchange Commission of all or part of their common stock.
These shareholders also have piggyback registration rights for
their common stock following the consummation of this offering.
See Description of Capital Stock Registration
Rights.
19
You will pay a price per share that substantially
exceeds the per share value of our tangible assets after
subtracting our total liabilities. As a result, if we were to
distribute our net tangible assets to our shareholders
immediately following this offering, you would receive less than
the amount you paid for your shares of our Class A common
stock. As of September 30, 2003, our net tangible book
value was $2.59 per share of common stock. After giving effect
to the issuance and sale of 8,000,000 shares of our
Class A common stock in this offering, and after deducting
the underwriting discounts and estimated offering expenses that
we will pay, our pro forma net tangible book value as of
September 30, 2003 would have been $4.79 per share of
common stock. This represents an immediate increase in net
tangible book value of $2.20 per share to existing shareholders
and an immediate dilution of $14.21 per share to new investors
purchasing shares of Class A common stock in this offering.
See Dilution.
Immediately after this offering, our executive
officers, directors and principal shareholders will beneficially
own, in the aggregate, 71.0% of our outstanding common stock and
possess 91.4% of the combined voting power of our common stock,
and Michael S. Dunlap and Stephen F. Butterfield, our
Co-Chief Executive Officers, persons related to them and trusts
in which they have beneficial interests will beneficially own an
aggregate of 60.7% of our common stock and possess 88.4% of the
combined voting power of our common stock. Each share of
Class A common stock has one vote and each share of
Class B common stock has ten votes on all matters to be
voted upon by our shareholders. As a result, our executive
officers, directors and principal shareholders, as a group, and
Messrs. Dunlap and Butterfield, by themselves, will be able
to control substantially all matters requiring approval by our
shareholders, including the election of all directors, and they
may do so in a manner with which you may not agree or which may
not be in the best interest of other shareholders. See
Description of Capital Stock Common
Stock.
As of the date of this prospectus, we cannot
specify with certainty the amounts we will spend on particular
uses from the net proceeds that we will receive from this
offering. Our management will have broad discretion in the
application of these net proceeds, but currently intends to use
them as described in Use of Proceeds. The failure by
our management to apply these net proceeds effectively could
adversely affect our ability to continue to develop our business.
Provisions of our charter and by-laws could
discourage potential acquisition proposals or make it more
difficult for a third party to acquire control of us. These
provisions include, among others, the authority of our board of
directors to create and issue rights entitling the holders
thereof to purchase our securities or the securities of any
other corporation. In addition, we are subject to the provisions
of the Nebraska Shareholders Protection Act, an anti-takeover
law, which may also dissuade a potential acquiror of our common
stock. These provisions may make it more difficult or expensive
for a third party to acquire a majority of our outstanding
voting stock or may delay, prevent or deter a merger,
acquisition, tender offer or proxy contest, which may negatively
affect our stock price. See Description of Capital
Stock Nebraska Anti-takeover Law and Certain Charter
and By-law Provisions.
Failure to comply with governmental
regulations or guaranty agency rules could harm our
business.
breaches of our internal control system, such as
a failure to adjust manual or automated servicing functions
following a change in regulatory requirements;
technological defects, such as a malfunction in
or destruction of our computer systems; or
fraud by our employees or other persons in
activities such as borrower payment processing.
We must satisfy certain requirements
necessary to maintain the federal guarantees of our FFELP loans
and we may incur penalties or lose our guarantees if we fail to
meet these requirements.
Failure to comply with restrictions on
inducements under the Higher Education Act could harm our
business.
Possible changes in legislation and
regulations could have a negative impact upon our
business.
Our derivative instruments may not be
successful in managing our interest rate risks.
We face liquidity risks due to the fact
that our operating and warehouse financing needs are
substantially provided by third-party sources.
Characteristics unique to asset-backed
securitization pose risks to our continued
liquidity.
Future losses due to defaults on loans held
by us present credit risk which could adversely affect our
earnings.
We could experience cash flow problems if a
guaranty agency defaults on its guarantee
obligation.
Failure of counterparties to perform under
credit enhancement agreements could harm our
business.
Competition created by the Federal Direct
Loan Program and from other lenders and servicers may adversely
impact our business.
Higher rates of prepayments of student
loans could reduce our profits.
Increases in consolidation loan activity by
us and our competitors present a risk to our loan portfolio and
profitability.
The volume of available student loans may
decrease in the future and may adversely affect our
income.
Special allowance payments on student loans
originated or acquired with the proceeds of certain tax-exempt
obligations may limit the interest rate on certain student loans
to our detriment.
Failures in our information technology
system could materially disrupt our business.
Transactions with affiliates and potential
conflicts of interest of certain of our officers and directors,
including one of our Co-Chief Executive Officers, pose risks to
our shareholders.
performance of servicing duties;
sales of student loans by such affiliates to us;
and
sales of student loan origination rights by such
affiliates to us.
Material problems affecting Union Bank
could have a material adverse effect on us.
Imposition of personal holding company tax
would decrease our net income.
Do not call registries may
limit our ability to market our products and
services.
Our inability to maintain our relationships
with significant branding partners and/or customers could have
an adverse impact on our business.
loan origination volume with borrowers
attending certain schools;
loan origination volume generated by some of our
branding partners;
loan and guarantee servicing volume generated by
some of our loan servicing customers and guaranty agencies; and
software licensing volume generated by some of
our licensees.
Future sales of our Class A common
stock may depress our stock price.
You will experience immediate and
substantial dilution as a result of this offering.
Our executive officers, directors and
principal shareholders own a large percentage of our common
stock and will be able to control substantially all corporate
decisions.
Our management will have broad discretion
in the use of net proceeds from this offering and may not use
them effectively.
Provisions of our charter and by-laws and
Nebraska law may inhibit a takeover, which could negatively
affect our stock price.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry that involve risks and uncertainties. The
20
21
USE OF PROCEEDS
Our net proceeds from this offering are estimated
to be $137.4 million, or $158.6 million if the
underwriters overallotment option is exercised in full,
after deducting the underwriting discounts and estimated
offering expenses that we will pay.
We intend to use the net proceeds from this
offering to originate and acquire interests in student loans
potentially including up to approximately $55 million to
fund a portion of the acquisitions described in Prospectus
Summary Potential Acquisitions, to repay any
revolving credit indebtedness outstanding at the closing of this
offering and for general corporate purposes, including capital
expenditures, working capital and possible acquisitions
complementary to our business. The indebtedness to be repaid is
revolving credit indebtedness with a weighted average interest
rate of 1.40% as of October 31, 2003, and that matures on
September 24, 2004. The proceeds of the indebtedness to be
repaid were used to refinance one of our operating lines of
credit. The borrowings under that line of credit were used to
finance our 2001 acquisition of EFS, Inc., an Indiana student
loan servicing and secondary market company. We do not expect
revolving credit indebtedness to be repaid with the net proceeds
of this offering to exceed $35 million, which was the
amount of such indebtedness outstanding on November 21,
2003. Except as described in Prospectus
Summary Potential Acquisitions, we currently
have no agreements or understandings with respect to any
material acquisition.
A portion of the net proceeds from this offering
may be applied to capital expenditures, which could include
costs incurred in connection with expanding our sales and
marketing forces. Such expansion may include up to the addition,
between August 2003 and the end of the first quarter of 2004, of
approximately 10 additional personnel, who market to schools and
are dispersed throughout the country. During the same time
period, we may also use a portion of the net proceeds from this
offering to add up to approximately 100 direct consumer
marketing personnel in Denver, Colorado, 70 in Lincoln, Nebraska
and 30 in Fredericksburg, Virginia.
The foregoing uses of the net proceeds from this
offering represent our current intentions based upon our present
plans and business condition. We retain broad discretion in the
allocation and use of the net proceeds of this offering and a
change in our plans or business condition could result in the
application of the net proceeds from this offering in a manner
other than as described in this prospectus. Pending the uses
described above, we intend to invest the net proceeds from this
offering in our student loan portfolio and/or short-term,
investment grade securities.
DIVIDEND POLICY
We have not declared or paid dividends on our
capital stock during 2001, 2002 or 2003 and do not intend to pay
any cash dividends on our common stock. Any future determination
to pay dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements and other factors that our
board of directors may deem relevant.
22
CAPITALIZATION
The following table sets forth our capitalization
as of September 30, 2003:
You should read this table in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and the related notes included elsewhere in this
prospectus.
23
on an actual basis; and
on an as adjusted basis to give effect to the
sale of 8,000,000 shares of our Class A common stock
in this offering and the use of a portion of the net proceeds
from this offering to repay revolving credit indebtedness;
$30 million of such indebtedness was outstanding on
September 30, 2003, and $35 million was outstanding on
November 21, 2003.
As of September 30, 2003
Actual
As adjusted
(in thousands, except share data)
$
10,892,347
$
10,862,347
50,000,000 shares authorized; no shares
issued or outstanding actual or as adjusted
600,000,000 shares authorized; 31,015,034
shares issued and outstanding actual and 39,015,034 as adjusted
310
390
15,000,000 shares authorized;
14,023,454 shares issued and outstanding actual and as
adjusted
140
140
43,219
180,499
87,553
87,553
131,222
268,582
$
11,023,569
$
11,130,929
DILUTION
If you invest in our Class A common stock,
your interest will be diluted to the extent of the difference
between the initial public offering price per share of our
Class A common stock and the pro forma net tangible book
value per share of our common stock after this offering.
Our net tangible book value as of
September 30, 2003 was approximately $116.8 million,
or $2.59 per share of common stock. Net tangible book value per
share represents total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding.
After giving effect to the issuance and sale of
8,000,000 shares of our Class A common stock in this
offering, and after deducting the underwriting discounts and
estimated offering expenses that we will pay, our pro forma net
tangible book value as of September 30, 2003 would have
been approximately $254.2 million, or $4.79 per share
of common stock. This represents an immediate increase in net
tangible book value of $2.20 per share to existing
shareholders and an immediate dilution of $14.21 per share
to new investors purchasing shares of Class A common stock
in this offering.
The following table illustrates this dilution:
The following table summarizes, as of
September 30, 2003, on a pro forma basis, the total number
of shares of common stock acquired from us for cash (in one case
for cash and services) during the past five years by existing
shareholders and the total consideration received by us and the
average price per share paid by them and by new investors
purchasing shares of Class A common stock in this offering,
before deducting the underwriting discounts and estimated
offering expenses that we will pay:
24
$
19.00
$
2.59
$
2.20
$
4.79
$
14.21
Shares purchased
Total consideration
Percent of
Average price
Number
total shares
Amount
Percent
per share
31,547,250
79.8
%
$
3,981,432
2.6
%
$
0.13
8,000,000
20.2
%
152,000,000
97.4
%
$
19.00
39,547,250
100.0
%
$
155,981,432
100.0
%
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated
financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial
statements and the related notes included elsewhere in this
prospectus. We derived the financial data as of
December 31, 2002 and 2001 and for the years ended
December 31, 2002, 2001 and 2000 from our audited financial
statements included elsewhere in this prospectus. We derived the
financial data as of December 31, 2000, 1999 and 1998 and
for the years ended December 31, 1999 and 1998 from our
audited financial statements not included in this prospectus. We
derived the financial data as of September 30, 2003 and for
the nine months ended September 30, 2003 and 2002 from our
unaudited financial statements included elsewhere in this
prospectus; and such unaudited interim financial statements
reflect all material adjustments, consisting only of normal
recurring accruals, which, in the opinion of management, are
necessary for a fair presentation. Results for interim periods
are not necessarily indicative of results to be expected during
the remainder of the fiscal year or for any future periods.
25
26
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
1999
1998
(dollars in thousands, except per share data)
$
133,827
$
156,296
$
190,900
$
114,565
$
64,853
$
59,538
$
19,855
8,875
3,319
5,587
3,925
1,370
1,800
899
124,952
152,977
185,313
110,640
63,483
57,738
18,956
74,470
80,189
103,899
93,172
66,015
13,988
15,129
21,909
7,713
8,431
5,387
7,506
(4,632
)
(579
)
(579
)
(2,962
)
178,827
172,928
234,701
195,438
131,196
47,417
22,086
29,951
74,788
75,841
13,125
6,733
15,708
4,376
16,771
47,853
48,538
7,147
4,520
9,671
2,879
$
0.37
$
1.06
$
1.08
$
0.16
$
0.11
$
0.42
$
0.14
45,019,823
44,971,290
44,971,290
44,331,490
41,187,230
22,863,444
21,000,000
$
3,173,325
$
2,113,134
$
2,665,786
$
1,448,607
$
1,027,498
$
2,015,263
$
700,317
$
9,432,513
$
8,056,047
$
8,171,898
$
5,135,227
$
3,388,156
$
1,750,097
$
1,147,842
$
18,341,409
$
17,393,686
$
17,863,210
$
16,585,295
$
11,971,095
$
$
1.76
%
2.38
%
2.15
%
2.09
%
1.76
%
2.60
%
1.24
%
0.21
%
0.70
%
0.52
%
0.12
%
0.12
%
0.32
%
0.21
%
17.8
%
67.1
%
49.2
%
11.7
%
8.2
%
99.6
%
109.2
%
0.073
%
0.036
%
0.047
%
0.042
%
0.055
%
0.033
%
0.022
%
As of
As of December 31,
September 30,
2003
2002
2001
2000
1999
1998
(in thousands)
$
34,650
$
40,155
$
36,440
$
23,263
$
26,497
$
11,636
10,059,920
8,559,420
7,423,872
3,585,943
2,989,985
1,814,625
11,152,997
9,766,583
8,134,560
4,021,948
3,302,098
2,739,605
10,892,347
9,447,682
7,926,362
3,934,130
3,265,532
2,718,705
131,222
109,122
63,186
54,161
15,380
4,038
(a)
Initial loans originated and acquired through
various channels, including originations through our direct
channel and acquisitions through our branding partner channel,
our forward flow channel and the secondary market.
(b)
Net interest margin is computed by dividing net
interest income by the sum of average student loans and the
average balance of other interest earning assets.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF
You should read the following discussion and
analysis by our management of our financial condition and
results of operations in conjunction with our Selected
Consolidated Financial Data and our financial statements
and the related notes included elsewhere in this
prospectus.
Overview
We are a vertically integrated education finance
company, with over $11 billion in total assets, making us
one of the leading education finance companies in the country.
We are focused on providing quality products and services to
participants in the education finance process. Headquartered in
Lincoln, Nebraska, we originate, hold and service student loans,
principally loans originated under the Federal Family Education
Loan Program. For 2002, we were the fourth largest holder and
second largest servicer of FFELP loans. In addition, we,
together with our branding partners, originated and acquired
approximately $3.2 billion of student loans in the nine
months ended September 30, 2003 and $2.7 billion of
student loans in 2002, making us a leading originator and
acquirer of student loans.
Our business is comprised of four primary product
and service offerings:
27
In accordance with accounting principles
generally accepted in the United States, our asset management
and student loan servicing offerings constitute reportable
operating segments. Our guarantee servicing and servicing
software offerings are operating segments that do not meet the
quantitative thresholds, and, therefore, are included as other
segments that do not meet the reportable segment criteria. In
the nine months ended September 30, 2003, our asset
management, student loan servicing and other segments generated
50.8%, 40.1% and 9.1%, respectively, of our total segment
revenues and 73.2%, 23.3% and 3.5%, respectively, of our segment
net income. For additional information, see note 19 of the
notes to consolidated financial statements.
Our student loan portfolio has grown
significantly through origination and acquisition. With the
development of our fully integrated platform, we are positioned
for sustained organic growth. We originated and acquired
$3.2 billion of student loans in the nine months ended
September 30, 2003 and $2.7 billion in student loans
during 2002 through various channels, including:
In addition, we also acquire student loans
through spot purchases and whole-company acquisitions, which
accounted for 9.7% and 18.1% of student loans that we originated
and acquired in the nine months ended September 30, 2003
and in 2002, respectively. We have increased our student loan
portfolio by $6.4 billion over the last two years and nine
months, including $2.9 billion of loans acquired in
subsidiary acquisitions.
Our student loan portfolio and asset growth will
be significant factors in determining future growth in our net
interest income as our primary source of income is interest
earned on our student loan portfolio. If our student loan
portfolio continues to grow and our net interest margin remains
relatively stable, we expect our net interest income to increase
after adjusting for any variable rate floor income. Interest
income, and to a certain extent our net income, is also
dependent upon the relative level of interest rates. While we
expect our student loan portfolio and interest earning assets to
continue to grow, which should cause interest income and
earnings growth, we do not expect to continue to grow at
historical levels. Specifically, our net income for the nine
months ended September 30, 2003 decreased
$31.1 million, or 65.0%, as compared to the comparable
period in 2002. Net interest income decreased by
$22.5 million, or 14.4%, for the nine months ended
September 30, 2003 as compared to the comparable period in
2002. However, net interest income, excluding the effects of
variable rate floor income, increased approximately
$11.9 million, or 10.9%, for the nine months ended
September 30, 2003 as compared to the comparable period in
2002. This increase in net interest income, excluding variable
rate floor income, has resulted from the portfolio growth
previously discussed. Variable rate floor income occurs in
certain declining interest rate environments, and we cannot
predict whether these interest rate environments will occur in
the future. We generally do not anticipate receiving or plan to
receive variable rate floor income.
We have positioned ourself for growth by building
a strong foundation through mergers and acquisitions of related
and unrelated entities. Although our assets and loan portfolios
increased through these transactions, a key aspect of each
transaction was its impact on our prospective organic growth and
the development of our integrated platform of services. As a
result of our rapid growth, the development of
28
Our earnings and earnings growth are directly
affected by the size of our portfolio of student loans, the
interest rate characteristics of our portfolio, the costs
associated with financing and managing our portfolio and the
costs associated with the origination and acquisition of the
student loans in the portfolio. See Liquidity and Capital
Resources Student Loan Portfolio.
We generate the majority of our earnings from the
spread between the yield we receive on our portfolio of student
loans and the cost of funding these loans. This spread income is
reported on our income statement as net interest income. The
amortization and write-offs of premiums or discounts, including
capitalized costs of origination, the consolidation loan rebate
fee and yield adjustments from borrower benefit programs are
netted against loan interest income on our income statement. The
amortization and write-offs of bond issuance costs are included
in interest expense on our income statement.
Our portfolio of FFELP loans generally earns
interest at the higher of a variable rate based on the special
allowance payment, or SAP, formula set by the DOE, and the
borrower rate, which is fixed over a period of time. The SAP
formula is based on an applicable index plus a fixed spread that
is dependent upon when the loan was originated and the
loans repayment status. Depending on the type of student
loan and when the loan was originated, the borrower rate is
either fixed to term or is reset to a market rate each
July 1. Loans that reset annually on each July 1 can
generate excess spread income as compared to the rate based on
the SAP formula in certain declining interest rate environments.
We refer to this additional income as variable rate floor income
and it is included in loan interest income as described further
in Results of Operations below.
Historically, we have earned excess spread, or variable rate
floor income, in declining interest rate environments as
recently as our most recent fiscal year. Since the rates are
reset annually, we view these earnings as temporary and not
necessarily sustainable. Our ability to earn variable rate floor
income in the future periods is dependent upon the interest rate
environment following the annual reset of borrower rates, and we
cannot assure that such environment will exist in the future.
29
The table below sets forth the weighted average
borrower interest rate and weighted average lender interest rate
for all variable-rate student loan assets for the period
indicated.
Because we generate the majority of our earnings
from the spread between the yield we receive on our portfolio of
student loans and the cost of financing these loans, the
interest rate sensitivity of our balance sheet is very important
to our operations. The current and future interest rate
environment can and will affect our interest earnings, net
interest income and net income. The effects of changing interest
rate environments are further outlined in
Interest Rate Risk below.
On those FFELP loans with fixed to term borrower
rates, primarily consolidation loans, we earn interest at the
greater of the borrower rate or a variable rate based on the SAP
formula. Since we finance the majority of our student loan
portfolio with variable-rate debt, we may earn excess spread on
these loans for an extended period of time.
On most consolidation loans, we must pay a 1.05%
per year rebate fee to the DOE. Those consolidation loans which
have variable interest rates based on the SAP formula earn a
yield less than that of a Stafford loan. Those consolidation
loans which have fixed interest rates less than the sum of 1.05%
and the variable rate based on the SAP formula also earn a yield
less than that of a Stafford loan. As a result, as consolidation
loans matching these criteria become a larger portion of our
loan portfolio, there will be a lower yield on our loan
portfolio in the short term. However, due to the extended terms
of consolidation loans, we expect to earn the yield on these
loans for a longer duration, making them beneficial to us in the
long term.
A portion of our FFELP loan portfolio, with an
outstanding balance of $1.4 billion as of
September 30, 2003, is comprised of loans which were
previously financed with tax-exempt obligations issued prior to
October 1, 1993. Based upon provisions of the Higher
Education Act and related interpretations by the DOE, we believe
that we may be entitled to receive special allowance payments on
these loans providing us with a 9.5% minimum rate of return. To
date, we have not recognized interest income generated by these
loans based on the 9.5% minimum rate of return. We have asked
the DOE to confirm that we are allowed to recognize the income
based on the 9.5% minimum rate of return. We have deferred
recognition of this excess interest income pending satisfactory
resolution of this issue. As of September 30, 2003, the
amount of excess interest income deferred totaled approximately
$20.3 million. Since we did not refinance loans with the
aforementioned tax-exempt obligations until 2003, all of this
deferred income was recorded this year.
In declining interest rate environments, we can
earn significant amounts of variable rate floor income. The more
drastic the reduction in rates subsequent to the July 1
annual borrower interest rate reset date, the greater our
opportunity to earn such income. Conversely, as the decline in
rates abates, or in environments where interest rates are
rising, our opportunity to earn variable rate floor income can
be reduced, in some cases substantially. This, for example,
occurred in the nine months ended September 30, 2003 as
compared with the comparable period of the prior year. Although
we have been in a historically low interest rate environment,
interest rates have been rising since the second quarter of
2003, possibly from a recovering economy. As interest rates
increase, we incur greater financing costs on our variable rate
financings. An increase in our financing costs, in turn,
decreases the spread between the rate of our FFELP loans (which
reset annually) and the rate of our financings, ultimately
causing a decrease in variable rate floor income.
Investment interest income includes income from
unrestricted interest-earning deposits and funds in our special
purpose entities for our asset-backed securitizations.
30
We maintain an allowance for loan losses
associated with our student loan portfolio at a level that is
based on the performance characteristics of the underlying
loans. We analyze the allowance separately for our FFELP loans
and our private loans.
The loan loss allowance attributable to FFELP
loans consists of two components: a risk sharing reserve and a
reserve for rejected guaranty agency claim losses, caused mainly
by servicing defects. The risk sharing reserve is an estimate
based on the amount of loans subject to the 2% risk sharing and
on the historical experience of losses. The rejected claim loss
reserve is based on the historical trend of ultimate losses on
loans initially rejected for reimbursement by guaranty agencies.
FFELP loans are guaranteed as to both principal and interest
and, therefore, continue to accrue interest until the time they
are paid by the guaranty agency. Once a FFELP loan is rejected
for claim payment, our policy is to continue to pursue recovery
of principal and interest, whether by curing the reject or
collecting from the borrower. We attempt to cure the rejected
claims through our collection efforts. As of September 30,
2003, we had an allowance for loan losses on FFELP loans
aggregating approximately $11.0 million.
In determining the private loan loss allowance,
we divide the portfolio into various categories, such as the
type of program, loan status and months into repayment. We then
estimate defaults based on the borrowers credit profiles,
net of estimated recoveries. We place a private loan on
non-accrual status and charge off the loan when the collection
of principal and interest is 120 days past due. We utilize
this data to estimate the amount of losses in the portfolio, net
of subsequent collections, that are probable of occurrence. As
of September 30, 2003, we had an allowance for loan losses
on private loans of approximately $4.7 million.
The evaluation of the provision for loan losses
is inherently subjective, as it requires material estimates that
may be subject to significant changes. The provision for loan
losses reflects the activity for the applicable period and
provides an allowance at a level which our management believes
is adequate to cover probable losses inherent in the loan
portfolio.
We also earn fees and generate income from other
sources, including principally loan servicing, guarantee
servicing and licensing fees on our software products. Loan
servicing fees are determined according to individual agreements
with customers and are calculated based on the dollar value or
number of loans or accounts serviced for each customer.
Guarantee servicing fees are earned as a result of our providing
system software, hardware and telecommunication support,
borrower and loan updates, default aversion tracking services,
claim processing services and post-default collection services
to guaranty agencies. Guarantee servicing fees are calculated
based on the number of loans serviced or amounts collected.
Software services income includes software license and
maintenance fees associated with student loan software products
as well as certain loan marketing fees. We also charge borrowers
fees on certain private loans, both at origination and when the
loan enters repayment, which help to compensate for anticipated
loan losses. In addition, we earn fee income on some of our
securitization transactions through UFS Securities LLC, our
wholly owned broker-dealer, or UFS Securities, which effectively
decreases our costs associated with accessing this market. UFS
Securities sells certain tranches of our auction rate securities
in a co-broker dealer arrangement with certain third-party
broker-dealers. UFS Securities is paid the same amount of fees
as the third-party broker-dealers for selling the auction rate
securities. Since UFS Securities, which was acquired in
August 2003, is our wholly owned subsidiary, these sales
and the fees received for the sales by our wholly owned
subsidiary will have the effect of reducing our overall costs on
the sales of our auction rate securities.
As we expand our student loan origination and
acquisition activities, we may face increased competition with
some of our servicing customers. In the past, including in one
case in 2003, servicing customers have terminated their
servicing relationships with us. Furthermore, we could in the
future lose more servicing customers as a result of such
increased competition. However, the vast majority of our
servicing agreements provide for life-of-loan servicing of the
existing loans, and, as such, we do not expect
31
One of our guarantee servicing customers recently
notified us of its intention not to renew its servicing
contract. The loss of this customer is not expected to have a
material effect on our results of operations due to the relative
portion of our earnings attributable to guarantee servicing
revenue and the size of the individual customer.
The income and revenues provided through our
servicing software operations have increased in recent years
with the acquisitions of Idaho Financial Associates, Inc. and
Charter Account Systems, Inc. To the extent that our servicing
software license and maintenance revenues continue to increase,
we believe that such increase will primarily come from our
existing customer base.
Operating expenses include costs incurred to
manage and administer our student loan portfolio and our
financing transactions, costs incurred to generate and acquire
student loans and general and administrative expenses, which
include corporate overhead. Operating expenses also include
amortization of intangible assets related to acquisitions.
In addition to the impact of growth of our
student loan portfolio, our results of operations and financial
condition may be materially affected by, among other things,
changes in:
See Risk Factors for more information
on the impact of these factors on our results of operations and
financial condition.
Results of Operations
Net interest income.
Loan interest income decreased by
$41.5 million, or 13.3%, during the nine months ended
September 30, 2003 as compared to the comparable period in
2002. This decrease was a result of changes in the interest rate
environment, in the pricing characteristics of our student loan
assets and in the size of our student loan portfolio. Lower
interest rates in the nine months ended September 30, 2003
caused a decrease in the average net yield on our student loan
portfolio to 3.82% from 5.16% for the comparable period in 2002.
Variable rate floor income decreased approximately $34.3 million
to approximately $12.7 million during the nine months ended
September 30, 2003 from approximately $47.0 million for the
comparable period in 2002, due to the timing and relative change
in interest rates during the periods. Essentially, prevailing
interest rates declined drastically subsequent to the
July 1, 2001 annual borrower interest rate reset date
compared to their less substantial decline following the reset
of rates on July 1, 2002. Consequently, we realized
significantly less variable rate floor income during the nine
months ended September 30, 2003 than we did in the
comparable period in 2002. The weighted average interest rate on
our student loan portfolio decreased during the nine months
ended September 30, 2003 due to lower interest rates,
together with the addition of lower yielding consolidation
loans. The lower weighted average loan interest rate resulted in
a reduction in loan interest income of approximately
$37.0 million. Consolidation loan activity also increased
the amortization and write-offs of acquisition costs
32
Investment interest income decreased
$3.2 million, or 21.3%, during the nine months ended
September 30, 2003 as compared to the comparable period in
2002. This decrease was due to the termination of a joint
venture with a large financial institution in the second quarter
of 2003.
Interest expense on bonds and notes payable
decreased $22.3 million, or 13.1%, during the nine months
ended September 30, 2003 as compared to the comparable
period in 2002. This decrease occurred despite an increase in
average total debt of approximately $1.4 billion,
specifically an increase in average variable-rate debt of
$1.5 billion, which increased interest expense by
approximately $16.8 million. The reduction in interest
rates, specifically LIBOR and auction rates, decreased our
average cost of funds to 1.92% in the nine months ended
September 30, 2003 from 2.55% in the nine months ended
September 30, 2002. As a result, interest expense decreased
approximately $34.7 million during the nine months ended
September 30, 2003 as compared to the comparable period in
2002. We reduced average fixed-rate debt by $182.3 million
during the nine months ended September 30, 2003, which
decreased our overall interest expense by approximately
$8.0 million as compared to the comparable period in 2002.
Interest expense on bonds and notes payable during the nine
months ended September 30, 2003 includes additional
amortization and write-offs of bond issuance costs of
$2.6 million incurred as a result of refinancing certain
debt transactions.
As a result of the foregoing, net interest income
decreased by $22.5 million, or 14.4%, during the nine months
ended September 30, 2003 as compared to the comparable
period in 2002. Our net interest margin decreased to 1.76%
during the nine months ended September 30, 2003 from 2.38%
for the comparable period in 2002. Net interest income,
excluding the effects of variable rate floor income of
$12.7 million during the nine months ended
September 30, 2003 and $47.0 million for the
comparable period in 2002, increased approximately
$11.9 million to approximately $121.2 million during
the nine months ended September 30, 2003 from approximately
$109.3 million for the comparable period in 2002.
Provision for loan losses.
The provision for loan losses for
FFELP and private loans increased $5.6 million, or 167.4%,
during the nine months ended September 30, 2003 as compared
to the comparable period in 2002. The provision for loan losses
for FFELP loans increased $1.0 million during the nine
months ended September 30, 2003 compared to the comparable
period in 2002 due to the increase in the size of our FFELP loan
portfolio. The provision for loan losses for private loans
increased $4.5 million during the nine months ended
September 30, 2003 compared to the comparable period in
2002. This increase was due to a provision of $4.0 million
for an identified pool of private loans based on aging,
delinquency and performance of such identified pool. This pool
of private loans was limited to borrowers attending a single
school, and, in early 2002, we ceased making private loans to
borrowers attending that school. The remaining increase of
$500,000 was due to the increase in size of our private loan
portfolio.
Other income.
Total
other income decreased $10.9 million, or 11.5%, during the
nine months ended September 30, 2003 as compared to the
comparable period in 2002. Loan servicing and other fee income
decreased $5.7 million, or 7.1%, software services and
other income decreased $1.1 million, or 7.5%, and
derivative market value adjustment loss increased
$4.1 million during the nine months ended
September 30, 2003 as compared to the comparable period in
2002.
Loan servicing and other fee income decreased due
to the reduction in the number and dollar amount of loans we
serviced for third parties. Total third-party loan servicing
volume decreased $718.6 million, or 7.0%, during the nine
months ended September 30, 2003 as compared to the
comparable period in 2002. This resulted in a decrease in loan
servicing income of $9.6 million during the nine months
ended September 30, 2003 as compared to the comparable
period in 2002. This decrease in income was offset by
33
Software services and other income decreased
$6.2 million during the nine months ended
September 30, 2003 as compared to the comparable period in
2002 due to additional income earned on a marketing contract
during the nine months ended September 30, 2002 that was
terminated in the fourth quarter of 2002. This decrease was
offset by an increase of $2.0 million due to the
acquisitions of Charter Accounts Systems, Inc. in May 2002 and
Idaho Financial Associates in January 2002 and an increase in
other income of $847,000 due to the acquisition of UFS
Securities in August 2003. In addition, late fee income on
borrower payments increased $1.2 million during the nine
months ended September 30, 2003 as compared to the
comparable period in 2002.
The derivative market value adjustment loss
increased as we utilized derivative instruments in the total
notional amount of $3.5 billion in the three months ended
September 30, 2003 to provide economic hedges to protect
against the impact of adverse changes in interest rates. The
derivative market value adjustment loss of $579,000 in the nine
months ended September 30, 2002 was due to the interest
rate swap in the notional amount of $500 million entered
into in 2001 that expired in the second quarter of 2002. See
Liquidity and Capital Resources
Interest Rate Risk.
Operating expenses.
Total operating expenses increased
$5.9 million, or 3.4%, during the nine months ended
September 30, 2003 as compared to the comparable period in
2002. Salaries and benefits increased $13.0 million, or
16.2%, and total other expenses decreased $7.1 million, or
7.6%, during the nine months ended September 30, 2003 as
compared to the comparable period in 2002.
Salaries and benefits increased as a non-cash
stock compensation expense of $5.2 million was recognized
in the three months ended September 30, 2003 equal to the
difference between the product of the estimated initial public
offering price and the number of shares issued in March 2003 and
the total price paid by the employees. In addition, salaries
expense increased $3.9 million during the nine months ended
September 30, 2003 as compared to the comparable period in
2002 due to the termination of consulting and employment
agreements of six employees. The remaining increase is due to
the increased personnel from the acquisitions previously
described.
The net decrease in total other expenses can be
attributed to an increase of $1.2 million in the
depreciation and amortization of furniture, equipment and
leasehold improvements in the nine months ended
September 30, 2003 as compared to the comparable period in
2002. This increase was offset by a decrease in the amortization
of intangible assets of $8.5 million due to certain
intangible assets having been fully amortized in 2002. Trustee
and other debt-related fees increased $2.5 million, or
19.8%, during the nine months ended September 30, 2003 as
compared to the comparable period in 2002 as a result of a
$1.4 billion increase in average total debt outstanding.
Occupancy and communications expense increased
$1.0 million, or 11.9%, during the nine months ended
September 30, 2003 as compared to the comparable period in
2002 as a result of increased telemarketing activities related
to consolidation loan originations. Advertising and marketing
expenses decreased $3.7 million, or 35.5%, during the nine
months ended September 30, 2003 as compared to the
comparable period in 2002 due to a $2.4 million expense
incurred on a large marketing contract that was terminated in
December 2002. The remaining decrease was due to large purchases
of marketing materials in the three months ended
September 30, 2002 related to the increased marketing
activities related to consolidation mailings. Professional
services increased $2.6 million, or 42.7%, during the nine
months ended September 30, 2003 as compared to the
comparable period in 2002 as a result of outsourcing selected
borrower payment processing activities in the three months ended
June 30, 2002. Consulting fees and support services to
related parties decreased $3.7 million, or 54.3%, during the
nine months ended September 30, 2003 as compared to the
comparable period in 2002 as a result of a $1.4 million
decrease in consulting fees due to the termination of a large
consulting agreement in December 2002. The remaining decrease
was due to the conversion related fees paid in 2002 for the
systems conversion that occurred in November 2002. Postage and
distribution expenses increased $2.3 million, or 29.8%,
during the nine months ended September 30, 2003 as compared
to the comparable period in 2002 due to an increase in mass
mailings to promote origination of Stafford and consolidation
loans.
34
Income tax expense.
Income tax expense decreased
$13.8 million, or 51.0%, during the nine months ended
September 30, 2003 from $27.1 million for the
comparable period in 2002, due to the decrease in income before
income taxes. Our effective tax rate was 44.4% for the nine
months ended September 30, 2003 as compared to 36.3% for
the comparable period in 2002. The increase in the effective
rate principally was a result of the non-cash stock compensation
expense for financial statement purposes that was not deductible
for tax purposes.
Net income.
Net
income decreased to $16.8 million for the nine months ended
September 30, 2003 from $47.9 million as compared to
the comparable period in 2002, for the reasons discussed above.
Net interest income.
Loan interest income increased by $86.7 million, or 27.2%,
for 2002 as compared to 2001. This increase was the result of
changes in the interest rate environment, in the pricing
characteristics of our student loan assets and in the size of
our student loan portfolio. Lower interest rates in 2002 caused
a decrease in the average net yield on our student loan
portfolio to 4.96% in 2002 from 6.20% in 2001. Variable rate
floor income increased approximately $19.9 million to
approximately $49.8 million for 2002 from approximately
$29.9 million for 2001, due to the timing and relative
change in interest rates during the periods. The weighted
average interest rate on our student loan portfolio decreased in
2002 due to the lower interest rates, together with the addition
of lower yielding consolidation loans. The lower weighted
average loan interest rate resulted in a reduction in loan
interest income of approximately $65.2 million.
Consolidation loan activity also increased the amortization and
write-offs of acquisition costs, reducing loan interest income
an additional approximately $40.4 million in 2002. The
reduction in loan interest income resulting from the decline in
interest rates and the reduction in variable rate floor income
was partially offset by an increase in our portfolio of student
loans. The average student loan portfolio increased by
approximately $3.0 billion, or 59.1%, for 2002 as compared
to 2001, which increased loan interest income by approximately
$192.1 million for 2002 as compared to 2001, including the
increase related to variable rate floor income.
Investment interest income increased
$4.0 million, or 23.6%, for 2002 as compared to 2001, due
to an approximately $360.1 million increase in average
investment and interest-earning deposits during 2002.
Interest expense on bonds and notes payable
increased $14.3 million, or 6.5%, for 2002 as compared to
2001. Average variable-rate debt increased $4.1 billion,
which resulted in an increase in interest expense of
$85.9 million. The reduction in short-term interest rates,
specifically LIBOR, decreased our average cost of funds to 2.59%
in 2002 from 3.95% in 2001. As a result, interest expense
decreased approximately $83.1 million in 2002 as compared
to 2001. We increased average fixed-rate debt by
$199.9 million during 2002, which increased our overall
interest expense by approximately $12.0 million as compared
to 2001. In 2002, we first accessed the term securitization
market. While the interest expense associated with term
securitizations is less than that associated with our other debt
instruments, the incremental benefit in 2002 was negligible.
While we expect that we will continue to access the term
securitization markets, we cannot predict whether the benefits
of our accessing those markets will be material to our results
of operations in future periods.
As a result of the foregoing, net interest income
increased by $76.3 million, or 66.6%, for 2002 as compared
to 2001. Our net interest margin increased to 2.15% for 2002
from 2.09% for 2001. Net interest income, excluding the effects
of variable rate floor income of $49.8 million for 2002 and
$29.9 million for 2001, increased $56.4 million to
$141.1 million for 2002 from $84.7 million for 2001.
Provision for loan
losses.
The provision for loan losses
for FFELP and private loans increased $1.7 million, or
43.3%, for 2002 as compared to 2001. The provision for loan
losses for FFELP loans decreased $100,000, or 3.0%, for 2002 as
compared to 2001. The provision for loan losses for private
loans increased $1.8 million, or 242.9%, for 2002 as
compared to 2001. This increase was due to a provision of
approximately $1.6 million for an identified pool of
private loans based on aging, delinquency and performance of
such identified pool. This pool of private loans was limited to
loans to borrowers attending a single school, and, in early
2002, we ceased making private loans to borrowers attending that
school. The
35
Other income.
Total
other income increased $27.3 million, or 27.9%, in 2002 as
compared to 2001. Loan servicing and other fee income increased
$10.7 million, or 11.5%, software services and other income
increased $14.2 million, or 184.1%, and derivative market
value adjustment loss decreased $2.4 million, or 80.5%, in
2002 as compared to 2001.
Loan servicing and other fee income increased due
to growth in the loan servicing portfolio of $817.5 million
in 2002 and the acquisition of EFS, Inc., which increased the
servicing portfolio by an additional $1.0 billion in 2002.
The change in the loan servicing volume resulted in an increase
in loan servicing income of $1.3 million. In addition, we
acquired GuaranTec, LLP in June 2001 resulting in an increase of
$8.7 million in guarantee servicing income in 2002 as
compared to 2001.
Software services and other income increased due
to the acquisitions of Charter Account Systems, Inc. in May 2002
and Idaho Financial Associates, Inc. in January 2002. These
acquisitions resulted in an increase in income of approximately
$6.2 million in 2002 compared to 2001. Additional income of
$6.6 million was earned on a marketing contract in 2002
that was not in existence in 2001. Other income also included an
increase in administrative services income of $1.2 million
in 2002 as compared to 2001 from the support services provided
to FirstMark Services, LLC, which was not in existence in 2001.
The derivative market value adjustment loss
decreased as the interest rate swap entered into in 2001 expired
in June 2002.
Operating expenses.
Total operating expenses increased $39.3 million, or 20.1%,
in 2002 as compared to 2001. Salaries and benefits increased
$29.5 million, or 38.1%, and total other expenses increased
$11.3 million, or 10.1%, in 2002 as compared to 2001. The
increase in salaries and benefits is due to the following: the
acquisition of EFS, Inc. in December 2001, which increased
salaries and benefits by $11.2 million, the acquisition of
Idaho Financial Associates, Inc. in January 2002, which
increased salaries and benefits by $7.9 million and the
acquisition of Charter Account Systems, Inc. in May 2002, which
increased salaries and benefits by $1.0 million. The
remaining increase in salaries and benefits is due to an
increase in support services personnel and the rising cost of
employee benefits.
The net increase in total other expenses can be
attributed to an increase in depreciation and amortization of
$3.9 million, or 13.5%, in 2002 as compared to 2001, which
includes an increase in the amortization of intangible assets of
$3.4 million due to acquisitions of EFS, Inc., Idaho
Financial Associates, Inc. and Charter Account Systems, Inc. in
December 2001, January 2002 and May 2002, respectively. The
remaining increase in depreciation and amortization was a result
of increased depreciation and amortization of furniture,
equipment and leasehold improvements in 2002 as compared to
2001, due to the acquisitions previously described. Trustee and
other debt related fees increased $3.8 million, or 29.5%,
in 2002 as compared to 2001, as a result of the
$4.3 billion increase in average total debt outstanding.
Occupancy and communications expense increased
$3.9 million, or 52.6%, in 2002 as compared to 2001 due to
the acquisitions previously described. Advertising and marketing
expenses increased $1.4 million, or 13.7%, in 2002 as
compared to 2001 due to an increase in consolidation loan
origination activities. Professional services increased
$5.9 million, or 175.3%, in 2002 as compared to 2001 as a
result of technology-related consulting in 2002 that did not
exist in 2001. Consulting fees and support services to related
parties decreased $16.6 million, or 56.4%, in 2002 as
compared to 2001. This decrease can be attributed to a
$9.7 million decrease due to the termination of the support
services contract for InTuition Holdings, Inc. and GuaranTec,
LLP in December 2001, a $4.8 million decrease in contracted
technology services obtained from 5280 Solutions, Inc. related
to the consolidation of our servicing platform in December 2001
and a $2.1 million decrease as a result of a reduction in
consulting fees for services provided by related parties. Other
expenses increased $4.0 million, or 21.5%, due to the
acquisitions previously described.
Income tax expense.
Income tax expense increased to $27.7 million for 2002 as
compared to $5.4 million in 2001 due to the increase in
income before income taxes in 2002. Our effective tax rate was
36.5% for 2002 as compared to 41.0% in 2001. The 2002 effective
tax rate was lower than the 2001 rate
36
Net income.
Net
income increased to $48.5 million for 2002 from $7.1 million for
2001, for the reasons discussed above.
Net interest income.
Loan interest income increased by $37.4 million, or 13.3%,
for 2001 as compared to 2000. This increase was the result of
changes in the interest rate environment, in the pricing
characteristics of our student loan assets and in the size of
our student loan portfolio. Lower interest rates in 2001 caused
a decrease in the average net yield on our student loan
portfolio to 6.20% in 2001 from 8.29% in 2000. Variable rate
floor income increased approximately $29.9 million in 2001,
due to the timing and relative change in interest rates during
the periods. There was no variable rate floor income in 2000.
The weighted average interest rate on our student loan portfolio
decreased in 2001 due to the lower interest rates, together with
the addition of lower yielding consolidation loans. The lower
weighted average interest rate resulted in a reduction in loan
interest income of approximately $75.0 million.
Consolidation loan activity also increased the amortization and
write-offs of acquisition costs, reducing loan interest income
an additional $3.5 million in 2001. The reduction in loan
interest income resulting from a decline in interest rates and
reduction in variable rate floor income was partially offset by
an increase in our portfolio of student loans. The average
student loan portfolio increased by approximately
$1.7 billion, or 51.6%, for 2001 as compared to 2000, which
increased loan interest income by approximately
$117.2 million for 2001 as compared to 2000, which includes
the increase related to variable rate floor income.
Investment interest income decreased by
$1.1 million, or 6.4%, for 2001 as compared to 2000, due to
the decrease in interest rates on invested funds.
Interest expense on bonds and notes payable
decreased $13.4 million, or 5.7%, for 2001 as compared to
2000. The decline in short-term interest rates, specifically
LIBOR, decreased our average cost of funds to 3.95% in 2001 from
6.04% in 2000. As a result, interest expense decreased
approximately $72.8 million for 2001 as compared to 2000.
Additional average debt of $1.2 million issued during 2001
increased our interest expense by approximately
$57.0 million for 2001 as compared to 2000.
As a result of the foregoing, net interest income
increased by $49.7 million, or 76.7%, for 2001 as compared
to 2000. Our net interest margin increased to 2.09% for 2001
from 1.76% for 2000. Net interest income, excluding the effects
of variable rate floor income of $29.9 million for 2001 and
$0 for 2000, increased approximately $19.8 million to
approximately $84.7 million for 2001 from approximately
$64.9 million for 2000.
Provision for loan
losses.
The provision for loan losses
for FFELP and private loans increased $2.6 million, or
189.8%, for 2001 as compared to 2000. The provision for loan
losses for FFELP loans increased $1.9 million, or 135.7%,
for 2001 as compared to 2000. The provision for loan losses for
private loans increased $700,000, or 100.0%, for 2001 as
compared to 2000. This increase was due to a provision of
approximately $400,000, for an identified pool of private loans
based on aging, delinquency and performance of such identified
pool. This pool of private loans was limited to loans to
borrowers attending a single school, and, in early 2002, we
ceased making private loans to borrowers attending that school.
The remaining combined increase of $2.2 million, or 160.6%,
was due to the increase in size of our FFELP and private loan
portfolios.
Other Income.
Total
other income increased $23.5 million, or 31.5%, in 2001 as
compared to 2000. Loan servicing and other fee income increased
$27.2 million, or 41.1%, software services and other income
decreased $718,000, or 8.5%, and derivative market value
adjustment loss increased $3.0 million, or 100.0%, in 2001
as compared to 2000.
Loan servicing and other fee income increased due
to the acquisition of InTuition Holdings, Inc. in June 2000 and
UNIPAC Service Corporation in March 2000 resulting in an
increase in income of
37
Software services and other income decreased as
we recognized a cash gain on the sale of student loans to a
third party of $700,000 in 2000. Derivative market value
adjustment loss increased as we entered into an interest rate
swap in 2001.
Operating expenses.
Total operating expenses increased $64.2 million, or 49.0%,
in 2001 as compared to 2000. Salaries and benefits increased
$25.6 million, or 49.5%, and total other expenses increased
$36.4 million, or 48.8% in 2001 as compared to 2000. The
increase in salaries and benefits expense was due to salaries
expense of $9.6 million related to the conversion of our
servicing platform in December 2001. The remaining increase was
due to salary and benefit increases related to the acquisitions
of UNIPAC Service Corporation in March 2000, InTuition Holdings,
Inc. in June 2000 and GuaranTec, LLP in June 2001.
The net increase in total other expenses can be
attributed to an increase in depreciation and amortization of
$11.3 million, or 65.2%%, in 2001 as compared to 2000,
which included an increase in the amortization of intangible
assets of $6.1 million due to acquisitions of UNIPAC
Service Corporation and InTuition Holdings, Inc. in March and
June 2000, respectively. The remaining increase in depreciation
and amortization was the result of increased depreciation and
amortization of furniture, equipment and leasehold improvements
in 2001 as compared to 2000 related to the acquisitions
described above. Trustee and other debt related fees increased
$3.8 million, or 41.6%, in 2001 as compared to 2000 as a
result of a $1.2 billion increase in average total debt
outstanding in 2001. Occupancy and communications expense
increased $2.0 million, or 35.7% in 2001 as compared to
2000 due to the acquisitions previously described. Advertising
and marketing expenses increased $5.6 million, or 122.8%,
due to a large marketing services contract entered into in 2001.
Professional services increased $1.8 million, or 113.0%, in
2001 as compared to 2000 due to an increase in revenue from
payment processing services and origination activities due to a
complete years operation of InTuition Holdings, Inc.,
which was acquired in June 2000. Consulting fees and support
services to related parties increased $14.1 million, or
91.8%, in 2001 compared to 2000. Consulting fees and support
services to related parties increased due to an
$11.8 million increase in technology services contract
related to the acquisition of 5280 Solutions and a
$5.0 million increase due to the acquisitions of the
outsourced support services contract for InTuition Holdings,
Inc. and GuaranTec, LLP. Postage and distribution expenses
increased $1.9 million, or 33.4%, in 2001 as compared to
2000 due to the acquisitions discussed above.
Income tax expense.
Income tax expense increased to $5.4 million for 2001 as
compared to $2.2 million in 2000 due to the increase in
income before income taxes in 2001. Our effective tax rate was
41.0% for 2001 as compared to 32.9% for 2000. The 2001 effective
tax rate was higher than the 2000 rate because other items, net,
not deductible for tax purposes contributed negatively to our
effective tax rate in 2001 whereas they contributed positively
in 2000.
Net income.
Net
income increased to $7.1 million for 2001 from $4.5 million
for 2000, for the reasons discussed above.
Financial Condition
Total assets increased $1.4 billion, or 14.2%,
from $9.8 billion at December 31, 2002 to $11.2 billion at
September 30, 2003. This was due to an increase in student
loans receivable of approximately $1.5 billion, or 17.5%, from
$8.6 billion at December 31, 2002 to $10.1 billion at
September 30, 2003. This increase was a result of net
growth in consolidation loans of approximately $1.5 billion
during the nine months ended September 30, 2003. The
increase in student loans receivable was offset by a decrease in
restricted cash due to loan program customers of
$92 million, or 69.2%. The decrease in restricted cash due
to loan program customers is a result of timing of second
disbursements on loans and reduced lockbox volume.
38
Total liabilities increased $1.4 billion, or
14.1%, from $9.7 billion at December 31, 2002 to
$11.0 billion at September 30, 2003. The growth in
liabilities was a result of an increase in bonds and notes
payable of approximately $1.4 billion, or 15.3%, from $9.4
billion at December 31, 2002 to $10.9 billion at
September 30, 2003. The increase in bonds and notes payable
resulted from additional borrowings to fund our growth in
student loans receivable during the nine months ended
September 30, 2003. The increase in bonds and notes payable
was offset by a decrease in restricted cash due to loan program
customers of $92 million, or 69.2%. The decrease in restricted
cash due to loan program customers is a result of timing of
second disbursements on loans and reduced lockbox volume.
Shareholders equity increased
$22.1 million, or 20.3%, from $109.1 million at
December 31, 2002 to $131.2 million at
September 30, 2003 principally as a result of net income
for the nine months ended September 30, 2003.
Shareholders equity also increased as a result of a
non-cash stock compensation charge of $5.2 million during the
nine months ended September 30, 2003.
Total assets increased approximately
$1.7 billion, or 20.1%, from $8.1 billion at
December 31, 2001 to $9.8 billion at December 31,
2002. The increase in assets resulted from an increase in
student loans receivable of $1.2 billion, or 15.3%, from
$7.4 billion at December 31, 2001 to $8.6 billion
at December 31, 2002. The increase in student loans
receivable resulted from an increase in consolidation loans of
approximately $1.1 billion as a result of acquisitions and
origination activities. Total assets also increased due to an
increase in restricted cash and investments of
$408.8 million, or 121.9%, resulting from bond indenture
requirements that restricted cash reserves be held for the
additional debt financings issued in 2002.
Total liabilities increased $1.6 billion, or
19.7%, from $8.1 billion at December 31, 2001 to
$9.7 billion at December 31, 2002. The growth in
liabilities was a result of an increase in bonds and notes
payable of $1.5 billion, or 19.2%, from $7.9 billion at
December 31, 2001 to $9.4 billion at December 31,
2002. The increase in bonds and notes payable was a result of
additional debt financings issued to fund our growth in student
loans receivable during 2002.
Shareholders equity increased
$45.9 million, or 72.7%, from $63.2 million at
December 31, 2001 to $109.1 million at
December 31, 2002 as a result of the net income for the
year ended December 31, 2002 of $48.5 million, net of
a $3.0 million charge in connection with a related party
acquisition.
Liquidity and Capital Resources
We finance our operations through operating cash
flow, borrowings under credit facilities and secured financing
transactions. Operating activities provided net cash of
$86.7 million for the nine months ended September 30,
2003, an increase of approximately $20.6 million from the
net cash provided by operating activities of $66.1 million
during the nine months ended September 30, 2002. Operating
activities provided net cash of $134.2 million in 2002, an
increase of approximately $52.7 million from the net cash
provided by operating activities of $81.5 million during
2001. Operating cash flows are driven by net income adjusted for
various non-cash items such as the provision for loan losses,
depreciation and amortization.
We also use secured and unsecured operating lines
of credit and financing agreements to fund operations and
student loan acquisitions. Historically, a significant portion
of our unsecured operating credit facilities was provided by
affiliated parties. See Related Party Transactions.
We have obtained $100.0 million, and are in the process of
obtaining an additional $30.0 million, of operating lines
of credit and commercial paper transactions under three separate
facilities from a group of six large regional and national
financial institutions. The cost of funds associated with our
operating lines of credit is higher than that of the secured
financing transactions used to fund our student loan portfolio.
Our operating lines of credit are generally priced at a spread
over LIBOR ranging from 60 to 250 basis points. We believe that
the expansion of our operating lines and credit facilities will
provide expanded access to capital in the future. In addition to
our expanded operating lines and credit facilities, we believe
that the growth in our cash flow from operating activities and
shareholders equity indicates a favorable trend in our
available
39
In the second quarter of 2003, we expanded our
warehousing capacity for student loan assets with the addition
of a $750 million short-term student loan warehouse
facility. In the third quarter of 2003, we further expanded this
short-term student loan warehouse facility to
$1.05 billion. This warehouse facility will allow for
expansion of our liquidity and capacity and will replace a
smaller facility of approximately $350 million which
expired in the third quarter of 2003. We believe that the
expansion of our warehousing capacity and continued access to
the asset-backed securities market will provide adequate
liquidity to fund our student loan operations for the
foreseeable future.
Our secured financing instruments include
commercial paper lines, short-term student loan warehouse
programs, variable-rate tax-exempt bonds, fixed-rate, tax-exempt
bonds and various asset-backed securities. Of the
$10.9 billion of debt outstanding as of September 30,
2003, approximately $9.3 billion was issued under
securitization transactions. During the nine months ended
September 30, 2003 and in 2002, we completed three
asset-backed securities transactions in each period totaling
$2.9 billion and $2.8 billion, respectively. We
anticipate continuing to access the asset-backed securities
markets in 2003 and subsequent years, depending on market
conditions.
Securities issued in our securitization
transactions are generally priced off a spread to LIBOR or set
under an auction procedure related to the bonds and notes. The
student loans financed are generally priced on a spread to
commercial paper or Treasury bills.
The following table summarizes our bonds and
notes outstanding as of September 30, 2003:
40
Total unused commitments under various commercial
paper and warehouse agreements totaled $670.6 million as of
September 30, 2003. In addition, in October 2003 we
obtained an additional $70.0 million in an operating line
of credit and a commercial paper facility. Bonds and notes
outstanding as of September 30, 2003 are due in varying
amounts as follows:
We have commitments with our branding partners,
from whom we acquire student loans and to whom we provide
marketing and origination services, and forward flow lenders,
from whom we acquire student loans and to whom we provide
origination services only, which obligate us to purchase loans
originated under specific criteria, although our branding
partners and forward flow lenders are not obligated to provide
us with a minimum amount of loans. These commitments generally
run for periods ranging from one to five years and are generally
renewable. As of September 30, 2003 and December 31,
2002 and 2001, we were obligated to purchase up to
$246.1 million, $266.2 million and
$334.7 million, respectively, in student loans at current
market rates upon the respective sellers request under
various agreements through September 30, 2004. We may also
expand our sales and marketing forces, or acquire interests in
student loans, potentially including up to approximately
$55 million to fund a portion of the acquisitions described
in Prospectus Summary Potential
Acquisitions, each of which may result in short-term or
long-term capital commitments.
Student Loan
Portfolio
The tables below describe the components of our
loan portfolio:
41
The provision for loan losses represents the
periodic expense of maintaining an allowance sufficient to
absorb losses, net of recoveries, inherent in the portfolio of
student loans.
An analysis of our allowance for loan losses is
presented in the following table:
42
The table below shows the student loan
delinquency amounts as of September 30, 2003 and 2002 and
December 31, 2002, 2001 and 2000. Delinquencies have the
potential to adversely impact our earnings through increased
servicing and collection costs and account charge-offs.
43
Origination
and Acquisition
Our student loan portfolio increases through
various channels, including originations through our direct
channel and acquisitions through our branding partner channel,
our forward flow channel and the secondary market. Our portfolio
increases with the addition of portfolios acquired through whole
company or subsidiary acquisitions.
One of our primary objectives is to focus on
originations through our direct channel and acquisitions through
our branding partner channel. We have extensive and growing
relationships with many large financial and educational
institutions which are active in the education finance industry.
Our branding relationships and forward flow relationships
include Union Bank, an affiliate of ours, as well as many
schools and national and regional financial institutions. See
Related Party Transactions.
The table below sets forth the increase during
each period presented of loans originated or acquired through
each of our channels:
44
The following table analyzes the student loan
spread on our portfolio of student loans for the period
indicated. This table represents the spread on assets earned in
conjunction with the liabilities used to fund the assets.
Maintenance of the spread on assets is a key factor in
maintaining and growing our income.
Because we generate the majority of our earnings
from the spread between the yield we receive on our portfolio of
student loans and the cost of funding these loans, the interest
sensitivity of our balance sheet is a key profitability driver.
The majority of student loans have variable-rate characteristics
in certain interest rate environments. Certain of our student
loans include fixed-rate components depending upon the rate
reset provisions, or, in the case of consolidation loans, are
fixed at the weighted average interest rate of the underlying
loans at the time of consolidation. The table below sets forth
our loan assets and debt instruments by rate characteristics:
Historically, we followed a policy of funding the
majority of our student loan portfolio with variable-rate debt.
In the current low interest rate environment, our FFELP loan
portfolio is yielding excess income primarily due to the
reduction in interest rates on the variable-rate liabilities
funding student loans at the fixed borrower rate and due to
consolidation loans earning interest at a fixed rate to the
borrower. See
45
One objective when financing our student loan
portfolio is to manage interest rate risk through:
We have used derivative instruments as described
below to provide economic hedges to protect against the impact
of adverse changes in interest rates. These derivative
instruments do not meet the criteria for hedge accounting
pursuant to SFAS No. 133; consequently, the changes in fair
value of the derivative instruments of $4.6 million are
included in the derivative market value adjustment in other
income in the statement of income for the nine months ended
September 30, 2003 and have reduced our net income.
We attempt to match the interest rate
characteristics of pools of loan assets with debt instruments of
substantially similar characteristics, particularly in rising
interest rate markets. Due to the variability in duration of our
assets and varying market conditions, we do not attempt to
perfectly match the interest rate characteristics of the entire
loan portfolio with the underlying debt instruments. We have
adopted a policy of periodically reviewing the mismatch related
to the interest rate characteristics of our assets and our
liabilities and our opinion as to current and future market
conditions. Based on those factors, we will periodically use
interest rate swaps and other derivative instruments as part of
overall risk management strategy to manage risk arising from our
fixed-rate and variable-rate financial instruments. These
strategies entail risk and may not be effective. Although the
derivative instruments we currently hold do not meet the
criteria for hedge accounting pursuant to SFAS No. 133, it
is our intention to consider these criteria when entering into
future derivative instruments and to use hedge accounting, if
qualified to do so, pursuant to SFAS No. 133.
During the third quarter of 2003, we entered into
various derivative instrument contracts to help manage our
interest rate risk. The table below summarizes the derivative
instruments to which we are currently a party:
46
As a result of our interest rate management
activities, we expect the change in pre-tax net income resulting
from 100 basis point and 200 basis point increases in interest
rates will not result in a proportional decrease in net income
due to the effective switch of some variable-rate loans to
fixed-rate loans. The change would also be less dramatic had the
interest rate management strategies and derivative products
employed in the third quarter of 2003 been in place for the
entire nine months ended September 30, 2003 or the year
ended December 31, 2002.
Under Statement of Financial Accounting Standards
(SFAS) No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, the derivatives
described above do not qualify for hedge accounting because they
do not meet all criteria for effectiveness and, therefore, the
change in fair value of the derivative instrument will be
reflected in the statements of income. See
Critical Accounting Policies
Accounting for Derivatives.
The following tables summarize the effect on our
earnings for the nine months ended September 30, 2003 and the
years ended December 31, 2002 and 2001, based upon a sensitivity
analysis performed by us assuming a hypothetical increase and
decrease in interest rates of 100 basis points and an increase
in interest rates of 200 basis points while funding costs remain
constant. The effect on earnings was performed on our
variable-rate assets and liabilities.
47
The table below sets forth our variable-rate
assets and liabilities categorized by the 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 our interest
rate-sensitive positions as of September 30, 2003 and
December 31, 2002 and is not necessarily reflective of the
positions that existed throughout the period.
48
Critical Accounting Policies
This Managements Discussion and Analysis of
Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America, or GAAP. The preparation of these
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of income and expenses
during the reporting periods. We base our estimates and
judgments on historical experience and on various other factors
that we believe are reasonable under the circumstances. Actual
results may differ from these estimates under varying
assumptions or conditions. Note 3 of the notes to consolidated
financial statements includes a summary of the significant
accounting policies and methods used in the preparation of our
consolidated financial statements.
On an on-going basis, management evaluates its
estimates and judgments, particularly as they relate to
accounting policies that management believes are most
critical that is, they are most
important to the portrayal of our financial condition and
results of operations and they require managements most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are
inherently uncertain. These accounting policies include
securitization accounting, accounting for derivatives,
determining the level of the allowance for loan losses and the
program reimbursement reserve.
We use the issuance of asset-backed securities,
commonly called securitization transactions, as a key component
of our financing strategy. In conjunction with these
transactions, we transfer student loans to a trust which issues
bonds backed by the student loans. Our securitization
transactions do not qualify for sale treatment under SFAS
No. 140,
Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a
Replacement of SFAS No. 125
, as the trusts continue to
be under our effective control and as such we do not record or
recognize gain on sale in conjunction with the transaction, but
rather treat the transfers as secured borrowings. All of the
financial activities and related assets and liabilities,
including debt, of the securitizations are reflected and
consolidated in our financial
49
We account for derivative and certain financial
instruments in accordance with SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
which
requires that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded
at fair value on the balance sheet as either an asset or
liability. We determine fair value for our derivative contracts
from bid pricing obtained from independent market sources.
For some of our derivatives, mainly certain
interest rate swaps, we document the relationship between the
hedging instrument and the hedged items, as well as the risk
management objective and strategy for undertaking various hedge
transactions at the inception of the hedging relationship. To
the extent possible, we link each derivative to either a
specific asset or liability on the balance sheet or expected
future cash flows, and designate them as either fair value or
cash flow hedges. Fair value hedges are designed to hedge our
exposure to changes in fair value of a fixed-rate asset or
liability, or a fair value hedge, while cash flow
hedges are designed to hedge our exposure to variability of
either a variable-rate assets or liabilitys cash
flows or expected fixed-rate debt issuance, or a cash
flow hedge. For effective fair value hedges, we adjust the
derivative instruments to fair value with any difference
recorded immediately in the income statement. For effective cash
flow hedges, changes in the fair value of the cash flow hedge
are deferred in other comprehensive income, net of tax, and
recognized in earnings in the same period as the earnings
effects of the hedged item. SFAS No. 133 requires that
changes in the fair value of derivative instruments be
recognized currently in earnings unless specific hedge
accounting criteria as specified by SFAS No. 133 are met.
We believe that our derivatives are effective economic hedges
and they are a critical element of our interest rate risk
management strategy. Our derivative instruments do not meet the
criteria to qualify for hedge accounting pursuant to SFAS
No. 133.
Basis swaps are used to convert variable-rate
debt from one interest rate index to another to match the
interest rate characteristics of the assets. We will
periodically use basis swaps to change the index of our
LIBOR-based debt, to better match the cash flows of our student
loan assets. SFAS No. 133 requires that the change in the
cash flows of the derivative effectively offset both the change
in the cash flows of the asset and the change in the cash flows
of the liability. As a result, these swaps are recorded at fair
value with subsequent changes in value reflected in the income
statement.
The allowance for loan losses represents
managements estimate of probable losses on student loans.
This evaluation process is subject to numerous estimates and
judgments. In making such estimates and judgments, management
considers such things as the value and character of loans
outstanding, past loan loss experience and general economic
conditions. We evaluate the adequacy of the allowance for losses
on our FFELP loan portfolio separately from our private loan
portfolio. Historical delinquencies and credit loss experience
are also considered when reviewing the current aging of the
portfolio, together with analyses that reflect current trends
and conditions.
In contrast to the determination of our allowance
for loan losses for our private loan portfolio, when we
determine the allowance for our FFELP loan portfolio, we
consider trends in student loan claims rejected for payment by
guaranty agencies and the amount of FFELP loans subject to the
2% risk sharing. The allowance is based on periodic evaluations
of our loan portfolio considering past experience, changes to
federal student loan programs, current economic conditions and
other relevant factors. The allowance is maintained at a level
management believes is adequate to provide for estimated
probable credit losses inherent in the loan portfolio. This
evaluation is inherently subjective, as it requires estimates
that may be susceptible to significant changes.
50
In determining the adequacy of the allowance for
loan losses on private loans, we consider several factors
including:
The program reimbursement reserve represents the
amount that management estimates we will be required to repay to
lenders due to our failure to follow prescribed due diligence
procedures and servicing activities prescribed by the Higher
Education Act. Failure to meet certain due diligence
requirements that must be followed to maintain the DOE guarantee
on the loans will cause a loss of the guarantee on the loans and
potential loss to us if we are unable to cure the deficiency
under procedures prescribed by the federal government.
This evaluation process is subject to numerous
estimates and judgments. In making these estimates and
judgments, management considers such factors as the outstanding
loan volume that we service, servicing loss experience, cure
experience, portfolio default rates and general economic
conditions. The program reimbursement reserve is determined
based on a process that begins with an estimate of the probable
losses on serviced student loans. This estimate is based on the
weighted average historical loss rates for the past ten years,
current portfolio delinquency rates and other economic
conditions that provide information on the expected servicing
losses. The estimated loss rate is applied to the student loans
currently serviced to derive a gross estimated servicing loss.
The estimated servicing loss is then reduced by the estimated
cure rate on such claims. The estimated cure rate is based on
the weighted average historical cure rates for the past ten
years to derive a reasonable estimate of the expected cure rate.
The gross servicing losses net of the estimated cures will
provide the estimated servicing reimbursement reserve that we
recognize.
The program reimbursement reserve reflects
assumptions and estimates we believe are reasonable in light of
historical servicing errors and known trends with respect to
student loans serviced. However, these estimates and assumptions
are inherently subjective and may be susceptible to significant
changes. Management continually measures expected losses against
actual losses and assumptions are revised accordingly.
Management believes that the program reimbursement reserve is
adequate to cover probable losses in the portfolio of student
loans serviced.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standard
Board, or FASB, issued SFAS No. 145,
Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections
. This statement
rescinds FASB Statement No. 4,
Reporting Gains and
Losses from Extinguishment of Debt
and an amendment of that
statement,
FASB Statement No. 64,
Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements
. The
statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers
and
amends FASB Statement No. 13,
Accounting for Leases
to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed
conditions. The provisions of SFAS No. 145 related to the
rescission of FASB No. 4 are effective for fiscal years
beginning after May 15, 2002. The provisions of SFAS
No. 145 related to FASB No. 13 are
51
In June 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities
. SFAS No. 146 requires that a liability for
costs associated with exit or disposal activities be recognized
when the liability is incurred. Previously, generally accepted
accounting principles provided for the recognition of such costs
at the date of managements commitment to an exit plan. In
addition, SFAS No. 146 requires that the liability be
measured at fair value and be adjusted for changes in estimated
cash flows. The provisions of the new standard are effective for
exit or disposal activities initiated after December 31,
2002. It is not expected that SFAS No. 146 will materially
affect our financial statements.
In December 2002, the FASB issued SFAS
No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment
to FASB Statement No. 123
. SFAS No. 148 requires
annual disclosures about the method of accounting for
stock-based compensation and tabular information about the
effect of the method accounting for stock-based compensation on
net income and earnings per share, including pro forma amounts,
in the Summary of Significant Accounting Policies.
On a quarterly basis, SFAS No. 148 requires prominent
disclosure in tabular form of the effect of the method of
stock-based compensation on net income and earnings per share
for all periods presented as accounted for under APB Opinion
No. 25. The disclosures required by SFAS 148 will be
made in the financial statements to the extent required for
shares when issued under the recently adopted Employee Share
Purchase Plan.
In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
. FIN
No. 45 identifies characteristics of certain guarantee
contracts and requires that a liability be recognized at fair
value at the inception of such guarantees for the obligations
undertaken by the guarantor. Additional disclosures also are
prescribed for certain guarantee contracts. The initial
recognition and initial measurement provisions of FIN
No. 45 are effective for those guarantees issued or
modified after December 31, 2002. The disclosure
requirements of FIN No. 45 were effective for us as of
December 31, 2002. Disclosures required by FIN No. 45
are included in note 16 of the notes to consolidated
financial statements related to the guarantee of an
affiliates liabilities to an unrelated third party. We do
not believe such guarantee required a liability to be recognized
under FIN No. 45. The adoption of FIN No. 45 did not
have a material effect on our financial statements.
In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities
. FIN
No. 46 clarifies the application of Accounting Research
Bulletin No. 51,
Consolidated Financial Statements,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties, which are referred to as variable interest
entities. Variable interest entities are required to be
consolidated by their primary beneficiaries. The primary
beneficiary of a variable interest entity is the party that
absorbs a majority of the entitys expected losses,
receives a majority of its expected residual returns, or both,
as a result of holding variable interests. FIN No. 46 also
requires new disclosures about variable interest entities. The
implementation date has been deferred until December 31,
2003 for calendar year companies. On October 31, 2003, the
FASB issued an exposure draft of a proposed interpretation
modifying Interpretation No. 46. The proposed
clarifications and modifications would apply to periods ending
after December 31, 2003. We do not believe that FIN
No. 46 will have a material effect on our financial
statements.
52
This Statement amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging
activities under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
. This Statement is
effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition,
except as stated below, all provisions of this Statement should
be applied prospectively. The provisions of this Statement that
relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7(a) and
23(a) of SFAS No. 133, which relate to forward purchases or
sales of when-issued securities or other securities that do not
yet exist, should be applied to both existing contracts and new
contracts entered into after June 30, 2003. The adoption of
SFAS No. 149 did not have a significant impact on our
financial statements.
In May 2003, the FASB issued SFAS No 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability, or an asset in some circumstances. SFAS No. 150
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. We have adopted the standard effective
July 1, 2003. The adoption of SFAS No. 150 did not
have a significant impact on our financial statements.
53
INDUSTRY OVERVIEW
Since the creation of federal student loan
programs, hundreds of billions of dollars in federal student
loans have financed the higher education of millions of students
at thousands of schools across the United States. College costs
have risen at both public and private institutions. According to
the DOE, in the decade 1990-1991 to 2000-2001, prices at public
and private colleges rose by approximately 23% and 27%,
respectively, after adjustment for inflation. Students and
families depend more on federal student loans to cover the costs
of post-secondary education than any other single source of
financial aid. The demand for student loans is expected to grow.
According to a projection by the DOE, gross federal student loan
volume, comprised of FFELP loans and FDLP loans, is expected to
grow to $71.8 billion in federal fiscal year 2009,
excluding consolidation loan volume. This projection is an
increase from the $45.4 billion in loans that were
originated in federal fiscal year 2002, and this projection does
not include the potential for higher loan limits that are
currently being contemplated by Congress. A detailed description
of the FFEL Program appears in Annex A to this prospectus.
The large majority of student loans are made to
finance post-secondary education under federally guaranteed
student loan programs, although many students and parents also
obtain education funding through private student loan programs.
Federally guaranteed student loan programs are highly regulated
by the DOE. Under programs guaranteed by the federal government,
banks and other lenders that satisfy statutory eligibility
requirements can make student loans at below-market rates due to
subsidies and guarantees. The largest student loan program,
formerly called the Guaranteed Student Loan Program, or GSLP,
and currently known as the Federal Family Education Loan
Program, was created in 1965 to ensure affordable access by
families to a full range of post-secondary educational
institutions. In 1972, to encourage further bank participation
in the GSLP, Congress established the Student Loan Marketing
Association, known as Sallie Mae, a government-sponsored
enterprise as a for-profit, public stockholder-owned, national
secondary market for student loans. Currently, Sallie Mae is a
wholly owned subsidiary of SLM Corporation. SLM Corporation was
formed in 1997 as a Delaware corporation, marking the beginning
of the privatization of Sallie Mae as a government-sponsored
enterprise, to be completed by September 2006.
The FFEL Program currently includes a network of
thousands of originators and educational institutions and 36
state-sponsored or non-profit guaranty agencies which guarantee
and administer loans under contract with the DOE. A number of
non-profit entities, banks and other financial intermediaries
54
Student Loan Business Model
In general, a student applies for a loan from a
financial institution through a schools financial aid
office or directly from the financial institution. Typically,
financial institutions acting as lenders or entities that
service student loans are the source of student loan
originations. A financial institution may hold the student loan
it originates or sell its student loan portfolio to the
secondary market. The characteristics of student loans typically
result in those loans trading at a premium. This creates a
situation that allows for selling the portfolio to the secondary
market at a premium which frees up capital enabling the
institution to originate new student loans. The secondary market
is made up of a variety of non-profit entities, banks and
for-profit companies. Typically, a participant in the secondary
market funds loans purchased from the financial institution
through the use of a warehouse financing line. Once a loan
holder, such as Nelnet, has garnered enough loans, it may choose
to finance the loans through an asset securitization vehicle.
The student loans are generally transferred to a special purpose
entity that pays for the loans through the issuance of debt. As
a result of the federal guarantee of student loans, the senior
tranches of notes in these securitizations are generally rated
AAA, and the subordinated tranches are generally rated A or
better.
To induce lenders to enter the student loan
market, the government assures that a lender receives a minimum
yield on FFELP loans, regardless of whether rates change over
the course of a year or whether rates exceed the cap on a
borrowers loans. Depending on the type of student loan and
when it was originated, the borrower rate is either fixed to
term or is reset to a market rate each July 1. FFELP
student loans generally earn interest at the greater of the
borrower rate or a variable rate determined by reference to the
average of the applicable index (91-day Treasury bill rate or
90-day commercial paper rate) in a calendar quarter plus a fixed
spread that is dependent upon when the loan was originated and
the loans repayment status. If the resulting variable rate
plus the applicable spread exceeds the borrower rate, the DOE
pays the difference. This payment is referred to as the special
allowance payment, or SAP. We refer to the fixed spread to the
underlying index as the special allowance margin. In some
declining interest rate environments, lenders earn additional
spread income through the next reset date on those FFELP loans
earning at the annually reset borrower rate. We refer to this
additional income as variable rate floor income. On those FFELP
loans with fixed to term borrower rates, primarily consolidation
loans, lenders earn interest at the greater of the borrower rate
or a variable rate based on the SAP formula.
Guaranty agencies expedite government
reimbursement for defaulted student loans to eligible lenders.
These guaranty agencies are non-profit institutions and state
agencies that have entered into federal reimbursement contracts
with the DOE pursuant to the Higher Education Act. Guaranty
agencies collect revenue in the form of fees based upon new
guarantees, the outstanding principal amount of loans guaranteed
and default prevention activities. Reimbursement from a guaranty
agency to the lender is contingent upon servicing in accordance
with certain regulatory requirements. The guaranty agencies
provide for 100% reimbursement of principal and accrued interest
for loans disbursed before October 1, 1993 and 98%
reimbursement of principal and accrued interest for loans
disbursed on or after October 1, 1993, if the loans are serviced
according to DOE guidelines. In addition, the lender is entitled
to receive the full 100% of principal and accrued interest in
the event of a borrowers death, disability or bankruptcy.
Guaranty agencies reimburse eligible lenders from reserve
accounts established for this purpose. The guaranty agency, in
turn, receives reimbursement from the DOE. In the event a
guaranty agency fails to pay, the lender can claim reimbursement
directly from the DOE.
Servicing student loan assets is important
because losses on defaults are largely mitigated by the
servicers ability to service the student loans according
to DOE guidelines. Proper servicing of a student loan is
required in order to maintain eligibility for interest subsidy
payments and guarantee reimbursement for principal and accrued
interest losses. As a result of the strict requirements and
expense associated with properly servicing accounts, servicing
is often outsourced by financial institutions and secondary
market
55
Claims rejected by the DOE or a guaranty agency
may be cured, which involves reinstatement of the
guarantee. When the lender obtains a payment or a new signed
repayment agreement from the borrower in the case of certain
collection due diligence violations, the lender may receive
reinstated interest subsidies and special allowance payments.
Interest subsidies are interest payments made by the DOE on
eligible loans while the borrower is in school and during grace
and deferment periods.
The following chart illustrates the student loan
process.
Federal Student Loan Programs
Federal student loans are made up of two primary
programs:
The federal government guarantees the repayment
of at least 98% of the principal balance and the accrued
interest of all FFELP loans. In addition, the federal government
subsidizes the interest cost of some of these loans. As
described below, the amount of the subsidy a borrower receives
and the repayment terms vary depending upon the type of loan and
borrower.
The FFEL Program is a public-private partnership
in which lenders make federally guaranteed student loans to
students and their parents in coordination with school financial
aid offices. During the 2002 federal fiscal year, which ended
September 30, 2002, almost eight million new FFELP loans,
which excludes consolidation loans, with a principal amount of
$32.8 billion, were made to eligible borrowers, according
to the DOEs fiscal year 2004 budget presentation.
Loans made under the FFEL Program include:
56
Participants in the FFEL Program include:
57
The Federal
Direct Loan Program
Under the FDL Program, loans are made directly by
the federal government to borrowers. Most terms of FDLP loans
are the same as FFELP loans. According to the DOEs fiscal
year 2004 budget presentation, the $12.7 billion of FDLP
loans in 2002 consisted of approximately $6.2 billion in
subsidized Stafford loans, $4.9 billion in unsubsidized
Stafford loans and $1.6 billion in PLUS loans. During the
2002 federal fiscal year, newly originated FDLP loans
constituted 28% of total newly originated FFELP and FDLP loans,
down from 33% during the 1998 federal fiscal year.
The Higher Education Act, and thereby the federal
student loan program, needs to be reauthorized every five years.
The next reauthorization is set for September 2004. Some of the
key issues being debated are:
58
BUSINESS
Overview
We are a vertically integrated education finance
company, with over $11 billion in total assets, making us
one of the leading education finance companies in the country.
We are focused on providing quality products and services to
participants in the education finance process. Headquartered in
Lincoln, Nebraska, we originate, hold and service student loans,
principally loans originated under the FFEL Program. For 2002,
we were the fourth largest holder and second largest servicer of
FFELP loans. In addition, we, together with our branding
partners, originated and acquired approximately
$3.2 billion of student loans in the nine months ended
September 30, 2003 and $2.7 billion of student loans
in 2002, making us a leading originator and acquirer of student
loans. A detailed description of the FFEL Program appears
in Annex A to this prospectus.
We offer a broad range of financial services and
technology-based products, including student loan origination
and lending, student loan and guarantee servicing and a suite of
software solutions. Our products are designed to simplify the
student loan process by automating financial aid delivery, loan
processing and funds disbursement. Our infrastructure,
technological expertise and breadth of product and service
offerings connect the key constituents of the student loan
process, including lenders, financial aid officers, guaranty
agencies, governmental agencies, student and parent borrowers,
servicers and the capital markets, thereby streamlining the
education finance process.
Our business is comprised of four primary product
and service offerings:
59
In accordance with accounting principles
generally accepted in the United States, our asset management
and student loan servicing offerings constitute reportable
operating segments. Our guarantee servicing and servicing
software offerings are operating segments that do not meet the
quantitative thresholds, and, therefore, are included as other
segments that do not meet the reportable segment criteria. In
the nine months ended September 30, 2003, our asset
management, student loan servicing and other segments generated
50.8%, 40.1% and 9.1%, respectively, of our total segment
revenues and 73.2%, 23.3% and 3.5%, respectively, of our segment
net income. For additional information, see note 19 of the
notes to consolidated financial statements.
Our earnings and earnings growth are directly
affected by the size of our portfolio of student loans, the
interest rate characteristics of our portfolio, the costs
associated with financing and managing our portfolio and the
costs associated with origination and acquisition of the student
loans in the portfolio. We generate the majority of our earnings
from the spread between the yield we receive on our student loan
portfolio and the cost of funding these loans. While the spread
may vary due to fluctuations in interest rates, special
allowance payments from the federal government ensure that we
receive a minimum yield on our student loans, so long as certain
requirements are met. We also earn fees from student loan and
guarantee servicing and licensing fees from our servicing
software. Earnings growth is primarily driven by the growth in
the student loan portfolio and growth in our fee-based product
and service offerings, coupled with cost-effective financing and
expense management. For the nine months ended September 30,
2003, we generated net interest income of $133.8 million,
total other income, including loan servicing income, of
$83.8 million and net income of $16.8 million. In
2002, we generated net interest income of $190.9 million,
total other income, including loan servicing income, of
$125.2 million and net income of $48.5 million.
We originate and acquire student loans through a
variety of methods, or channels, including:
In addition, we acquire student loans through
spot purchases and whole-company acquisitions, which accounted
for 9.7% and 18.1% of the student loans that we originated and
acquired in the nine months ended September 30, 2003 and in
2002, respectively.
Of the $3.2 billion and $2.7 billion in
student loans we originated and acquired in the nine months
ended September 30, 2003 and in 2002, respectively,
$1.5 billion and $859 million, respectively, were
loans consolidated through our direct channel. Student loans
that we originate through our direct channel are our most
profitable student loans because they typically cost us less
than loans acquired through our other channels and they remain
in our portfolio for a longer period of time. As of
September 30, 2003, our student loan portfolio was
$10.1 billion.
We currently service more than $18 billion
in FFELP loans, which makes us the second largest servicer of
FFELP loans, according to SLSA statistics. Our software is also
used by third parties to service an additional $27 billion
in student loans. In addition, we currently provide servicing
support to guaranty agencies on a total of $20 billion of
FFELP loans. Servicing support includes functions such as system
software, hardware and telecommunication support, borrower and
loan updates, default aversion tracking services, claim
processing services and post-default collection services. We
provide student loan servicing
60
Over 99% of the student loans in our portfolio as
of September 30, 2003 were FFELP loans, as opposed to the
less than 1% of private loans in our portfolio that did not
carry federal guarantees. At least 98% of the principal and
accrued interest of FFELP loans is guaranteed by the federal
government, provided that we meet certain procedures and
standards specified in the Higher Education Act. We believe we
are in material compliance with the procedures and standards as
required in the Higher Education Act. FFELP loans originated
prior to October 1, 1993 carry a 100% guarantee on the
principal amount and accrued interest, and FFELP loans
originated after that date are guaranteed for 98% of the
principal amount and accrued interest. As a result, holders of
FFELP loan portfolios historically have experienced minimal
losses net of the guarantee. Our net loan losses on FFELP loans
in 2002 were approximately $2.7 million, or less than 0.04%
of our average FFELP loan portfolio.
Our History
We have a 25-year history dating back to the
formation of UNIPAC Service Corporation in 1978. UNIPAC was
formed to service loans for Union Bank of Lincoln, Nebraska and
Packers Service Corporation of Omaha, Nebraska. It grew its
third-party student loan servicing business to approximately
$9.7 billion in loans in 2000, when it was merged with
Nelnet. Our immediate predecessor was formed in 1996 as a
student loan acquisition company, and, prior to the merger, it
had built its student loan portfolio through a series of spot
portfolio acquisitions and later through student loan company
acquisitions.
In 2000, we decided to create a vertically
integrated platform that would be able to compete in each sector
of the student loan industry. Over the past three years we have
acquired several education finance services companies, including
a student loan secondary market company. In addition, in August
2003, we acquired the securities company that provides us with
broker-dealer services in connection with our asset-backed
securitizations.
We executed these acquisitions to complete our
effort to vertically integrate and add geographic diversity and
operational expertise to our education finance platform. We have
successfully integrated these companies into the Nelnet
platform, and they have increased our profitability as a result.
We now believe that we have all of the key components of our
vertical integration strategy. Going forward, we intend to focus
principally on organic growth while opportunistically making
company and portfolio acquisitions.
Competitive Strengths
We believe that the following competitive
strengths are important to maintaining our growth, profitability
and standing in our industry:
Focused leader with vertically integrated
platform.
We maintain a strong
position and deep expertise in each of our product and service
offerings and are well positioned to capitalize on industry
growth. We were among the largest holders of federally
guaranteed student loans with $10.1 billion of loans
outstanding as of September 30, 2003. In the nine months
ended September 30, 2003 and in 2002, we
61
High-quality loan portfolio established
through our concentration on FFELP loans.
We have focused our lending
operations on FFELP loans, which carry at least a 98% federal
guarantee on principal and accrued interest. As of
September 30, 2003, more than 99%, or $10.0 billion,
of our student loan portfolio consisted of FFELP loans and less
than 1%, or $92 million, consisted of private loans, which
do not carry a federal guarantee. We maintain strict
underwriting criteria for our private loan portfolio.
Strong relationships with student loan
market constituents.
We use a network of student loan
channels to offer services to students, schools, lenders and
secondary markets throughout the United States. As part of our
loan origination activities, we have established long-term
strategic relationships either directly with school financial
aid offices or with eligible banks and schools that function as
branding partners, who direct committed portions of
their originations to us through forward flow commitments.
Financial aid offices can have considerable influence on
students selections of lenders. The effort and expense to
create and maintain these relationships, as well as the low
turnover of selected providers, acts as a barrier to entry for
competitors. Our branding partners act as alternative channels
for origination and have strong brand recognition in the areas
on which they focus. By utilizing the appropriate and effective
brand, we can cost-effectively leverage our penetration at
different schools and throughout certain regions of the United
States.
Access to cost-effective financings.
We currently have a loan
warehousing capacity of over $2 billion through 364-day
commercial paper conduit programs maturing at different times
and participation funding arrangements committed on a short-term
basis by various financial institutions. Our large warehousing
capacity allows us to pool student loans in order to aggregate
sufficient volume for cost-effective, long-term financing and to
time securitization market conditions properly. Generally, loans
that best fit long-term financing vehicles are selected to be
transferred into one of our long-term securitizations. Because
transferring those loans to a long-term securitization includes
certain fixed administrative costs, we maximize the economies of
scale by executing large transactions that routinely price in
line with our largest competitor within the student loan
industry.
Leading, cost-competitive servicing
platform with a focus on asset protection.
We have built a leading,
nationally recognized student loan servicing platform. We
believe that a servicing operation is critical to success as a
lender in the student loan marketplace. The servicing platform
is the mechanism that facilitates interaction with borrowers.
Our servicing portfolio includes both loans from our lending
portfolio as well as from third parties. Nelnet-originated and
third-party serviced loans utilize the same servicing platform,
technology and employee base and are all serviced in exactly the
same manner. The quality of our servicing operation is best
demonstrated by our low initial claim reject rate due to
servicer error. The quality of our servicing capability is also
a key factor in preserving the federal guarantee on our FFELP
loans. In 2002, our initial claim reject rate was only
approximately 0.25%. The technological focus
62
Comprehensive suite of software
products.
Our products include an Internet-based
financial aid delivery and management system, an Internet-based
loan origination system and a centralized disbursement agent
service. Our open architecture origination products
afford schools the flexibility to work with multiple lenders of
their choice. These products are directly integrated into our
servicing platform, which provides various features such as loan
approval, disbursement of funds, customer service, account
maintenance, federal reporting and billing collections, payment
processing, default aversion, claim filing and uninsured loan
recovery. Our software products include:
These programs are designed to reduce paperwork,
streamline the approval process and improve communication
between a schools financial aid office and its students.
The software unites financial aid offices, lenders, students,
secondary markets and servicing companies, reducing turnaround
time, simplifying the process for students and providing better
service with fewer errors.
Management team with significant operating
and acquisition experience.
Our
management is led by Co-Chief Executive Officers Michael S.
Dunlap and Stephen F. Butterfield. Mr. Dunlap has
worked in the financial services industry for 20 years,
having served previously as chief executive officer of Union
Bank of Nebraska. Mr. Butterfield has worked in the student
loan industry for 14 years and the broader financial
services industry for 29 years. Mr. Dunlap focuses on
our day-to-day operating activities, and Mr. Butterfield
focuses on capital markets and investor relations. Our senior
employees with management responsibilities have been with us or
one of our predecessor companies for an average of over ten
years. Furthermore, we have successfully integrated the
companies that we have acquired and have retained their key
employees. As a result, we have a management team with
significant experience and knowledge in both student loan
operations and portfolio and company acquisitions.
Strategy
Our corporate objective is to further our
leadership position in the student loan industry. We intend to
achieve this objective by executing the following strategies:
Establish and maintain leadership in all
our product and service offerings by utilizing our technology.
Schools, lenders, guaranty
agencies and borrowers in todays student loan industry
demand cutting edge, state-of-the-art technology to streamline
the burdensome and time consuming processes of originating,
servicing and administering student loans. We believe that the
technology products that we provide position us to become a
preferred provider for participants in the student loan industry
and that their expanded utilization will promote our
originations and acquisitions. Our user-friendly software not
only allows us to service loans both internally and for third
parties, but also continues to facilitate our growing position
as a preferred originator and holder of loans for schools and
borrowers. We will continue to invest,
63
Focus on increasing our organic growth
while maintaining a low-cost
infrastructure.
We will continue
to grow our student loan portfolio and maintain and capitalize
on our low-cost infrastructure to realize increased
profitability as the industry expands. We believe there is
continued opportunity for significant growth in light of the
DOEs projected growth rates for the student loan industry.
To increase our organic growth, we have expanded our sales and
marketing force to promote FFELP loan origination and
consolidation efforts. During the period from August 2003 until
the end of the first quarter of 2004, we may expand our sales
and marketing forces so as to increase personnel that market to
schools throughout the country by adding approximately 10
additional personnel, and may similarly increase the number of
our direct consumer marketers by adding approximately 100 direct
consumer marketing personnel in Denver, Colorado, 70 in Lincoln,
Nebraska and 30 in Fredericksburg, Virginia. We believe the
infrastructure we have developed has positioned us to continue
to achieve economies of scale and be a low-cost provider to our
customers. In this regard, we decreased our operating expenses
as a percentage of average student loans from 0.78% in 1998 to
0.54% in 2002.
Strengthen existing relationships while
establishing new ones.
We have
extensive customer relationships with schools and lenders
throughout the United States. We will continue to focus on
expanding the loan volume associated with these existing
relationships, while establishing new ones through our sales
force. We have a sales force of over 390 people, of whom
approximately 80 are calling directly on colleges and
universities, while the remaining approximately 310 focus on
marketing directly to borrowers. We will continue to take
advantage of the sales forces experience as well as our
managements industry knowledge and relationships.
Continue our commitment to highly focused
and disciplined loan origination and acquisition practices.
We will continue to pursue our
conservative approach to asset quality by concentrating on
originating, acquiring and holding federally guaranteed loans
through the FFEL Program, while maintaining a disciplined
underwriting approach to private loans. As of September 30,
2003, our student loan portfolio was comprised of over 99% FFELP
loans and less than 1% private loans. Due to existing
commitments, we expect the percentage of private loans in our
student portfolio to increase to between 1% and 2% over the next
three years. Future circumstances may dictate or warrant
incremental increases. In any event, we will maintain our strict
underwriting standards for the limited amount of private loans
in our portfolio.
Opportunistically make company and
portfolio acquisitions.
Although
we have reached a point in our development where we offer a
comprehensive set of products and services essential to our
vertically integrated business model and benefit from economies
of scale and organic growth, we will still consider acquisitions
in the future. These may include either individual companies or
loan portfolios that we believe have the potential to enhance
long-term shareholder value. Since our inception, we have a
successful track record of acquisitions. We have acquired and
successfully integrated more than ten education finance related
companies and have retained their key employees. As a result, we
have the experience and skill sets necessary to acquire and
integrate additional targets that add long-term value to our
franchise and are accretive to earnings.
Product and Service Offerings
Our asset management business, including student
loan originations and acquisitions, is our largest product and
service offering and drives the majority of our earnings. When
we originate FFELP loans on our own behalf or when we acquire
FFELP loans from others, we engage one or more eligible
lenders, as defined in the Higher Education Act, to act as
our trustees to hold title to all such originated and acquired
FFELP loans. These eligible lender trustees hold the legal title
to our FFELP loans, and we hold 100% of the beneficial interests
in those loans. We have originated and acquired
$8.3 billion in student loans since January 1, 2000,
excluding subsidiary acquisitions. We often originate loans
using the Nelnet brand name but, in many cases, we use
well-known, geographically strategic brand names of our branding
64
The branding partner channel for FFELP loan
acquisitions is established by our various contracts with FFELP
lenders. In the nine months ended September 30, 2003
and in 2002 and 2001, 22.8%, 19.5% and 36.2%, respectively, of
our loan acquisitions were attributable to this channel. We
frequently act as exclusive marketing agent for some branding
partners in specified geographic areas. We ordinarily purchase
loans originated by those branding partners pursuant to a
commitment to purchase loans at a premium above par, shortly
following full disbursement of the loans. We ordinarily retain
rights to acquire loans subsequently made to the same borrowers,
or serial loans. Some branding partners, however, retain rights
to portions of their loan originations. Origination and
servicing of loans made by branding partners is performed by us
during the lives of loan origination and servicing agreements so
that loans do not need to be changed to a different servicer
upon purchase by us. The marketing agreements and commitments to
purchase loans are ordinarily for the same term, which is
commonly three to five years in duration. These agreements
ordinarily contain provisions for automatic renewal for
successive terms, subject to termination by notice at the end of
a term or early termination for breach. We are generally
obligated to purchase all of the loans originated by our
branding partners under these commitments, although our branding
partners are not obligated to provide us with a minimum amount
of loans.
In addition to the branding partner channel, we
have established a forward flow channel for acquiring FFELP
loans from third parties. In the nine months ended
September 30, 2003 and in 2002 and 2001, 15.3%, 21.7% and
33.4%, respectively, of our loan acquisitions were attributable
to this channel. The forward flow channel is established by
entering into various agreements pursuant to which FFELP lenders
retain responsibilities for marketing, but commit to sell all or
a portion of their future originations to us at a premium. These
forward flow commitments frequently obligate the lender to sell
all loans made by the applicable lender, but in other instances
are limited to sales of loans originated in certain specific
geographic regions or exclude loans that are otherwise committed
for sale to third parties. We are generally obligated to
purchase loans subject to forward flow commitments shortly
following full disbursement, although our forward flow lenders
are not obligated to provide us with a minimum amount of loans.
We typically retain rights to purchase serial loans. The loans
subject to purchase are generally subject to a servicing
agreement with us for the life of each such loan. Such forward
flow commitments ordinarily are for terms of three to five years
in duration.
65
As of September 30, 2003, the
characteristics of our student loan portfolio, exclusive of the
unamortized cost of acquisition, were as described below.
Composition of Student Loan
Portfolio
Once a students loans have entered the
repayment or grace period, they are eligible to be consolidated
if they meet certain requirements. Loan consolidation allows
borrowers to make one payment per month and extend the loan
repayment period. In addition to these attributes, in recent
years, historically low interest rates have contributed to
demand for consolidation loans. To meet this demand, we have
developed an extensive loan consolidation department to serve
borrowers with loans in our portfolio as well as borrowers whose
loans are held by other lenders.
Our capital markets and portfolio administration
departments provide financing options to fund our loan
portfolio. We have a warehousing capacity of over
$2 billion through 364-day commercial paper conduit
programs and participation funding arrangements. These
transactions provide short-term asset financing for the purchase
of student loan portfolios. The financings are constructed to
offer short-term capital and are annually renewable.
Short-term warehousing allows us to buy and
manage student loans prior to transferring them into more
permanent financing arrangements. Our large warehousing capacity
allows us to pool student loans in order to maximize loan
portfolio characteristics for efficient financing and to
properly time market conditions. Generally, loans that best fit
long-term financing vehicles are selected to be transferred into
one of our long-term securitizations. We hold loans in
short-term warehousing for a period of time ranging from
approximately one month to as many as 18 months, at which
point these loans are transferred into one of our long-term
securitizations. Because transferring those loans to a long-term
securitization includes certain fixed administrative costs, we
maximize our economies of scale by executing large transactions
that routinely price in line with our largest competitor. We are
a frequent issuer and benefit from a high level of name
recognition by the asset-backed investment community.
We had approximately $9.3 billion in
asset-backed securities issued as of September 30, 2003,
including auction-rate notes whose interest rates are reset
periodically. These asset-backed securities allow us to finance
student loan assets over multiple years, thereby eliminating the
renewal risk associated with warehouse vehicles.
We rely upon securitization vehicles as our most
significant source of funding for student loans on a long-term
basis. The net cash flow we receive from the securitized student
loans generally represents the excess amounts, if any, generated
by the underlying student loans over the amounts required to be
paid to
66
Our original securitization transactions began in
1996, utilizing a master trust structure, and were privately
placed auction-rate note securitizations. As the size and volume
of our securitizations increased, we began publicly offering
asset-backed securities under shelf registration statements,
using special purpose entities. When we deemed long-term
interest rates attractive, we issued fixed-rate debt backed by
cash flows from FFELP loans with fixed-rate floors which
effectively match the funding of our assets and liabilities. In
2002, we began accessing the term asset-backed securities market
by issuing amortizing multi-tranche LIBOR-indexed variable-rate
debt securities. Almost all of the securitization debt that we
have issued since 1996 is still outstanding today, including the
taxable and tax-exempt securitization debt issued by companies
we have acquired. We have utilized financial guarantees from
monoline insurers and senior/ subordinate structures to assist
in obtaining AAA ratings on our senior securitized
debt in addition to cash reserves and excess spread to assist in
obtaining A and AA ratings on our
subordinated debt. We intend to continue to issue auction rate
notes, variable-rate and fixed-rate term asset-backed securities
and debt securities through other asset funding vehicles in
order to minimize our cost of funds and give us the most
flexibility to optimize the return on our student loan assets.
We acquired UFS Securities in August 2003 in
order to enhance our access to broker-dealer services related to
our debt securities offerings. UFS Securities fits into our
overall business strategy by effectively decreasing our costs
associated with accessing the asset-backed securitization
market. UFS Securities sells certain tranches of our auction
rate securities in co-broker-dealer arrangements with certain
third-party broker-dealers. Since UFS Securities has become our
wholly owned subsidiary, the fees that it receives in
conjunction with sales of our securities reduce our overall
costs of issuance with respect to our auction rate securities.
We intend at this time to continue other business activities of
UFS Securities, including providing consulting services to
financial institutions and broker-dealers, serving as a
distributor of accounts with the College Savings Plan and acting
as an underwriter for mutual funds. The business activities of
UFS Securities do not constitute a material part of our business
today, and there is no assurance that they will in the future.
Our student loan origination and lending
activities could be significantly impacted by the
reauthorization of the Higher Education Act. For example, if the
single holder rule, which generally restricts a competitor from
consolidating loans away from a holder that owns all of a
students loans, is abolished, a substantial portion of our
non-consolidated portfolio would be at risk of being
consolidated away by a competitor. On the other hand, abolition
of the rule would also open up a portion of the rest of the
market and provide us with the potential to gain market share.
The portion of the rest of the market that would be opened up to
us, as measured in aggregate principal amount of student loans,
would be greater than the portion of our non-consolidated
portfolio that would be at risk of being consolidated by a
competitor. Other potential changes which could impact us
include:
A further description of the issues in connection
with the reauthorization of the Higher Education Act appears
under Industry Overview Federal Student Loan
Programs Reauthorization of the Higher Education
Act.
67
In addition, our efforts to expand into the
consolidation market are expected to be affected by recently
amended Federal Trade Commission rules and similar state
regulations providing for so-called do not call
registries. Under these rules, consumers may have their phone
numbers added to a do not call registry, and we
would generally be prohibited from calling any such consumers to
market our products and services. This rule may restrict our
ability to market effectively our products and services to new
customers. Furthermore, compliance with this new rule may prove
difficult, and we may incur penalties for improperly conducting
our marketing activities.
We specialize in the servicing of federally
guaranteed and private student loans. Our servicing division
offers lenders across the country a complete line of education
loan services, including recovery of non-guaranteed loans,
application processing, disbursement of funds, customer service,
account maintenance, federal reporting and billing collections,
payment processing, default aversion and claim filing. Our
student loan and guarantee servicing divisions each uses a
proprietary system to manage the servicing process. These
systems provide for automated compliance with most Higher
Education Act regulations. For additional information, see
Software Products.
Our quality and experience in student loan
servicing is evident in the historical performance of our entire
pool of loan assets, which enjoys a very low initial claim
rejection rate due to servicer error, which is the percent of
claims submitted by us or our servicing customers rejected by a
guaranty agency due to servicer error. In 2002, the initial
claim rejection rate due to servicer error was approximately
0.25% of all claims filed by us or servicing customers. The
substantial majority of these initial claim rejections are
cured, meaning a payment or the borrowers promise to pay
has been received. Historically, the aggregate of our losses and
those of our servicing customers from rejected loans and
interest denials has been less than $1 million per year, or
less than 0.01% of our average servicing portfolio.
As we expand our student loan origination and
acquisition activities, we may face increased competition with
some of our servicing customers. In the past, including in one
case recently, servicing customers have terminated their
servicing relationships with us, and we could in the future lose
more servicing customers as a result. However, due to our
life-of-loan servicing agreements, we do not expect this loss
and potential loss of customers to have a material adverse
effect on our results of operations for the foreseeable future.
We provide servicing support for $20 billion
in FFELP loans. This servicing support is provided to guaranty
agencies, which are the organizations that serve as the
intermediary between the federal government and the lender and
who are responsible for paying the claims made on defaulted
loans. One of our guarantee servicing customers recently
notified us of its intention not to renew its servicing
contract. The loss of this customer is not expected to have a
material effect on our results of operations.
Our servicing software is focused on providing
technology solutions to education finance issues. Our
subsidiaries, Idaho Financial Associates, Inc. and Charter
Account Systems, Inc. provide student loan software and support
for entities involved in the asset management aspects of the
student loan arena. In addition, 5280 Solutions, Inc., of
which we own a 51% interest, provides customized software
solutions to help in the administration and management of the
student loan process. Staffed with more than
100 programmers, support staff and administrative support
personnel, we provide software and maintenance to 34 different
clients servicing $27 billion in student loan assets.
68
Software Products
Our software products are designed to provide us
loan origination access to colleges and universities, while
simplifying the financial aid process. We also license our
servicing software products to third-party student loan holders
and servicers. Our software products include the following:
In addition to the products described above, we
offer a variety of borrower services to assist students and
parents in navigating the financial aid process. These services
include our unique @theU higher education resource, which
provides free information on college planning and financial aid,
paired with a loyalty program to allow members to earn credit
toward reducing the balance of a student loan regardless of
lender or servicer. Another product, Nelnet Notes, provides
online assistance to help borrowers better understand the
financial aid process, as well as broader money management
issues.
Generally, our non-servicing related software
products are operated for the benefit of our school and borrower
customers on our hardware without specific charges to the school
or borrowers. Our servicing software can be licensed to third
parties for use on their hardware for which they pay annual
license and maintenance fees.
Our software products, including website content
and functionality, have been developed and maintained using
internal business and technical resources. External software
consultants are utilized on selected occasions when
circumstances require specific technical knowledge or
experience. Costs associated with research and development
related to the development of computer software are expensed
when incurred in accordance with SFAS No. 86,
Accounting
for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed.
Research and development machinery and
equipment that have alternative future uses either in research
and development activities or otherwise are capitalized and
depreciated over their useful lives.
All costs associated with website development or
the maintenance of existing software products are expensed when
incurred. We also capitalize software costs under the provisions
of Statement of Position 98-1,
Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use
.
69
Interest Rate Risk Management
Since we generate the majority of our earnings
from the spread between the yield we receive on our portfolio of
student loans and the cost of financing these loans, the
interest rate sensitivity of our balance sheet could have a
material effect on our operations. Although the majority of our
student loans have variable-rate characteristics in interest
rate environments when the special allowance payment formula
exceeds the borrower rate, some of our student loans, primarily
consolidation loans, have fixed-rate characteristics to them.
We attempt to match the interest rate
characteristics of pools of loan assets with debt instruments of
substantially similar characteristics, particularly in rising
interest rate markets. Due to the variability in duration of our
assets and varying market conditions, we do not attempt to
perfectly match the interest rate characteristics of the entire
loan portfolio with the underlying debt instruments. To date, we
have financed the majority of our student loan portfolio with
variable-rate debt.
In the current low interest rate environment, our
FFELP loan portfolio is yielding excess income due to the
reduction in the interest rates on the variable-rate liabilities
financing student loans at a fixed borrower rate. In higher
interest rate environments, where the interest rate rises above
the borrower rate and fixed-rate loans become variable, the
impact of the rate fluctuations is substantially reduced. We
have employed various derivative instruments to help manage our
interest rate risk. We periodically review mismatched interest
rate characteristics of our portfolios of student loans and
those of our underlying debt instruments in order to evaluate
utilization of interest rate swaps and other derivative
instruments as part of our overall risk management strategy. In
the third quarter of 2003, we entered into a fixed/floating
swap, three basis swaps and one cap contract in our current
interest rate risk management efforts, which are more
specifically described in Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
ResourcesInterest Rate Risk. As a result of our
interest rate management activities, we believe we have reduced
the volatility and effects of a rising interest rate
environment. For further information, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Interest Rate Risk.
Intellectual Property
We own numerous trademarks and service marks to
identify our various products and services, both by words and
logos, or by design marks. We currently have
approximately 15 pending and ten registered marks for such
products and services, and we actively assert our rights to
those marks when we believe potential infringement may be
occurring. We believe our marks and logos have developed and
continue to develop strong brand-name recognition in our
industry and the consumer marketplace. Each of these marks has,
upon registration, an indefinite duration so long as we continue
to use the mark on or in connection with such goods or services
as the mark identifies. In order to protect the indefinite
duration, we make filings to continue registration of these
marks. We own one patent application that has been published
with respect to a customer-loyalty program and have also
actively asserted our rights thereunder in situations where we
believe our claims may be infringed upon. If such patent is
granted, it will have a duration and effect of 20 years from the
date of application. We own many copyright-protected works,
including our various computer system codes and displays,
websites, publications and marketing collateral. We also have
trade secret rights to many of our processes and strategies, and
our software product designs. Our software products are
protected by both registered and common law copyrights. We also
protect our software products through strict confidentiality and
ownership provisions placed in license agreements which restrict
the ability to copy, distribute or disclose the software
products. We also have adopted internal procedures designed to
preserve trade secrets with respect to our intellectual property.
70
We seek federal and/or state protection of
intellectual property when deemed appropriate, including patent,
trademark/service mark and copyright. The decision whether to
seek such protection may depend on the perceived value of the
intellectual property, the likelihood of securing protection,
the cost of securing and maintaining that protection and the
potential for infringement. Our employees are trained in the
fundamentals of intellectual property, intellectual property
protection and infringement issues, and are also required to
sign agreements requiring, among other things, confidentiality
of trade secrets, assignment of inventions and non-solicitation
of other employees post-termination. Consultants, suppliers and
other business partners are also required to sign nondisclosure
agreements to protect our proprietary rights.
Seasonality
Origination of student loans is generally subject
to seasonal trends, which correspond to the beginning of each
semester of the school year. Student loans are disbursed as
directed by the school and are usually divided into two or three
equal disbursements released at specified times during the
school year. The two periods of August through October and
December through February account for approximately 73% of our
total annual disbursements. While applications and disbursements
are seasonal, our earnings are generally not tied to this cycle.
Due to our portfolio size, new disbursements or run-off for any
given month will not materially change the net interest earnings
of the portfolio. Consolidation loans are generally made prior
to or immediately after the July 1 reset in a rising or
falling interest rate environment.
Customers
We provide student loan servicing either directly
or through our proprietary software to approximately
1.7 million borrowers. We have direct and indirect
relationships with hundreds of colleges and universities across
the nation. We have servicing agreements with 255 customers
and software license agreements with 34 licensees.
Notwithstanding the depth of our customer base, our business is
subject to some vulnerability arising from concentrations of:
loan origination volume with borrowers attending certain
schools; loan origination volume generated by certain branding
partners; loan and guarantee servicing volume generated by
certain loan servicing customers and guaranty agencies; and
software licensing volume generated by certain licensees. Our
ability to maintain strong relationships with significant
schools, branding partners, servicing customers, guaranty
agencies and software licensees is subject to a variety of
risks. Termination of such a strong relationship could result in
a material adverse effect on our business. We cannot assure you
that our forward flow channel lenders or our branding partners
will continue their relationships with us. Loss of a strong
relationship, like that with a significant branding partner,
such as Union Bank, or with schools such as University of
Phoenix and Nova Southeastern University from which we directly
or indirectly acquire a significant volume of student loans,
could result in an adverse effect on our business. For example,
Nova Southeastern University, from which we purchased FFELP
loans (through its relationship with Union Bank) comprising
approximately 7.4% of our total student loan volume in 2002 and
5.9% for the nine months ended September 30, 2003, has
informed us and Union Bank, the direct acquirer of the student
loans, of its intent to not renew its sale commitment starting
January 2007, in order to make a request for a proposal to
potential purchasers, including Union Bank and us.
Competition
We face competition from many lenders in the
highly competitive student loan industry. Using our size, we
have leveraged economies of scale to gain market share and
compete by offering a full array of FFELP and private loan
products and services. In addition, we differentiate ourselves
from other lenders through our vertical integration, technology
and strong relationships with colleges and universities.
We view SLM Corporation, the parent company of
Sallie Mae, as our largest competitor in loan origination,
holding and servicing. SLM Corporation services nearly half of
all outstanding FFELP loans and is the largest holder of student
loans, with a portfolio of nearly $70 billion. Large
national and regional banks are also strong competition,
although many are involved only in origination. In different
geographic locations across the country, we run into strong
competition from the local tax-exempt student loan secondary
markets. The FDL Program has also reduced the origination volume
available for FFEL
71
Employees
As of September 30, 2003, we had
approximately 1,950 employees. Approximately 700 of these
employees hold professional and management positions while 1,250
are in support and operational positions. None of our employees
is covered by collective bargaining agreements. We are not
involved in any material disputes with any of our employees, and
we believe that relations with our employees are good.
Properties
We maintain 14 principal offices in cities
across the United States. We do not own any of our principal
facilities. The following table lists the principal facilities
leased by us.
Litigation
We are subject to various claims, lawsuits and
proceedings that arise in the normal course of business. These
matters principally consist of claims by borrowers disputing the
manner in which their loans have been processed. On the basis of
present information, anticipated insurance coverage and advice
received from counsel, it is the opinion of our management that
the disposition or ultimate determination of these claims,
lawsuits and proceedings will not have a material adverse effect
on our business, financial position or results of operations.
72
Asset management, including student loan
originations and acquisitions.
We
provide student loan sales, marketing, originations, acquisition
and portfolio management. We own a large portfolio of student
loan assets through a series of education lending subsidiaries.
As of September 30, 2003, our student loan portfolio was
$10.1 billion, consisting of over 99% of FFELP loans and
less than 1% of private loans. We generate loans owned in
special purpose lending facilities through direct origination or
through acquisition of loans. We generate the majority of our
earnings from the spread between the yield we earn on our
student loan portfolio and the cost of funding these loans. We
also provide marketing and sales support and managerial and
administrative support related to our asset generation
activities, as well as those performed for our branding partners
or other lenders who sell us loans. Revenues are primarily
generated from interest earnings. While our net interest margin
may vary due to fluctuations in interest rates, government
special allowance payments ensure that we receive a minimum
yield on our student loans, so long as certain requirements are
met.
Student loan
servicing.
We service our student
loan portfolio and the portfolios of third parties. We currently
service or provide complete outsourcing of servicing activities
for more than $18 billion in student loans, including
approximately $8.7 billion of loans in our own portfolio.
The servicing activities provided include loan origination
activities, application processing, borrower updates, payment
processing, claim processing and due diligence procedures. These
activities are performed internally for our own portfolio in
addition to generating fee revenue when performed for
third-party clients.
Guarantee
servicing.
We provide servicing
support to guaranty agencies, which includes system software,
hardware and telecommunication support, borrower and loan
updates, default aversion tracking services, claim processing
services and post-default collection services. We currently
provide servicing support to agencies that guarantee
$20 billion of FFELP loans. These activities generate fee
revenue in addition to expanding our relationship with other
participants in the education finance sector.
Servicing
software.
We provide student loan
servicing software internally and to third-party student loan
holders and servicers. We currently service more than
$18 billion in student loans, which makes us the second
largest servicer of FFELP loans, according to SLSA statistics.
Our software is also used by third parties to service an
additional $27 billion in student loans. We earn software
license and maintenance fees annually from third-party clients
for use of this software. We also provide computer consulting,
custom software applications and customer service support.
our direct channel, in which we originate student
loans in one of our brand names directly to student and parent
borrowers, which accounted for 52.2% and 40.7% of the student
loans we originated and acquired in the nine months ended
September 30, 2003 and in 2002, respectively;
our branding partner channel, in which we acquire
student loans from lenders to whom we provide marketing and
origination services, which accounted for 22.8% and 19.5% of the
student loans we originated and acquired in the nine months
ended September 30, 2003 and in 2002, respectively; and
our forward flow channel, in which we acquire
student loans from lenders to whom we provide origination
services, but provide no marketing services, or who have agreed
to sell loans to us under forward sale commitments, which
accounted for 15.3% and 21.7% of the student loans we originated
and acquired in the nine months ended September 30, 2003
and in 2002, respectively.
We acquired the operations of UNIPAC Service
Corporation, a related entity, in March 2000, which added
servicing operations and growth potential.
We added the servicing and origination operations
of InTuition Holdings, Inc. in June 2000, which expanded
our presence in the southeastern United States.
We acquired MELMAC, Inc., a Maine student loan
company, in January 2001, which increased our FFELP
portfolio by $424 million, and increased our presence on
the East Coast.
We acquired GuaranTec, LLP in June 2001,
which expanded our products and services through the addition of
guarantee servicing.
We acquired EFS, Inc. in December 2001,
which increased our origination opportunities in the Midwest,
increased our loan servicing operations and added
$2.5 billion to our FFELP portfolio.
We acquired Idaho Financial Associates, Inc. in
January 2002 and Charter Account Systems, Inc. in
May 2002, which further secured and expanded our product
suite through proven and tested loan servicing software products.
We acquired UFS Securities, LLC in August 2003,
which added broker-dealer services to our services.
Net Interest Income
As of September 30,
As of December 31,
2003
2002
2002
2001
2000
3.87
%
5.29
%
4.97
%
7.02
%
7.80
%
3.54
%
4.40
%
4.27
%
6.23
%
7.80
%
Provision for Loan Losses
Other Income
Operating Expenses
Other Significant Drivers
applicable laws and regulations that may affect
the volume or terms of education loans;
demand for education financing and competition
within the student loan industry;
the interest rate environment, funding spreads on
our financing programs and access to capital markets;
prepayment rates on student loans, including
prepayments relating to loan consolidation; and
acquisition costs of student loan assets.
Nine months ended September 30, 2003
compared to nine months ended September 30,
2002
Year ended December 31, 2002 compared
to year ended December 31, 2001
Year ended December 31, 2001 compared
to year ended December 31, 2000
At September 30, 2003 compared to
December 31, 2002
At December 31, 2002 compared to
December 31, 2001
As of September 30, 2003
Carrying
Percent of
Amount
Interest rate
amount
total
available
range
Final maturity
(dollars in thousands)
$
3,340,967
30.7
%
$
3,340,967
1.12% 1.90
%
05/01/07 01/25/37
4,927,835
45.2
4,927,835
0.79% 1.22
%
07/01/05 07/01/43
8,268,802
75.9
8,268,802
1,555,244
14.3
2,225,885
1.34% 1.72
%
09/02/04 09/25/24
991,012
9.1
991,012
5.50% 6.68
%
05/01/05 06/01/28
77,289
0.7
77,289
1.30% 6.00
%
01/10/05 11/01/05
$
10,892,347
$
11,562,988
(a)
Issued in securitization transactions.
As of
September 30, 2003
(dollars in
thousands)
$
440,704
220,979
127,965
230,873
86,070
9,785,756
$
10,892,347
As of September 30,
2003
2002
Percent of
Percent of
Dollars
total
Dollars
total
(dollars in thousands)
$
5,200,632
51.7
%
$
5,237,030
61.8
%
273,598
2.7
338,066
4.0
4,347,866
43.2
2,651,402
31.3
91,774
0.9
75,206
0.9
9,913,870
98.5
8,301,704
98.0
161,774
1.6
176,848
2.1
(10,974
)
(0.1
)
(10,289
)
(0.1
)
(4,750
)
(1,089
)
$
10,059,920
100.0
%
$
8,467,174
100.0
%
(a)
Supplemental Loans for Students, or SLS, are the
predecessor to unsubsidized Stafford loans.
As of December 31,
2002
2001
2000
Percent of
Percent of
Percent of
Dollars
total
Dollars
total
Dollars
total
(dollars in thousands)
$
4,983,021
58.2
%
$
4,947,316
66.6
%
$
2,390,203
66.7
%
313,100
3.7
335,083
4.5
115,237
3.2
3,033,607
35.4
1,923,896
25.9
1,004,548
28.0
74,660
0.9
60,760
0.8
31,843
0.9
8,404,388
98.2
7,267,055
97.8
3,541,831
98.8
167,032
1.9
167,059
2.3
47,726
1.3
(9,970
)
(0.1
)
(9,378
)
(0.1
)
(3,004
)
(0.1
)
(2,030
)
(864
)
(610
)
$
8,559,420
100.0
%
$
7,423,872
100.0
%
$
3,585,943
100.0
%
(a)
Supplemental Loans for Students, or SLS, are the
predecessor to unsubsidized Stafford loans.
Activity in the Allowance for Loan
Losses
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(dollars in thousands)
$
12,000
$
10,242
$
10,242
$
3,614
$
4,122
3,275
2,244
3,162
3,250
1,370
5,600
1,075
2,425
675
8,875
3,319
5,587
3,925
1,370
4,866
(2,271
)
(1,417
)
(2,570
)
(1,742
)
(1,389
)
(2,937
)
(821
)
(1,333
)
(499
)
(497
)
(5,208
)
(2,238
)
(3,903
)
(2,241
)
(1,886
)
57
55
74
78
8
(5,151
)
(2,183
)
(3,829
)
(2,163
)
(1,878
)
$
15,724
$
11,378
$
12,000
$
10,242
$
3,614
$
10,974
$
10,289
$
9,970
$
9,378
$
3,004
4,750
1,089
2,030
864
610
$
15,724
$
11,378
$
12,000
$
10,242
$
3,614
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(dollars in thousands)
student loans
0.073
%
0.036
%
0.047
%
0.042
%
0.055
%
student loans
0.167
%
0.141
%
0.147
%
0.199
%
0.107
%
0.159
%
0.137
%
0.143
%
0.141
%
0.102
%
5.176
%
1.448
%
2.719
%
1.422
%
1.916
%
$
9,432,513
$
8,056,047
$
8,171,898
$
5,135,227
$
3,388,156
$
9,913,870
$
8,301,704
$
8,404,388
$
7,267,055
$
3,541,831
$
91,774
$
75,206
$
74,660
$
60,760
$
31,843
September 30,
December 31,
2003
2002
2002
2001
2000
Balance
Percent
Balance
Percent
Balance
Percent
Balance
Percent
Balance
Percent
(dollars in thousands)
grace/deferment(1)
$
3,336,280
$
2,684,837
$
2,293,763
$
1,807,308
$
954,655
1,380,721
1,305,380
1,289,606
854,737
99,153
4,465,828
87.5
%
3,639,344
85.9
%
4,002,025
84.3
%
3,957,114
87.1
%
2,139,113
87.1
%
221,590
4.3
208,130
4.9
307,668
6.5
247,074
5.4
131,582
5.4
143,278
2.8
148,988
3.5
146,198
3.1
110,913
2.4
64,947
2.6
274,399
5.4
239,819
5.7
290,468
6.1
229,149
5.1
120,538
4.9
5,105,095
100.0
%
4,236,281
100.0
%
4,746,359
100.0
%
4,544,250
100.0
%
2,456,180
100.0
%
$
9,822,096
$
8,226,498
$
8,329,728
$
7,206,295
$
3,509,988
$
26,554
$
36,069
$
30,545
$
34,597
$
10,253
13,304
4,148
7,711
530
47,449
91.4
%
33,294
95.2
%
31,168
85.6
%
24,839
96.9
%
20,712
95.9
%
1,046
2.0
584
1.7
2,953
8.1
339
1.3
335
1.6
1,765
3.4
474
1.3
1,259
3.5
222
0.9
66
0.3
1,656
3.2
637
1.8
1,024
2.8
233
0.9
477
2.2
51,916
100.0
%
34,989
100.0
%
36,404
100.0
%
25,633
100.0
%
21,590
100.0
%
$
91,774
$
75,206
$
74,660
$
60,760
$
31,843
(1)
Loans for borrowers who still may be attending
school or engaging in other permitted educational activities and
are not yet required to make payments on the loans,
e.g.
,
residency periods for medical students or a grace period for bar
exam preparation.
(2)
Loans for borrowers who have temporarily ceased
making full payments due to hardship or other factors, according
to a schedule approved by the servicer consistent with the
established loan program servicing procedures and policies.
(3)
The period of delinquency is based on the number
of days scheduled payments are contractually past due and relate
to repayment loans, that is, receivables not charged off, and
not in school, grace, deferment or forbearance.
(4)
Loans delinquent 91 days or greater include
loans in claim status, which are loans which have gone into
default and have been submitted to the guaranty agency for FFELP
loans or the private insurer for private loans to process the
claim for payment.
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(dollars in thousands)
$
8,404,388
7,267,055
$
7,267,055
$
3,541,831
$
2,940,679
188,695
186,671
224,827
84,599
1,469,624
452,108
859,120
55,715
43,951
723,023
510,291
521,023
524,964
592,001
485,334
494,389
577,603
484,058
391,503
306,649
469,675
483,213
299,271
43
3,173,325
2,113,134
2,665,786
1,448,607
1,027,498
2,919,845
(1,663,843
)
(1,078,485
)
(1,528,453
)
(643,228
)
(426,346
)
$
9,913,870
$
8,301,704
$
8,404,388
$
7,267,055
$
3,541,831
(a)
Includes repayments on all consolidation loans.
Student Loan Spread Analysis
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(dollars in thousands)
4.93
%
6.08
%
5.94
%
6.71
%
8.86
%
(0.40
)
(0.29
)
(0.31
)
(0.23
)
(0.25
)
(0.71
)
(0.63
)
(0.67
)
(0.28
)
(0.32
)
3.82
5.16
4.96
6.20
8.29
(1.92
)
(2.55
)
(2.59
)
(3.95
)
(6.04
)
1.90
2.61
2.37
2.25
2.25
(0.13
)
(0.58
)
(0.61
)
(0.58
)
1.77
%
2.03
%
1.76
%
1.67
%
2.25
%
$
9,432,513
$
8,056,047
$
8,171,898
$
5,135,227
$
3,388,156
Interest Rate Risk
As of September 30,
As of December 31,
2003
Percent
2002
Percent
2002
Percent
2001
Percent
2000
Percent
(dollars in thousands)
$
4,812,473
48.5
%
$
3,097,072
37.3
%
$
3,320,121
39.5
%
$
2,486,649
34.2
%
$
1,277,098
36.1
%
5,101,397
51.5
5,204,632
62.7
5,084,267
60.5
4,780,406
65.8
2,264,733
63.9
$
9,913,870
100.0
%
$
8,301,704
100.0
%
$
8,404,388
100.0
%
$
7,267,055
100.0
%
$
3,541,831
100.0
%
$
991,012
9.1
%
$
1,171,986
12.8
%
$
1,122,881
11.9
%
$
1,232,662
15.6
%
$
583,191
14.8
%
9,901,335
90.9
7,971,637
87.2
8,324,801
88.1
6,693,700
84.4
3,350,939
85.2
$
10,892,347
100.0
%
$
9,143,623
100.0
%
$
9,447,682
100.0
%
$
7,926,362
100.0
%
$
3,934,130
100.0
%
(a)
Includes approximately $570 million,
$430 million, $430 million, $570 million and
$530 million of variable-rate loan assets which are
classified as fixed-rate loan assets as a result of being
financed by variable-rate, tax-exempt bonds subject to a 9.5%
minimum yield as of September 30, 2003 and 2002 and
December 31, 2002, 2001 and 2000, respectively.
matching the funding of certain assets and
liabilities;
to some extent, utilizing derivative instruments
to manage a portion of downside risk and interest rate
fluctuations; and
positioning our portfolio to benefit from
interest rate movements and fluctuations.
Notional Amounts by product type
Fixed/
Floating
Basis
Cap
Maturity
Swaps(a)
Swaps(b)
Contracts(c)
Total
(dollars in millions)
$
1,000
$
500
$
$
1,500
1,000
500
1,500
500
500
$
1,000
$
2,000
$
500
$
3,500
$
(0.3
)
$
(3.0
)
$
4.2
$
0.9
(a)
A fixed/floating swap is an interest rate swap in
which we agree to pay a fixed rate in exchange for a floating
rate. The interest rate swap effectively converts a portion of
our variable rate debt to a fixed rate for a period of time
fixing the relative spread between a portion of our student loan
assets equal to the size of the swaps, notional amount and
earning at a fixed rate and the converted fixed-rate liability.
(b)
A basis swap is an interest rate swap agreement
in which we agree to pay a floating rate in exchange for another
floating rate, based upon different market indices. We have
employed basis swaps to limit our sensitivity to dramatic
fluctuations in the underlying indices used to price a portion
of our variable-rate assets and variable-rate debt.
(c)
A cap contract is a derivative instrument in
which we agree to pay an up-front premium in exchange for a cap
on the level of interest on a notional amount. We have entered
into an interest rate cap contract to limit the relative rates
on a portion of our variable rate debt, limiting the sensitivity
to a dramatically rising interest rate market. The interest rate
cap contract was purchased from J.P. Morgan Chase Bank for
$6 million in August 2003. The interest rate cap
contract cost is amortized over the term of the contract, which
matures in August 2005. The interest rate cap was
terminated on October 16, 2003 for approximately
$6 million.
Nine months ended September 30, 2003
Change from decrease
Change from increase
Change from increase
of 100 basis points
of 100 basis points
of 200 basis points
Dollars
Percent
Dollars
Percent
Dollars
Percent
$
27,650
92.3
%
$
(23,369
)
(78.0
)%
$
(38,604
)
(128.9
)%
$
(11,700
)
(39.1
)%
$
9,375
31.3
%
$
20,625
68.9
%
$
15,950
53.2
%
$
(13,994
)
(46.7
)%
$
(17,979
)
(60.0
)%
$
0.23
$
(0.20
)
$
(0.26
)
Year ended December 31, 2002
Change from decrease
Change from increase
Change from increase
of 100 basis points
of 100 basis points
of 200 basis points
Dollars
Percent
Dollars
Percent
Dollars
Percent
$
15,119
18.6
%
$
(11,553
)
(14.2
)%
$
(20,236
)
(24.9
)%
$
0.0
%
$
0.0
%
$
0.0
%
$
15,119
18.6
%
$
(11,553
)
(14.2
)%
$
(20,236
)
(24.9
)%
$
0.22
$
(0.16
)
$
(0.29
)
Year ended December 31, 2001
Change from decrease
Change from increase
Change from increase
of 100 basis points
of 100 basis points
of 200 basis points
Dollars
Percent
Dollars
Percent
Dollars
Percent
$
2,054
10.3
%
$
(749
)
(3.7
)%
$
(1,975
)
(9.9
)%
$
0.0
%
$
0.0
%
$
0.0
%
$
2,054
10.3
%
$
(749
)
(3.7
)%
$
(1,975
)
(9.9
)%
$
0.03
$
(0.01
)
$
(0.03
)
As of September 30, 2003
Interest rate sensitivity period
3 months
3 months
6 months
1 to 2
2 to 5
Over 5
or less
to 6 months
to 1 year
years
years
years
(dollars in thousands)
$
10,059,920
$
$
$
$
$
733,956
10,793,876
9,901,335
69,100
55,940
111,880
210,803
281,754
261,535
9,970,435
55,940
111,880
210,803
281,754
261,535
823,441
(55,940
)
(111,880
)
(210,803
)
(281,754
)
(261,535
)
823,441
767,501
655,621
444,818
163,064
(98,471
)
108.3
%
%
%
%
%
%
7.6
%
7.1
%
6.1
%
4.1
%
1.5
%
(0.9
)%
As of December 31, 2002
Interest rate sensitivity period
3 months
3 months
6 months
1 to 2
2 to 5
Over 5
or less
to 6 months
to 1 year
years
years
years
(dollars in thousands)
$
8,559,420
$
$
$
$
$
916,572
9,475,992
8,324,801
48,645
48,645
97,289
223,759
436,617
267,926
8,373,446
48,645
97,289
223,759
436,617
267,926
1,102,546
(48,645
)
(97,289
)
(223,759
)
(436,617
)
(267,926
)
1,102,546
1,053,901
956,612
732,853
296,236
28,310
113.2
%
%
%
%
%
%
11.6
%
11.1
%
10.1
%
7.7
%
3.1
%
0.3
%
Securitization Accounting
Accounting for Derivatives
Allowance for Loan Losses
loans in repayment versus those in non-paying
status;
months in repayment;
delinquency status;
type of program; and
trends in defaults in the portfolio based on our
experience and industry data.
Program Reimbursement Reserve
Early Extinguishment of Debt
Accounting for Costs Associated with Exit
or Disposal Activities
Accounting for Stock-Based
Compensation
Accounting for Guarantees
Consolidation of Variable Interest
Entities
Statement of Financial Accounting Standards
No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity
The Federal Family Education Loan Program, which
is known as the FFEL Program or the FFELP.
The William D. Ford Federal Direct Loan Program,
which is known as the FDL Program or the FDLP.
The Federal Family Education Loan
Program
Subsidized Federal Stafford Loans
for students who pass a financial
needs test. This loan type is the largest component of the FFEL
Program, with aggregate borrowing limited to $23,000 for
undergraduate students and $65,500 for graduate students. The
federal government pays all interest costs for subsidized
Stafford borrowers while borrowers are in school and during
grace and deferment periods. The interest rate on these loans
currently changes annually, but is capped at a maximum annual
rate of 8.25%. During the 2002 federal fiscal year,
$15.3 billion in subsidized Stafford loans were made,
according to the DOEs fiscal year 2004 budget presentation.
Unsubsidized Federal Stafford Loans
for students who do not meet a
financial needs test or who need to supplement their subsidized
loans. Although borrowers may defer payment of interest while
they are in school, they are responsible for all
interest that accrues. The interest rate on these loans also
changes annually and is capped at a maximum annual rate of
8.25%. During the 2002 federal fiscal year, $13.9 billion
in unsubsidized Stafford loans were made, according to the
DOEs fiscal year 2004 budget presentation.
Federal PLUS Loans
for parents of dependent
undergraduate students. Although borrowers may defer payment of
interest while their children are in school, they are
responsible for all interest that accrues. Borrowers may borrow
up to the cost of attendance per child, minus financial aid from
other sources. The interest rate on PLUS loans is variable, but
is capped at a maximum annual rate of 9.00%. During the 2002
federal fiscal year, $3.6 billion in PLUS loans were made,
according to the DOEs fiscal year 2004 budget presentation.
Federal Consolidation Loans
designed to help borrowers manage
repayment of multiple loans by combining all eligible loans into
a single, new guaranteed FFELP loan with a longer repayment
term, a fixed interest rate and a smaller total monthly payment.
As a result of extended repayment periods associated with
consolidation loans, total payments made by consolidation
borrowers over the life of their consolidation loan are
generally greater than those made by borrowers with standard
repayment periods. According to the DOE, during the 2002 federal
fiscal year $23.0 billion in federal consolidation loans
were made in addition to the $32.8 billion in new loans
made under the FFEL Program during the same year, due in part to
record-low interest rates.
Eligible
Lenders.
Eligible lenders, which
are registered with the DOE, originate and hold FFELP loans and
receive interest subsidy payments, special allowance payments
and default reimbursement. Eligible lenders include banks,
savings and loan associations, credit unions, pension funds,
insurance companies and, under certain conditions, schools and
guaranty agencies. Eligible lenders may also serve as a trustee
on behalf of entities not otherwise eligible to hold FFELP
loans, such as Nelnet, allowing such other entities to
participate in the FFEL Program as a beneficial owner of the
loan assets.
Servicers.
Servicing of student loan assets is critical for FFELP lenders
because losses on defaults are mainly dependent on the
servicers ability to service the loans according to DOE
guidelines. Proper servicing of a student loan is required in
order to maintain eligibility for special allowance payments,
interest subsidy payments and guarantee reimbursement.
Guaranty
Agencies.
Guaranty agencies
expedite reimbursement for defaulted student loans to eligible
lenders. These guaranty agencies are non-profit institutions or
state agencies that have entered into federal reimbursement
contracts with the DOE pursuant to the Higher Education Act.
Reimbursement from the guaranty agency to the lender is
contingent upon servicing in accordance with certain regulatory
requirements. There will be 100% reimbursement of principal and
accrued interest for defaulted loans disbursed before
October 1, 1993 and 98% reimbursement of principal and
accrued interest for defaulted loans disbursed on or after
October 1, 1993, if such loans are serviced according to
DOE guidelines. Guaranty agencies reimburse eligible lenders
from reserve accounts established for this purpose. The guaranty
agency, in turn, receives reimbursement from the DOE. The level
of reimbursement to the guaranty agency depends on a number of
factors. Typically, guaranty agencies guarantee loans to
students attending eligible institutions in the state or region
serviced by the guaranty agency. They may also guarantee loans
to students who reside in their own state or region, but who
attend eligible institutions in another state or region. After a
claim has been paid, the guaranty agency assumes ownership of
the loan and is obligated to pursue post-disposition recoveries.
The guaranty agency retains a percentage of post-disposition
recoveries and reimburses the DOE with the remaining percentage.
Department of
Education.
The DOEs
regulations provide a number of incentives to student loan
market participants. The DOE provides eligible private lenders
with an incentive to lend to students by guaranteeing default
reimbursement. When applicable, it also pays special allowance
payments. The DOE provides eligible borrowers with an incentive
to borrow by providing interest subsidies and capped
interest rates. In the event of a guaranty agency
bankruptcy or a determination by the DOE that the guaranty
agency is unable to reimburse claims, an eligible lender has the
right to submit claims directly to the DOE for payment. Under
such circumstances, the DOE is obligated to pay the holder of
the loan the full insurance obligation of the guaranty agency,
subject to its servicing guidelines.
Reauthorization of the Higher Education
Act
Single holder rule on consolidation
loans.
Currently, if only one
lender holds all of a students loans, then a competitor
cannot consolidate the loans away from the current holder unless
the current holder refuses to consolidate the loans for the
borrower. There is a high probability that the single holder
rule will be eliminated during reauthorization. In the industry
as a whole, a large portion of all non-consolidated loans are
currently held by only one lender. Elimination of the single
holder rule would open up a portion of the market to increased
competition.
The ability to refinance consolidation
loans.
Currently, once a loan is
consolidated, it cannot be refinanced by another government
guaranteed student loan unless subsequent FFELP loans are made
to the borrower. If this rule changes, the amount of
consolidation loans that are refinanced could be significant.
Variable-rate consolidation loans and
extended repayment of Stafford
loans.
Reauthorization proposals
have been made to Congress that would continue variable borrower
rates for Stafford and PLUS loans beyond July 1, 2006. In
addition, language has been suggested that would permit new
consolidation loans to have variable rates. Language has also
been proposed that would allow Stafford/PLUS borrowers to have
extended repayment terms, similar to those terms provided for
under the loan consolidation program. Both of these initiatives
would offset two of the most appealing aspects of consolidation
loans,
i.e.
, long-term fixed rates and extended
repayment. Adoption of these initiatives could decrease
consolidation opportunities in the market.
9.5% floor
income.
Student loans originated
or acquired with the proceeds of tax-exempt obligations issued
prior to October 1, 1993 are subject to a minimum, or floor,
rate of return of 9.5% per year based upon provisions of the
Higher Education Act and related interpretations by the DOE.
Reauthorization proposals have been made to Congress that would
limit the minimum return to those loans which are funded
directly with tax-exempt obligations and potentially eliminate
excess earnings on loans subsequently funded with taxable
obligations. Adoption of this initiative could decrease loan
interest income to lenders receiving 9.5% floor income.
Variable rate floor
income.
Language has been proposed
that would eliminate the potential of excess earnings on student
loans that are reset annually in a declining interest rate
environment. Adoption of this initiative could decrease loan
interest income to lenders receiving variable rate floor income.
Borrower
limits.
For the last
20 years, the maximum amount that a freshman or sophomore
can borrow has remained around $2,500. Educational tuition has
increased at approximately two times the rate of inflation over
this same time frame. There is a possibility that these borrower
limits could be increased, thereby potentially increasing the
average size of future loan originations in the market.
Asset management, including student loan
originations and acquisitions.
We
provide student loan sales, marketing, originations, acquisition
and portfolio management. We own a large portfolio of student
loan assets through a series of education lending subsidiaries.
As of September 30, 2003, our student loan portfolio was
$10.1 billion, consisting of over 99% of FFELP loans and
less than 1% of private loans. We generate loans owned in
special purpose lending facilities through direct origination or
through acquisition of loans. We generate the majority of our
earnings from the spread between the yield we earn on our
student loan portfolio and the cost of funding these loans. We
also provide marketing and sales support and managerial and
administrative support related to our asset generation
activities, as well as those performed for our branding partners
or other lenders who sell such loans. Revenues are primarily
generated from interest earnings. While our net interest margin
may vary due to fluctuations in interest rates, government
special allowance payments ensure that we receive a minimum
yield on our student loans, so long as certain requirements are
met.
Student loan
servicing.
We service our student
loan portfolio and the portfolios of third parties. We currently
service or provide complete outsourcing of servicing activities
for more than $18 billion in FFELP loans, including
approximately $8.7 billion of loans in our own portfolio.
The servicing activities include loan origination activities,
application processing, borrower updates, payment processing,
claim processing and due diligence procedures. These activities
are performed internally for our own portfolio and generate fee
revenue when performed for third-party clients.
Guarantee
servicing.
We provide servicing
support to guaranty agencies, which includes system software,
hardware and telecommunication support, borrower and loan
updates, default aversion tracking services, claim processing
services and post-default collection services. We currently
provide servicing support to agencies that guarantee
$20 billion of FFELP loans. These activities generate fee
revenue in addition to expanding our relationship with other
participants in the education finance sector.
Servicing
software.
We provide student loan
servicing software internally and to third-party student loan
holders and servicers. We currently service more than
$18 billion in student loans, which makes us the second
largest servicer of FFELP loans, according to SLSA statistics.
Our software is also used by third parties to service an
additional $27 billion in student loans. We earn software
license and maintenance fees annually from third-party clients
for use of this software. We also provide computer consulting,
custom software applications and customer service support.
our direct channel, in which we originate student
loans in one of our brand names directly to student and parent
borrowers, which accounted for 52.2% and 40.7% of the student
loans we originated and acquired in the nine months ended
September 30, 2003 and in 2002, respectively;
our branding partner channel, in which we acquire
student loans from lenders to whom we provide marketing and
origination services, which accounted for 22.8% and 19.5% of the
student loans we originated and acquired in the nine months
ended September 30, 2003 and in 2002, respectively; and
our forward flow channel, in which we acquire
student loans from lenders to whom we provide origination
services, but provide no marketing services, or who have agreed
to sell loans to us under forward sale commitments, which
accounted for 15.3% and 21.7% of the student loans we originated
and acquired in the nine months ended September 30, 2003
and in 2002, respectively.
Focused leader with vertically integrated
platform.
High-quality loan portfolio established through
our concentration on FFELP loans.
Strong relationships with student loan market
constituents.
Access to cost-effective financings.
Leading, cost-competitive servicing platform with
a focus on asset protection.
Comprehensive suite of software products.
Management team with significant operating and
acquisition experience.
Nteract
our Internet-based student loan origination system.
Ntrust
our centralized disbursement agent service.
Ngenius
our origination and disbursement engine that supports Ntrust and
Nteract.
Nservice
our servicing system for FFELP and private loans.
Establish and maintain leadership in all our
product and service offerings by utilizing our technology.
Focus on increasing our organic growth while
maintaining a low-cost infrastructure.
Strengthen existing relationships while
establishing new ones.
Continue our commitment to highly focused and
disciplined loan origination and acquisition practices.
Opportunistically make company and portfolio
acquisitions.
Asset management, including student loan
originations and acquisitions
$9,913,870
$5,200,632
$273,598
$4,347,866
$91,774
797,902
$12,425
2,181,264
$4,545
4.52
%
173.6
(a)
Supplemental Loans for Students, or SLS, are the
predecessor to unsubsidized Stafford loans.
allowing refinancing of consolidation loans,
which would open approximately 43% of our portfolio to such
refinancing;
allowing for variable-rate consolidation loans
and extended repayment terms of Stafford loans, which would lead
to less loans lost through consolidation of our portfolio, but
would also decrease our consolidation opportunities; and
allowing for increased borrower limits, which may
provide opportunities for increasing the average size of our
future loan originations.
Student Loan Servicing
Guarantee Servicing
Servicing Software
Nteract
an
Internet-based, open-architecture student loan origination and
disbursement management system. Nteract provides a complete
solution for processing FFELP and private student loan
certifications, initiating change transactions and comprehensive
application through disbursement reporting. Nteract operates in
a real-time environment and can be accessed for online inquiry
at any time 24 hours a day, seven days a week. Nteract is
used by our student loan origination, acquisition and portfolio
management unit and our student loan servicing unit.
Ntrust
a
centralized disbursement service. It is a comprehensive,
open-architecture solution for receiving FFELP and private
student loan funds, reports and the student loan industrys
standardized data files. Ntrust provides a single point of
contact for the college or universitys entire electronic
loan processing needs and provides real-time loan disbursement
adjustment processing. Ntrust is used by our student loan
origination, acquisition and portfolio management unit and our
student loan servicing unit.
Ngenius
the
origination engine that supports the Ntrust and Nteract
products. Used internally for our loan origination initiatives
and those of our customers, it is a table-driven origination
platform which provides flexibility and scalability. The system
interacts with multiple guaranty agencies and can support an
instant guarantee. Ngenius is used by our student
loan origination, acquisition and portfolio management unit and
our student loan servicing unit.
Nservice
our
servicing engine for FFELP and private loans. The Nservice
system is a profile driven system, allowing for easy
implementation of most regulatory changes and rapid development
of custom loan programs. Software development is aided by the
use of high-level application development tools to speed
delivery of enhancements. The Nservice system provides for
automated compliance with most Higher Education Act regulations.
Nservice also facilitates the servicing of FFELP and private
loans into a single, integrated servicing environment, improving
service to schools, borrowers and lenders. Nservice is used by
our student loan servicing unit, and the software is also
licensed to third-party student loan holders and servicers by
our servicing software unit.
Lease
Square
expiration
Location
Function
footage
date
Charter Software Licensing
3,550
September 2004
IFA Software Licensing
9,993
August 2005
Loan Servicing, Executive Management, Technology
106,185
February 2008
Loan Consolidation
18,000
May 2007
Sales
611
October 2004
Loan Servicing, Loan Generation
58,770
February 2008
Loan Servicing, Loan Generation, Technology
116,828
January 2007
Corporate Headquarters, Loan Servicing, Loan
Generation
94,909
December 2010
Capital Markets
3,500
N/A
Loan Generation, Sales
5,211
January 2010
Loan Generation
3,431
March 2004
Loan Generation
426
June 2004
Loan Generation, Sales
2,500
July 2008
Government Relations, Sales
1,806
May 2010
MANAGEMENT
Executive Officers and Directors
The following table sets forth our executive
officers and directors, and their ages and positions, as of
October 31, 2003. Except as otherwise indicated, each of
the Executive Directors specified below was appointed to that
position as one of our Executive Directors on August 8,
2003.
Michael S. Dunlap has served as our Chairman and
Co-Chief Executive Officer since August 2003. Mr. Dunlap
previously served as our President and sole Chief Executive
Officer from December 2001 until August 2003. He has been a
member of our Board of Directors since 1989. As Chairman of our
Board of Directors, Mr. Dunlap is responsible for our
overall strategy and direction. From January 1996 to December
2001, Mr. Dunlap served as chairman of Nelnets
predecessor. In addition, since August 2003, Mr. Dunlap has
been the non-executive chairman of Union Bank and since January
1995, a director and president of Farmers & Merchants
Investment Inc. (the parent of Union Bank and Trust Company).
Union Bank and Farmers & Merchants Investment Inc. are
affiliates of Nelnet (see Related Party
Transactions). From January 2001 to August 2003,
Mr. Dunlap served as chief executive officer of Union Bank.
From January 1993 to January 2001, Mr. Dunlap served as
executive vice president of Union Bank. Mr. Dunlap is also
a member of the Nebraska State Bar Association. Mr. Dunlap
received his B.S. degree in Finance and Accounting and his J.D.
degree from the University of Nebraska.
Stephen F. Butterfield has served as our Co-Chief
Executive Officer since August 2003, and as our Vice Chairman
since March 2000. He served as vice chairman and a director
of Nelnets predecessor since
73
Don R. Bouc has served as our President and a
member of our Board of Directors since March 2000. In March
2001, Mr. Bouc became president of Nelnet Corporation
(subsequently renamed Nelnet Corporate Services, Inc.), a
subsidiary of Nelnet. From May 1997 through March 2001,
Mr. Bouc served as president of National Education Loan
Network, Inc., a subsidiary of Nelnet. From 1990 to 1997,
Mr. Bouc served as president of Nebraska Higher Education
Loan Program, Inc., or NEBHELP. During his tenure, he assisted
in creating the Education Finance Council and later served as
its chairman. In 1985, Mr. Bouc founded Midwest Computing,
Inc., the developer of EASEL, a servicing and related software
package used by over 50 financial institutions in the
student loan industry. From 1974 to 1985, Mr. Bouc worked
for the University of Nebraska Central Administration Computing
Services network leaving as director of administrative
computing. Mr. Bouc earned an undergraduate degree in math
education in 1969 and an M.S. in computer science in 1974 from
the University of Nebraska-Lincoln. He served on the Board of
Trustees of Lincoln General Hospital from 1996 to 1998, and
currently he serves on the Board of Trustees of Health Lincoln,
of Junior Achievement/Lincoln and for the Nebraska Independent
College Foundation. Mr. Bouc has been appointed by the
Secretary of Education to the Federal Advisory Committee on
Student Financial Assistance.
Terry J. Heimes has served as our Chief Financial
Officer and as Executive Director in charge of Finance since
March 2001. He is responsible for the coordination of all
financial and accounting functions. Active in our strategic
planning and direction, Mr. Heimes oversees the preparation
and issuance of financial statements, corporate accounting/tax
matters and our asset-backed securitization and warehousing
activities. Mr. Heimes served as our Director from March
2001 until August 2003 and as executive vice president of our
subsidiary National Education Loan Network, Inc., or NELNI, from
March 2001 until October 2002. In October 1998, in connection
with the conversion and acquisition of NEBHELP, Mr. Heimes
became the vice president of finance of National Education Loan
Network, Inc., a subsidiary of Nelnet. Prior to joining NEBHELP,
Mr. Heimes worked for the public accounting firm of KPMG
LLP through 1992 as a manager in the audit department.
Mr. Heimes graduated magna cum laude from the University of
Nebraska-Kearney with a B.S. degree in business administration
with an emphasis in accounting.
Hilario J. Arguinchona is our Executive Director
in charge of Idaho Financial Associates, Inc., which does
business as IFA Systems. Mr. Arguinchona served as the
executive vice president of NELNI from January 2001 until
October 2002, when he became an executive director of NELNI, and
served as one of our Directors from January 2001 until August
2003. As president of IFA Systems, Mr. Arguinchona is
responsible for the development, maintenance and implementation
of student loan software systems used by us and our clients.
Mr. Arguinchona has been active in the student loan
business since 1978 and was a founding director for both a
guaranty agency and secondary market in Idaho. In 1986, Mr.
Arguinchona started Idaho Financial Associates, Inc. (dba IFA
Systems), a private secondary market for student loans, which
eventually became a company that developed software for use in
the student loan industry.
74
David A. Bottegal is one of our Executive
Directors and our Chief Marketing Officer. Mr. Bottegal served
as a senior vice president of NELNI from September 2001 until he
became an executive director in October 2002, and also served as
one of our Directors from September 2001 until August 2003.
Mr. Bottegal is responsible for Nelnet Marketing Solutions,
our sales division. In addition, Mr. Bottegal assists in
our overall strategic direction as well as fostering our
significant client relationships. Prior to joining us,
Mr. Bottegal spent 18 years with Sallie Mae in various
areas of the company, including vice president of sales and
marketing from 1998 to 2001. Mr. Bottegal received his
M.B.A from Marymount University and his B.A. from Catholic
University in Washington, DC.
Raymond J. Ciarvella is one of our Executive
Directors and has been our Chief Information Officer since May
2003. Mr. Ciarvella has over 13 years experience with us in
various capacities, serving as one of our Directors from January
1995 until August 2003. As our Chief Information Officer, Mr.
Ciarvella oversees our internal Information Technology areas
along with a number of our subsidiary companies, including
Charter Systems, IFA Systems and Nelnet Canada Inc., and a
number of our affiliates, including 5280 Solutions, Inc. and
FirstMark Services, LLC. As Chief Information Officer, Mr.
Ciarvella is responsible for the information technology and
computer systems that support our enterprise goals. Mr.
Ciarvella is also engaged in other strategic partnerships and
key client initiatives. Mr. Ciarvella served as the chief
operating officer of UNIPAC Service Corporation from September
1993 until March 2000. Prior to joining us, Mr. Ciarvella had
over 11 years of experience with Electronic Data Systems in all
facets of information technology services. Mr. Ciarvella
received a B.S. degree in computer science from Colorado State
University.
Todd M. Eicher has served as our Executive
Director in charge of Loan Generation since May 2003.
Mr. Eicher oversees and directs School Product Support,
Business Integration and all aspects of our Loan Origination
operations. Mr. Eicher also has responsibility for our
relationship with ELM as the ELM NDN service provider. Prior to
his current role, he served as a senior vice president from July
1997 until May 2003, when he became an Executive Director. Mr.
Eicher received his J.D. degree from the University of Nebraska
College of Law.
Matthew D. Hall is our Executive Director
responsible for Loan Servicing. Mr. Hall served as one of
our Directors until August 2003 and as a senior vice
president of NELNI until he became an executive director of
NELNI in October 2002. Mr. Hall oversees and directs lender
product support, customer service, customer accounting, process
engineering, conversions, claims and all aspects of school and
repayment loan servicing for our various loan servicing
operations. Prior to his current position, Mr. Hall managed
our loan origination and loan servicing operations. Before
entering operations in 1992, Mr. Hall was employed in our
information systems department and was responsible for the
maintenance and development of our student loan servicing
system. Mr. Hall has ten years of operations management
experience and eight years of experience in information systems,
programming and management within the banking and financial
industries. He earned a bachelors degree in business
finance from Indiana University.
75
Charles Hosea is our Executive Director in charge
of GuaranTec, LLP, our subsidiary, which provides system and
operational support and services to guaranty agencies
participating in the FFEL Program. Mr. Hosea has more than
17 years of education loan experience with various
organizations, including financial institutions, guaranty
agencies and third-party service providers. Mr. Hosea
served as senior vice president of NELNI until October 2002,
when he became an executive director of NELNI. Prior to becoming
president of GuaranTec in 1996, he served as regional vice
president for Electronic Data Systems in Tallahassee, Florida.
Mr. Hosea received his B.S. degree in business
administration from Southeast Missouri State University.
Dennis Leach is our Executive Director
responsible for Corporate Planning. This function develops and
maintains strategies for our product and service offerings
within the organization. In addition, Corporate Planning assists
with key initiatives that have strategic impact for us.
Mr. Leach served as senior vice president of NELNI until
January 2001, when he became an executive director of NELNI.
Prior to that, he served as vice president of our subsidiary,
InTuition Solutions, Inc., from April 1998 until January 2001.
Mr. Leach has been involved in education financing since
1983. He held a number of positions within Sallie Mae and had a
consulting practice serving a cross-section of clients in the
student loan industry. Prior to this position, he was
responsible for Nelnets product development for business
and technology planning with InTuition, and was the president of
InTuition Solutions (prepaid college tuition plan
administration). Mr. Leach has a degree in philosophy and
economics from the University of Northern Iowa.
Edward P. Martinez is our Executive Director
responsible for Legal, Policy Support, Facilities and
Purchasing. Mr. Martinez joined us in April 1989. Prior to
joining us, Mr. Martinez was general counsel to the Student
Loan Division of the Colorado Department of Higher Education,
was an assistant attorney general with the Colorado Attorney
Generals Office and was an associate with the law firm of
Davis Graham & Stubbs LLP in Denver, Colorado.
Mr. Martinez received a J.D. degree from the University of
Colorado School of Law.
Jeffrey R. Noordhoek is our Executive Director in
charge of Capital Markets. Mr. Noordhoek heads up our
Capital Markets area and is responsible for our securitization
and capital markets funding efforts. Mr. Noordhoek served
as senior vice president of NELNI from March 2001 until October
2002, when he became an executive director of NELNI, and served
as a vice president of Nelnets predecessor prior to that.
Mr. Noordhoek has been in our capital markets area since
1996. Prior to joining us, Mr. Noordhoek served as a senior
associate for State Street Capital Corporation where he assisted
in the establishment of commercial paper conduit financing
vehicles. Mr. Noordhoek received his B.S. degree in
business administration from the University of Nebraska and his
M.B.A. from Boston University.
Richard H.
Pierce
Richard H. Pierce is our Executive Director in
charge of Portfolio Management. Mr. Pierce served as a
Director until August 2003 and as an executive vice president of
NELNI from January 2001 until he became an executive director of
NELNI in October 2002. Mr. Pierce developed the MES
Foundation and has headed that company since its origin in 1983.
He has served in both the Maine House of Representatives and the
Maine Senate, serving as a Senate Majority Leader from
1978-1982. Among his many experiences, Mr. Pierce has
served as the commissioner of the Education Commission of the
State of Maine, on the White House Commission on Presidential
Scholars, as Director of the National Council of Higher
Education Loan Programs and as a member of the review panel for
the Harry S. Truman
76
Dominic
Rotondi
Dominic Rotondi is our Executive Director in
charge of Charter Account Systems, a subsidiary of Nelnet.
Mr. Rotondi was one of the founders of Charter Account
Systems and serves as president of that company. He has been
involved in eduction finance and data processing for
26 years, including positions at the New England Student
Loan Marketing Association and the New York Higher Eduction
Services Corporation. Mr. Rotondi received a B.S. degree in
management from Rensselaer Polytechnic Institute.
Cheryl
Watson
Cheryl Watson is our Executive Director
responsible for Investor Relations. Ms. Watson served as
one of our Directors from April 2002 until August of 2003 and
served as an executive vice president of NELNI from April 2002
until she became an executive director of NELNI in October 2002.
She also serves as president of EFS, Inc., one of our wholly
owned subsidiaries. In addition, she participates in our
strategic planning and capital markets initiatives. Prior to
joining us, Ms. Watson was employed with Sallie Mae, Inc.
and USA Group Secondary Market Services, Inc. and was vice
president and treasurer of Sallie Mae Servicing, LLP and
president and chief financial officer of USA Group Secondary
Market Services, Inc. She has held financial service positions
in education lending and private industry for over
18 years. She serves on the board of directors for the
Greater Indianapolis Area YMCA and serves as treasurer for the
Riverview Hospital Foundation. Ms. Watson received a B.S.
degree from Indiana University and is a certified public
accountant.
James P. Abel has served as a member of our Board
of Directors since August 2003. Mr. Abel has served as a
director of our subsidiary, NHELP-I, Inc., from 2000 until
becoming our Director in August 2003. Since 1983, Mr. Abel
has served as president and chief executive officer of NEBCO,
Inc., a company with interests in the manufacture of building
materials, construction, insurance, mining, railroading, farming
and real estate. Mr. Abel serves on the boards of directors
of Ameritas Life Insurance Corp. and Linweld, Inc. He is an
Advisory Board Member for the US Bank Lincoln.
Mr. Abel received a B.S. degree from Arizona State
University.
Thomas E. Henning has served as a member of our
Board of Directors since August 2003. Mr. Henning has
served as a director of Security Financial Life Insurance
Company since 1987 and as president and chief operating officer
since 1990. Mr. Henning serves as chairman, president and
chief executive officer of Security Mutual Life Nebraska, as
well as its wholly owned subsidiary, Security Financial Life
Insurance Company. Previously, Mr. Henning served as
president and chief operating officer of National Bank of
Commerce of Lincoln, Nebraska and executive vice president of
First Commerce Bancshares between 1985 and 1990.
Mr. Henning is a graduate of the University of Nebraska as
well as Stonier Graduate School of Banking at Rutgers
University. He also has completed the Wharton Schools
Effective Management Program. Mr. Henning holds the CLU and
CFA designations. Mr. Henning is a member of the Investment
and Executive Committee and board of the University of Nebraska
Foundation and serves on Lincoln Plating Companys Advisory
Board.
77
Lee E. Mikles has served as a member of our Board
of Directors since August 2003. Mr. Mikles has served as a
director of our subsidiary, Nelnet Education Loan Funding, Inc.,
since 1998. Mr. Mikles has served since 1992 as chairman of
Mikles/Miller Mgmt., Inc., a registered investment adviser, and
as chairman of Mikles/Miller Securities, L.L.C., a registered
broker-dealer, from 1998 to the present. Formed in 1992,
Mikles/Miller Mgmt., Inc. is the managing general partner of the
Kodiak family of investment funds. The firm manages funds for
institutional clients worldwide. Prior to the formation of
Mikles/Miller Mgmt., Inc., Mr. Mikles headed Mikles/Miller
Group, an affiliate of Shearson Lehman Brothers. Mr. Mikles
serves on the boards of directors of Coastcast Corporation and
Boss Holdings, Inc.
Arturo Moreno has served as a member of our Board
of Directors since August 2003. Mr. Moreno served as
president, chief operating officer and director of Outdoor
Systems, Inc. from 1984 until 1999. Under Mr. Morenos
leadership, Outdoor Systems became the largest outdoor
advertising organization in North America and was the first such
company to go public. In 1999, the company was sold to
Infinity/CBS and in 2000 it merged with Viacom. In June of 2003,
Mr. Moreno purchased the Anaheim Angels Professional
Baseball Team and currently serves as its president. As founder
of The Moreno Family Foundation, he is deeply involved with
issues related to children and education. Mr. Moreno
received his B.S. degree in marketing from the University of
Arizona in 1973.
Brian J. OConnor has served as a member of
our Board of Directors since August 2003. Mr. OConnor
has served as a director of our subsidiaries, Nelnet Education
Loan Funding, Inc., since 1998 and Nelnet Private Student Loan
Corporation-I, since 2001. Since 1997, Mr. OConnor
has held the position of senior vice president at Hutchinson,
Shockey, Erley & Co., which underwrites and trades
securities for various local governments in Arizona and the
western United States. From 1990 to 1997, he was a senior vice
president with Alden Capital Markets, Inc.; from 1988 to 1990,
he served as senior vice president with Capital Markets
Corporation; from 1987 to 1988, he was a vice president for
Security Pacific Merchant Bank in Phoenix; and from 1983 to
1987, Mr. OConnor was with Boettcher & Company,
Inc., a regional investment banking firm specializing in
municipal finance. In addition, Mr. OConnor served as
a member of the board of directors and audit committee of
Outdoor Systems, Inc. from 1992 to 1999.
James H. VanHorn has served as a member of our
Board of Directors since March 2001. Mr. VanHorn is the
former Executive Director of Loan Generation, which provides
fee-based lender servicing and educational support services to
government and private entities. Mr. VanHorn served as our
Senior Vice President from March 2000 until October 2002, when
he became our Executive Director. Mr. VanHorn left his
position as Executive Director in June 2003 and thereafter has
served as president and chief executive officer of InTuition
Development Holdings, LLC, which is not affiliated with Nelnet.
Mr. VanHorn has more than 28 years of operational
experience with Bethlehem Steel, Astro Metallurgical, InTuition,
Inc. and Nelnet. Prior to our acquisition of InTuition, Inc., he
joined InTuition in 1994, became president in 1998 and continued
serving as president of InTuition, Inc. until June 2003. Before
serving as president of InTuition, Inc., Mr. VanHorn served
as vice president of operations at Astro Metallurgical in
Wooster, Ohio. He earned his M.B.A. at Jacksonville University
and his B.S.C.E. at Valparaiso University.
78
Board Composition
Our board of directors is composed of a majority
of independent directors as defined by the rules of the New York
Stock Exchange.
Board Committees
Our board of directors has established an audit
committee, a compensation committee, a nominating and corporate
governance committee and an executive committee. Each committee,
other than the executive committee, is composed entirely of
independent directors.
Our audit committee is composed of
Messrs. Henning, Mikles and OConnor. The audit
committee provides assistance to our board of directors in its
oversight of the integrity of our financial statements, the
qualifications and independence of our independent auditors, the
performance of our internal audit functions, the procedures
undertaken by the independent auditors and our compliance with
other regulatory and legal requirements. Our audit committee
operates pursuant to a formal written charter.
Our compensation committee is composed of
Messrs. Abel, Mikles and Moreno. The compensation committee
oversees our compensation and benefit policies. Our compensation
policies are designed with the goal of maximizing shareholder
value over the long term. The compensation committee believes
that this goal is best realized by utilizing a compensation
program which serves to attract and retain superior executive
talent by providing management with performance-based incentives
and closely aligning the financial interests of management with
those of our shareholders. Our compensation program combines two
components: base salary and annual bonus. The level of
compensation is based on numerous factors, including achievement
of results and financial objectives established by our
compensation committee and our board of directors. Salary and
bonus compensation awards are reviewed regularly for
competitiveness and are determined in large part by reference to
compensation levels for comparable positions at comparable
companies.
Our nominating and corporate governance committee
is composed of Messrs. Henning, Mikles and OConnor. The
nominating and corporate governance committee is responsible for
identifying and recommending qualified nominees to serve on our
board of directors as well as developing and overseeing our
internal corporate governance processes.
Our executive committee is composed of Messrs.
Dunlap, Butterfield, Bouc and OConnor.
Compensation Committee Interlocks and Insider
Participation
Prior to August 2003, Messrs. Dunlap,
Butterfield, Bouc, Pierce and K. Jon Kern, a former Executive
Director, participated in deliberations concerning executive
officer compensation. No member of our compensation committee
serves or in the past has served as a member of another
entitys board of directors or compensation committee,
which entity has one or more executive officers serving as a
member of our board of directors or compensation committee.
Compensation of Directors
Our independent directors receive an annual
retainer of $50,000. We also pay an additional annual retainer
of $10,000 to those independent directors who serve on the audit
committee, the compensation committee, the executive committee
or the nominating and corporate governance committee, as
applicable. Independent directors also earn a fee of $1,000 for
each board meeting attended and $1,000 for each committee
meeting attended. Our directors, other than our independent
directors, do not receive any consideration for participation in
board meetings or committee meetings.
79
Our board of directors has adopted, and our
shareholders have approved, a share-based compensation plan for
nonemployee directors pursuant to which our nonemployee
directors will have an election to receive their annual retainer
fees in the form of cash or our Class A common stock. Up to
100,000 shares may be issued under the plan, subject to
antidilution adjustments in the event of certain changes in our
capital structure. If a nonemployee director elects to receive
Class A common stock, the number of shares of Class A
common stock that will be awarded will be equal to the amount of
the annual retainer fee otherwise payable in cash divided by 85%
of the fair market value of a share of Class A common stock
on the date the fee is payable. Nonemployee directors who choose
to receive Class A common stock may also elect to defer
receipt of the Class A common stock until termination of
their service on our board of directors. Any dividends paid in
respect of deferred shares during the deferral period will also
be deferred in the form of additional shares and paid out at
termination from our board of directors. Notwithstanding the
foregoing, no elections will be available to any nonemployee
director for annual retainer fees payable for calendar year
2004. Instead, the annual retainer fee for each nonemployee
director for calendar year 2004 will be paid currently in the
form of a number of shares of Class A common stock
determined by dividing the amount of the annual retainer fee
otherwise payable by 85% of the initial public offering price
per share in this offering. The plan may be amended or
terminated by our board of directors at any time, but no
amendment or termination will adversely affect a nonemployee
directors rights with respect to previously deferred
shares without the consent of the nonemployee director.
Agreements with Employees
In May 2001, Richard H. Pierce, our Executive
Director in charge of Portfolio Management, entered into an
employment agreement with one of our subsidiaries, Nelnet
Corporate Services, Inc. (formerly known as Nelnet Corporation).
The agreement extends until April 2006, after which it shall
renew for successive one-year terms unless terminated earlier by
Nelnet Corporate Services, Inc. or Mr. Pierce upon the
occurrence of certain events or upon 90 days notice
from either party prior to the end of the initial term or any
renewal term. Mr. Pierce received a base salary of $382,000
in 2001, which amount gradually decreases until it reaches
$300,000 in 2006. In addition, Mr. Pierce is entitled to
receive an annual bonus tied to our pretax earnings, which shall
not exceed $700,000. Nelnet Corporate Services, Inc. shall
continue to pay Mr. Pierces base salary and a
pro-rated portion of the bonus he would have received during the
year his employment terminates, if Nelnet Corporate Services,
Inc. terminates the agreement without cause or if
Mr. Pierce resigns from his position with good reason, in
each case as defined in the employment agreement. The agreement
also prohibits Mr. Pierce from having any business-related
contact with competitors, customers or service providers of
Nelnet Corporate Services, Inc. or any of its affiliates so long
as Mr. Pierce continues to receive compensation payments
from Nelnet Corporate Services, Inc..
We have not entered into employment agreements
with any of our other named executive officers.
Executive Compensation
The following table sets forth summary
information relating to compensation paid for services rendered
for our fiscal year ended December 31, 2002, with respect
to the compensation paid and bonuses granted to our Co-Chief
Executive Officers as well as each of our other five most highly
compensated executive officers, each of whose aggregate
compensation during the last fiscal year was greater than
$100,000. Messrs. Dunlaps and Butterfields
annual salaries, effective August 1, 2003, are $1,000,000
each, and Mr. Boucs annual salary, effective
August 1, 2003, which will be payable by us, is $350,000.
In addition, they are each entitled to receive bonus
compensation as described below under
Executive Officers Bonus Plan. Further,
in the third quarter of 2003, Mr. Heimes received a bonus
of $408,000 in connection with the termination of our consulting
agreement with Great Plains Financial, LLC, which is described
under Related Party Transactions Transactions
with Miscellaneous Related Parties, and Mr. Ciarvella
received a bonus of $897,000 in connection with the termination
of his employment agreement. Salaries and bonuses are paid at
the discretion of our board of directors. For purposes of this
prospectus, we will refer to the executive officers named in the
table below as the named executive officers.
80
Summary Compensation Table
Options/SARs/Restricted Stock/LTIPs
We do not have any stock option, SAR or other
long-term incentive plans, other than the restricted stock plan,
and we have not issued any stock options, SARs or restricted
shares.
Employee Share Purchase Plan
Our board of directors has adopted, and our
shareholders have approved, an employee share purchase plan
pursuant to which our employees and employees of our designated
subsidiaries will be entitled to purchase our Class A
common stock. The employee share purchase plan is intended to
enhance our ability to attract and retain employees and to
better enable such persons to participate in our long-term
success and growth.
The employee share purchase plan will be
administered by our compensation committee. Subject to the
express provisions of the employee share purchase plan, our
compensation committee has the power to determine the terms and
conditions of each offering of shares to employees under the
plan, and it has the authority to adopt and revise rules
governing the plan and to interpret the terms and provisions of
the plan.
A total of 1,000,000 shares of our
Class A common stock are reserved for issuance under the
employee share purchase plan, subject to equitable adjustment by
the compensation committee in the event of stock dividends,
recapitalizations and other similar corporate events. All of our
employees and those employees of our participating subsidiaries,
other than those whose customary employment is 20 hours or
less per week, who have been employed for at least six months,
or another period determined by our compensation committee not
in excess of two years, will be eligible to purchase
Class A common stock under the plan. The participating
subsidiaries will be those designated by the compensation
committee to participate in the employee share purchase plan.
81
The plan is designed to qualify as an
employee stock purchase plan under Section 423
of the Code. The plan will allow participating employees to
purchase our Class A common stock through payroll
withholding. The plan provides for consecutive six-month
offering periods (or other periods of not more than
27 months, as determined by our compensation committee)
under which participating employees can elect to have amounts
withheld from their total compensation during the offering
period and applied to purchase our Class A common stock at
the end of the period. Unless otherwise determined by our
compensation committee before an offering period, the purchase
price will be the lesser of 85% of the fair market value of our
Class A common stock at the beginning or end of the
offering period. Applicable Code limitations specify, in
general, that a participants right to purchase stock under
the plan cannot accrue at a rate in excess of $25,000 (based on
the value at the beginning of the applicable offering periods)
per calendar year.
The employee share purchase plan will terminate
when all shares authorized to be issued under it have been
exhausted. Our board of directors may discontinue the employee
share purchase plan at any time and may amend it from time to
time.
Executive Officers Bonus Plan
Our board of directors has adopted, and we will
maintain, an executive officers bonus plan pursuant to which our
Co-Chief Executive Officers and President will be entitled to
receive annual bonus compensation based upon our consolidated
net income before taxes. The purpose of the executive officers
bonus plan is to provide our Co-Chief Executive Officers and
President with an opportunity to earn annual bonus compensation
as an incentive and reward for their leadership, ability and
exceptional services. The executive officers bonus plan will be
administered by our compensation committee.
Our Co-Chief Executive Officers and President
will each be entitled to receive an annual bonus equal to 0.85%
of our consolidated net income before taxes, computed in
accordance with generally accepted accounting principles. Our
Presidents annual bonus may not exceed $500,000. Annual
bonuses payable under the plan will be paid in cash after the
end of each calendar year.
Our board of directors may terminate the
executive officers bonus plan and may amend it from time to
time, but no termination or amendment will adversely affect the
rights of an executive to a previously earned but unpaid bonus.
Restricted Stock Plan
Our board of directors has adopted, and our
shareholders have approved, a restricted stock plan. The
restricted stock plan is intended to provide incentives to
attract, retain and motivate our employees in order to achieve
our long-term growth and profitability objectives. The
restricted stock plan provides for the grant to eligible
employees of awards of restricted shares of our Class A
common stock. An aggregate of 1,000,000 shares of our Class
A common stock have been reserved for issuance under the
restricted stock plan, subject to antidilution adjustments in
the event of certain changes in our capital structure. Shares of
our Class A common stock issued pursuant to the restricted
stock plan will be either authorized but unissued shares or
treasury shares.
Our employees and the employees of our
subsidiaries and affiliates will be eligible to be granted
awards of restricted stock under the restricted stock plan. The
restricted stock plan will be administered by the compensation
committee or such other board committee (or the entire board of
directors) as may be designated by our board of directors. The
committee will determine which eligible employees receive awards
and the terms and conditions of these awards. The committee will
have authority to waive conditions relating to an award or
accelerate vesting of awards. In addition, our Co-Chief
Executive Officers will have the authority to make awards under
the restricted stock plan to employees not subject to
Section 16 of the Exchange Act, subject to limitations
imposed by the committee.
Awards of restricted shares will be subject to
such restrictions on transferability and other restrictions, if
any, as the committee may impose. Such restrictions will lapse
under circumstances as the committee
82
We currently anticipate that awards of restricted
shares will be granted to employees engaged as part of our
salesforce and that the restricted shares will only be granted
if certain performance goals are met. Moreover, it is our
current intention that, once granted, the awards will vest
ratably over a multi-year period, provided the employee remains
employed through the applicable vesting dates.
The restricted stock plan may be amended,
suspended or terminated by our board of directors at any time,
in whole or in part. However, any amendment for which
shareholder approval is required under the rules of any stock
exchange or automated quotation system on which our Class A
common stock may then be listed or quoted will not be effective
until such shareholder approval has been obtained. In addition,
no amendment, suspension or termination of the restricted stock
plan may materially and adversely affect the rights of a
participant under any award theretofore granted to him or her
without the consent of the affected participant.
The restricted stock plan is effective as of
November 13, 2003. Unless earlier terminated, the
restricted stock plan will expire on November 13, 2013, and
no further awards may be granted thereunder after such date.
83
Name
Age
Position
40
Chairman and Co-Chief Executive Officer
51
Vice Chairman and Co-Chief Executive Officer
57
President and Director
39
Chief Financial Officer and Executive Director
60
Executive Director
46
Executive Director and Chief Marketing Officer
46
Executive Director and Chief Information Officer
33
Executive Director
43
Executive Director
43
Executive Director
49
Executive Director
49
Executive Director and Secretary
37
Executive Director
60
Executive Director
49
Executive Director
42
Executive Director
52
Director
50
Director
47
Director
57
Director
48
Director
51
Director
Michael S. Dunlap
Stephen F. Butterfield
Don R. Bouc
Terry J. Heimes
Hilario J. Arguinchona
David A. Bottegal
Raymond J. Ciarvella
Todd M. Eicher
Matthew D. Hall
Charles Hosea
Dennis Leach
Edward P. Martinez
Jeffrey R. Noordhoek
James P. Abel
Thomas E. Henning
Lee E. Mikles
Arturo Moreno
Brian J. OConnor
James H. VanHorn
Annual compensation(a)
All other
compensation
Name and principal position
Year
Salary ($)
Bonus ($)(b)
($)(c)
2002
450,000
675,198
2,642
2002
450,000
675,198
2,642
2002
700,000
(d)
1,830
2002
179,167
150,000
5,232
2002
179,167
150,000
5,307
2002
240,000
510,000
6,076
2002
380,000
700,000
6,100
(a)
Executive officers may receive perquisites and
personal benefits, the dollar amounts of which are below current
Securities and Exchange Commission thresholds for reporting
requirements.
(b)
Amounts represent bonuses paid in 2003 for
services rendered during the 2002 calendar year.
(c)
Amounts represent matching contributions under
our 401(k) plan in the following amounts: Mr. Dunlap
$2,450, Mr. Butterfield $2,450, Mr. Bouc $1,710,
Mr. Heimes $4,872, Mr. Bottegal $4,947,
Mr. Ciarvella $5,500 and Mr. Pierce $5,500; and
premiums on life insurance in the following amounts:
Mr. Dunlap $192, Mr. Butterfield $192, Mr. Bouc
$120, Mr. Heimes $360, Mr. Bottegal $360,
Mr. Ciarvella $576 and Mr. Pierce $600.
(d)
$650,000 of Mr. Boucs salary was paid
by Great Plains Financial, LLC, which had a consulting
arrangement with Nelnet. See Related Party Transactions
Transactions with Miscellaneous Related Parties for
a description of the consulting arrangement.
PRINCIPAL SHAREHOLDERS
The following table sets forth information
regarding the beneficial ownership of each class of our common
stock immediately before and after the sale of
8,000,000 shares of our Class A common stock in this
offering by:
Beneficial ownership is determined in accordance
with the rules and regulations of the Securities and Exchange
Commission. Under these rules, a person is deemed to
beneficially own a share of our common stock if that person has
or shares voting power or investment power with respect to that
share, or has the right to acquire beneficial ownership of that
share within 60 days, including through the exercise of any
option, warrant or other right or the conversion of any other
security.
The number of shares of Class B common stock
for each person in the tables below assumes such persons do not
convert any Class B common stock into Class A common
stock. Unless otherwise indicated in a footnote, the address of
each five percent beneficial owner is c/o Nelnet, Inc.,
121 South 13th Street, Suite 201, Lincoln,
Nebraska 68508. As of the date of this prospectus, Nelnet had
147 holders of record of its Class A common stock and
six holders of record of its Class B common stock. Unless
otherwise indicated in a footnote, the persons named in the
tables below have sole voting and investment power with respect
to all shares of common stock shown as being beneficially owned
by them.
Beneficial Ownership Before This
Offering
84
Beneficial Ownership After This
Offering
85
86
each person, entity or group known by us to
beneficially own more than five percent of the outstanding
shares of any class our common stock;
each of the named executive officers;
each of our directors; and
all of our executive officers and directors as a
group.
Percentage of
Percentage of shares
combined
Number of shares beneficially owned
beneficially owned(1)
voting power
of all classes
Name
Class A
Class B
Total
Class A
Class B
Total
of stock(2)
16,211,021
(3)
9,830,204
(4)
26,041,225
52.3
%
70.1
%
57.8
%
66.9
%
5,779,941
(5)(6)
5,779,941
41.2
%
12.8
%
33.8
%
18,170,416
(7)
2,000,000
(8)
20,170,416
58.6
%
14.3
%
44.8
%
22.3
%
5,142,417
2,000,000
7,142,417
16.6
%
14.3
%
15.9
%
14.7
%
11,068,604
11,068,604
35.7
%
24.6
%
6.5
%
1,571,990
1,571,990
5.1
%
3.5
%
*
218,190
218,190
*
*
*
522,900
522,900
1.7
%
1.2
%
*
449,610
449,610
1.4
%
1.0
%
*
349,104
349,104
1.1
%
*
*
402,301
402,301
1.3
%
*
*
204,901
204,901
*
*
*
115,080
115,080
*
*
*
21,000
21,000
*
*
*
92,131
92,131
*
*
*
750,000
750,000
2.4
%
1.7
%
*
460,740
460,740
1.5
%
1.0
%
*
12,600
12,600
*
*
*
Percentage of
Percentage of shares
combined
Number of shares beneficially owned
beneficially owned(1)
voting power
of all classes
Name
Class A
Class B
Total
Class A
Class B
Total
of stock(2)
69,999
69,999
*
*
*
115,080
115,080
*
*
*
21,566,647
14,023,454
35,590,101
69.5%
100.0
%
79.0%
94.5%
Percentage of
Percentage of shares
combined
Number of shares beneficially owned
beneficially owned(1)
voting power
of all classes
Name
Class A
Class B
Total
Class A
Class B
Total
of stock(2)
16,211,021
(3)
9,830,204
(4)
26,041,225
41.6
%
70.1
%
49.1
%
63.9
%
5,779,941
(5)(6)
5,779,941
41.2
%
10.9
%
32.2
%
18,170,416
(7)
2,000,000
(8)
20,170,416
46.6
%
14.3
%
38.0
%
21.3
%
5,142,417
2,000,000
7,142,417
13.2
%
14.3
%
13.5
%
14.0
%
11,068,604
11,068,604
28.4
%
20.9
%
6.2
%
1,571,990
1,571,990
4.0
%
3.0
%
*
218,190
218,190
*
*
*
522,900
522,900
1.3
%
*
*
449,610
449,610
1.2
%
*
*
349,104
349,104
*
*
*
402,301
402,301
1.0
%
*
*
204,901
204,901
*
*
*
115,080
115,080
*
*
*
21,000
21,000
*
*
*
92,131
92,131
*
*
*
750,000
750,000
1.9
%
1.4
%
*
460,740
460,740
1.2
%
*
*
12,600
12,600
*
*
*
69,999
69,999
*
*
*
115,080
115,080
*
*
*
21,566,647
14,023,454
35,590,101
55.3
%
100.0
%
67.1
%
90.3
%
*
Less than 1%.
(1)
Based on:
31,015,034 shares of Class A common stock
and 14,023,454 shares of Class B common stock
outstanding after giving effect to our recapitalization but
immediately before this offering; and
39,015,034 shares of Class A common
stock and 14,023,454 shares of Class B common stock
outstanding immediately after the sale of shares of our
Class A common stock in this offering.
(2)
These percentages reflect the different voting
rights of our Class A common stock and our Class B
common stock. Each share of Class A common stock has one
vote and each share of Class B common stock has ten votes
on all matters to be voted upon by our shareholders.
(3)
Consists of shares owned by entities which
Mr. Dunlap may be deemed to control, consisting of:
11,068,604 shares owned by Packers Service Group, of which
Mr. Dunlap is a director and president and owns 28.3% of
the outstanding capital stock, 842,417 shares owned by Union
Bank as Trustee for the University of Nebraska Foundation and
4,300,000 shares owned by Union Bank as Trustee under
several grantor retained annuity trusts (the Class A
GRATs). Mr. Dunlap is non-executive chairman of and
controls Union Bank through Farmers & Merchants
Investment Inc., of which Mr. Dunlap is a director and
president and owns or controls 38.4% of the outstanding voting
stock. Mr. Dunlap disclaims beneficial ownership of the
shares held by Union Bank as Trustee for the University of
Nebraska Foundation and under the Class A GRATs. He also
disclaims beneficial ownership of the shares held by Packers
Service Group, except to the extent of his pecuniary interest
therein.
(4)
Includes 1,701,000 shares owned by
Mr. Dunlaps spouse, 1,586,691 shares owned by
Union Financial Services, Inc., of which Mr. Dunlap is
chairman and owns 50.0% of the outstanding capital stock, and
2,000,000 shares owned by Union Bank as Trustee under two
grantor retained annuity trusts (the Class B
GRATs). Mr. Dunlap disclaims beneficial ownership of
the shares held by Union Financial Services, Inc., except to the
extent of his pecuniary interest therein. Mr. Dunlap also
disclaims beneficial ownership of the shares held by Union Bank
as Trustee under the Class B GRATs, except for his retained
beneficial interest in 1,400,000 shares of Class B
common stock held in trust on his behalf under one of the
Class B GRATs.
(5)
Does not include 600,000 shares of Class B
common stock held by Union Bank as Trustee under one of the
Class B GRATs in which Mr. Butterfield has a retained
beneficial ownership.
(6)
Includes 1,586,691 shares owned by Union
Financial Services, Inc., of which Mr. Butterfield is a
director and president and owns 50.0% of the outstanding capital
stock. Mr. Butterfield disclaims beneficial ownership of
the shares held by Union Financial Services, Inc., except to the
extent of his pecuniary interest therein.
(7)
Includes 88,864 shares jointly owned by
Ms. Mulheisen and her spouse, 851,000 shares owned by
her spouse and 16,211,021 shares that are owned by entities
that Ms. Mulheisen may be deemed to control, consisting of:
11,068,604 shares owned by Packers Service Group, of which
Ms. Mulheisen is a director and owns or controls 27.0% of
the outstanding capital stock, 842,417 shares owned by Union
Bank as Trustee for the University of Nebraska Foundation and
4,300,000 shares owned by Union Bank as Trustee under the
Class A GRATs. Ms. Mulheisen, the sister of Michael S.
Dunlap, is a director, president and chief executive officer of
and controls Union Bank through Farmers & Merchants
Investment Inc., of which Ms. Mulheisen is a director and
executive vice president and owns or controls 35.9% of the
outstanding capital stock. Ms. Mulheisen disclaims
beneficial ownership of the shares held by Union Bank as Trustee
for the University of Nebraska Foundation and as Trustee under
the Class A GRATs, except for her retained beneficial
interest in 1,700,000 shares of Class A common stock
held in trust on her behalf and on behalf of her spouse under
two of the Class A GRATs. She also disclaims beneficial
ownership of the shares held by Packers Service Group, except to
the extent of her pecuniary interest therein.
(8)
Includes 2,000,000 shares owned by Union
Bank as Trustee under the Class B GRATs. Ms. Mulheisen
disclaims beneficial ownership of the shares held by Union Bank
as Trustee under the Class B GRATs.
(9)
The Class A common stock beneficially owned
by Union Bank consists of 842,417 shares owned as Trustee for
the University of Nebraska Foundation and 4,300,000 shares owned
as Trustee under the Class A GRATs. The Class B common
stock beneficially owned by Union Bank is owned as Trustee under
the Class B GRATs. The address for Union Bank is P.O. Box
82529, Lincoln, NE 68501, Attention: Michael S. Dunlap.
(10)
The address for Packers Service Group is
c/o Farmers & Merchants Investment Inc.,
Attention: Michael S. Dunlap, 6801 South 27th Street,
Lincoln, NE 68512.
(11)
Includes 1,371,930 shares owned by Great
Plains Financial, LLC, a limited liability company of which
Mr. Bouc is the sole member; does not include 300,000
shares of Class A common stock held by Union Bank as
Trustee under one of the Class A GRATs in which
Mr. Bouc has a retained beneficial ownership and 400,000
shares of Class A common stock held by Union bank under one
of the Class A GRATs in which his spouse has a retained
beneficial ownership.
(12)
Includes 310,170 shares owned by The Judy
Eicher & Todd Eicher Partnership, of which
Mr. Eicher is a general partner.
(13)
Does not include 300,000 shares of Class A
common stock held by Union Bank as Trustee under one of the
Class A GRATs in which Mr. Noordhoek has a retained
beneficial ownership.
RELATED PARTY TRANSACTIONS
Some of our directors and members of our
management beneficially own shares of stock or other ownership
interests in other entities with which we do business and, in
some cases, they serve on the board of directors and/or as
executive officers of one or more such entities. These related
parties include:
Prior to the date of this prospectus, the
directors and members of management referenced above resigned
from all executive officer positions they held with these
entities, except for Michael S. Dunlap, who remains president of
Packers Service Group and Farmers & Merchants, and Stephen
F. Butterfield, who remains president of Union Financial.
The chart below sets forth the total payments we
made to each of the above-mentioned related parties for the year
ended December 31, 2002:
87
For a detailed description of the relationships
between management and the entities with which we transact
business, see Management and Principal
Shareholders.
Going forward, our independent directors will be
responsible for reviewing and approving all new transactions,
and any material amendments or modifications to existing
transactions, between Nelnet and Union Bank or any other
affiliated party.
Transactions with Union Bank
We have entered into a series of agreements with
Union Bank, including transactions to sell interests in student
loans to Union Bank in its capacity as trustee, to purchase
student loans from Union Bank, to provide student loan servicing
to Union Bank, to sublease real estate from Union Bank and to
provide consulting services to and receive consulting services
from Union Bank. Union Bank is a major source of student loan
origination and sales volume for us, and these purchases were
accomplished through a series of free standing loan purchase
agreements until 1997. In June 1997, Union Bank entered into a
commitment to sell to us rights with respect to future
originations of guaranteed student loans which exceed the annual
aggregate amount of $120 million; however, Union Bank holds
an option to retain 25% of its originations in excess of
$240 million in a given year and to retain the rights to
any of the remaining 75% of originations in excess of
$240 million by paying to us an amount equal to the amount
by which the fair market value of such originations exceeds the
principal balance. We pay Union Bank a purchase price equal to
100% of the outstanding principal balance and accrued and unpaid
interest on the loans purchased pursuant to this agreement, and
we also reimburse Union Bank for origination fees required to be
paid to the DOE (50 basis points of the principal balance) and
for origination costs (initially $6.00 per purchased loan, which
amount subsequentially increased to $25.00 per purchased
loan). We also paid to Union Bank a one-time amount of
$3.5 million in 1997 to acquire these origination rights.
We granted to Union Bank an option to sell us up to
$120 million of federally guaranteed student loans per year
at the same purchase price described above. During 2002, Nelnet
paid to Union Bank an aggregate sum of approximately
$6.4 million plus the outstanding balances of loans
purchased from Union Bank pursuant to this agreement and related
purchases. We purchased an aggregate of approximately
$378 million of student loans from Union Bank in 2002
pursuant to this agreement and related loan purchase agreements.
This agreement renews automatically for successive one-year
terms unless both parties mutually agree to terminate it.
Effective January 1999, we entered into an
agreement with Union Bank to reimburse certain of Union
Banks student loan-related marketing expenses arising from
Union Bank engaging in its ordinary student loan marketing
activities. Union Bank agreed to bear the first $240,000 of
annual marketing costs incurred by it. In April 2001, as a
part of an amendment to this agreement, we agreed to assume the
bulk of marketing responsibilities for Union Bank and to hire
Union Banks marketing personnel if Union Bank decided to
reduce its marketing personnel commitment. The amendment
adjusted the marketing expense sharing arrangement to more
closely approximate a prorated portion of the costs associated
with the volume of loans we acquire from Union Bank. During
2002, we received from Union Bank marketing expenses in the net
amount of approximately $519,000. This marketing expense
reimbursement agreement is coterminous with the student loan
origination transfer agreement described in the preceding
paragraph. As consideration for our assumption of the costs with
respect to Union Banks marketing employees, Union Bank
granted us rights to hire its marketing personnel, transferred
servicing and origination software to us and increased the
origination fee paid to us from $6.00 per loan to $25.00 per
loan. The $25.00 origination fee that Union Bank agreed to pay
to us for originating Union Banks student loans is
reimbursed to Union Bank when we acquire those loans from Union
Bank pursuant to the agreement described in the preceding
paragraph. Our obligation to share Union Banks marketing
expenses is indirectly related to the volume of originations
resulting from such marketing efforts.
In 1999, we entered into a 360-day commitment
with Union Bank to purchase its federally guaranteed student
loans, in which Union Bank retained rights pursuant to the
agreement above at par. This purchase commitment has been
renewed annually for successive terms after its inception. The
commitment has grown into an obligation to purchase an aggregate
amount of up to $1.25 billion of student loans from Union
Bank. The consideration we received is Union Banks
obligation to sell us $37.5 million of student
88
Pursuant to a June 2001 agreement, Union
Bank, in its capacity as trustee for various grantor trusts,
agreed to purchase from us up to $750 million of
participation interests in student loans. We retain a portion of
the interest earned from the participated loans at a rate equal
to the difference between the borrowers interest rate on
the loans and the 90-day commercial paper rate plus 30 basis
points. However, we also must continue to pay the servicing
costs with respect to such participated loans. We sold to Union
Bank, as trustee, participation interests with balances of
approximately $149 million as of December 31, 2002. We
have the option to purchase the participation interests from
these grantor trusts at the end of a 364-day term upon
termination of the participation certificate. The agreement
automatically renews for additional 364-day terms unless either
party gives notice to terminate. The agreement is also
terminable by either party upon five business days notice.
This agreement provides beneficiaries of Union Banks
grantor trusts with access to investments in interests in
student loans, while providing liquidity to us on a short-term
basis.
We have serviced loans for Union Bank since 1978,
and, pursuant to a servicing agreement dated January 1,
1998, as amended, we charge a standard origination and servicing
fee at a level substantially commensurate to those charged to
the majority (in terms of volume of loans serviced) of our
non-affiliated servicing clients. Those fees are as follows:
$1.67 per Stafford or PLUS loan per month in school; $2.92 per
Stafford or PLUS loan per month other than in school; $2.89 per
loan per month for consolidation loans; and $25.00 per loan
origination fee. Union Bank paid us fees pursuant to this
servicing agreement aggregating approximately $5.5 million
in 2002. Our accounts receivable as of December 31, 2002
included approximately $371,000 for loan servicing fees due from
Union Bank. The servicing agreement is for a month-to-month
term, subject to a removal fee of $13.32 per loan and a
deconversion fee of $10.66 per loan. The agreement may be
terminated in the event of a material uncured breach by us.
Beginning in May 2001, we subleased 4,124
square feet of office space from Union Bank at a price of $8.50
per square foot and 320 square feet of storage space for
$3.00 per square foot. These terms are the same rental terms as
are charged to Union Bank by the non-affiliated landlord. During
2002, we made rent payments to Union Bank of approximately
$36,000. This sublease agreement is coterminous with the master
lease between Union Bank and the non-affiliated landlord.
Starting in June 2001, we obtained the right to
acquire from Union Bank 100% of the participation interests in
an unspecified volume of private loans which comply with our
internal underwriting criteria (as modified from time to time).
On these participations, we earn 100% of the borrower interest
rate, less servicing costs thereon in an amount equal to 1% per
annum of the aggregate average outstanding principal balances of
such participations. The parties mutually agree upon the volume
of such participations from time to time. In 2002, we did not
purchase any participation interests in private loans pursuant
to this agreement. The agreement is subject to termination upon
30 days notice by either party.
In December 2000, we entered into an agreement to
assist Union Bank in marketing and providing program operations
related to the Nebraska College Savings Plan, or the College
Savings Plan, a plan under Section 529 of the Code. Union
Bank has agreed to pay us fees in an amount equal to 50% of the
net profits, if any, associated with Union Banks program
management agreement with the College Savings Plan. Union Bank
is entitled to a fee as program manager pursuant to its program
management agreement with the College Savings Plan and is not
entitled to other payments pursuant to that agreement. We have
agreed to share 50% of the expenses relating to the program, up
to a capped amount of $1.25 million over the life of the
agreement, as well as 50% of mutually agreeable costs related to
the program operations, if
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Since October 1998, we have invested in student
loans from time to time by establishing several grantor trusts
with Union Bank as trustee for Union Banks Short Term
Federal Investment Trust. As a grantor, we place cash into the
trust account, and Union Bank uses such cash to acquire
interests in student loans on our behalf. We earn the yield on
the student loans purchased by the trust and pay to Union Bank a
trustee fee in an amount ranging from 75 basis points to 375
basis points per annum of amounts invested, depending upon the
type of investment asset being acquired in the trust account. We
invested approximately $12.9 million in these trusts as of
December 31, 2002. Union Bank has created almost 1,000
similar Short Term Federal Investment Trusts with non-affiliated
trust beneficiaries, and the fees and terms applicable to the
trust agreements it has entered into with us are the same as the
fees charged by Union Bank to the majority (in terms of assets)
of non-affiliated persons. As trustee, Union Bank has agreed to
return our funds invested in these trusts or assets held on our
behalf in these trusts upon 30 days notice from us at
any time and thus terminate the trusts. We utilize these trust
arrangements as a short-term investment facility.
In January 2001, we, Union Bank and UFS
Securities (which was then controlled by Michael S. Dunlap and
Stephen F. Butterfield, but which we subsequently have
acquired), entered into an employee sharing arrangement with
respect to a small group of employees. The arrangement requires
each counterparty receiving services from any such employee to
pay for the share of the employees salary and payroll
equal to the approximate percentage of such employees time
devoted to such recipient. This agreement renews automatically
for one-year terms unless the parties mutually agree not to
renew.
We have retained Union Bank to administer our
401(k) profit sharing and related employee benefit plans
pursuant to a series of agreements, the most recent of which was
entered into in April 2003. The fees charged by Union Bank are
commensurate with those Union Bank charges to other employee
benefit customers. We paid Union Bank the sum of approximately
$92,000 in 2002 for these services, based upon fees ranging
between 0.25% and 0.125% of the plan assets, plus a
recordkeeping fee, depending upon the aggregate of plan assets.
This agreement may be terminated upon 60 days notice
from either party, but we must pay liquidated damages if we
terminate prior to April 2004.
Union Bank and Trust Company and Farmers &
Merchants Investment Inc., or Farmers &
Merchants
Union Bank is
controlled by Farmers & Merchants, which owns 80.9% of Union
Banks stock. Michael S. Dunlap, our Co-Chief Executive
Officer, owns or controls 38.4% of the stock of Farmers &
Merchants, while Mr. Dunlaps sister, Angela L.
Mulheisen, owns or controls 35.9% of such stock. Mr. Dunlap
serves as a director and president of Farmer & Merchants and
as non-executive chairman of Union Bank. Ms. Mulheisen
serves as director and executive vice president of Farmers &
Merchants and as a director, president and chief executive
officer of Union Bank. Union Bank beneficially owns 15.7% of our
common stock as Trustee for the University of Nebraska
Foundation and for the Class A and Class B Grantor
Retained Annuity Trusts, or GRATs. Farmers & Merchants does
not own 5% or more of our stock; however, the stock holdings of
both Union Bank and Farmers & Merchants are deemed to be
beneficially owned by both Mr. Dunlap and
Ms. Mulheisen, respectively. Before this offering,
Mr. Dunlap beneficially owned 57.6% of our outstanding
common stock, and Ms. Mulheisen beneficially owned 44.9% of
our outstanding common stock.
Packers Service Group, Inc., or Packers
Service Group
Packers
Service Group beneficially owned 24.6% of our common stock
before this offering. Mr. Dunlap owns 28.3% of the stock of
Packers Service Group and also serves as president and a
director of that corporation. Ms. Mulheisen owns or
controls 27.0% of the stock of Packers Service Group and also
serves as one of its directors.
Union Financial Services, Inc., or Union
Financial
Union Financial
is 50% owned by Mr. Dunlap and 50% owned by Stephen F.
Butterfield, our Co-Chief Executive Officers.
Mr. Butterfield also serves as president of Union
Financial. Union Financial does not own 5% or more of our common
stock; however, its holdings are deemed to be beneficially owned
by both Mr. Dunlap and Mr. Butterfield. Before this
offering, Mr. Butterfield beneficially owned 12.8% of our
outstanding common stock.
Great Plains Financial, LLC, or Great
Plains
Great Plains is
controlled by Don R. Bouc, who is its sole member as well as our
President. Great Plains does not own 5% or more of our common
stock; however, its holdings are deemed to be beneficially owned
by Mr. Bouc. Before this offering, Mr. Bouc
beneficially owned 5.4% of our outstanding common stock.
UFS Securities, LLC
UFS Securities is one of our wholly
owned subsidiaries; however, prior to August 2003, it was owned
by Packers Service Group and Union Financial.
Aggregate payments for the year ended
Related Party
December 31, 2002
(dollars in thousands)
$
6,747
1,400
1,000
1,650
1,750
1,425
Transactions with Farmers & Merchants and Its Related Parties |
In August 2001, we provided to The First Marblehead Corporation, or First Marblehead, and each special purpose entity, or SPE, named in the agreement a guarantee of liabilities of First National Bank Northeast, or First National, pursuant to indemnity covenants given by First National to First Marblehead with respect to a sale of loans from First National to First Marblehead. Our liability under such guarantee is limited to an aggregate amount of $10 million, plus costs incurred by First Marblehead with respect to recovery efforts. In consideration for such guarantee, First Marblehead agreed to pay or cause a SPE to pay us the sum of 1% of the outstanding balance of private loans sold by First National to First Marblehead. This guarantee remains in effect until First Marblehead and the SPEs receive written notice from us to discontinue the guarantee or until all obligations of First National pursuant to its indemnity of First Marblehead are paid in full. We earned nothing in 2002 from this agreement and have not paid out any sums pursuant to the indemnity covenants thereunder. Michael S. Dunlap is a director of First National, and Farmers & Merchants owns, indirectly, approximately 25% of the outstanding capital stock of that financial institution.
In September 2000, we engaged Farmers & Merchants, one of our shareholders at the time, as well as the holding company of Union Bank, to provide consulting services with respect to financial matters, merger and acquisition activities, student loan marketing and legislative support and other advisory matters. In 2002, we paid consulting fees in the amount of approximately $1.4 million to Farmers & Merchants and
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We obtained an unsecured operating line of credit from Farmers & Merchants in November 2001. The interest rate we were charged was equal to 165 basis points above 30-day LIBOR, which was the same cost to Farmers & Merchants from a third-party credit provider at the time to cover Farmers & Merchants lending commitment. The commitment amount under this line of credit was $30 million, which was drawn upon and later repaid in full as of the end of 2002. No funds were borrowed by Nelnet under this agreement in 2003. This line of credit was recently terminated. In January 2002, we entered into an intercreditor agreement with Farmers & Merchants and Bank of America, N.A., pursuant to which Farmers & Merchants agreed to subordinate certain of its rights as one of our lenders to the rights of Bank of America. This intercreditor agreement will terminate upon discharge of all of our indebtedness to Bank of America pursuant to its commitment which expires in January 2005.
In May 2002, we transferred our preferred stock holdings in Packers Service Group to Infovisa, Inc., one of our subsidiaries at that time. In May 2002, we then sold 91.43% of the outstanding capital stock of Infovisa, Inc. to Farmers & Merchants for a purchase price equal to that companys book value of approximately $6 million.
Transactions with Miscellaneous Related Parties
In November 2000, we entered into an agreement with Union Financial pursuant to which Union Financial furnished consulting services to us. We paid Union Financial consulting fees in the amount of $1.65 million in 2002. This agreement was terminated in 2002.
In December 2000, we entered into an agreement to obtain consulting services on a broad range of matters from Great Plains, which until recently owned 6.8% of our common stock. Don R. Bouc, our President and one of our Directors, owned a 75% interest in Great Plains, and Terry J. Heimes, Chief Financial Officer and an Executive Director of Nelnet, owned a 7% interest. We paid Great Plains consulting fees of approximately $1.75 million during 2002 pursuant to this agreement, a portion of which constituted payment for Mr. Boucs consulting services provided to Nelnet during 2002. This agreement was terminated in July 2003.
Since January 2001, we have owned 50% of a technology firm, 5280 Solutions, Inc., or 5280 Solutions, which provided us with contract programming and related technological support starting in January 2002. In 2002, we paid 5280 Solutions approximately $7.0 million for its services. Since March 2002, we have owned 50% of FirstMark Services, LLC, or FirstMark Services. In March 2002, FirstMark Services agreed to provide subcontracting servicing functions on our behalf with respect to private loan services. We incurred expenses with respect to private loan servicing provided by FirstMark Services of approximately $4.6 million in 2002. We provided a $2.5 million operating line of credit to FirstMark Services in March 2002, and this line of credit will expire in March 2004. During 2002, Raymond J. Ciarvella and Matthew D. Hall owned interests in both companies, and Todd M. Eicher and Edward P. Martinez owned interests in 5280 Solutions. They currently own no interest in these companies.
UFS Securities Transactions with Miscellaneous Related Parties
Prior to August 2003, UFS Securities, LLC was owned by Packers Service Group and Union Financial. In August 2003, we acquired a 100% ownership interest in UFS Securities for the purchase price of $2.6 million. Thus, although transactions with UFS Securities prior to August 2003 would have been treated previously as affiliate transactions, such transactions are now with our wholly owned subsidiary. We have retained UFS Securities in a series of advisory arrangements pursuant to which UFS Securities provides advisory services in connection with our offerings of debt securities. We paid approximately $1.4 million in fees to UFS Securities in 2002 for such services.
In December 2002, UFS Securities retained Union Bank to administer the UFS Securities 401(k) profit sharing plan for fees which are commensurate with those charged to other 401(k) profit sharing
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In August 2001, UFS Securities entered into an agreement with Farmers & Merchants pursuant to which UFS Securities, for a fee equal to the amount received by Farmers & Merchants, assists with the performance of mortgage loan consulting services that Farmers & Merchants provides for a bank. UFS Securities received fees of approximately $237,000 in 2002 from this agreement. This agreement terminates when the agreement between Farmers & Merchants and the third-party bank terminates.
In March 2001, UFS Securities began serving as distributor on behalf of Union Bank for all advisor-sold accounts with the College Savings Plan. UFS Securities is entitled to approximately 10 basis points of plan assets pursuant to this agreement. This agreement may be terminated by either party upon 30 days notice. In November 2001, UFS Securities began acting as distributor on behalf of Union Bank for the TD Waterhouse accounts within the College Savings Plan. This agreement terminates upon termination of the TD Waterhouse distribution agreement for the College Savings Plan. UFS Securities received payments aggregating approximately $77,000 from these agreements in 2002.
In October 2002, UFS Securities agreed to act as the principal underwriter for the Stratus Funds, Inc., or Stratus Funds, a group of mutual funds associated with Union Bank and of which Michael S. Dunlap serves as president. UFS Securities did not receive any fees in 2002 pursuant to this agreement. This agreement has a one-year term that renews automatically, with the Stratus Funds prior approval, for successive one-year terms unless terminated by a vote of the majority of the board of directors, including a majority of disinterested directors, of the Stratus Funds or a majority of its shareholders. UFS Securities may also terminate this agreement on 60 days notice. In April 2000, UFS Securities leased office space and office amenities from Union Bank at the rate of $15.00 per square foot, or $1,000 per month. This agreement terminates in April 2004, but will automatically renew for successive one-year terms unless either party terminates upon written notice. In March 2001, UFS Securities, together with Union Bank, hired Adminisystems, Inc., one of our affiliates, which we refer to as Adminisystems, and Union Bank, to perform certain administrative services in connection with the investment portfolios maintained by the College Savings Plan. The fees to be paid under this agreement equal 40% of the distribution fees that UFS Securities receives with respect to certain accounts placed with the College Savings Plan. UFS Securities paid Adminisystems the sum of approximately $51,000 in 2002. This agreement may be terminated by any party upon 60 days notice.
In March 2000, Farmers & Merchants furnished a $1 million unsecured line of credit to UFS Securities with interest accruing at the prime rate. No monies have ever been drawn or advanced on this line. The initial term of this line of credit expires in March 2005.
In January 2002, we retained UFS Securities for a one time fee of $25,000 to provide advisory services in connection with a swap agreement to which we were a party.
In April 2002, UFS Securities retained Union Financial to provide consulting services in connection with an advisory agreement between UFS Securities and J.P. Morgan Securities Inc. This agreement is coterminous with the advisory agreement between UFS Securities and J.P. Morgan Securities Inc. UFS Securities paid to Union Financial the sum of approximately $1.87 million in 2002 pursuant to this agreement.
In June 2000, Union Bank agreed to permit UFS Securities to gain certain access to Union Bank customers by permitting marketing efforts in Union Bank facilities, in consideration for 90% of UFS Securities gross commissions, after deducting trading and closing expenses. UFS Securities paid Union Bank approximately $245,000 in 2002 pursuant to this agreement.
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DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated articles of
incorporation, which we refer to as our articles of
incorporation, provide that we have the authority to issue
615,000,000 shares of common stock, par value $0.01 per
share. The common stock is divided into two classes, consisting
of 600,000,000 shares of Class A common stock and
15,000,000 shares of Class B common stock. Upon
consummation of the offering, 39,015,034 shares of
Class A common stock and 14,023,454 shares of Class B
common stock will be issued and outstanding.
Our articles of incorporation also provide that
we have authority to issue 50,000,000 shares of preferred stock,
par value $0.01 per share. Our board of directors may fix the
relative rights and preferences of each series of preferred
stock in a resolution of the board of directors.
Common Stock
Holders of Class A common stock are entitled
to one vote per share and holders of Class B common stock
are entitled to ten votes per share on all matters submitted to
a vote of shareholders. Except as otherwise required by law,
Class A common stock and Class B common stock shall
vote as a single class on all matters to be voted on by our
shareholders, including, without limitation, any consolidation
or merger of us into or with any other corporation or the sale
or transfer by us of all or substantially all of our assets.
With the approval of a majority of the shares of Class B
common stock, voting separately as a class, we may lower the
number of votes per share each share of Class B common
stock shall be entitled to have.
Holders of common stock are entitled to receive
ratably dividends payable in cash, in stock or otherwise if, as
and when declared by the board of directors out of assets
legally available therefor, subject to any preferential rights
of any outstanding preferred stock.
Each share of Class B common stock shall
automatically be converted into one share of Class A common
stock, without any action by us or further action by the holder
thereof, upon the transfer of such share, other than the
following transfers:
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Notwithstanding the foregoing, Class B
common stock shall automatically convert into Class A
common stock upon any transfer pursuant to a divorce or
separation agreement or order.
For purposes of this paragraph,
affiliate means, with respect to any business
organization, any natural person or business organization that,
directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with,
such business organization.
Each share of Class B common stock shall, at
the option of the holder thereof, be convertible into one share
of Class A common stock at any time.
In the event at any time the shares of
Class B common stock outstanding constitute less than 50%
of the Class B common stock outstanding on the date hereof,
each remaining share of Class B common stock outstanding
shall automatically be converted into one share of Class A
common stock.
On liquidation, dissolution or winding up of
Nelnet, after payment in full of the amounts required to be paid
to the holders of any outstanding preferred stock, all holders
of common stock are entitled to receive ratably any assets
available for distribution to holders of common stock after the
payment of all of our debts and other liabilities. No shares of
common stock have preemptive rights to purchase additional
shares of common stock. All the outstanding shares of common
stock are, and the shares sold hereunder will be, fully paid and
nonassessable. The rights, preferences and privileges of holders
of common stock will be subject to and may be adversely affected
by the rights of holders of any preferred stock that may be
issued in the future. All shares of Class A common stock
and Class B common stock which are acquired by us shall be
available for reissuance by us at any time.
Preferred Stock
Our board of directors is authorized, subject to
limitations prescribed by law, without further shareholder
approval, to issue from time to time up to an aggregate of
50,000,000 shares of preferred stock, in one or more series, and
to determine or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of
each such series thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting
any series or designations of such series. The exercise of this
authority eliminates delays associated with a shareholder vote
in specific instances. The ability of the board of directors to
issue preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
The voting and other rights of the holders of
common stock will be subject to, and may be adversely affected
by, the rights of holders of any preferred stock that may be
issued in the future.
Nebraska Anti-takeover Law and Certain Charter
and By-law Provisions
Provisions of our articles of incorporation and
our amended and restated by-laws, which we refer to as our
by-laws, could discourage potential acquisition proposals and
could delay or prevent a change in control of Nelnet. These
provisions are intended to enhance the likelihood of continuity
and stability in the composition of the board of directors and
in the policies formulated by the board of directors and to
discourage types of transactions that may involve an actual or
threatened change in control of Nelnet.
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Our by-laws provide that a vacancy in the board
of directors occurring from an increase in the number of
directors or otherwise may be filled by the vote of a majority
of directors then in office, though less than a quorum. This
precludes a third party or a majority of shareholders from
removing incumbent directors and simultaneously gaining control
of the board of directors by filling, with its own nominees, the
vacancies created by removal.
Our articles of incorporation do not permit our
shareholders to call special meetings of shareholders, except to
the extent provided by applicable law. Nebraska law provides
that the holders of shares of common stock representing 10% or
more of the voting power of a Nebraska corporation may call a
special meeting of shareholders at any time.
Our by-laws establish an advance notice procedure
for the nomination, other than by or at the direction of the
board of directors or a committee thereof, of candidates for
election as directors as well as for other shareholder proposals
to be considered at shareholders meetings. A notice
regarding any nomination must contain, as to each nominee, all
information relating to such person that is required to be
disclosed in solicitations of proxies for the election of
directors, or that is otherwise required, in each case pursuant
to Regulation 14A of the Securities Exchange Act of 1934,
including each such persons written consent to serving as
a director if elected. A notice regarding any business,
including nomination of directors, to be brought before an
annual meeting must contain the following:
Although the notice provisions do not give the
board of directors any power to approve or disapprove
shareholders nominations or proposals for action by us,
they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder
proposals if the procedures established by our by-laws are not
followed and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal, without regard to whether
consideration of such nominees or proposals might be harmful or
beneficial to us and our shareholders. The purpose of requiring
advance notice is to afford the board of directors an
opportunity to consider the qualifications of the proposed
nominees or the merits of other shareholder proposals and, to
the extent deemed necessary or desirable by the board of
directors, to inform shareholders about those matters.
Our articles of incorporation authorize our board
of directors to create and issue, whether or not in connection
with the issuance and sale of any of our securities or property,
rights entitling the holders thereof to purchase our securities
or any other corporation. The times at which and the terms upon
which such rights are to be issued are to be determined by the
board of directors and set forth in the contracts or other
instruments that evidence such rights. The authority of the
board of directors with respect to such rights shall include,
without limitation, the determination of the initial purchase
price, the times and circumstances under which such rights may
be exercised, provisions denying holders of a specified
percentage of our outstanding capital stock the right to
exercise such rights and provisions to permit us to redeem or
exchange such rights. This provision in our articles of
incorporation could have the effect of discouraging third
parties from seeking, or impairing their ability to seek, to
acquire a significant portion of our outstanding securities, to
engage in any transaction which might result in a change in
control of us or
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We are a Nebraska corporation and are therefore
subject to the provisions of the Nebraska Shareholders
Protection Act. The Nebraska Shareholders Protection Act,
subject to certain exemptions, prohibits a Nebraska corporation
from engaging in any of a broad range of business
combinations involving an interested
shareholder, or any affiliate or associate of such interested
shareholder, for a period of five years following the date that
such shareholder became an interested shareholder, unless prior
to such date the board of directors of the corporation approved
either the business combination or the transaction that resulted
in the shareholder becoming an interested shareholder. A
business combination includes a merger, asset sale
or other transaction resulting in a financial benefit to the
shareholder. The Nebraska Shareholders Protection Act also
provides that shares acquired in a control-share acquisition
have no voting rights with respect to matters other than the
election of directors unless approved by a vote of shareholders
of the corporation, and that any such control share acquisition
is effective only if approved by a majority of the
corporations voting shares that are not
interested shares. A control-share acquisition
is an acquisition of voting stock in a corporation that, when
added to the shares the shareholder had prior to the
acquisition, would elevate the shareholders voting power
into one the three following ranges: (i) between 20% and
33 1/3%, (ii) between 33 1/3% and 50% and
(iii) over 50%. For purposes of the Nebraska Shareholders
Protection Act, an interested shareholder is a
person who owns 10% or more of a corporations outstanding
voting stock, or an affiliate or associate of the corporation
that owns, or within five years prior did own, 10% or more of
the corporations outstanding voting stock. These
provisions may have the effect of discouraging, delaying,
deferring or preventing a change in control of Nelnet.
Registration Rights
Michael S. Dunlap, Stephen F. Butterfield,
persons related to them and trusts in which they have beneficial
interests have the right to make two written demands of Nelnet
for registration with the Securities and Exchange Commission of
all or part of their common stock. However, we need not effect a
demand registration unless it includes securities with an
aggregate offering price, net of underwriting discounts and
commissions, of at least $5 million. The first such demand
may not be made prior to the first anniversary of this offering,
and the second such demand may not be made within twelve months
after the first demand. We are obligated to comply with any such
demand unless our independent directors determine that such sale
would be contrary to the best interests of Nelnet. Our
independent directors may consider several factors in making any
such determination, including share price performance after the
date of this offering, equity market conditions and our
operating results. These shareholders also have piggyback
registration rights for their common stock. The number of
securities to be included in an offering by these shareholders
will be subject to reduction by the applicable underwriter in
some cases. We will bear all expenses incident to our
performance of our registration obligations, other than some of
the costs or expenses of selling shareholders. The foregoing
registration rights are not transferable and may be amended or
waived only with the written consent of Nelnet and the
applicable shareholders.
Limitation of Directors
Liability
Our articles of incorporation contain a provision
which limits the personal liability of each of our directors for
monetary damages for breaches of fiduciary duty as one of our
directors, except for liability of a director for the following:
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The inclusion of this provision in our articles
of incorporation may have the effect of reducing the likelihood
of derivative litigation against directors, and may discourage
or deter shareholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefited us
and our shareholders. Our by-laws also contain provisions
indemnifying our directors and officers to the fullest extent
permitted by the Nebraska Business Corporation Act. Management
believes that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
Indemnification and Insurance
Our articles of incorporation provide that we
will indemnify each person who was or is made a party or
threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he
or she or a person of whom he or she is the legal representative
is or was one of our directors or officers, to the fullest
extent allowed by the Nebraska Business Corporation Act. This
right of indemnification shall include the right to be paid by
us the expenses, including attorneys fees, incurred in
defending any such proceeding in advance of its final
disposition. However, if Nebraska law so requires, the
advancement of such expenses will only be made upon the delivery
to us of an undertaking by or on behalf of such person to repay
all amounts so advanced if it shall ultimately be determined by
final judicial decision, from which there is no further right to
appeal, that such person is not entitled to be indemnified for
such expenses by us.
In addition, our articles of incorporation
provide that we may maintain insurance to protect ourselves and
any of our directors, officers, employees or agents against any
expense, liability or loss, whether or not we would have the
power to indemnify a person against any expense, liability or
loss under Nebraska law. Our articles of incorporation further
provide that we may, to the extent permitted by the board of
directors, grant rights to indemnification, and rights to
advancement of expenses, to any of our employees or agents. We
have obtained insurance for the benefit of our officers and
directors insuring such persons against liabilities, including
liabilities under the securities laws.
Share Retention Policy
Under our share retention policy, none of our
officers or the officers of any of our direct or indirect
subsidiaries at or above the level of Executive Director,
defined for purposes of the policy as Executives, may sell or
otherwise dispose of a number of shares of common stock in any
calendar year in excess of one-third of the number of shares of
common stock beneficially owned by the Executive on the first
day of the calendar year. The policy applies to Executives
during and following their employment by us, provided that
following five years from the closing date of this offering, an
Executive will be free to sell or otherwise dispose of all of
his or her shares.
Exceptions that apply to the share retention
policy are as follows:
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock will be Mellon Investor Services LLC.
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Listing
We have applied to list our Class A common
stock on the New York Stock Exchange under the symbol
NNI.
Recapitalization
Effective August 14, 2003, we recapitalized
our outstanding capital stock. In connection therewith, our
outstanding 2,859.99 shares of Class A voting common
stock, par value $0.10 per share, and our outstanding
211,609 shares of Class B non-voting common stock, par
value $0.10 per share, were converted into an aggregate of
31,015,034 shares of Class A common stock, par value
$0.01 per share, and 14,023,454 shares of Class B
common stock, par value $0.01 per share. We also changed our
name from Nelnet Loan Services, Inc. to Nelnet, Inc. effective
August 14, 2003.
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Voting Rights
Dividends
Conversion
to any other holder of Class B common stock
or an affiliate of a holder of Class B common stock which
holder is a natural person or a business
organization, as defined in our articles of incorporation;
to a spouse, sibling, parent, grandparent or
descendant, whether natural or adopted, of a holder of
Class B common stock;
to a trust for the sole benefit of:
a holder of Class B common stock who is a
natural person,
a spouse, sibling, parent, grandparent or
descendent, whether natural or adopted, of a holder of
Class B common stock, and/or
a charitable foundation or other organization
qualified under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended;
by will to:
a spouse, sibling, parent, grandparent or
descendent, whether natural or adopted, of a holder of
Class B common stock,
a charitable foundation or other organization
qualified under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended, or
to a trust as described above;
pursuant to the laws of descent and distribution
to a spouse, sibling, parent, grandparent or descendant, whether
natural or adopted, of a holder of Class B common stock;
to any charitable foundation or other
organization qualified under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended; or
to us.
Other Rights
Board of Directors
Special Meetings of
Shareholders
Advance Notice Requirements for Shareholder
Proposals and Director Nominations
a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting
such business at the annual meeting;
the name and address of the shareholder proposing
such business;
the class and number of shares of our stock
beneficially owned by the shareholder; and
any material interest of the shareholder in such
business.
Shareholder Rights
Nebraska Shareholders Protection
Act
breach of the duty of loyalty to us or our
shareholders;
acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law;
any transaction from which the director derived
an improper personal benefit; or
violations under provisions of the Nebraska
Business Corporation Act relating to unlawful payments of
dividends or unlawful stock purchases or redemptions.
Transfers to family members and family-owned
partnerships or other family-owned entities will not be
prohibited, so long as such transfers are effected only for
estate planning purposes and the transferee agrees to comply
with the share retention policy (treating the transferee(s) as
the transferring Executive).
It shall not be prohibited for any Executive to
sell or otherwise dispose of up to $500,000 in value of shares
of common stock during any calendar year.
All restrictions under the share retention policy
shall cease in the event of the death or retirement at normal
retirement age of an Executive.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Restricted Shares
Upon the completion of this offering, we will
have 39,015,034 shares of our Class A common stock
outstanding. Of these shares, the 8,000,000 shares of our
Class A common stock sold in this offering will be freely
tradeable by persons other than our affiliates, as that term is
defined in Rule 144 under the Securities Act of 1933,
without restriction or further registration under the Securities
Act of 1933.
All of the remaining 31,015,034 shares of
our Class A common stock outstanding upon completion of
this offering, and the 14,023,454 shares of Class A common
stock issuable upon the conversion of our Class B common
stock outstanding upon completion of this offering, are deemed
restricted securities under Rule 144 under the
Securities Act of 1933. None of these restricted securities will
be eligible for sale in the public market on the date of this
prospectus. Upon expiration of the lock-up agreements described
below, 180 days after the date of this prospectus, up to an
additional 45,038,488 shares of our Class A common
stock, including 14,023,454 shares of Class A common
stock issuable upon the conversion of our outstanding
Class B common stock, will be eligible for sale in the
public market pursuant to Rule 144.
In general, under Rule 144, a shareholder
who has beneficially owned his or her restricted shares for at
least one year is entitled to sell, within any three-month
period, a number of shares of our Class A common stock that
does not exceed the greater of:
In addition, our affiliates must comply with the
restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to publicly sell
shares of our Class A common stock which are not restricted
securities. A shareholder who is not one of our affiliates and
has not been our affiliate for at least three months prior to
the sale and who has beneficially owned restricted shares of our
Class A common stock for at least two years may resell the
shares without limitation. In meeting the one- and two-year
holding periods described above, a holder of restricted shares
of our Class A common stock can include the holding period
of a prior owner who was not our affiliate. The one- and
two-year holding periods described above do not begin to run
until the full purchase price or other consideration is paid by
the person acquiring the restricted shares of our Class A
common stock from us or one of our affiliates.
Registration Rights
Michael S. Dunlap, Stephen F. Butterfield,
persons related to them and trusts in which they have beneficial
interests have the right, subject to limitations, to make two
written demands of Nelnet for registration with the Securities
and Exchange Commission of all or part of their common stock.
These shareholders also have piggyback registration rights for
their common stock. See Description of Capital
Stock Registration Rights.
Lock-up Agreements
We and our executive officers and directors and
all of our shareholders have agreed that, with some exceptions,
during the period beginning from the date of this prospectus and
continuing to and including the date 180 days after the
date of this prospectus, none of us will, directly or
indirectly, sell, offer to sell, contract to sell or grant any
option to sell (including without limitation any short sale),
pledge, transfer, establish an open put equivalent
position within the meaning of Rule 16a-1(h) under
the Securities Exchange Act of 1934, as amended, or otherwise
dispose of any shares of our common stock, options or
99
Share Retention Policy
Our share retention policy prohibits our
Executives from selling or otherwise disposing of a number of
shares of Class A common stock in any calendar year in
excess of one-third of the number of shares of common stock
beneficially owned by the Executive officers on the first day of
the calendar year, subject to limited exceptions. This policy
applies to Executive officers during and, unless their
employment is terminated due to death or retirement at normal
retirement age, following termination of their employment by
Nelnet and expires five years from the closing date of this
offering. We retain the ability in our discretion to waive
compliance with the Share Retention Policy. See
Description of Capital Stock Share Retention
Policy. For additional information on transfer
restrictions applicable to shares of our Class A common
stock, see Underwriting.
100
UNITED STATES TAX CONSEQUENCES TO
The following is a general discussion of certain
material U.S. federal income and estate tax consequences of
the ownership and disposition of our Class A common stock
by a beneficial owner thereof that is a
Non-U.S. Holder. A
Non-U.S. Holder is a person or entity that, for
U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation or a foreign estate or trust.
The test for whether an individual is a resident of the U.S. for
federal estate tax purposes differs from the test used for
federal income tax purposes. Some individuals, therefore, may be
Non-U.S. Holders for purposes of the federal
income tax discussion below, but not for purposes of the federal
estate tax discussion, and vice versa.
This discussion is based on the U.S. Internal
Revenue Code of 1986, as amended, judicial decisions and
administrative regulations and interpretations in effect as of
the date of this prospectus, all of which are subject to change,
including changes with retroactive effect. This discussion does
not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of
their particular circumstances (including, without limitation,
Non-U.S. Holders who are pass-through entities or who hold
their Class A common stock through pass-through entities)
and does not address any tax consequences arising under the laws
of any state, local or non-U.S. jurisdiction. Prospective
holders should consult their tax advisors with respect to the
federal income and estate tax consequences of holding and
disposing of our Class A common stock in light of their
particular situations and any consequences to them arising under
the laws of any state, local or non-U.S. jurisdiction.
Dividends
Subject to the discussion below, dividends, if
any, paid to a Non-U.S. Holder of our Class A common
stock out of our current or accumulated earnings and profits
generally will be subject to withholding tax at a 30% rate or
such lower rate as may be specified by an applicable income tax
treaty. To obtain a reduced rate of withholding under a treaty,
a Non-U.S. Holder generally will be required to provide us
with a properly executed IRS Form W-8BEN certifying the
Non-U.S. Holders entitlement to benefits under that
treaty. U.S. Treasury Regulations provide special rules to
determine whether, for purposes of determining the applicability
of a tax treaty, dividends paid to a Non-U.S. Holder that
is an entity should be treated as paid to the entity or to those
holding an interest in that entity.
There will be no withholding tax on dividends
paid to a Non-U.S. Holder that are effectively connected with
the Non-U.S. Holders conduct of a trade or business within
the United States if a properly-executed IRS Form W-8ECI,
stating that the dividends are so connected, is filed with us.
Instead, the effectively connected dividends will be subject to
regular U.S. income tax, generally in the same manner as if
the Non-U.S. Holder were a U.S. citizen or resident
alien or a domestic corporation, as the case may be, unless a
specific treaty exemption applies. A corporate
Non-U.S. Holder receiving effectively connected dividends
may also be subject to an additional branch profits
tax, which is imposed, under certain circumstances, at a
rate of 30% (or such lower rate as may be specified by an
applicable treaty) of the corporate Non-U.S. Holders
effectively connected earnings and profits, subject to certain
adjustments.
Gain on Disposition of Class A Common
Stock
A Non-U.S. Holder generally will not be subject
to U.S. federal income tax with respect to gain realized on
a sale or other disposition of our Class A common stock
unless (i) the gain is effectively connected with a trade
or business of such holder in the United States and a specific
treaty exemption does not apply to eliminate the tax,
(ii) if a tax treaty would otherwise apply to eliminate the
tax, the gain is attributable to a permanent establishment of
the Non-U.S. Holder in the United States, (iii) in the
case of Non-U.S. Holders who are nonresident alien individuals
and hold our Class A common stock as a capital asset, such
individuals are present in the United States for 183 or more
days in the taxable year of the disposition and certain other
conditions are met, (iv) the Non-U.S. Holder is subject to
tax pursuant
101
Information Reporting Requirements and Backup
Withholding
Generally, we must report to the U.S. Internal
Revenue Service, or the IRS, the amount of dividends paid, the
name and address of the recipient and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to
tax treaties or certain other agreements, the IRS may make its
reports available to tax authorities in the recipients
country of residence.
Backup withholding will generally not apply to
payments of dividends made by us or our paying agents to a
Non-U.S. Holder if the holder has provided its federal taxpayer
identification number, if any, or the required certification
that it is not a U.S. person (which is generally provided
by furnishing a properly executed IRS Form W-8BEN), unless
the payer otherwise has knowledge that the payee is a
U.S. person.
Under current U.S. federal income tax law,
information reporting and backup withholding imposed at a rate
of 28.0% will apply to the proceeds of a disposition of our
Class A common stock effected by or through a
U.S. office of a broker unless the disposing holder
certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of
disposition proceeds where the transaction is effected outside
the United States through a non-U.S. office of a
non-U.S. broker. However, U.S. information reporting
requirements (but not backup withholding) will apply to a
payment of disposition proceeds where the transaction is
effected outside the United States by or through an office
outside the United States of a broker that fails to maintain
documentary evidence that the holder is a Non-U.S. Holder
and that certain conditions are met, or that the holder
otherwise is entitled to an exemption, and the broker is
(i) a U.S. person, (ii) a foreign person which derived
50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
(iii) a controlled foreign corporation for
U.S. federal income tax purposes, or (iv) a foreign
partnership (a) at least 50% of the capital or profits
interest in which is owned by U.S. persons or (b) that is
engaged in a U.S. trade or business. Backup withholding
will apply to a payment of disposition proceeds if the broker
has actual knowledge that the holder is a U.S. person.
Backup withholding is not an additional tax.
Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to
the IRS.
Federal Estate Tax
An individual Non-U.S. Holder who is treated
as the owner of, or has made certain lifetime transfers of, an
interest in our Class A common stock will be required to
include the value thereof in his gross estate for
U.S. federal estate tax purposes, and may be subject to
U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.
102
one percent of the then-outstanding shares of our
Class A common stock, which is approximately
390,000 shares of our Class A common stock immediately
after the completion of this offering; or
the average weekly trading volume in our
Class A common stock on the New York Stock Exchange during
the four calendar weeks preceding the date on which notice of
such sale is filed, provided certain requirements concerning
availability of public information, manner of sale and notice of
sale are satisfied.
UNDERWRITING
J.P. Morgan Securities Inc. and Banc of America
Securities LLC are acting as joint book-running managers for
this offering.
We and the underwriters named below have entered
into an underwriting agreement covering the Class A common
stock to be sold in this offering. Each underwriter has agreed
to purchase the number of shares of Class A common stock
set forth opposite its name in the following table.
The underwriting agreement provides that if the
underwriters take any of the shares presented in the table
above, then they must take all of these shares. No underwriter
is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances. The underwriting
agreement provides that the obligations of the underwriters are
subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt
of certain certificates, opinions and letters from us, our
counsel and our independent auditors.
The underwriters are offering the shares of
Class A common stock, subject to the prior sale of shares,
and when, as and if such shares are delivered to and accepted by
them. The underwriters will initially offer to sell shares to
the public at the initial public offering price shown on the
front cover page of this prospectus. The underwriters may sell
shares to securities dealers at a discount of up to
$ per
share from the initial public offering price. Any such
securities dealers may resell shares to certain other brokers or
dealers at a discount of up to
$ per
share from the initial public offering price. After the initial
public offering, the underwriters may vary the public offering
price and other selling terms.
If the underwriters sell more shares than the
total number shown in the table above, the underwriters have the
option to buy up to an additional 1,200,000 shares of
Class A common stock from us to cover such sales. They may
exercise this option during the 30-day period from the date of
this prospectus. If any shares are purchased with this option,
the underwriters will purchase shares in approximately the same
proportion as shown in the table above. If any additional shares
of Class A common stock are purchased, the underwriters
will offer the additional shares on the same terms as those on
which the shares are being offered.
The following table shows the per share and total
underwriting discounts that we will pay to the underwriters.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase additional
shares.
The underwriters have advised us that they may
make short sales of our Class A common stock in connection
with this offering, resulting in the sale by the underwriters of
a greater number of shares than they are required to purchase
pursuant to the underwriting agreement. The short position
resulting from those short sales will be deemed a
covered short position to the extent that it does
not exceed the 1,200,000 shares subject to the
underwriters overallotment option and will be deemed a
naked short position to the extent that it exceeds
that number. A naked short position is more likely to be created
if
103
The underwriters have advised us that, pursuant
to Regulation M under the Securities Act of 1933, they may
engage in transactions, including stabilizing bids or the
imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of
Class A common stock at a level above that which might
otherwise prevail in the open market. A stabilizing
bid is a bid for or the purchase of shares of Class A
common stock on behalf of the underwriters for the purpose of
fixing or maintaining the price of the Class A common
stock. A penalty bid is an arrangement permitting
the underwriters to claim the selling concession otherwise
accruing to an underwriter or syndicate member in connection
with the offering if the Class A common stock originally
sold by that underwriter or syndicate member is purchased by the
underwriters in the open market pursuant to a stabilizing bid or
to cover all or part of a syndicate short position. The
underwriters have advised us that stabilizing bids and open
market purchases may be effected on the New York Stock Exchange,
in the over-the-counter market or otherwise and, if commenced,
may be discontinued at any time.
One or more of the underwriters may facilitate
the marketing of this offering online directly or through one of
its affiliates. In those cases, prospective investors may view
offering terms and a prospectus online and, depending upon the
particular underwriter, place orders online or through their
financial advisor.
The following table details the estimated
offering expenses payable by us:
We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933.
We and our executive officers and directors and
all of our shareholders have agreed that, during the period
beginning from the date of this prospectus and continuing to and
including the date 180 days after the date of this
prospectus, none of us will, directly or indirectly, offer,
sell, offer to sell, contract to sell or otherwise dispose of
any shares of our common stock without the prior written consent
of J.P. Morgan Securities Inc. and Banc of America
Securities LLC, except in limited circumstances, including the
issuance of shares of common stock by us in connection with an
acquisition, provided that the recipient of the shares agrees to
be bound by these lock-up arrangements.
104
The underwriters have informed us that they do
not intend sales to discretionary accounts to exceed five
percent of the total number of shares of our Class A common
stock offered by them and that no sales to discretionary
accounts may be made without prior written approval of the
customer.
At our request, the underwriters have reserved
shares of Class A common stock for sale to our directors,
officers and employees, and other persons with whom we have a
business relationship, who have expressed an interest in
participating in this offering. We expect these persons to
purchase no more than five percent of the Class A common
stock offered in this offering. The number of shares available
for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Shares purchased
under this program will not be subject to the lock-up
arrangements described above.
We have applied to list our Class A common
stock on the New York Stock Exchange under the symbol
NNI. The underwriters intend to sell shares of our
Class A common stock to a minimum of 2,000 beneficial
owners in lots of 100 or more so as to meet the distribution
requirements of this listing.
There has been no public market for the
Class A common stock prior to this offering. We and the
underwriters will negotiate the initial public offering price.
In determining the initial public offering price, we and the
underwriters expect to consider a number of factors in addition
to prevailing market conditions, including:
We and the underwriters will consider these and
other relevant factors in relation to the price of similar
securities of generally comparable companies. Neither we nor the
underwriters can assure investors that an active trading market
will develop for the Class A common stock, or that the
Class A common stock will trade in the public market at or
above the initial public offering price.
From time to time in the ordinary course of their
respective businesses, certain of the underwriters and their
affiliates have engaged in and may in the future engage in
commercial banking and/or investment banking transactions with
us and our affiliates. For example, J.P. Morgan Securities Inc.,
Banc of America Securities LLC, Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston LLC have
underwritten various of our asset-backed securities. Affiliates
of J.P. Morgan Securities Inc. and Banc of America
Securities LLC have provided credit enhancements in connection
with our securitization transactions through various swap
agreements. Affiliates of J.P. Morgan Securities Inc. are acting
as agents for some of our financing arrangements. Bank of
America, N.A., an affiliate of Banc of America Securities LLC,
provides financing to one of our subsidiaries under a letter of
credit and is the lender under one of our operating lines of
credit. We are in the process of obtaining a $30 million
line of credit with JPMorgan Chase Bank, an affiliate of J.P.
Morgan Securities Inc. Bank of America, N.A. also acts as a
lender and agent under one of our warehouse financing
facilities. In addition, affiliates of J.P. Morgan Securities
Inc., Banc of America Securities LLC and Morgan Stanley &
Co. Incorporated act as remarketing agents in connection with
some of our existing financing arrangements. We have also
entered into arrangements in the ordinary course of business
with affiliates of Banc of America Securities LLC to purchase
student loans from them and to service certain of their loans.
105
Name
Number of shares
8,000,000
Without
With
overallotment
overallotment
exercise
exercise
$
$
$
$
$
14,886
20,500
210,600
1,000,000
1,750,000
800,000
11,000
193,014
$
4,000,000
the history of and prospects for our industry and
for student loan companies generally;
an assessment of our management;
our present operations;
our historical results of operations;
the trend of our revenues and earnings; and
our earnings prospects.
LEGAL MATTERS
The validity of the Class A common stock offered hereby have been and are being passed upon for Nelnet by Perry, Guthery, Haase & Gessford, P.C., L.L.O., Lincoln, Nebraska. Legal matters in connection with this offering are being passed upon for Nelnet by Cahill Gordon & Reindel LLP, New York, New York, and for the underwriters by Davis Polk & Wardwell, New York, New York. Shareholders of, and an Of Counsel to, Perry, Guthery, Haase & Gessford, P.C., L.L.O. own an aggregate of 258,802 shares of Class A common stock of Nelnet.
The consolidated financial statements of Nelnet, Inc. as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002, have been included herein in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits, under the Securities Act of 1933 with respect to the shares of our Class A common stock to be sold in the offering. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and the shares to be sold in the offering, reference is made to the registration statement and the exhibits attached to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934 and will file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.
You may read and copy all or any portion of the registration statement or any reports, statements or other information that we file at the Securities and Exchange Commissions Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our Securities and Exchange Commission filings, including the registration statement, are also available to you on the Securities and Exchange Commissions web site http:// www.sec.gov .
106
INDEX TO FINANCIAL STATEMENTS
F-1
Independent Auditors Report
The Board of Directors
We have audited the accompanying consolidated
balance sheets of Nelnet, Inc. (formerly Nelnet Loan Services,
Inc.) and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income,
shareholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of
Nelnet, Inc. and subsidiaries management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Nelnet, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Lincoln, Nebraska
F-2
Consolidated Balance Sheets
See accompanying notes to consolidated financial
statements.
F-3
Nelnet, Inc. and Subsidiaries
Consolidated Statements of Income
See accompanying notes to consolidated financial
statements.
F-4
Consolidated Statements of Shareholders
Equity
See accompanying notes to consolidated financial
statements.
F-5
Consolidated Statements of Cash
Flows
Supplemental disclosure of noncash operating
activities regarding acquisitions is contained in note 1.
See accompanying notes to consolidated financial
statements.
F-6
Notes to Consolidated Financial
Statements
(1) Corporate Structure
Nelnet, Inc. (Nelnet or the Company, formerly
Nelnet Loan Services, Inc.) is a privately owned, vertically
integrated education finance company, which, together with its
subsidiaries, is focused on providing quality products and
services to participants in the education finance process.
Nelnet is an originator, holder and servicer of education loans
and offers a broad range of financial services and
technology-based products, including student loan origination
and lending, student loan and guarantee services and a suite of
internet-based software solutions.
The Company owns the stock of various
corporations which are engaged in the securitization of
education finance assets. The Companys student lending
subsidiaries described below are separate entities holding
beneficial interests in eligible loans, subject to creditors
with specific interests. The liabilities of the Companys
student lending subsidiaries are not the liabilities of the
Company or any of its other subsidiaries and cannot be
consolidated in the event of bankruptcy. The transfers of
student loans to the eligible lender trusts do not qualify as
sales under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities
, as the trusts continue to be under the
effective control of the Company. All the financial activities
and related assets and liabilities, including debt, of the
securitizations are reflected in the Companys consolidated
financial statements. The following subsidiaries of the Company
hold the financial assets (collectively referred to as the
Student Lending Subsidiaries):
NELNET1, NELNET2, NELNET SLF, NELF,
NHELPII, NELnet Private-1, MELMAC, and EMT Corp. finance
eligible student loan assets on a more permanent basis, as the
assets are funded with bonds and notes payable, which have
longer maturities. NHELPI, NHELPIII, NELNET SLWC-1,
select operating lines within NELF, and EFS Fin Co. are
warehouse facilities designed to fund student loan assets on a
temporary basis until the assets are moved to another Student
Lending Subsidiary to provide more permanent financing.
The Company also provides managerial,
administrative support, loan servicing, origination processing,
computer software development, broker-dealer activities and
marketing to the Student Lending Subsidiaries through the
following wholly owned subsidiary management companies: National
Education Loan Network, Inc. (NELN); Nelnet Marketing Solutions,
Inc. (NMS) and subsidiaries, including its 100% owned subsidiary
(80% owned through February 28, 2003), Student Partner
Services, Inc (SPS); Nelnet Guarantee Services, Inc. and
GuaranTec LLP (collectively, NGS); EFS Services, Inc. (EFS
Services); Charter Account Systems, Inc. (Charter); Idaho
Financial Associates, Inc. (IFA); UFS Securities, LLC
(UFS Securities) and its 100% owned subsidiary, Shockley
Financial Corp.; and Nelnet Corporation (subsequently renamed
Nelnet Corporate Services, Inc.).
F-7
Notes to Consolidated Financial
Statements (Continued)
Nelnet is the legal parent of NELN. Through
May 15, 2002, Nelnet also owned 91.43% of Infovisa, Inc.
and its subsidiary (Infovisa). Infovisa primarily developed and
provided software systems for financial institutions. Effective
May 15, 2002, Nelnet sold its ownership of Infovisa to
Farmers & Merchants Investment Inc. (F&M) at carrying
value, which approximated fair value.
Effective March 2, 2000, Nelnets
common stock, which was owned by Union Bank and Trust Company
(UB&T), was spun out to its holding company, F&M, and
the minority stockholders of UB&T. F&M is an entity
under common control with the Company. Following this
distribution, Nelnet entered into a triangular reorganization,
pursuant to which Nelnet established a new subsidiary, NELN.
NELN acquired through merger a former entity also named National
Education Loan Network, Inc. Subsequent to the reorganization,
Nelnet became the legal parent of NELN and its subsidiaries.
Majority voting and ownership control was retained by the former
shareholders of NELN, and accordingly, the transaction was
treated as a reverse acquisition for financial statement
reporting purposes. In accordance with generally accepted
accounting principles, NELN was treated as the acquiring entity
and Nelnet as the acquired entity.
As Nelnet was the acquired entity, Nelnets
assets were recorded at fair value at the date of the reverse
acquisition. Intangible assets, consisting of loan servicing
contracts, were recorded through a credit to additional paid-in
capital. In addition, the preferred and common stock of NELN was
converted to new shares of stock of Nelnet. Therefore, on the
acquisition date, in the accompanying consolidated statements of
shareholders equity, the common stock consisted of legal
shares of Nelnet and the retained earnings consisted of those of
NELN.
NELNET SLWC-1, NELNET SLF, and SPS commenced
their business operations on January 24, 2002, May 1,
2002, and May 15, 2002, respectively. NELnet Private-1
commenced its business operations on November 1, 2001. The
consolidated financial statements reflect the operations of
these entities since the commencement dates.
The Student Lending Subsidiaries are organized as
special-purpose bankruptcy remote entities which primarily
invest in eligible student loans, through an eligible lender
trustee, issued under Title IV of the Higher Education Act of
1965, as amended (the Act). NHELPII and NELnet Private-1
also invest in self-insured or privately-insured student loan
programs through an eligible lender trustee.
Student loans beneficially owned by the Student
Lending Subsidiaries include those originated under the Stafford
Loan Program (SLP), the Parent Loan Program for Undergraduate
Students (PLUS) program, the Supplemental Loans for Students
(SLS) program, and loans which consolidate certain borrower
obligations (Consolidation). Title to the student loans is held
by eligible lender trustees under the Act for the benefit of the
Student Lending Subsidiaries. The financed eligible loan
borrowers are geographically located throughout the United
States. The bonds and notes payable outstanding are payable
primarily from interest and principal payments on the student
loans, as specified in the resolutions authorizing the sale of
the bonds and notes.
The Companys business is comprised of four
primary product and service offerings:
F-8
Notes to Consolidated Financial
Statements (Continued)
Nelnet Guarantee Services, Inc., a wholly owned
subsidiary of NELN, commenced its business operations in June
2001. On June 30, 2001, it acquired 51% of the voting
control of GuaranTec, LLP (GuaranTec) for $2.6 million. On
January 1, 2002, NELN acquired the remaining 49% of
GuaranTec for $4.5 million from F&M. The excess
purchase price over F&Ms carrying value was
$3.0 million. As the 49% interest was acquired from an
entity under common control with the Company, the excess
purchase price was recorded as a dividend distribution in the
consolidated statement of shareholders equity in 2002.
On January 1, 2001, NELN acquired MELMAC and
its wholly owned subsidiaries, MELMAC LLC and MELMAC Enterprise,
Inc., for approximately $30 million. The acquisition was
accounted for under purchase accounting. The assets and
liabilities of MELMAC and its subsidiaries were recorded at fair
value. An intangible asset, representing loan origination
rights, of approximately $6.4 million was recorded and is
being amortized over its estimated useful life of three years.
The results of operations of MELMAC have been included in the
consolidated financial statements since the date of acquisition.
On December 21, 2001, NELN acquired all of
the outstanding stock of EFS, Inc. (EFS) and its wholly owned
subsidiaries, EMT Corp., EFS Services, EFS Fin Co., and
Advantage Network, Inc., for approximately $141 million.
The acquisition was accounted for under purchase accounting. The
assets and liabilities of EFS and its subsidiaries were recorded
at fair value. An intangible asset, representing lender
relationships and loan origination rights, of approximately
$4 million was recorded and is being amortized over its
estimated useful life of three years. The results of operations
of EFS have been included in the consolidated financial
statements since the date of acquisition.
F-9
Notes to Consolidated Financial
Statements (Continued)
NELN acquired MELMAC and EFS to increase its
market share in the student lending industry. The allocation of
the purchase price for the MELMAC and EFS acquisitions is shown
below (dollars in thousands):
On January 2, 2002, NELN acquired IFA for
approximately $17 million. The acquisition was accounted
for under purchase accounting. The assets and liabilities of IFA
were recorded at fair value. An intangible asset, representing
servicing system software and other intellectual property, of
$14.2 million was recorded and is being amortized over its
estimated useful life of three years. The results of operations
of IFA have been included in the consolidated financial
statements since the date of acquisition.
On May 9, 2002, NELN acquired Charter for
approximately $7 million. The acquisition was accounted for
under purchase accounting. The assets and liabilities of Charter
were recorded at fair value. An intangible asset, representing
servicing system software and other intellectual property, of
$6.8 million was recorded and is being amortized over its
estimated useful life of three years. Unamortized goodwill of
$2.6 million was also recorded. The results of operations
of Charter have been included in the consolidated financial
statements since the date of acquisition.
NELN acquired IFA and Charter to provide student
loan servicing software solutions to the student lending
industry. The allocation of the purchase price for the IFA and
Charter acquisitions is shown below (dollars in thousands):
On August 7, 2003, the Company acquired UFS
Securities for $2.6 million from affiliated parties. The
acquisition was accounted for under purchase accounting. The
results of operations of UFS Securities have been included in
the consolidated financial statements since the date of
acquisition. This acquisition is immaterial to the consolidated
financial statements.
F-10
Notes to Consolidated Financial
Statements (Continued)
The following unaudited pro forma information
presents the combined results of the Company as though the 2002,
2001 and 2000 acquisitions occurred on January 1, 2000. The
pro forma financial information does not necessarily reflect the
results of operations if the acquisitions had been in effect at
the beginning of the period or which may be attained in the
future.
The pro forma information presenting the combined
operations of the Company as though the 2002 acquisitions
occurred on January 1, 2002 is not significantly different
than actual 2002 results.
In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141,
Business
Combinations
(SFAS No. 141), and SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142).
SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations. SFAS
No. 141 specified criteria that intangible assets acquired
in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual
values.
The Company adopted the provisions of SFAS
No. 141 as of July 1, 2001 and SFAS No. 142 as of
January 1, 2002. Upon adoption of SFAS No. 142, the
Company was required to evaluate its existing intangible assets
and goodwill that were acquired in purchase business
combinations and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS
No. 141 for recognition separate from goodwill. The Company
was also required to reassess the useful lives and residual
values of all intangible assets acquired and make any necessary
amortization period adjustments by the end of the first interim
period after adoption. Based on this evaluation, no
reclassifications or changes to useful lives or residual values
were made.
(2) Interim Financial
Information
The accompanying interim financial information as
of September 30, 2003 and for the nine months ended
September 30, 2003 and 2002 have not been audited by
independent accountants. In the opinion of management, the
accompanying unaudited interim financial information contains
all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation in
accordance with generally accepted accounting principles. The
interim financial information should be read in conjunction with
the audited financial statements and notes for the years ended
December 31, 2002, 2001, and 2000. The results of
operations for the nine months ended September 30, 2003 are
not necessarily indicative of the results which may be expected
for the entire calendar year 2003.
F-11
Notes to Consolidated Financial
Statements (Continued)
(3) Summary of Significant Accounting
Policies and Practices
The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation. As discussed in Note 1(a), the Company
consolidates all special purpose entities in accordance with
SFAS No. 140. Non-consolidated entities in which the
Company has significant influence are recorded using the equity
method of accounting.
Investments in student loans, including premiums,
are recorded at cost, net of premium amortization and the
allowance for loan losses. Student loans consist of federally
insured student loans, private student loans and student loan
participations.
The allowance for loan losses is estimated and
established through a provision charged to expense. Losses are
charged against the allowance when management believes the
collectibility of the loan principal is unlikely. Recovery of
amounts previously charged off is credited to the allowance for
loan losses.
For the FFELP loan portfolio, the Company
considers trends in student loan claims rejected for payment by
guarantors and the amount of FFELP loans subject to the 2% risk
sharing. The allowance is based on periodic evaluations of its
loan portfolios considering past experience, changes to federal
student loan programs, current economic conditions and other
relevant factors. FFELP loans are guaranteed as to both
principal and interest, and, therefore, continue to accrue
interest until the time they are paid by the guaranty agency.
The allowance is maintained at a level management believes is
adequate to provide for estimated probable credit losses
inherent in the loan portfolio. This evaluation is inherently
subjective as it requires estimates that may be susceptible to
significant changes.
In determining the adequacy of the allowance for
loan losses on the private loans, the Company considers several
factors including: loans in repayment versus those in a
non-paying status, months in repayment, delinquency status, type
of program and trends in defaults in the portfolio based on
Company and industry data. The Company places a private loan on
non-accrual status and charges off the loan when the collection
of principal and interest is 120 days past due.
Management believes that the allowance for loan
losses is adequate. While management uses available information
to recognize probable losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in
economic conditions.
For purposes of the consolidated statements of
cash flows, the Company considers all investments with
maturities when purchased of three months or less to be cash
equivalents.
The Companys restricted cash and restricted
investments are held by the trustees in various accounts,
subject to use restrictions imposed by the trust indenture. The
Company recognizes all restricted cash and restricted
investments held by trustees on their consolidated balance sheet.
F-12
Notes to Consolidated Financial
Statements (Continued)
As a servicer of student loans, Nelnet collects
student loan remittances and subsequently disburses these
remittances to the appropriate lending entities. In addition,
Nelnet requests funding from lenders and subsequently disburses
loan funds to borrowers and schools on behalf of borrowers. Cash
collected for customers and the related liability are included
in the accompanying consolidated balance sheets. Net interest
income earned by the Company on this cash in the nine months
ended September 30, 2003 and 2002 and for the years ended
December 31, 2002, 2001 and 2000 was $144,000, $783,000,
$1.2 million, $2.1 million and $3.3 million,
respectively.
Intangible assets, consisting of loan servicing
contracts, lender relationships and loan origination rights, and
servicing system software and other intellectual property, are
being amortized on a straight-line basis over the expected
periods to be benefited, ranging from 30 to 36 months.
Goodwill resulting from acquisitions is not being amortized.
Furniture and equipment are carried at cost, net
of accumulated depreciation. Maintenance and repairs are charged
to expense as incurred, and major improvements, including
leasehold improvements, are capitalized. Gains and losses from
retirement of equipment and improvements are included in
determining net income. The Company uses accelerated and
straight-line methods for recording depreciation and
amortization. Accelerated methods are used for certain equipment
and software when this method is believed to provide a better
matching of income and expenses.
Other assets are recorded at cost or amortized
cost and consist primarily of prepaid bond insurance, debt
issuance costs, deferred tax assets, and income taxes
receivable. Prepaid bond insurance and debt issuance costs are
amortized using the straight-line method and effective interest
methods, respectively, over the estimated lives of the bonds and
notes payable.
The program reimbursement reserve, which is
included in other liabilities, represents the amount of student
loans that management estimates the Company will be required to
repay to lenders, for which the Company performs servicing, due
to the Companys failure to follow prescribed due diligence
procedures. The program reimbursement reserve is established
through a provision for losses charged to expense. The amount of
provision is based on managements evaluation of the
servicing portfolio as it relates to the complex due diligence
requirements that must be followed to maintain the Department of
Education guarantee on the loans. Failure to meet certain due
diligence requirements will cause a loss of guarantee on the
loans and potential loss to the Company if it is unable to cure
the condition under procedures prescribed by the federal
government.
Serviced student loans are charged against the
allowance when they lose their Department of Education guarantee
and the Company is required to reimburse the lender. Loans that
are subsequently returned to a repayment status can reacquire
their guaranteed status, and such amounts are then credited to
the program reimbursement reserve as recoveries.
Management believes that the program
reimbursement reserve is adequate. While management uses
available information to determine the adequacy of the reserve
and to recognize losses, future additions to the reserve may be
necessary based on changes in federal policy, economic
conditions, or managements performance relating to
compliance with the Department of Educations due diligence
requirements.
F-13
Notes to Consolidated Financial
Statements (Continued)
Charter and IFA account for software revenues in
accordance with the AICPAs Statement of
Position 97-2,
Software Revenue Recognition
(SOP 97-2). SOP 97-2 provides guidance on when and
in what amounts income should be recognized for licensing,
selling, leasing, or otherwise marketing computer software.
Income for contracts with customers that does not require
significant production, modification, or customization of
software is recognized when all the following criteria are met:
persuasive evidence of an arrangement exists, delivery has
occurred, vendors fee is fixed and determinable, and
collectibility is probable. Income paid on maintenance and
enhancement agreements for services to be performed in
subsequent periods is deferred and recognized in income over the
life of the agreements. Deferred revenue of approximately
$1.5 million and $900,000 is included in other liabilities
on the accompanying consolidated balance sheets at
September 30, 2003 and December 31, 2002, respectively.
Costs associated with research and development
related to the development of computer software are expensed
when incurred in accordance with SFAS No. 86,
Accounting
for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed.
All costs associated with website
development or the maintenance of existing software products are
expensed when incurred. Research and development machinery and
equipment that have alternative future uses either in research
and development activities or otherwise are capitalized and
depreciated over their useful lives.
The Company also capitalizes software costs under
the provisions of Statement of Position 98-1,
Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use
. Material software developments or enhancements
that are considered to have useful lives of greater than one
year are capitalized and amortized over their useful lives.
Costs related to maintaining its purchased software including
the costs of programming are expensed as incurred. Purchased
software is capitalized and amortized over the estimated useful
life. Unamortized capitalized software costs included in
furniture, equipment and leasehold improvements were
$3.7 million at December 31, 2001. There were no
unamortized costs at December 31, 2002 or
September 30, 2003.
In 2001, minority interest reflects the
proportionate share of shareholders equity and income of
GuaranTecs minority stockholder. In 2003 and 2002,
minority interest reflects the proportionate share of
shareholders equity and loss of SPSs minority
stockholders.
Nelnet allocated Infovisas income or loss
proportionately between Nelnets percentage interest and
the remaining percentage minority interest. When losses
applicable to the minority interest exceeded the minority
interest in equity capital, such excess was charged against
Nelnets interest as a charge to retained earnings in
Nelnets shareholders equity. When earnings were
generated applicable to the minority interest, Nelnets
interest was credited through retained earnings to the extent of
losses previously charged to retained earnings. For purposes of
reporting on the Company, these changes are reflected in
additional paid-in capital, as retained earnings are those of
NELN. During 2002, Infovisa was sold to F&M and the minority
interest loss was recaptured through additional paid-in capital
at the date of sale.
Effective January 1, 2001, the Company
adopted SFAS No. 133
, Accounting for Derivative
Instruments and Hedging Activities
, as amended by SFAS
No. 138,
Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an Amendment of FASB Statement
No. 133
. These statements establish accounting and
reporting standards for derivative instruments and hedging
activities, as defined, including certain derivative instruments
embedded in other contracts, and requires that an entity
recognize all derivatives as either assets and liabilities in
the balance sheet and measure them at fair value. The fair
F-14
Notes to Consolidated Financial
Statements (Continued)
value of the Companys derivative
instruments is determined based on the quoted market prices for
comparable instruments, if available, or a valuation model that
calculates the present value of expected future cash flows.
Subsequent changes in a derivatives fair value are
recognized currently in earnings unless specific hedge
accounting criteria are met.
The Company has entered into certain derivative
instruments such as interest rate swaps, caps and basis swaps as
part of managing its interest rate risk. Interest rate swaps are
used to exchange fixed and floating rate interest payment
obligations while caps are used to protect the Companys
income statement from unfavorable movements in interest rates
while allowing benefit from favorable movements. Basis swaps are
used to convert variable-rate debt from one interest rate index
to another to match the interest rate characteristics of the
assets. The Company uses basis swaps to change the index of the
LIBOR-based debt, to better match the cash flows of the student
loan assets.
All derivative instruments that qualify for
specific hedge accounting pursuant to SFAS No. 133, as
amended, are recorded at fair value and classified either as a
hedge of the fair value of a recognized asset or liability
(fair value hedge) or as a hedge of the variability
of cash flows to be received or paid to a recognized asset or
liability or a forecasted transaction (cash flow
hedge). All relationships between hedging instruments and hedged
items are formally documented, including the risk management
objective and strategy for undertaking various hedge
transactions. This process includes linking all derivative
instruments that are designated as hedges to specific assets and
liabilities on the balance sheet.
Changes in the fair value of a derivative
instrument that is highly effective and designated as a fair
value hedge and the offsetting changes in the fair value of the
hedged item are recorded in the income statement. Changes in the
fair value of a derivative instrument that is highly effective
and designated as a cash flow hedge are recognized in other
comprehensive income until changes in the cash flows of the
hedged item are recognized. The Company performs an assessment,
both at inception of the hedge and on a quarterly basis
thereafter, to determine whether these derivative instruments
are highly effective in offsetting changes in the value of the
hedged items. Any change in fair value resulting from hedge
ineffectiveness is immediately recorded in the income statement.
The Companys derivative instruments do not
meet the criteria for hedge accounting pursuant to
SFAS No. 133.
Long-lived assets, such as furniture and
equipment and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. There were no
impairments of long-lived assets in the nine months ended
September 30, 2003 or in 2002, 2001, or 2000.
The Company recognizes student loan income using
the interest method, net of premium amortization and capitalized
direct origination and acquisition costs. Loan income is
recognized based on the expected yield of the loan after giving
effect to borrower utilization of incentives for timely payment
(borrower benefits) and other yield adjustments. The
effect of the borrower benefits on student loan yield are based
on the historical payment behavior of borrowers who are eligible
for the incentives. The interest is paid by the Department of
Education or the borrower, depending on the status of the loan
at the time of the
F-15
Notes to Consolidated Financial
Statements (Continued)
accrual. In addition, the Department of Education
makes quarterly interest subsidy payments on certain qualified
FFELP loans until the student is required under the provisions
of the Act to begin repayment. Repayment of FFELP loans normally
begins within six months after completion of the loan holders
course of study, leaving school or ceasing to carry at least
one-half the normal full-time academic load as determined by the
educational institution. Repayment of PLUS loans normally begins
within 60 days from the date of loan disbursement, and
repayment of SLS loans begins within one month after completion
of course study, leaving school or ceasing to carry at least the
normal full-time academic load as determined by the educational
institution. Repayment on private loans typically begins six
months following a borrowers graduation from a qualified
institution and the interest is either paid by the borrower or
capitalized annually or at repayment.
The Department of Education provides a special
allowance to lenders participating in the FFEL program. The
special allowance is accrued using the interest method based
upon the average rate established in the auction of 13-week
Treasury Bills in the previous quarter relative to the yield of
the student loan. Under certain circumstances, the special
allowance is reduced by approximately one-half for loans which
were originated or purchased from funds obtained from issuance
of tax-exempt obligations, depending upon the issuance date of
the obligation.
Premiums and capitalized direct origination and
acquisition costs are amortized over the estimated lives of the
related loans in accordance with SFAS No. 91,
Accounting
for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases.
The
Company periodically evaluates the assumptions used to estimate
the life of the loans. The Company also pays an annual 105 basis
point rebate fee on consolidation loans. The amortization and
fees are netted against student loan income.
Loan servicing fees are determined according to
agreements with customers and are calculated based on the dollar
value or number of loans serviced for each customer. Fees are
accrued as earned as income on a monthly basis. As of
September 30, 2003 and December 31, 2002 and 2001, the
Company serviced $18.3 billion, $17.9 billion, and
$17.0 billion, respectively, of loans, including
approximately $8.7 billion, $7.5 billion, and
$6.7 billion of Company-owned loans, and $568 million,
$720 million, and $834 million of loans serviced for
UB&T.
Income taxes are accounted for under the asset
and liability method. Deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to
temporary differences between the consolidated financial
statement carrying amounts of existing assets and liabilities
and their respective income tax basis. Deferred income tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The basic earnings per common share (EPS) is
computed by dividing net income by the weighted-average number
of common shares outstanding for the periods presented. The
weighted average number of shares used in the nine months ended
September 30, 2003 and 2002 and for the years ended
December 31, 2002, 2001 and 2000, adjusted to reflect the
recapitalization referred to in note 20, were 45,019,823,
44,971,290, 44,971,290, 44,331,490, and 41,187,230,
respectively. Nelnet had no common stock equivalents and no
potentially dilutive common shares during the periods presented.
F-16
Notes to Consolidated Financial
Statements (Continued)
The Company has no sources of other comprehensive
income. Therefore, comprehensive income consists solely of net
income.
The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make a number of estimates and assumptions that affect the
reported amounts of assets and liabilities, reported amounts of
revenues and expenses, and other disclosures. Actual results
could differ from those estimates. The most significant
estimates made by management relate to the adequacy of the
program reimbursement reserve and allowance for loan losses.
Certain amounts have been reclassified to conform
to the 2003 consolidated financial statement presentation.
(4) Restricted Investments
Held by Trustee
NELF and MELMACs restricted investments are
held by a trustee in various accounts subject to use
restrictions and consist of guaranteed investment contracts,
commercial banking deposits, and repurchase agreements, which
are classified as held-to-maturity. The carrying value of these
investments approximates fair value at September 30, 2003
and December 31, 2002 and 2001. The carrying value of these
investments by contractual maturity is shown below:
F-17
Notes to Consolidated Financial
Statements (Continued)
(5) Student Loans Receivable and
Concentration of Credit Risk
Student loans receivable at September 30,
2003 and December 31, 2002 and 2001 consisted of the
following:
FFELP loans may be made under the FFELP program
by certain lenders as defined by the Act. These loans, including
related accrued interest, are guaranteed at their maximum level
permitted under the Act by an authorized guaranty agency which
has a contract of reinsurance with the Department of Education.
The terms of the loans, which vary on an individual basis,
generally provide for repayment in monthly installments of
principal and interest over a period of up to 20 years.
Interest rates on loans may be fixed or variable, will vary
based on the average of the 91-day U.S. Treasury bill rate,
and currently range from 3.0% to 13.0% (the weighted-average
rate was 4.5%, 5.3%, and 6.7% at September 30, 2003 and
December 31, 2002 and 2001) dependent upon type, terms of
loan agreements, and date of origination. For FFELP loans, the
Student Lending Subsidiaries have entered into trust agreements
in which unrelated financial institutions serve as the eligible
lender trustees. As eligible lender trustees, the financial
institutions act as the eligible lender in acquiring certain
eligible student loans as an accommodation to the subsidiaries,
which hold beneficial interests in the student loan assets as
the beneficiaries of such trusts.
Substantially all FFELP loan principal and
related accrued interest is guaranteed as defined by the Act.
These guarantees are made subject to the performance of certain
loan servicing procedures stipulated by applicable regulations.
If these due diligence procedures are not met, affected student
loans may not be covered by the guarantees should the borrower
default. The Company and its Student Lending Subsidiaries retain
and enforce recourse provisions against servicers and lenders
under certain circumstances. Such student loans are subject to
cure procedures and reinstatement of the guarantee
under certain circumstances. Also, in accordance with the
Student Loan Reform Act of 1993, student loans disbursed prior
to October 1, 1993 are fully insured, and loans disbursed
subsequent to October 1, 1993 are insured up to 98% of
their principal amount and accrued interest.
Student loans receivable also include a
beneficial interest in private loans. The private loan portfolio
consists of privately-insured and self-insured loans. The terms
of the private loans, which vary on an individual basis,
generally provide for repayment in monthly installments of
principal and interest over a
F-18
Notes to Consolidated Financial
Statements (Continued)
period of up to 20 years. Interest rates on
the loans will vary based on the average of the 91-day Treasury
bill or the prime rate. The private loans primarily represent
student borrowers in the medical, dental, or physical sciences
fields of study. The self-insured private loans are not covered
by guarantees or collateral should the borrower default. The
privately-insured private loans are insured by various third
parties for between 90% and 100% of principal and interest.
The Company has provided for an allowance for
loan losses related to the private loans and FFELP loans. The
provision is based upon historical default rates for such loans.
Activity in the allowance for loan losses for the nine months
ended September 30, 2003 and 2002 and the years ended
December 31, 2002, 2001, and 2000 is shown below:
(6) Guaranty and Insurance
Agencies
At September 30, 2003 and December 31,
2002 and 2001, Nebraska Student Loan Program, Inc., United
Student Aid Funds, Inc., Pennsylvania Higher Education
Assistance Authority, California Student Aid Commission, New
York State Higher Education Services Corporation, Tennessee
Student Assistance Corporation, Florida Department of Education
Office of Student Financial Assistance, and the Finance
Authority of Maine were the primary guarantors of the student
loans beneficially owned by the Student Lending Subsidiaries.
Management periodically reviews the financial condition of its
guarantors and does not believe the level of concentration
creates an unusual or unanticipated credit risk. In addition,
management believes that based on the Higher Education
Amendments of 1992, the security for and payment of any of the
Student Lending Subsidiaries obligations would not be
materially adversely affected as a result of legislative action
or other failure to perform on its obligations on the part of
any guaranty agency. The Student Lending Subsidiaries, however,
offer no absolute assurances to that effect.
NHELP-II and NELnet Private-1 also have a student
loan indemnification agreement with a private insurer, under
which a portion of the private loans are insured. The agreement
indemnifies NHELP-II and NELnet Private-1 for 90% of losses
incurred resulting from borrower default. Upon default, all
rights of recovery are subrogated to a private insurer. As of
September 30, 2003 and December 31, 2002 and 2001, a
private insurer insured 33%, 31%, and 18%, respectively, of the
private loans owned by NHELP-II and NELnet Private-1.
F-19
Notes to Consolidated Financial
Statements (Continued)
(7) Intangible Assets
Intangible assets at September 30, 2003 and
December 31, 2002 and 2001 consist of the following:
The Company recorded amortization of
$10.0 million, $18.5 million, $22.2 million,
$18.8 million and $12.7 million for the nine months
ended September 30, 2003 and 2002 and for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company
will continue to amortize intangible assets over their remaining
useful lives and will record amortization of $2.8 million,
$8.3 million and $0.8 million in the fourth quarter of
2003, and in 2004 and 2005, respectively.
(8) Furniture, Equipment and Leasehold
Improvements
Furniture, equipment and leasehold improvements
at September 30, 2003 and December 31, 2002 and 2001
consist of the following:
Depreciation and amortization expense for the
nine months ended September 30, 2003 and 2002 and for the
years ended December 31, 2002, 2001, and 2000 related to
furniture, equipment and leasehold improvements was
$7.1 million, $5.9 million, $10.1 million,
$8.0 million, and $4.3 million, respectively.
(9) Bonds and Notes Payable
The Student Lending Subsidiaries periodically
issue bonds, commercial paper, short-term variable auction rate
notes, taxable student loan asset-backed notes, and other credit
facilities to finance the acquisition of student loans or to
refinance existing debt. Most of the bonds and notes payable are
primarily secured by the student loans receivable, related
accrued interest, and by the amounts on deposit in the accounts
established under the respective bond resolutions or financing
agreements. The student
F-20
Notes to Consolidated Financial
Statements (Continued)
loan interest margin (SLIMS) notes are secured by
the rights to residual cash flows from certain variable-rate
bonds and notes and fixed rate notes. Certain variable-rate
bonds and notes and fixed rate bonds of $1.2 billion,
$1.0 billion, and $883 million at September 30,
2003 and December 31, 2002 and 2001, respectively, are
secured by financial guaranty insurance policies issued by
Municipal Bond Investors Assurance Corporation (MBIA) and
Ambac Assurance Corporation. Certain variable-rate bonds and
notes of $144 million in 2001 were also secured by
irrevocable letters of credit provided by Student Loan Marketing
Association (SLMA). Effective January 2, 2002, the SLMA
irrevocable letters of credit were replaced with financial
guaranty insurance policies issued by MBIA. Effective
November 20, 2002, SLMA was replaced as the liquidity
provider with Lloyds Bank on $143 million of
variable-rate bonds.
The following table summarizes outstanding bonds
and notes payable at September 30, 2003 and
December 31, 2002 and 2001 by type of instrument:
F-21
Notes to Consolidated Financial
Statements (Continued)
Variable-rate bonds are long-term bonds with
interest rate reset dates ranging from weekly to semi-annually
and from time to time based upon auction rates and national
indices.
The Company has a $30 million line of credit
from an unrelated bank. As of September 30, 2003 and
December 31, 2002, $30 million was outstanding under
this line of credit. This line was subsequently paid down in its
entirety on October 6, 2003. The line of credit bears
interest at the prime rate (4.00% at September 30, 2003 and
4.25% at December 31, 2002) and now matures January 2005.
Interest is payable quarterly or monthly depending on the term
of the borrowing.
The Company entered into a commercial paper
placement program with an unrelated bank on September 25,
2003. The program allows for issuance up to $35 million.
Additionally, this unrelated bank coordinated a $35 million line
of credit with three other unrelated banks. There was no amount
outstanding on the line at September 30, 2003.
In May 2002 and October 2002, NELNET SLF
consummated debt offerings of student loan asset-backed notes of
$1.0 billion and $1.2 billion, respectively. In
connection with these debt offerings, the Company entered into
agreements with certain investment banks pursuant to which the
Company will pay the investment banks a fee equal in the
aggregate to 0.01% and 0.0075% per annum of the principal
balance of the May 2002 and October 2002 notes, respectively.
These fees are for credit enhancements to the notes whereby the
investment banks will provide liquidity advances to the Company
in the instance of disintermediation in the spread between
student loan interest rates and the notes interest rates
as defined in the agreement. The total amount paid by the
Company under these agreements was approximately $191,000 and
$42,000 during the nine months ended September 30, 2003 and
2002 and $72,000 during the year ended December 31, 2002.
Bonds and notes outstanding at September 30,
2003 are due in varying amounts as follows (dollars in
thousands):
F-22
Notes to Consolidated Financial
Statements (Continued)
Generally, bonds bearing interest at variable
rates can be redeemed on any interest payment date at par plus
accrued interest. Subject to conversion provisions, all bonds
and notes are subject to redemption prior to maturity at the
option of certain Student Lending Subsidiaries without a
prepayment penalty. These provisions include price, conditions
precedent, and limitations.
A Student Lending Subsidiary has irrevocably
escrowed funds to make the remaining principal and interest
payments on previously issued bonds and notes. Accordingly,
neither these obligations nor the escrowed funds are included on
the accompanying consolidated balance sheets. At
September 30, 2003 and December 31, 2002 and 2001,
$21.8 million, $20.6 million, and $19.2 million,
respectively, of defeased debt remained outstanding.
The Student Lending Subsidiaries have unused
commitments under the various commercial paper and warehouse
agreements of $671 million, $416 million, and
$869 million at September 30, 2003 and
December 31, 2002 and 2001, respectively. At
September 30, 2003 and December 31, 2002 and 2001,
certain Student Lending Subsidiaries had various short-term
borrowing agreements with a maximum aggregate stated amount of
$2.1 billion, $1.9 billion and $2.1 billion,
respectively.
Certain bond resolutions contain, among other
requirements, covenants relating to restrictions on additional
indebtedness, limits as to direct and indirect administrative
expenses, and maintaining certain financial ratios. Management
believes the Company is in compliance with all covenants of the
bond indentures and related credit agreements.
(10) Program Reimbursement
Reserve
For the nine months ended September 30, 2003
and 2002 and the years ended December 31, 2002, 2001, and
2000, a provision for losses on program reimbursements of
$1.5 million, $1.3 million, $1.6 million,
$1.2 million, and $800,000, respectively, was recognized,
which is included in other expenses in the accompanying
consolidated statements of income. Other liabilities in the
accompanying consolidated balance sheets include
$7.3 million, $6.1 million, and $5.8 million as
an allowance for program reimbursements at September 30,
2003 and December 31, 2002 and 2001, respectively.
(11) Income Taxes
Income tax expense for the nine months ended
September 30, 2003 and 2002 and the years ended
December 31, 2002, 2001, and 2000 consists of the following
components:
F-23
Notes to Consolidated Financial
Statements (Continued)
The actual income tax expense differs from the
expected income tax expense, computed by applying
the 35% federal statutory corporate tax rate to income before
income tax expense for the nine months ended September 30,
2003 and 2002 and the years ended December 31, 2002, 2001,
and 2000 as shown below:
The Companys deferred income tax assets and
liabilities which are included in other assets as of
September 30, 2003 and December 31, 2002 and 2001
consisted of the following:
No valuation allowance was considered necessary
for the deferred tax assets at September 30, 2003 and
December 31, 2002 and 2001.
F-24
Notes to Consolidated Financial
Statements (Continued)
(12) Fair Value of Financial
Instruments
The following table summarizes the fair values of
the Companys financial instruments at September 30,
2003 and December 31, 2002 and 2001:
The carrying amount approximates fair value due
to the variable-rate of interest and/or the short maturities of
these instruments.
The fair value of student loans receivable is
estimated at amounts recently paid by the Company to acquire a
similar portfolio of loans in the market.
Due to the characteristics of the investments,
there is no available or active market for these types of
financial instruments. These investments are guaranteed and are
purchased and redeemed at par value, which equals their cost.
F-25
Notes to Consolidated Financial
Statements (Continued)
The fair value of the bonds and notes payable is
based on market prices for securities that possess similar
credit risk and interest rate risk.
The fair value of the interest rate swap
agreements, interest rate cap contract and the basis swap
agreements, obtained from market quotes from independent
security brokers, was the estimated amount that would have been
paid to terminate the respective agreements.
The fair value of a financial instrument is the
current amount that would be exchanged between willing parties,
other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the
Companys various financial instruments. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized
in an immediate settlement of the instrument.
SFAS No. 107,
Disclosures About Fair Value of
Financial Instruments,
excludes certain financial
instruments and all non-financial instruments from its
disclosure requirements. The fair value estimates, methods, and
assumptions are set forth above.
During August 2003 and July 2001, the Company
entered into two interest rate swap agreements with notional
amounts of $1 billion and $500 million, respectively.
Under the terms of the agreements, the Company received payments
based on a variable interest rate tied to the 30-day LIBOR and
made payments based on fixed interest rates of 1.18% and 3.06%,
respectively. This arrangement allows the Company to lock the
related debt interest rate at the respective fixed interest
rate. These interest rate swaps do not meet the criteria to
qualify for hedge accounting pursuant to SFAS No. 133.
Consequently, the effects of the adjustment of the derivative
instruments to fair value, based on the current interest rate
environment, has been, and will continue to be until the
respective maturity dates, included in the statements of income.
The fair value adjustment resulted in an unrealized loss being
included in the derivative market value adjustment in other
income, in the amounts of approximately $311,000, $579,000,
$579,000 and $3.0 million for the nine months ended
September 30, 2003 and 2002 and for the years ended
December 31, 2002 and 2001, respectively. The interest rate
swap agreement entered into in July 2001 expired in June
2002. The interest rate swap agreement entered into in
August 2003 expires in July 2004.
During August 2003, the Company entered into
three basis swap agreements with notional amounts of
$500 million, $1 billion and $500 million with
maturities in August 2004, 2005 and 2006, respectively. The
basis swap agreements provide for the Company to pay a floating
interest rate based on the U.S. Treasury bill interest rate
of the variable-rate student loan assets hedged and receive a
floating interest rate based on the 30-day LIBOR interest rate
of the variable-rate debt hedged. This arrangement allows the
Company to limit the interest rate sensitivity of the interest
rate spread between the hedged assets and liabilities. The basis
swaps do not meet the criteria for hedge accounting pursuant to
SFAS No. 133. Consequently, the effects of the adjustment
of the derivative instruments to fair value, based on the
current interest rate environment, has been and will continue to
be until the respective maturity dates, included in the
statement of income. The fair value adjustment resulted in an
unrealized loss being included in the derivative market value
adjustment in other income in the amount of approximately
$3.0 million for the nine months ended September 30,
2003.
F-26
Notes to Consolidated Financial
Statements (Continued)
During August 2003, the Company purchased, for
$6 million, an interest rate cap contract with a notional
amount of $500 million. The interest rate cap contract will
limit the relative interest rates on a portion of the
Companys variable date by capping the 30-day LIBOR
interest rate at 1.50%. The cap contract matures in August 2005.
The interest rate cap contract cost is amortized over the term
of the contract. The interest rate contract does not meet the
criteria for hedge accounting pursuant to SFAS No. 133.
Consequently, the effects of the adjustment of the derivative
instrument to fair value, based on the current interest rate
environment, has been and will continue to be until the maturity
date, included in the statement of income. The fair value
adjustment resulted in an unrealized loss being included in the
derivative market value adjustment in other income in the amount
of approximately $1.4 million for the nine months ended
September 30, 2003.
(14) Employee Benefit Plans
NELN has a 401(k) savings plan which covers
substantially all of their employees. Employees may contribute
up to 100% of their pre-tax salary, subject to IRS limitations.
The Company made contributions to the plan of approximately
$1.2 million, $887,000, $1.4 million, $518,000, and
$537,000 in the nine months ended September 30, 2003 and
2002 and the years ended December 31, 2002, 2001, and 2000,
respectively. UB&T serves as the trustee for the plan. NMS
had a separate 401(k) savings plan in 2001. NMS made
contributions to the plan of approximately $154,000 and $100,000
for 2001 and 2000, respectively. GuaranTec also had a separate
401(k) savings plan in 2001. GuaranTec made contributions to the
plan of approximately $65,000 for the period July 1, 2001
to December 31, 2001. Effective January 1, 2002,
employees participating in the NMS and GuaranTec plans became
eligible to participate in the NELN 401(k) plan.
EFS maintained two retirement plans which covered
substantially all employees. The first was a 401(k) savings plan
and the second was a defined contribution pension plan, which is
an employee stock ownership plan (ESOP). Upon acquisition by
NELN, the ESOP sold its shares to NELN and distribution of the
cash occurred in 2003. EFS made contributions to the plan of
approximately $122,000 and $208,000 for the nine months ended
September 30, 2002 and the year ended December 31,
2002, respectively. Effective April 1, 2002, employees
participating in the EFS 401(k) savings plan became
eligible to participate in the NELN 401(k) plan.
(b) Book Value Stock
Plan
In March 2003, the Company issued
331,800 shares of Class A common stock at a formula
price based on book value to employees of the Company. Each new
shareholder was required to sign a stockholder agreement which
restricts the sale, assignment, pledge or otherwise transfer of
any interest in any of the shares of stock without obtaining the
prior written consent of the holders of an aggregate of more
than fifty percent of the Class A shareholders. The Company
has the option to redeem the outstanding stock in the event of
termination of employment, divorce, or change in control at the
formula price based on book value at the redemption date.
The Company accounted for the stock issuance by
applying the provisions of EITF 88-6,
Book Value Stock
Plans in an Initial Public Offering
(EITF 88-6).
Because the stockholders agreement did not provide any mechanism
that converted the book value stock to market value stock upon
completion of an initial public offering (IPO), the Company
accounted for the transaction as book value stock that remains
book value stock. The book value stock issued in March 2003 was
presumed to have been issued in contemplation of the IPO and,
thus, is subject to variable-plan (SAR) accounting for actual
changes in the book value of those shares from the date of
issuance in accordance with the provisions of EITF 88-6.
F-27
Notes to Consolidated Financial
Statements (Continued)
The stock appreciation between the date of
issuance and September 30, 2003 related to the shares
issued in March 2003 was not material to the financial
statements.
Upon the consummation of the IPO, the
stockholders agreement will be terminated in accordance with an
agreement entered into by all shareholders in August 2003. As a
result, in the third quarter of 2003 the Company recognized a
compensation charge of $5.2 million equal to the difference
between the estimated initial public offering price (estimated
fair value) of that number of shares and the total price paid by
the employees.
(15) Commitments
The Student Lending Subsidiaries acquire eligible
loans on a regular basis from lending institutions as part of
their normal business operations. At September 30, 2003 and
December 31, 2002 and 2001, NELN was committed to purchase
up to $204 million, $227 million and
$277 million, respectively, in student loans at current
market rates upon the sellers request under various
agreements through September 30, 2004. At
September 30, 2003 and December 31, 2002 and 2001, EFS
was committed to purchase up to $37.6 million,
$39.2 million, and $57.7 million, respectively, in
student loans at current market rates under various agreements
that renew automatically.
At September 30, 2003 and December 31,
2002 and 2001, MELMAC had commitments to extend credit for
educational loans of $4.5 million, $26.5 million, and
$29.8 million, respectively. Commitments to extend credit
are agreements to lend to a borrower as long as there is no
violation of any condition established in the commitment
agreement. Commitments generally have fixed expiration dates or
other termination clauses. MELMAC uses the same credit policies
in making commitments as it does for making student loans. If
these commitments are exercised, the resulting loans will be
subject to the guarantee of the Finance Authority of Maine and
reinsured by the Department of Education.
The Company is committed under noncancelable
operating leases for office and warehouse space and equipment.
Total rental expense incurred by the Company in the nine months
ended September 30, 2003 and 2002 and the years ended
December 31, 2002, 2001, and 2000 was $4.7 million,
$5.1 million, $6.9 million, $3.2 million, and
$3.0 million, respectively. Minimum future rentals under
noncancelable operating leases are shown below (dollars in
thousands):
The Company has shareholder agreements with the
holders of the vast majority of its common stock. These
shareholder agreements restrict the transfer of common stock
through sale, pledge, encumbrance or other transfer by the
shareholder, without the written consent of the holders of a
majority of the pre-recapitalization common stock. The Company
has an option to redeem all or a portion of a shareholders
interest in the event that, among other things, the shareholder
ceases to be an officer, director or employee of the Company.
The purchase price, if the Company elects to exercise its
redemption option, is the book value of the shares being
redeemed. The shareholder agreements will terminate upon the
consummation of the Companys initial public offering in
accordance with an agreement entered into by all shareholders in
August 2003.
F-28
Notes to Consolidated Financial
Statements (Continued)
(16) Related Parties
Income earned by Nelnet from loan servicing
provided to a related bank in the nine months ended
September 30, 2003 and 2002 and the years ended
December 31, 2002, 2001, and 2000 was $3.7 million,
$4.8 million, $5.5 million, $4.7 million and
$3.2 million, respectively. At September 30, 2003 and
December 31, 2002 and 2001, accounts receivable includes
approximately $678,000, $371,000, and $382,000, respectively,
from this bank for loan servicing.
The Company incurs a consulting management fee
for services provided by an entity that is a minority
stockholder of the Company. The Company incurred management fee
expenses of $1.3 million and $1.4 million for the nine
months ended September 30, 2003 and 2002, respectively and
$1.75 million, $1.8 million and $2.5 million for
the years ended December 31, 2002, 2001, and 2000,
respectively. This agreement terminated in 2003.
The Company participates in the Short-Term
Federal Investment Trust (STFIT) of the Student Loan Trust
Division of a related bank which is included in cash and cash
equivalents held at a related party on the accompanying
consolidated balance sheets. The Companys participation in
the STFIT had similar terms and investment yields as those
prevailing for other nonaffiliated customers.
In 2001, the Company entered into an agreement
with 5280 Solutions, Inc. (5280), an entity 50% owned by NELN,
to provide certain software development and technology support
services. During the nine months ended September 30, 2003
and 2002 and the years ended December 31, 2002 and 2001,
the Company incurred contract programming expenses of
$3.3 million, $5.7 million, $7.0 million, and
$11.8 million, respectively, for these services. At
September 30, 2003 and December 31, 2002 and 2001,
$528,000, $1.1 million, and $1.6 million,
respectively, was payable to 5280 and is included in other
liabilities in the accompanying consolidated balance sheets.
In March 2002, the Company acquired a 50%
interest in FirstMark Services LLC (FirstMark). FirstMark agreed
to provide subcontracting servicing functions on the
Companys behalf with respect to private loan servicing.
During the nine months ended September 30, 2003 and 2002
and the year ended December 31, 2002, the Company paid
FirstMark fees of approximately $4.5 million,
$2.5 million and $4.6 million, respectively. FirstMark
owed the Company $710,000 and $700,000 at September 30,
2003 and December 31, 2002, respectively.
During the nine months ended September 30,
2003 and 2002 and the years ended December 31, 2002, 2001,
and 2000, the Student Lending Subsidiaries purchased student
loans of $595 million, $327 million,
$378 million, $666 million, and $536 million,
respectively, from a related bank. The purchases from this bank
were made on terms similar to those made with unrelated
entities. During the nine months ended September 30, 2003
and 2002 and the years ended December 31, 2002 and 2001,
this bank reimbursed the Company for approximately $805,000,
$587,000, $519,000 and $1.1 million, respectively, for
student loan marketing services, and during the year ended
December 31, 2000, the Company reimbursed the bank
$2.6 million for such services. During 2001 and 2000, the
Company also incurred $750,000 and $2.7 million for
software advisory, consulting services and management fees
provided by this bank.
The Company had a $30 million unsecured line
of credit to provide operating funds from an affiliated company.
The line of credit renewed automatically for one-year terms. The
Company owed $29 million of principal and $56,000 of
accrued interest under the line of credit at December 31,
2001. There was no amount outstanding at December 31, 2002.
The line of credit was terminated in 2003.
In August 2001, the Company provided a guarantee
of liabilities of a bank affiliated with the Company through
certain common shareholders and a director in the amount of
$10 million. The Company is paid a fee for this
indemnification. The Company does not believe it is probable
that the
F-29
Notes to Consolidated Financial
Statements (Continued)
Company will be required to make payments on the
guarantee. Thus, no liability has been accrued for a loss
related to the Companys obligation under this guarantee
arrangement.
During the nine months ended September 30,
2003 and 2002 and the year ended December 31, 2002, the
Company paid UFS Securities $1.4 million, $782,000, and
$1.4 million, respectively, for services related to
financings. All payments were made before the acquisition of UFS
Securities. These payments have been recorded as debt issuance
costs and are included in other assets in the accompanying
consolidated balance sheets.
During the nine months ended September 30,
2003 and 2002 and the years ended December 31, 2002, 2001,
and 2000, the Company incurred consulting fees of $0,
$1.4 million, $1.65 million, $3 million, and
$2.6 million, respectively, for services provided by a
related party through common ownership in connection with
eligible loan purchases. This agreement terminated in 2003.
During the nine months ended September 30, 2003 and 2002
and the years ended December 31, 2002, 2001, and 2000, the
Company incurred consulting fees of $1.8 million,
$1.8 million, $2.4 million, $2.3 million, and
$2.8 million, respectively, for services provided by a
significant shareholder. This agreement terminated in 2003.
During 2001 and 2000, NMS and GuaranTec had a service agreement
with InTuition Services, Inc. (Services), an entity related
through common shareholders prior to acquisition, whereby
Services provided certain management and other operational
support services for NMS and GuaranTec. Amounts paid by NMS and
GuaranTec for such services, including certain occupancy related
expenses allocated to NMS and GuaranTec, were $9.7 million
and $4.7 million in 2001 and 2000, respectively. At
December 31, 2001 and 2000, NMS and GuaranTec owed Services
$1.6 million and $918,000, respectively, which is included
in other liabilities in the accompanying consolidated balance
sheets. During 2002, Nelnet Corp. provided these operational
support services.
During 2001, NELN owned $10 million in
preferred stock of a majority owned subsidiary of a significant
shareholder. The preferred stock paid a 2% annual cumulative
dividend and was included in other assets on the accompanying
consolidated balance sheet at December 31, 2001. During
2002, NELN sold the preferred stock to Nelnet at carrying value.
Nelnet transferred its ownership in the preferred stock to
Infovisa and subsequently sold Infovisa to a significant
shareholder at carrying value, which approximated fair value.
The operating results of Infovisa were not significant to the
consolidated financial statements.
(17) Recently Issued Accounting
Pronouncements
In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements Nos. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections
. This statement rescinds FASB Statement
No. 4,
Reporting Gains and Losses from Extinguishment of
Debt
and an amendment of that statement,
FASB
Statement No. 64,
Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements
. The statement also
rescinds FASB Statement No. 44,
Accounting for
Intangible Assets of Motor Carriers
and amends FASB
Statement No. 13,
Accounting for Leases
to eliminate
an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for
certain lease modifications which have economic effects which
are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. The provisions of
SFAS No. 145 related to the rescission of FASB No. 4
are effective for fiscal years beginning after May 15,
2002. The provisions of SFAS No. 145 related to FASB
No. 13 are effective for transactions occurring after
May 15, 2002. All other provisions of SFAS No. 145 are
effective for financial statements issued on or after
May 15, 2002. The adoption of SFAS No. 145 did not
have a material impact on the Companys financial
statements.
F-30
Notes to Consolidated Financial
Statements (Continued)
In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities
. SFAS No. 146 requires that a liability for
costs associated with exit or disposal activities be recognized
when the liability is incurred. Previously, generally accepted
accounting principles provided for the recognition of such costs
at the date of managements commitment to an exit plan. In
addition, SFAS No. 146 requires that the liability be
measured at fair value and be adjusted for changes in estimated
cash flows. The provisions of the new standard are effective for
exit or disposal activities initiated after December 31,
2002. It is not expected that SFAS No. 146 will materially
affect the Companys financial statements.
In October 2002, the FASB issued Statement
No. 147,
Acquisitions of Certain Financial
Institutions
, which amends Statement No. 72,
Accounting for Certain Acquisitions of Banking and Thrift
Institutions
, Statement No. 144,
Accounting for
Impairment or Disposal of Long-Lived Assets
, and FASB
Interpretation No. 9. Except for transactions between two
or more mutual enterprises, this Statement removes acquisitions
of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements
No. 141,
Business Combinations
, and No. 142,
Goodwill and Other Intangible Assets
. Thus, the
requirement in paragraph 5 of Statement No. 72 to
recognize any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset of a
business no longer applies to acquisitions within the scope of
this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term
customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss
recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held
and used. With some exceptions, the requirements of Statement
No. 147 were effective October 1, 2002. The adoption
of this Statement did not have a material impact on the
Companys financial statements.
In December 2002, the FASB issued SFAS
No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment
to FASB Statement No. 123
. SFAS No. 148 requires
annual disclosures about the method of accounting for
stock-based compensation and tabular information about the
effect of the method accounting for stock-based compensation on
net income and earnings per share, including pro forma amounts,
in the Summary of Significant Accounting Policies.
On a quarterly basis, SFAS No. 148 requires prominent
disclosure in tabular form of the effect of the method of
stock-based compensation on net income and earnings per share
for all periods presented as accounted for under APB Opinion
No. 25. This statement is effective for financial
statements for fiscal periods ending after December 15,
2002. The disclosures required by SFAS No. 148 will be made
to the extent required for shares when issued under the employee
share purchase plan.
In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
. FIN No. 45
identifies characteristics of certain guarantee contracts and
requires that a liability be recognized at fair value at the
inception of such guarantees for the obligations undertaken by
the guarantor. Additional disclosures also are prescribed for
certain guarantee contracts. The initial recognition
F-31
Notes to Consolidated Financial
Statements (Continued)
and initial measurement provisions of FIN
No. 45 are effective for these guarantees issued or
modified after December 31, 2002. The disclosure
requirements of FIN No. 45 were effective for the Company
at December 31, 2002. Disclosure required by FIN
No. 45 are included in the financial statements. The
guarantees did not require a liability to be recognized under
FIN No. 45. The adoption of FIN No. 45 did not have a
material effect on the financial statements.
In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities
. FIN
No. 46 clarifies the application of Accounting Research
Bulletin No. 51,
Consolidated Financial Statements
,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties (variable interest entities).
Variable interest entities (VIEs) are required to be
consolidated by their primary beneficiaries. The primary
beneficiary of a VIE is the party that absorbs a majority of the
entitys expected losses, receives a majority of its
expected residual returns, or both, as a result of holding
variable interests. FIN No. 46 also requires new
disclosures about VIEs. The implementation date has been
deferred until December 31, 2003 for calendar year
companies. On October 31, 2003, the FASB issued an exposure
draft of a proposed interpretation modifying Interpretation
No. 46. The proposed clarifications and modifications would
apply to periods ending after December 31, 2003. The
Company does not believe that FIN No. 46 will have a
material effect on its financial statements.
This Statement amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133,
Accounting for
Derivative Instruments and Hedging Activities
. This
Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition,
except as stated below, all provisions of this Statement should
be applied prospectively. The provisions of this Statement that
relate to Statement 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15,
2003 should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7(a)
and 23(a) of Statement 133 Implementation Issues, which
relate to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to
both existing contracts and new contracts entered into after
June 30, 2003. The adoption of FAS No. 149 did not
have a significant impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The Company adopted the standard on
July 1, 2003. The adoption of SFAS No. 150 did not
have a significant impact on its financial statements.
F-32
Notes to Consolidated Financial
Statements (Continued)
(18) Condensed Parent Company Financial
Statements
The following represents the condensed balance
sheets as of December 31, 2002 and 2001 and condensed
statements of income and cash flows for each of the years in the
three-year period ended December 31, 2002 for Nelnet, Inc.
(formerly Nelnet Loan Services, Inc.).
The Company is limited in the amount of funds
that can be transferred to it by its subsidiaries through
intercompany loans, advances, or cash dividends. These
limitations relate to the restrictions by trust indentures under
the Student Lending Subsidiaries debt financing arrangements.
The amounts of cash and investments restricted in the respective
reserve accounts of the Student Lending Subsidiaries are shown
on the consolidated balance sheets as restricted cash and
investments.
Balance Sheets
F-33
Notes to Consolidated Financial
Statements (Continued)
Statements of Income
F-34
Notes to Consolidated Financial
Statements (Continued)
Statements of Cash Flows
(19) Segment Reporting
The Company is a vertically integrated education
finance organization which has four operating segments as
defined in SFAS No. 131,
Disclosures about Segments of
an Enterprise and Related Information,
as follows: Asset
Management, Student Loan Servicing, Guarantee Servicing and
Servicing
F-35
Notes to Consolidated Financial
Statements (Continued)
Software. The Asset Management and Student Loan
Servicing operating segments meet the quantitative thresholds
identified in SFAS No. 131 as reportable segments and
therefore the related financial data is presented below. The
Guarantee Servicing and Servicing Software operating segments do
not meet the quantitative thresholds and therefore are included
as other segments that do not meet the reportable segment
criteria. The accounting policies of the reportable segments are
the same as those described in the summary of significant
accounting policies. Costs excluded from segment net income
primarily consist of unallocated corporate expenses, net of
miscellaneous revenues. Thus, net income of the segments
includes only the costs that are directly attributable to the
operations of the individual segment.
The Asset Management segment includes the
acquisition, management and ownership of the student loan
assets. Revenues are primarily generated from net interest
income on the student loan assets. The Company generates student
loan assets through direct origination or through acquisition of
the loans from branding and forward purchase relationships. The
student loan assets are held in a series of education lending
subsidiaries designed specifically for this purpose.
The Student Loan Servicing segment provides for
the servicing of our own and third parties student loan
portfolios. The servicing activities include application
processing, borrower updates, payment processing, claim
processing and due diligence procedures. These activities are
performed internally for our own portfolio in addition to
generating fee revenue when performed for third-party clients.
Substantially all of the Companys revenues
are earned from customers in the United States and no single
customer accounts for a significant amount of any reportable
segments revenues. Inter-segment revenues are charged by a
segment to another segment that provides the product or service.
The amount of inter-segment revenue is based on comparable fees
charged in the market.
Segment data is as follows:
F-36
Notes to Consolidated Financial
Statements (Continued)
F-37
Notes to Consolidated Financial
Statements (Continued)
Net corporate revenues and expenses included in
the above table relate to activities that are not related to the
four identified operating segments. The net corporate revenues
include investment earnings and non-recurring revenue for
marketing services. The net corporate expenses include expenses
for marketing, capital markets and other unallocated support
services. The net corporate revenues and expenses are not
associated with an ongoing business activity as defined by SFAS
No. 131 and, therefore, have not been included within the
operating segments.
The derivative market value adjustment is the
change in the fair value of the Companys derivative
instruments, as the Companys derivative instruments do not
qualify for hedge accounting, as discussed in note 13 of
the notes to consolidated financial statements. These derivative
instruments are not included in
F-38
Notes to Consolidated Financial
Statements (Continued)
the Companys operating segments as they are
not related to specific segment assets or liabilities. These
risk management agreements are part of corporate activities.
The assets held at the corporate level are not
identified with any of the operating segments. Accordingly,
these assets are included in the reconciliation of segment
assets to total assets. These assets consist primarily of cash,
investments, fixed assets, income tax receivables and other
deferred assets.
(20) Subsequent Event
Recapitalization
Effective August 14, 2003, the shareholders
of the Company approved amended and restated articles of
incorporation. The amended and restated articles of
incorporation effected a recapitalization of the Company whereby
each share of Class A voting common stock, and each share
of Class B non-voting common stock held by two principal
shareholders and a related entity (the Principal Shareholders),
was converted into 210 shares of new Class B common
stock, and each share of Class B nonvoting common stock
(other than these owners by the Principal Shareholders) was
converted into 210 shares of new Class A common stock.
Also, effective with the conversion of the Class B shares
to Class A, certain former Class B shareholders converted
their new Class B shares into new Class A shares. The
new Class B common stock has ten votes per share, and the
new Class A common stock has one vote per share. Each
Class B share is convertible at any time at the
holders option into one Class A share. With the
exception of the voting rights and the conversion feature, the
Class A and Class B shares are identical in terms of
other rights, including dividend and liquidation rights. The
Companys shareholders equity has been restated to
reflect the new capital stock structure for all periods
presented.
The Company is in the process of preparing to
register shares of its Class A common stock in the public
markets. The costs associated with the initial public offering
are capitalized and will be deducted from the proceeds upon the
sale and issuance of the shares of Class A common stock. In
the event this offering is not consummated, costs incurred will
be charged to expense. At September 30, 2003, other assets
included $1.2 million of costs associated with the initial
public offering.
F-39
ANNEX A
THE FEDERAL FAMILY EDUCATION LOAN
PROGRAM
The Federal Family Education Loan
Program
The Higher Education Act provides for a program
of direct federal insurance for student loans as well as
reinsurance of student loans guaranteed or insured by state
agencies or private non-profit corporations.
The Higher Education Act currently authorizes
certain student loans to be covered under the Federal Family
Education Loan Program. The 1998 Amendments to the Higher
Education Act extended the authorization for the FFEL Program
through September 30, 2004. Congress has extended similar
authorization dates in prior versions of the Higher Education
Act. However, the current authorization dates may not again be
extended and the other provisions of the Higher Education Act
may not be continued in their present form.
Generally, a student is eligible for loans made
under the FFEL Program only if he or she:
Eligible institutions include higher educational
institutions and vocational schools that comply with specific
federal regulations. Each loan is to be evidenced by an
unsecured note.
The Higher Education Act also establishes maximum
interest rates for each of the various types of loans. These
rates vary not only among loan types, but also within loan types
depending upon when the loan was made or when the borrower first
obtained a loan under the FFEL Program. The Higher Education Act
allows lesser rates of interest to be charged.
Regulations authorize the DOE to limit, suspend
or terminate lenders participation in the FFEL Program, as
well as to impose civil penalties, if lenders violate certain
program regulations. The regulations also authorize the DOE to
impose penalties on the servicer and/or limit, suspend or
terminate the servicers eligibility to contract to service
FFELP loans if the servicer fails to meet standards of financial
responsibility or administrative capability included in the
regulations or violates certain other FFELP requirements. The
DOE conducts frequent on-site audits of our loan servicing
activities. Guaranty agencies conduct similar audits on a
regular basis. In addition, we engage independent third parties
to conduct compliance reviews, as required by the DOE, with
respect to our own student loan portfolio and the portfolios of
our third-party servicing clients.
Types of Loans
Four types of loans are currently available under
the FFEL Program:
These loan types vary as to eligibility
requirements, interest rates, repayment periods, loan limits and
eligibility for interest subsidies and special allowance
payments. Some of these loan types have had other names in the
past. References to these various loan types include, where
appropriate, their predecessors.
A-1
The primary loan under the FFEL Program is the
subsidized Stafford loan. Students who are not eligible for
subsidized Stafford loans based on their economic circumstances
may be able to obtain unsubsidized Stafford loans. Parents of
students may be able to obtain PLUS loans. Consolidation loans
are available to borrowers with existing loans made under the
FFEL Program and other federal programs to consolidate repayment
of the borrowers existing loans. Prior to July 1,
1994, the FFEL Program also offered SLS loans to graduate and
professional students and independent undergraduate students
and, under certain circumstances, dependent undergraduate
students, to supplement their Stafford loans.
Subsidized Stafford Loans
General.
Subsidized
Stafford loans are eligible for reinsurance under the Higher
Education Act if the eligible student to whom the loan is made
has been accepted or is enrolled in good standing at an eligible
institution of higher education or vocational school and is
carrying at least one-half the normal full-time workload at that
institution. Subsidized Stafford loans have limits as to the
maximum amount which may be borrowed for an academic year and in
the aggregate for both undergraduate and graduate/ professional
study. Both aggregate limitations exclude loans made under the
SLS and PLUS programs. The Secretary of Education has discretion
to raise these limits to accommodate students undertaking
specialized training requiring exceptionally high costs of
education.
Subsidized Stafford loans are generally made only
to student borrowers who meet the needs tests provided in the
Higher Education Act. Provisions addressing the implementation
of needs analysis and the relationship between unmet need for
financing and the availability of subsidized Stafford loan
funding have been the subject of frequent and extensive
amendment in recent years. Further amendment to such provisions
may materially affect the availability of Subsidized Stafford
loan funding to borrowers or the availability of subsidized
Stafford loans for secondary market acquisition.
Interest rates for subsidized Stafford loans.
For a Stafford loan made prior to
July 1, 1994, the applicable interest rate for a borrower
who, on the date the promissory note was signed, did not have an
outstanding balance on a previous FFELP loan:
For a Stafford loan made prior to July 1,
1994, the applicable interest rate for a borrower who, on the
date the promissory note evidencing the loan was signed, had an
outstanding balance on a previous loan made insured or
guaranteed under the FFEL Program:
A-2
The interest rate on all Stafford loans made on
or after July 1, 1994 but prior to July 1, 1998,
regardless of whether the borrower is a new borrower or a repeat
borrower, is the rate described in clause (7) above, except
that the interest rate shall not exceed 8.25% per annum. For any
Stafford loan made on or after July 1, 1995, the interest
rate is further reduced prior to the time the loan enters
repayment and during any deferment periods. During deferment
periods, the formula described in clause (7) above is
applied, except that 2.5% is substituted for 3.1%, and the rate
shall not exceed 8.25% per annum.
For Stafford loans made on or after July 1,
1998 but before July 1, 2006, the applicable interest rate
shall be adjusted annually, and for any twelve month period
commencing on a July 1 shall be equal to the bond equivalent
rate of 91-day U.S. Treasury bills auctioned at the final
auction prior to the proceeding June 1, plus 1.7% per annum
prior to the time the loan enters repayment and during any
deferment periods, and 2.3% per annum during repayment, but not
to exceed 8.25% per annum.
For loans the first disbursement of which is made
on or after July 1, 2006, the applicable interest rate will
be 6.8%. There can be no assurance that the interest rate
provisions for these loans will not be further amended.
Unsubsidized Stafford Loans
General.
Unsubsidized Stafford loans were
created by Congress in 1992 for students who do not qualify for
subsidized Stafford loans due to parental and/or student income
and assets in excess of permitted amounts. These students are
entitled to borrow the difference between the Stafford loan
maximum and their subsidized Stafford eligibility. The general
requirements for unsubsidized Stafford loans are essentially the
same as those for subsidized Stafford loans. The interest rate,
the annual loan limits and the special allowance payment
provisions of the unsubsidized Stafford loans are the same as
the subsidized Stafford loans. However, the terms of the
unsubsidized Stafford loans differ materially from subsidized
Stafford loans in that the federal government will not make
interest subsidy payments and the loan limitations are
determined without respect to the expected family contribution.
The borrower will be required to either pay interest from the
time the loan is disbursed or capitalize the interest until
repayment begins. Unsubsidized Stafford loans were not available
before October 1, 1992. A student meeting the
A-3
Interest rates for unsubsidized Stafford
loans.
Unsubsidized Stafford loans are
subject to the same interest rate provisions as subsidized
Stafford loans.
PLUS Loans
General.
PLUS loans
are made only to borrowers who are parents and, under certain
circumstances, spouses of remarried parents, of dependent
undergraduate students. For PLUS loans made on or after
July 1, 1993, the parent borrower must not have an adverse
credit history as determined pursuant to criteria established by
the Department of Education. The basic provisions applicable to
PLUS loans are similar to those of subsidized Stafford loans
with respect to the involvement of guaranty agencies and the
Secretary of Education in providing federal reinsurance on the
loans. However, PLUS loans differ significantly from subsidized
Stafford loans, particularly because federal interest subsidy
payments are not available under the PLUS loan program and
special allowance payments are more restricted.
Interest rates for PLUS loans.
The applicable interest rate depends
upon the date of issuance of the loan and the period of
enrollment for which the loan is to apply. The applicable
interest rate on a PLUS loan:
For any 12-month period beginning on July 1,
2001 or any succeeding year, the weekly average 1-year constant
maturity Treasury yield, as published by the Board of Governors
of the Federal Reserve System, for the last calendar week before
such June 26, will be substituted for the 52-week Treasury
bill as the index for interest rate calculations.
SLS loans
General.
SLS loans
were limited to graduate or professional students, independent
undergraduate students, and dependent undergraduate students, if
the students parents were unable to obtain a PLUS loan and
were also unable to provide the students expected family
contribution. Except for dependent undergraduate students,
eligibility for SLS loans was determined without regard to need.
SLS loans are
A-4
Interest rates for SLS loans.
The applicable interest rates on SLS
loans made prior to October 1, 1992 are identical to the
applicable interest rates on PLUS loans made at the same time.
For SLS loans made on or after October 1, 1992, the
applicable interest rate is the same as the applicable interest
rate on PLUS loans, except that the ceiling is 11% per annum
instead of 10% per annum.
Consolidation Loans
General.
The Higher
Education Act authorizes a program under which certain borrowers
may consolidate their various student loans into a single loan
insured and reinsured on a basis similar to subsidized Stafford
loans. Consolidation loans may be obtained in an amount
sufficient to pay outstanding principal, unpaid interest and
late charges on federally insured or reinsured student loans
incurred under the FFEL Program, excluding PLUS loans made to
parent borrowers, selected by the borrower, as well
as loans made pursuant to the Perkins (formally National Direct
Student Loan) and Health Professional Student Loan Programs. To
be eligible for a consolidation loan, a borrower must:
If requested by the borrower, an eligible lender
may consolidate SLS or PLUS loans of the same borrower held by
the lender under a single repayment schedule. The repayment
period for each included loan shall be based on the commencement
of repayment of the most recent loan. The consolidated loan
shall bear interest at a rate equal to the weighted average of
the rates of the included loans. Such a consolidation shall not
be treated as the making of a new loan. In addition, at the
request of the borrower, a lender may refinance an existing
fixed rate SLS or PLUS loan, including an SLS or PLUS loan held
by a different lender who has refused to refinance the loan, at
a variable interest rate. In this case, proceeds of the new loan
are used to discharge the original loan.
A married couple who agree to be jointly liable
on a consolidation loan, for which the application is received
on or after January 1, 1993, may be treated as an
individual for purposes of obtaining a consolidation loan. For
consolidation loans disbursed prior to July 1, 1994 the
borrower was required to have outstanding student loan
indebtedness of at least $7,500. Prior to the adoption of the
Higher Education Technical Amendments Act of 1993, PLUS loans
could not be included in the consolidation loan. For
consolidation loans for which the applications were received
prior to January 1, 1993, the minimum student loan
indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness. For
applications received on or after January 1, 1993,
borrowers may add additional loans to a consolidation loan
during the 180-day period following the origination of the
consolidation loan.
Interest rates for consolidation loans.
A consolidation loan made prior to
July 1, 1994 bears interest at a rate equal to the weighted
average of the interest rates on the loans retired, rounded to
the nearest whole percent, but not less than 9% per annum.
Except as described in the next sentence, a consolidation loan
made on or after July 1, 1994 bears interest at a rate
equal to the weighted average of the interest rates on the loans
retired, rounded upward to the nearest whole percent, but with
no minimum rate. For a consolidation loan for which the
application is received by an eligible lender on or after
November 13, 1997 and before October 1, 1998, the
interest rate shall be adjusted annually, and for any
twelve-month period commencing on a July 1 shall be equal to the
bond equivalent rate of 91-day U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1%
per annum, but not to exceed 8.25%
A-5
Maximum Loan Amounts
Each type of loan is subject to limits on the
maximum principal amount, both with respect to a given year and
in the aggregate. Consolidation loans are limited only by the
amount of eligible loans to be consolidated. All of the loans
are limited to the difference between the cost of attendance and
the other aid available to the student. Stafford loans are also
subject to limits based upon needs analysis. Additional limits
are described below.
Loan limits for Stafford and unsubsidized
Stafford loans.
Stafford and
unsubsidized Stafford loans are generally treated as one loan
type for loan limit purposes. A student who has not successfully
completed the first year of a program of undergraduate education
may borrow up to $2,625 in an academic year. A student who has
successfully completed the first year, but who has not
successfully completed the second year may borrow up to $3,500
per academic year. An undergraduate student who has successfully
completed the first and second year, but who has not
successfully completed the remainder of a program of
undergraduate education, may borrow up to $5,500 per academic
year. For students enrolled in programs of less than an academic
year in length, the limits are generally reduced in proportion
to the amount by which the programs are less than one year in
length. A graduate or professional student may borrow up to
$8,500 in an academic year. The maximum aggregate amount of
Stafford and unsubsidized Stafford loans, including that portion
of a consolidation loan used to repay such loans, which an
undergraduate student may have outstanding is $23,000. The
maximum aggregate amount for a graduate and professional
student, including loans for undergraduate education, is
$65,500. The Secretary of Education is authorized to increase
the limits applicable to graduate and professional students who
are pursuing programs which the Secretary of Education
determines to be exceptionally expensive.
Prior to the enactment of the Higher Education
Amendments of 1992, an undergraduate student who had not
successfully completed the first and second year of a program of
undergraduate education could borrow Stafford loans in amounts
up to $2,625 in an academic year. An undergraduate student who
had successfully completed the first and second year, but who
had not successfully completed the remainder of a program of
undergraduate education could borrow up to $4,000 per academic
year. The maximum for graduate and professional students was
$7,500 per academic year. The maximum aggregate amount of
Stafford loans which a borrower could have outstanding,
including that portion of a consolidation loan used to repay
such loans, was $17,250. The maximum aggregate amount for a
graduate or professional student, including loans for
undergraduate education, was $54,750. Prior to the 1986 changes,
the annual limits were generally lower.
Loan limits for PLUS loans.
For PLUS loans made on or after
July 1, 1993, the amounts of PLUS loans are limited only by
the students unmet need. Prior to that time PLUS loans
were subject to limits similar to those of SLS loans applied
with respect to each student on behalf of whom the parent
borrowed.
Loan limits for SLS loans.
A student who had not successfully
completed the first and second year of a program of
undergraduate education could borrow an SLS loan in an amount of
up to $4,000. A student who had successfully completed the first
and second year, but who had not successfully completed the
remainder of a program of undergraduate education could borrow
up to $5,000 per year. Graduate and
A-6
Disbursement Requirements
The Higher Education Act now requires that
virtually all Stafford loans and PLUS loans be disbursed by
eligible lenders in at least two separate installments. The
proceeds of a loan made to any undergraduate first-year student
borrowing for the first time under the program must be delivered
to the student no earlier than thirty days after the enrollment
period begins.
Repayment
Repayment periods.
Loans made under FFEL Program, other
than consolidation loans, must provide for repayment of
principal in periodic installments over a period of not less
than five nor more than ten years. After the 1998 Amendments,
lenders are required to offer extended repayment schedules to
new borrowers who accumulate outstanding loans of more than
$30,000, in which case the repayment period may extend up to 25
years subject to certain minimum repayment amounts. A
consolidation loan must be repaid during a period agreed to by
the borrower and lender, subject to maximum repayment periods
which vary depending upon the principal amount of the
borrowers outstanding student loans, but may not be longer
than 30 years. For consolidation loans for which the
application was received prior to January 1, 1993, the
repayment period could not exceed 25 years. Repayment of
principal on a Stafford loan does not commence while a student
remains a qualified student, but generally begins upon
expiration of the applicable grace period. Grace periods may be
waived by borrowers. For Stafford loans for which the applicable
rate of interest is 7% per annum, the repayment period commences
not more than twelve months after the borrower ceases to pursue
at least a half-time course of study. For other Stafford loans
and unsubsidized Stafford loans, the repayment period commences
not more than six months after the borrower ceases to pursue at
least a half-time course of study. The six month or
12 month periods are the grace periods.
In the case of SLS, PLUS and consolidation loans,
the repayment period commences on the date of final disbursement
of the loan, except that the borrower of an SLS loan who also
has a Stafford loan may defer repayment of the SLS loan to
coincide with the commencement of repayment of the Stafford or
unsubsidized Stafford loan. During periods in which repayment of
principal is required, payments of principal and interest must
in general be made at a rate of not less than the greater of
$600 per year or the interest that accrues during the year,
except that a borrower and lender may agree to a lesser rate at
any time before or during the repayment period. A borrower may
agree, with concurrence of the lender, to repay the loan in less
than five years with the right subsequently to extend his
minimum repayment period to five years. Borrowers may
accelerate, without penalty, the repayment of all or any part of
the loan.
Income-sensitive repayment schedules.
Since 1992, lenders of consolidation
loans have been required to establish graduated or
income-sensitive repayment schedules and lenders of Stafford and
SLS loans have been required to offer borrowers the option of
repaying in accordance with graduated or income-sensitive
repayment schedules. A trust may implement graduated repayment
schedules and income-sensitive repayment schedules. Use of
income-sensitive repayment schedules may extend the ten-year
maximum term for up to five years. In addition, if the repayment
schedule on a loan that has been converted to a variable
interest rate does not provide for adjustments to the amount of
the monthly installment payments, the ten-year maximum term may
be extended for up to three years.
A-7
Deferment periods.
No principal repayments need be made
during certain periods of deferment prescribed by the Higher
Education Act. For loans to a borrower who first obtained a loan
which was disbursed before July 1, 1993, deferments are
available:
For loans to a borrower who first obtains a loan
on or after July 1, 1993, deferments are available:
A-8
Prior to the 1992 changes, only certain of the
deferment periods described above were available to PLUS loan
borrowers, and only certain deferment periods were available to
consolidation loan borrowers. Prior to the 1986 changes, PLUS
loan borrowers were not entitled to certain deferment periods.
Deferment periods extend the ten-year maximum term.
Forbearance period.
The Higher Education Act also provides
for periods of forbearance during which the borrower, in case of
temporary financial hardship, may defer any payments. A borrower
is entitled to forbearance for a period not to exceed three
years while the borrowers debt burden under Title IV
of the Higher Education Act (which includes the FFEL Program)
equals or exceeds 20% of the borrowers gross income, and
also is entitled to forbearance while he or she is serving in a
qualifying medical or dental internship program or in a
national service position under the National and
Community Service Trust Act of 1993. In addition, mandatory
administrative forbearances are provided in exceptional
circumstances such as a local or national emergency or military
mobilization, or when the geographical area in which the
borrower or endorser resides has been designated a disaster area
by the President of the United States or Mexico, the Prime
Minister of Canada, or by the governor of a state. In other
circumstances, forbearance is at the lenders option.
Forbearance also extends the ten year maximum term.
Interest payments during grace, deferment and
forbearance periods.
The Secretary of
Education makes interest payments on behalf of the borrower of
certain eligible loans while the borrower is in school and
during grace and deferment periods. Interest that accrues during
forbearance periods and, if the loan is not eligible for
interest subsidy payments, while the borrower is in school and
during the grace and deferment periods, may be paid monthly or
quarterly or capitalized not more frequently than quarterly.
Fees
Guarantee fee.
A
guaranty agency is authorized to charge a premium, or guarantee
fee, of up to 1% of the principal amount of the loan, which must
be deducted proportionately from each installment payment of the
proceeds of the loan to the borrower. Guarantee fees may not
currently be charged to borrowers of consolidation loans.
However, borrowers may be charged an insurance fee to cover the
costs of increased or extended liability with respect to
consolidation loans. For loans made prior to July 1, 1994,
the maximum guarantee fee was 3% of the principal amount of the
loan, but no such guarantee fee was authorized to be charged
with respect to unsubsidized Stafford loans.
Origination fee.
An
eligible lender is authorized to charge the borrower of a
Stafford loan, an unsubsidized Stafford loan or PLUS loan an
origination fee in an amount not to exceed 5% of the principal
amount of the loan, and is required to charge the borrower of an
unsubsidized Stafford loan or a PLUS loan an origination fee in
the amount of 3% of the principal amount of the loan. These fees
must be deducted proportionately from each installment payment
of the loan proceeds prior to payment to the borrower. These
fees are not retained by the lender, but must be passed on to
the Secretary of Education.
Lender origination fee.
The lender of any loan under the FFEL
Program made on or after October 1, 1993 is required to pay
to the Secretary of Education a fee equal to 0.5% of the
principal amount of such loan.
Rebate fee on Consolidation Loans.
The holder of any consolidation loan
made on or after October 1, 1993 is required to pay to the
Secretary of Education a monthly fee equal to .0875% (1.05%
A-9
Interest Subsidy Payments
Interest subsidy payments are interest payments
paid with respect to an eligible loan before the time that the
loan enters repayment and during grace and deferment periods.
The Secretary of Education and the guaranty agencies enter into
interest subsidy agreements whereby the Secretary of Education
agrees to pay interest subsidy payments to the holders of
eligible guaranteed loans for the benefit of students meeting
certain requirements, subject to the holders compliance
with all requirements of the Higher Education Act. Only Stafford
loans and consolidation loans for which the application was
received on or after January 1, 1993, are eligible for
interest subsidy payments. Consolidation loans made after
August 10, 1993 are eligible for interest subsidy payments
only if all loans consolidated thereby are Stafford loans,
except that consolidation loans for which the application is
received by an eligible lender on or after November 13,
1997 and before October 1, 1998, are eligible for interest
subsidy payments on that portion of the Consolidation loan that
repays Stafford loans or similar subsidized loans made under the
direct loan program. In addition, to be eligible for interest
subsidy payments, guaranteed loans must be made by an eligible
lender under the applicable guaranty agencys guarantee
program, and must meet requirements prescribed by the rules and
regulations promulgated under the Higher Education Act.
The Secretary of Education makes interest subsidy
payments quarterly on behalf of the borrower to the holder of a
guaranteed loan in a total amount equal to the interest which
accrues on the unpaid principal amount prior to the commencement
of the repayment period of the loan or during any deferment
period. A borrower may elect to forego interest subsidy
payments, in which case the borrower is required to make
interest payments.
Special Allowance Payments
The Higher Education Act provides for special
allowance payments to be made by the Secretary of Education to
eligible lenders. The rates for special allowance payments are
based on formulas that differ according to the type of loan, the
date the loan was originally made or insured and the type of
funds used to finance the loan (taxable or tax-exempt).
Subsidized and unsubsidized Stafford loans.
The effective formulas for special
allowance payment rates for Stafford and unsubsidized Stafford
loans are summarized in the following chart. The T-Bill Rate
mentioned in the chart refers to the average of the bond
equivalent yield of the 91-day Treasury bills auctioned during
the preceding quarter.
A-10
Federal PLUS, SLS and consolidation loans.
The formula for special allowance
payments on PLUS, SLS and Consolidation Loans are as follows:
For PLUS and SLS loans which bear interest at
rates adjusted annually, special allowance payments are made
only in years during which the interest rate ceiling on such
loans operates to reduce the rate that would otherwise apply
based upon the applicable formula. See Interest rates for
PLUS loans and Interest rates for SLS loans in
this Appendix. Special allowance payments are paid with respect
to PLUS Loans made on or after October 1, 1992 only if the
rate that would otherwise apply exceeds 10% per annum. For PLUS
loans made after July 1, 1998 and before July 1, 2006,
special allowance is paid only if the sum of the 91-day Treasury
bill rate determined at an auction held on June 1 of each year
plus 3.1% exceeds 9.0%. For PLUS loans first disbursed on or
after July 1, 2006, special allowance is paid for such
loans in any 12-month period beginning on July 1 and ending on
June 30 only if the sum of the average of the bond
equivalent rates of the quotes of the 3-month commercial paper
rate for the last calendar week ending on or before such
July 1 plus 2.64% exceeds 9.0%. The portion, if any, of a
consolidation loan that repaid a loan made under Title VII,
Sections 700-721 of the Public Health Services Act, as
amended, is ineligible for special allowance payments.
Special allowance payments for loans financed
by tax-exempt bonds.
The effective
formulas for special allowance payment rates for Stafford Loans
and Unsubsidized Stafford Loans differ depending on whether
loans to borrowers were acquired or originated with the proceeds
of tax-exempt obligations. The formula for special allowance
payments for loans financed with the proceeds of tax-exempt
obligations originally prior to October 1, 1993 is:
T Bill Rate less Applicable Interest Rate + 3.5%
2
provided
that the
special allowance applicable to the loans may not be less than
9 1/2% less the Applicable Interest Rate. Loans acquired
with the proceeds of tax-exempt obligations originally issued
after October 1, 1993 receive special allowance payments
made on other loans.
Adjustments to special allowance payments.
Special allowance payments and
interest subsidy payments are reduced by the amount which the
lender is authorized or required to charge as an origination
fee. In addition, the amount of the lender origination fee is
collected by offset to special allowance payments and interest
subsidy payments. The Higher Education Act provides that if
special allowance payments or interest subsidy payments have not
been made within 30 days after the Secretary of Education
receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by
an amount equal to the daily interest accruing on the special
allowance and interest subsidy payments due the holder.
Description of the Guaranty Agencies
The following discussion relates to guaranty
agencies under the FFELP.
A guaranty agency guarantees loans made to
students or parents of students by lending institutions such as
banks, credit unions, savings and loan associations, certain
schools, pension funds and insurance companies. A guaranty
agency generally purchases defaulted student loans which it has
guaranteed with its reserve fund. A lender may submit a default
claim to the guaranty agency after the student loan has been
delinquent for at least 270 days. The default claim package
must include all information and documentation required under
the FFELP regulations and the guaranty agencys policies
and procedures.
A-11
In general, a guaranty agencys reserve fund
has been funded principally by administrative cost allowances
paid by the Secretary of Education, guarantee fees paid by
lenders, investment income on moneys in the reserve fund, and a
portion of the moneys collected from borrowers on guaranteed
loans that have been reimbursed by the Secretary of Education to
cover the guaranty agencys administrative expenses.
Various changes to the Higher Education Act have
adversely affected the receipt of revenues by the guaranty
agencies and their ability to maintain their reserve funds at
previous levels, and may adversely affect their ability to meet
their guarantee obligations. These changes include:
Additionally, the adequacy of a guaranty
agencys reserve fund to meet its guarantee obligations
with respect to existing student loans depends, in significant
part, on its ability to collect revenues generated by new loan
guarantees. The Federal Direct Student Loan Program discussed
below may adversely affect the volume of new loan guarantees.
Future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues
received by guaranty agencies and the structure of the guaranty
agency program.
The Higher Education Act gives the Secretary of
Education various oversight powers over guaranty agencies. These
include requiring a guaranty agency to maintain its reserve fund
at a certain required level and taking various actions relating
to a guaranty agency if its administrative and financial
condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the
guaranty agency, terminating the guaranty agencys federal
reimbursement contracts, assuming responsibility for all
functions of the guaranty agency, and transferring the guaranty
agencys guarantees to another guaranty agency or assuming
such guarantees. The Higher Education Act provides that a
guaranty agencys reserve fund shall be considered to be
the property of the United States to be used in the operation of
the FFEL Program or the FDL Program, and, under certain
circumstances, the Secretary of Education may demand payment of
amounts in the reserve fund.
The 1998 Amendments mandate the recall of
guaranty agency reserve funds by the Secretary of Education
amounting to $85 million in fiscal year 2002,
$82.5 million in fiscal year 2006, and $82.5 million
in fiscal year 2007. However, certain minimum reserve levels are
protected from recall, and under the 1998 Amendments, guaranty
agency reserve funds were restructured to provide guaranty
agencies with additional flexibility in choosing how to spend
certain funds they receive. The new recall of reserves for
guaranty agencies increases the risk that resources available to
guaranty agencies to meet their guarantee obligation will be
significantly reduced. Relevant federal laws, including the
Higher Education Act, may be further changed in a manner that
may adversely affect the ability of a guaranty agency to meet
its guarantee obligations.
Student loans originated prior to October 1,
1993 are fully guaranteed as to principal and accrued interest.
Student loans originated after October 1, 1993 are
guaranteed as to 98% of principal and accrued interest.
A-12
Under the Higher Education Act, if the Department
of Education has determined that a guaranty agency is unable to
meet its insurance obligations, the holders of loans guaranteed
by such guaranty agency must submit claims directly to the
Department of Education, and the Department of Education is
required to pay the full guarantee payment due with respect
thereto in accordance with guarantee claims processing standards
no more stringent than those applied by the guaranty agency.
There are no assurances as to the Secretary of
Educations actions if a guaranty agency encounters
administrative or financial difficulties or that the Secretary
of Education will not demand that a guaranty agency transfer
additional portions or all of its reserve fund to the Secretary
of Education.
Federal Agreements
General.
A guaranty
agencys right to receive federal reimbursements for
various guarantee claims paid by such guaranty agency is
governed by the Higher Education Act and various contracts
entered into between guaranty agencies and the Secretary of
Education. Each guaranty agency and the Secretary of Education
have entered into federal reimbursement contracts pursuant to
the Higher Education Act, which provide for the guaranty agency
to receive reimbursement of a percentage of insurance payments
that the guaranty agency makes to eligible lenders with respect
to loans guaranteed by the guaranty agency prior to the
termination of the federal reimbursement contracts or the
expiration of the authority of the Higher Education Act. The
federal reimbursement contracts provide for termination under
certain circumstances and also provide for certain actions short
of termination by the Secretary of Education to protect the
federal interest.
In addition to guarantee benefits, qualified
student loans acquired under the FFEL Program benefit from
certain federal subsidies. Each guaranty agency and the
Secretary of Education have entered into an Interest Subsidy
Agreement under the Higher Education Act which entitles the
holders of eligible loans guaranteed by the guaranty agency to
receive interest subsidy payments from the Secretary of
Education on behalf of certain students while the student is in
school, during a six to twelve month grace period after the
student leaves school, and during certain deferment periods,
subject to the holders compliance with all requirements of
the Higher Education Act.
United States Courts of Appeals have held that
the federal government, through subsequent legislation, has the
right unilaterally to amend the contracts between the Secretary
of Education and the guaranty agencies described herein.
Amendments to the Higher Education Act in 1986, 1987, 1992,
1993, and 1998, respectively:
Federal Insurance and Reimbursement of
Guaranty Agencies
Effect of annual claims rate.
With respect to loans made prior to
October 1, 1993, the Secretary of Education currently
agrees to reimburse the guaranty agency for up to 100% of the
amounts paid on claims made by lenders, as discussed in the
formula described below, so long as the eligible lender has
properly serviced such loan. The amount of reimbursement is
lower for loans originated after October 1,
A-13
The formula used for loans initially disbursed
prior to October 1, 1993 is summarized below:
The claims experience is not accumulated from
year to year, but is determined solely on the basis of claims in
any one federal fiscal year compared with the original principal
amount of loans in repayment at the beginning of that year.
The 1993 Amendments reduce the reimbursement
amounts described above, effective for loans initially disbursed
on or after October 1, 1993 as follows: 100% reimbursement
is reduced to 98%, 90% reimbursement is reduced to 88%, and 80%
reimbursement is reduced to 78%, subject to certain limited
exceptions. The 1998 Amendments further reduce the federal
reimbursement amounts from 98% to 95%, 88% to 85%, and 78% to
75% respectively, for student loans first disbursed on or after
October 1, 1998.
The reduced reinsurance for federal guaranty
agencies increases the risk that resources available to guaranty
agencies to meet their guarantee obligation will be
significantly reduced.
Reimbursement.
The
original principal amount of loans guaranteed by a guaranty
agency which are in repayment for purposes of computing
reimbursement payments to a guaranty agency means the original
principal amount of all loans guaranteed by a guaranty agency
less:
Guaranty agencies with default rates below 5% are
required to pay the Secretary of Education annual fees
equivalent to 0.51% of new loans guaranteed, while all other
such agencies must pay a 0.5% fee. The Secretary of Education
may withhold reimbursement payments if a guaranty agency makes a
material misrepresentation or fails to comply with the terms of
its agreements with the Secretary of Education or applicable
federal law.
Under the guarantee agreements, if a payment on a
FFELP loan guaranteed by a guaranty agency is received after
reimbursement by the Secretary of Education, the guaranty agency
is entitled to receive an equitable share of the payment.
Any originator of any student loan guaranteed by
a guaranty agency is required to discount from the proceeds of
the loan at the time of disbursement, and pay to the guaranty
agency, an insurance premium which may not exceed that permitted
under the Higher Education Act.
Under present practice, after the Secretary of
Education reimburses a guaranty agency for a default claim paid
on a guaranteed loan, the guaranty agency continues to seek
repayment from the borrower. The guaranty agency returns to the
Secretary of Education payments that it receives from a borrower
after
A-14
A guaranty agency may enter into an addendum to
its Interest Subsidy Agreement that allows the guaranty agency
to refer to the Secretary of Education certain defaulted
guaranteed loans. Such loans are then reported to the IRS to
offset any tax refunds which may be due any
defaulted borrower. To the extent that the guaranty agency has
originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the
guaranty agency will not recover any amounts subsequently
collected by the federal government which are attributable to
that portion of the defaulted loan for which the guaranty agency
has not been reimbursed.
Rehabilitation of defaulted loans.
Under the Higher Education Act, the
Secretary of Education is authorized to enter into an agreement
with a guaranty agency pursuant to which the guaranty agency
shall sell defaulted loans that are eligible for rehabilitation
to an eligible lender. The guaranty agency shall repay the
Secretary of Education an amount equal to 81.5% of the then
current principal balance of such loan, multiplied by the
reimbursement percentage in effect at the time the loan was
reimbursed. The amount of such repayment shall be deducted from
the amount of federal reimbursement payments for the fiscal year
in which such repayment occurs, for purposes of determining the
reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the
guaranty agency must have received consecutive payments for
12 months of amounts owed on such loan. Upon
rehabilitation, a loan is eligible for all the benefits under
the Higher Education Act for which it would have been eligible
had no default occurred (except that a borrowers loan may
only be rehabilitated once).
Eligibility for federal reimbursement.
To be eligible for federal
reimbursement payments, guaranteed loans must be made by an
eligible lender under the applicable guaranty agencys
guarantee program, which must meet requirements prescribed by
the rules and regulations promulgated under the Higher Education
Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee
provisions described herein and the other requirements set forth
in the Higher Education Act.
Prior to the 1998 Amendments, a FFELP loan was
considered to be in default for purposes of the Higher Education
Act when the borrower failed to make an installment payment when
due, or to comply with the other terms of the loan, and if the
failure persists for 180 days in the case of a loan
repayable in monthly installments or for 240 days in the
case of a loan repayable in less frequent installments. Under
the 1998 Amendments, the delinquency period required for a
student loan to be declared in default is increased from
180 days to 270 days for loans payable in monthly
installments on which the first day of delinquency occurs on or
after the date of enactment of the 1998 Amendments and from
240 days to 330 days for a loan payable less
frequently than monthly on which the delinquency occurs after
the date of enactment of the 1998 Amendments.
The guaranty agency must pay the lender for the
defaulted loan prior to submitting a claim to the Secretary of
Education for reimbursement. The guaranty agency must submit a
reimbursement claim to the Secretary of Education within
45 days after it has paid the lenders default claim.
As a prerequisite to entitlement to payment on the guarantee by
the guaranty agency, and in turn payment of reimbursement by the
Secretary of Education, the lender must have exercised
reasonable care and diligence in making, servicing and
collecting the guaranteed loan. Generally, these procedures
require:
A-15
After the loan is made, the lender must establish
repayment terms with the borrower, properly administer
deferments and forbearances and credit the borrower for payments
made. If a borrower becomes delinquent in repaying a loan, a
lender must perform certain collection procedures, primarily
telephone calls, demand letters, skiptracing procedures and
requesting assistance from the applicable guaranty agency, that
vary depending upon the length of time a loan is delinquent.
Direct Loans
The 1993 Amendments authorized a program of
direct loans, to be originated by schools with funds
provided by the Secretary of Education. Under the FDL Program,
the Secretary of Education is directed to enter into agreements
with schools, or origination agents in lieu of schools, to
disburse loans with funds provided by the Secretary of
Education. Participation in the program by schools is voluntary.
The goals set forth in the 1993 Amendments call for the direct
loan program to constitute 5% of the total volume of loans made
under the FFELP Program and the FDL Program for academic year
1994-1995, 40% for academic year 1995-1996, 50% for academic
years 1996-1997 and 1997-1998 and 60% for academic year
1998-1999. No provision is made for the size of the FDL Program
thereafter. Based upon information released by the General
Accounting Office, participation by schools in the FDL Program
has not been sufficient to meet the goals for the 1995-1996 or
1996-1997 academic years. The 1998 Amendments removed references
to the phase-in of the FDL Program, including
restrictions on annual limits for FDL Program volume and the
Secretarys authority to select additional institutions to
achieve balanced school representation.
The loan terms are generally the same under the
FDL Program as under the FFEL Program, though more flexible
repayment provisions are available under the FDL Program. At the
discretion of the Secretary of Education, students attending
schools that participate in the FDL Program (and their parents)
may still be eligible for participation in the FFEL Program,
though no borrower could obtain loans under both programs for
the same period of enrollment.
It is difficult to predict the impact of the FDL
Program. There is no way to accurately predict the number of
schools that will participate in future years, or, if the
Secretary authorizes students attending participating schools to
continue to be eligible for FFEL Program loans, how many
students will seek loans under the direct loan program instead
of the FFEL Program. In addition, it is impossible to predict
whether future legislation will eliminate, limit or expand the
FDL Program or the FFEL Program.
A-16
8,000,000 Shares
Class A Common Stock
Prospectus
Joint Book-Running Managers
Until ,
2004, all dealers that buy, sell or trade in our Class A
common stock, whether or not participating in this offering, may
be required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
December , 2003
Page
F-2
F-3
F-4
F-5
F-6
F-7
December 31,
September 30,
2003
2002
2001
(unaudited)
(in thousands)
$
10,059,920
8,559,420
7,423,872
12,587
27,294
23,175
22,063
12,861
13,265
34,650
40,155
36,440
509,242
570,703
213,658
190,064
173,339
121,606
40,711
132,375
65,792
207,515
177,015
180,634
18,191
14,838
14,365
14,415
23,909
22,513
15,288
12,910
9,323
63,001
61,919
46,357
$
11,152,997
9,766,583
8,134,560
Liabilities and Shareholders
Equity
$
10,892,347
9,447,682
7,926,362
18,885
20,251
21,145
69,832
57,529
56,569
40,711
132,375
65,792
11,021,775
9,657,837
8,069,868
(376
)
1,506
310
309
309
140
140
140
43,219
37,891
37,499
87,553
70,782
25,238
131,222
109,122
63,186
$
11,152,997
9,766,583
8,134,560
Nine months ended
Year ended
September 30,
December 31,
2003
2002
2002
2001
2000
(unaudited)
(in thousands, except per share data)
$
270,399
311,937
405,149
318,453
281,028
11,984
15,235
20,759
16,794
17,933
282,383
327,172
425,908
335,247
298,961
148,556
170,876
235,008
220,682
234,108
133,827
156,296
190,900
114,565
64,853
8,875
3,319
5,587
3,925
1,370
124,952
152,977
185,313
110,640
63,483
74,470
80,189
103,899
93,172
66,015
13,988
15,129
21,909
7,713
8,431
(4,632
)
(579
)
(579
)
(2,962
)
83,826
94,739
125,229
97,923
74,446
93,049
80,077
106,874
77,370
51,765
17,214
24,477
32,449
28,592
17,304
14,953
12,477
16,617
12,836
9,067
9,149
8,173
11,424
7,488
5,518
6,692
10,380
11,512
10,122
4,543
8,647
6,061
9,237
3,355
1,575
3,102
6,786
12,800
29,350
15,300
10,228
7,881
11,095
7,647
5,734
15,793
16,616
22,693
18,678
20,390
85,778
92,851
127,827
118,068
79,431
178,827
172,928
234,701
195,438
131,196
29,951
74,788
75,841
13,125
6,733
13,289
27,131
27,679
5,380
2,213
16,662
47,657
48,162
7,745
4,520
109
196
376
(598
)
$
16,771
47,853
48,538
7,147
4,520
$
0.37
1.06
1.08
0.16
0.11
Class A
Class B
Additional
Total
Preferred
common
common
paid-in
Retained
shareholders
stock
stock
stock
capital
earnings
equity
(in thousands)
$
9
295
132
1,373
13,571
15,380
4,520
4,520
(9
)
8
34,349
34,348
(87
)
(87
)
295
140
35,635
18,091
54,161
7,147
7,147
14
1,996
2,010
(132
)
(132
)
309
140
37,499
25,238
63,186
48,538
48,538
(2,994
)
(2,994
)
392
392
309
140
37,891
70,782
109,122
16,771
16,771
5,166
5,166
3
803
806
(2
)
(641
)
(643
)
$
310
140
43,219
87,553
131,222
September 30,
December 31,
2003
2002
2002
2001
2000
(unaudited)
(in thousands)
$
16,771
47,853
48,538
7,147
4,520
74,500
63,785
93,864
45,301
28,198
4,632
579
579
2,962
5,166
(7,307
)
(7,711
)
(8,475
)
(11,363
)
(4,712
)
(109
)
(196
)
(376
)
598
8,875
3,319
5,587
3,925
1,370
(30,500
)
(25,306
)
3,619
(14,661
)
(31,352
)
(3,353
)
(5,946
)
918
13,286
(18,483
)
7,092
(4,423
)
(7,608
)
18,107
(5,629
)
(1,366
)
139
(894
)
(3,554
)
2,708
12,303
(5,972
)
(1,542
)
19,744
9,763
86,704
66,121
134,210
81,492
(13,617
)
(2,784,968
)
(1,833,849
)
(2,541,071
)
(774,959
)
(461,376
)
(594,996
)
(326,926
)
(377,788
)
(666,350
)
(536,451
)
9,906
1,820,830
1,076,302
1,724,077
529,190
381,861
(9,522
)
(9,213
)
(13,408
)
(6,264
)
(4,003
)
61,461
(163,394
)
(357,045
)
(50,186
)
(42,052
)
(323,202
)
(228,329
)
(318,822
)
(302,050
)
(53,068
)
306,477
213,136
267,089
296,405
51,778
(1,760
)
(20,809
)
(20,809
)
(102,184
)
1,594
(1,525,680
)
(1,293,082
)
(1,637,777
)
(1,076,398
)
(651,811
)
(2,242,545
)
(863,517
)
(2,259,769
)
(324,561
)
(331,402
)
3,687,380
2,081,089
3,781,474
1,338,959
1,000,000
(11,527
)
(7,186
)
(11,429
)
(8,325
)
(4,376
)
(2,994
)
(2,994
)
(643
)
806
2,010
1,433,471
1,207,392
1,507,282
1,008,083
664,222
(5,505
)
(19,569
)
3,715
13,177
(1,206
)
40,155
36,440
36,440
23,263
24,469
$
34,650
16,871
40,155
36,440
23,263
$
142,224
168,969
222,528
227,198
229,673
$
19,081
39,533
40,098
14,777
8,466
(a) Corporate
Organization
NELNET Student Loan Corporation1
(NELNET1)
NELNET Student Loan Corporation2
(NELNET2)
Nelnet Student Loan Funding LLC (NELNET SLF)
Nelnet Education Loan Funding, Inc. (formerly
known as NEBHELP, Inc.) (NELF)
MELMAC, Inc. and subsidiaries (MELMAC)
NHELPI, Inc. (NHELPI)
NHELPII, Inc. and subsidiary (NHELPII)
NHELPIII, Inc. (NHELPIII)
Nelnet Student Loan Warehouse Corporation-1
(NELNET SLWC-1)
NELnet Private Student Loan Corporation-1 (NELnet
Private-1)
EFS Finance Co. (EFS Fin Co.) and its subsidiary,
EMT Corporation (EMT Corp.)
(b) Description of
Business
Asset management, including student loan
originations and acquisitions.
The
Company provides student loan sales, marketing, originations,
acquisition and portfolio management. The Company owns a large
portfolio of student loan assets through a series of education
lending subsidiaries. The Company generates loans owned in
special purpose lending facilities through direct origination or
through acquisition of loans. The Company generates the majority
of its earnings from the spread between the yield it earns on
its student loan portfolio and the cost of funding these loans.
The Company also provides marketing and sales support and
managerial and administrative support
related to its asset generation activities, as
well as those performed for its branding partners or other
lenders who sell it loans. Revenues are primarily generated from
interest earnings. While the Companys net interest margin
may vary due to fluctuations in interest rates, government
special allowance payments ensure that the Company receives a
minimum yield on its student loans, so long as certain
requirements are met.
Student loan servicing.
The Company services its student
loan portfolio and the portfolios of third parties. As of
September 30, 2003, the Company serviced or provided
complete outsourcing of servicing activities for more than
$18 billion in student loans, including approximately
$8.7 billion of loans in its portfolio. The servicing
activities provided include loan origination activities,
application processing, borrower updates, payment processing,
claim processing and due diligence procedures. These activities
are performed internally for the Companys own portfolio,
in addition to generating fee revenue when performed for
third-party clients.
Guarantee servicing.
The Company provides servicing
support to guaranty agencies, which includes system software,
hardware and telecommunication support, borrower and loss
updates, default aversion tracking services, claim processing
services and post-default collection services. The Company
currently provides servicing support to agencies that guarantee
$20 billion of FFELP loans. These activities generate fee
revenue in addition to expanding the Companys relationship
with other participants in the education finance sector.
Servicing software.
The Company provides student loan
servicing software internally and to third-party student loan
holders and servicers. In addition to the more than
$18 billion in student loans which the Company services
directly, the software products are used to service an
additional $27 billion in student loans. The Company earns
software license and maintenance fees annually from third party
clients for use of this software. The Company also provides
computer consulting, custom software applications and customer
service support.
(c) Acquisitions
$
3,021,791
219,068
10,385
(3,055,403
)
(24,455
)
$
171,386
$
2,972
1,390
23,612
(4,193
)
$
23,781
Pro forma
Pro forma
year ended
year ended
December 31, 2001
December 31, 2000
(dollars in thousands)
(unaudited)
$
153,674
89,613
$
125,985
130,682
$
11,905
(8,273
)
44,331,490
41,187,230
$
0.27
$
(0.20
)
(a) Consolidation
(b) Student Loans
Receivable
(c) Allowance for Loan
Losses
(d) Cash and Cash
Equivalents
(e) Restricted Cash and Restricted
Investments Held by Trustee
(f) Restricted Cash Due to
Loan Program Customers/ Due to Loan Program
Customers
(g) Intangible Assets
(h) Furniture, Equipment and Leasehold
Improvements
(i) Other Assets
(j) Program Reimbursement
Reserve
(k) Software Sales, Development and
Maintenance, and Deferred Income
(l) Minority Interest
(m) Accounting for Derivatives and
Hedging Activities
(n) Impairment of Long-lived
Assets
(o) Student Loan Income
(p) Loan Servicing
Income
(q) Income Tax Expense
(r) Earnings Per Share
(s) Comprehensive Income
(t) Use of Estimates
(u) Reclassification
December 31,
September 30,
2003
2002
2001
(unaudited)
(dollars in thousands)
$
4,317
2,709
5,335
27,125
20,729
15,799
158,622
149,901
100,472
$
190,064
173,339
121,606
December 31,
September 30,
2003
2002
2001
(unaudited)
(dollars in thousands)
$
9,983,870
8,496,760
7,372,968
30,234
23,108
24,232
61,540
51,552
36,914
10,075,644
8,571,420
7,434,114
10,974
9,970
9,378
4,750
2,030
864
$
10,059,920
8,559,420
7,423,872
0.11%
0.12%
0.13%
5.18%
2.72%
1.41%
0.16%
0.14%
0.14%
September 30,
December 31,
2003
2002
2002
2001
2000
(unaudited)
(dollars in thousands)
$
12,000
10,242
10,242
3,614
4,122
4,866
8,875
3,319
5,587
3,925
1,370
(5,151
)
(2,183
)
(3,829
)
(2,163
)
(1,878
)
$
15,724
11,378
12,000
10,242
3,614
December 31,
Useful
September 30,
Life
2003
2002
2001
(unaudited)
(in
months)
(dollars in thousands)
36
$
2,321
4,765
8,238
30-36
1,786
14,275
36
9,543
14,807
2,551
2,551
$
14,415
23,909
22,513
December 31,
Useful
September 30,
Life
2003
2002
2001
(unaudited)
(dollars in thousands)
3-7 years
$
33,534
33,155
26,911
3-10 years
13,284
9,739
7,121
1-7 years
4,943
4,507
3,215
51,761
47,401
37,247
36,473
34,491
27,924
$
15,288
12,910
9,323
September 30, 2003 (unaudited)
Carrying
Interest rate
amount
range
Final maturity
(dollars in thousands)
$
1,555,244
1.34% - 1.72%
09/02/04 - 09/25/24
8,268,802
0.79% - 1.90%
07/01/05 - 07/01/43
677,600
5.50% - 5.76%
09/01/05 - 07/01/12
195,899
5.88% - 6.60%
05/01/05 - 06/01/28
117,513
5.69% - 6.68%
09/14/12 - 07/02/20
77,289
1.30% - 6.00%
01/10/05 - 11/01/05
$
10,892,347
December 31, 2002
Carrying
Interest rate
amount
range
Final maturity
(dollars in thousands)
$
1,388,579
1.36% - 1.64%
05/01/03 - 12/15/06
6,870,148
1.40% - 2.77%
07/01/05 - 10/01/36
786,700
5.48% - 5.76%
08/01/05 - 07/01/12
201,950
5.65% - 6.90%
11/01/03 - 06/01/28
134,231
5.69% - 6.68%
09/14/12 - 07/02/20
66,074
1.60% - 6.00%
01/10/03 - 11/01/05
$
9,447,682
December 31, 2001
Carrying
Interest rate
amount
range
Final maturity
(dollars in thousands)
$
1,200,805
1.80% - 2.76%
05/01/03 - 05/01/07
5,428,735
1.44% - 4.22%
07/01/05 - 10/01/36
855,000
5.48% - 5.76%
08/01/05 - 07/01/12
227,874
5.25% - 6.90%
11/01/03 - 06/01/28
149,788
5.69% - 6.68%
09/04/12 - 07/02/20
64,160
3.52% - 6.00%
06/30/02 - 11/01/09
$
7,926,362
(unaudited)
$
440,704
220,979
127,965
230,873
86,070
9,785,756
$
10,892,347
Nine months ended
Year ended
September 30,
December 31,
2003
2002
2002
2001
2000
(unaudited)
(dollars in thousands)
$
18,953
31,992
33,204
15,440
6,439
1,643
2,850
2,950
1,303
486
20,596
34,842
36,154
16,743
6,925
(6,321
)
(7,005
)
(7,717
)
(10,445
)
(4,459
)
(986
)
(706
)
(758
)
(918
)
(253
)
(7,307
)
(7,711
)
(8,475
)
(11,363
)
(4,712
)
$
13,289
27,131
27,679
5,380
2,213
Nine months ended
September 30,
Year ended December 31,
2003
2002
2002
2001
2000
(unaudited)
(dollars in thousands)
$
10,483
26,176
26,544
4,594
2,357
643
1,416
1,425
250
317
1,808
355
(461
)
(290
)
536
(461
)
$
13,289
27,131
27,679
5,380
2,213
44.4
%
36.3
%
36.5
%
41.0
%
32.9
%
December 31,
September 30,
2003
2002
2001
(unaudited)
(dollars in thousands)
$
4,161
1,866
1,359
2,206
6,849
406
696
1,065
4,567
4,768
9,273
10,322
6,118
4,358
1,644
1,007
701
648
1,235
1,264
1,711
214
1,094
1,027
1,476
1,057
456
1,103
941
1,113
599
400
935
452
84
18,530
11,424
10,005
$
13,963
6,656
732
September 30, 2003
December 31, 2002
December 31, 2001
Fair
Carrying
Fair
Carrying
Fair
Carrying
value
value
value
value
value
value
(unaudited)
(dollars in thousands)
$
34,650
$
34,650
$
40,155
$
40,155
$
36,440
$
36,440
40,711
40,711
132,375
132,375
65,792
65,792
509,242
509,242
570,703
570,703
213,658
213,658
207,515
207,515
177,015
177,015
180,634
180,634
10,214,978
10,059,920
8,659,613
8,559,420
7,527,007
7,423,872
190,064
190,064
173,339
173,339
121,606
121,606
869
869
10,944,919
10,892,347
9,471,710
9,447,682
8,044,119
7,926,362
18,885
18,885
20,251
20,251
21,145
21,145
40,711
40,711
132,375
132,375
65,792
65,792
2,962
2,962
(a)
Cash and Cash Equivalents, Restricted
Cash Due to Loan Program Customers, Restricted
Cash Held by Trustee, Accrued Interest Receivable/
Payable, and Due to Loan Program Customers
(b)
Student Loans Receivable
(c)
Restricted Investments Held by
Trustee
(d)
Bonds and Notes Payable
(e)
Derivative Financial
Instruments
(f)
Limitations
(13)
Derivative Financial Instruments
(a) 401(K) Plans
$
4,141
3,812
2,727
2,103
1,255
578
$
14,616
(a) Early Extinguishment of
Debt
(b) Accounting for Costs Associated
with Exit or Disposal Activities
(c) Accounting for Acquisitions of
Certain Financial Institutions
(d) Accounting for Stock-Based
Compensation
(e) Accounting for
Guarantees
(f) Consolidation of Variable Interest
Entities
(g) Statement of Financial Accounting
Standards No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(h) Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity
2002
2001
(dollars in thousands)
$
1,137
865
132,375
65,792
71,064
28,111
20,151
11,413
12,110
5,464
12,236
14,538
1,127
556
3,204
805
9,211
5,261
2,060
$
254,209
143,271
$
7,558
8,779
5,154
3,150
132,375
65,792
1,179
1,185
145,087
80,085
309
309
140
140
52,714
52,714
55,959
10,023
109,122
63,186
$
254,209
143,271
2002
2001
2000
(dollars in thousands)
$
113,477
83,352
81,207
4,712
4,170
4,124
118,189
87,522
85,331
38,692
43,382
49,931
71,161
52,947
38,111
109,853
96,329
88,042
8,336
(8,807
)
(2,711
)
1,515
2,121
3,807
9,851
(6,686
)
1,096
3,450
(2,777
)
(154
)
6,401
(3,909
)
1,250
(1,775
)
6,401
(3,909
)
(525
)
42,137
11,056
3,620
$
48,538
7,147
3,095
2002
2001
2000
(dollars in thousands)
$
48,538
7,147
3,095
10,635
17,973
13,682
(3,274
)
(5,717
)
(4,213
)
1,502
600
440
(234
)
2
(42,146
)
(11,055
)
(3,722
)
(6,564
)
(228
)
1,927
(8,713
)
2,363
(4,957
)
2,695
421
382
2,302
(10,770
)
(5,585
)
(2,369
)
2,731
1,033
(295
)
118
(2,427
)
(654
)
(374
)
179
2,282
1,828
(1,776
)
5,818
6,051
(10,000
)
(4,004
)
(4,003
)
250
(5
)
93
(3,759
)
(4,003
)
2,010
272
533
(2,175
)
865
332
2,507
$
1,137
865
332
$
6,677
13,709
4,753
Asset
Student Loan
Total
Management
Servicing
Other
Segments
Nine months ended September 30, 2003
(unaudited)
(dollars in thousands)
$
138,222
651
7
138,880
2
61,562
23,319
84,883
47,104
1,538
48,642
138,224
109,317
24,864
272,405
8,875
8,875
1,610
806
5,348
7,764
6,376
10,255
916
17,547
34,163
10,874
1,645
46,682
11,018,569
106,374
27,028
11,151,971
Asset
Student Loan
Total
Management
Servicing
Other
Segments
Nine months ended September 30, 2002
(unaudited)
(dollars in thousands)
$
155,073
1,036
36
156,145
91
62,465
17,290
79,846
40,397
1,071
41,468
155,164
103,898
18,397
277,459
3,319
3,319
1,609
11,281
4,650
17,540
25,610
2,534
(927
)
27,217
55,713
6,733
(2,831
)
59,615
Asset
Student Loan
Total
Management
Servicing
Other
Segments
Year ended December 31, 2002
(dollars in thousands)
$
190,667
1,427
42
192,136
1,724
83,866
24,409
109,999
55,217
1,553
56,770
192,391
140,510
26,004
358,905
5,587
5,587
2,146
12,313
6,473
20,932
24,988
3,094
(2,528
)
25,554
63,909
9,128
(5,479
)
67,558
9,552,699
192,921
29,211
9,774,831
Asset
Student Loan
Total
Management
Servicing
Other
Segments
Year ended December 31, 2001
(dollars in thousands)
$
117,809
2,365
120,174
926
88,379
8,770
98,075
29,948
29,948
118,735
120,692
8,770
248,197
3,925
3,925
2,146
19,854
132
22,132
14,751
(942
)
224
14,033
29,837
(3,367
)
996
27,466
7,913,099
127,283
5,766
8,046,148
Asset
Student Loan
Total
Management
Servicing
Other
Segments
Year ended December 31, 2000
(dollars in thousands)
$
63,778
3,142
66,920
1,559
67,972
69,531
19,359
19,359
65,337
90,473
155,810
1,370
1,370
15,470
15,470
4,306
(510
)
3,796
7,767
(479
)
7,288
Nine months ended
September 30,
Year ended December 31,
Reconciliation to the consolidated
2003
2002
2002
2001
2000
financial statements is as follows:
(unaudited)
(dollars in thousands)
$
272,405
277,459
358,905
248,197
155,810
(48,642
)
(41,468
)
(56,770
)
(29,948
)
(19,359
)
(1,478
)
15,623
14,573
(2,799
)
2,848
(4,632
)
(579
)
(579
)
(2,962
)
$
217,653
251,035
316,129
212,488
139,299
$
46,682
59,615
67,558
27,466
7,288
(29,911
)
(11,762
)
(19,020
)
(20,319
)
(2,768
)
$
16,771
47,853
48,538
7,147
4,520
As of December 31,
As of September 30,
2003
2002
2001
(unaudited)
(dollars in thousands)
$
11,151,971
9,774,831
8,046,148
(17,803
)
(96,727
)
(40,314
)
18,829
88,479
128,726
$
11,152,997
9,766,583
8,134,560
has been accepted for enrollment or is enrolled
in good standing at an eligible institution of higher education;
is carrying or planning to carry at least
one-half the normal full-time workload for the course of study
the student is pursuing as determined by the institution;
has agreed to promptly notify the holder of the
loan of any address change; and
meets the applicable needs
requirements.
Stafford loans,
Unsubsidized Stafford loans,
PLUS loans, and
Consolidation loans.
(1) is 7% per annum for a loan covering a
period of instruction beginning before January 1,1981;
(2) is 9% per annum for a loan covering a
period of instruction beginning on or before January 1,
1981, but before September 13, 1983;
(3) is 8% per annum for a loan covering a
period of instruction beginning on or after September 13,
1983, but before July 1, 1988;
(4) is 8% per annum for the period from the
disbursement of the loan to the date which is four years after
the loan enters repayment, for a loan made prior to
October 1, 1992, covering a period of instruction beginning
on or after July 1, 1988, and thereafter shall be adjusted
annually, and for any 12-month period commencing on a
July 1 shall be equal to the bond equivalent rate of 91-day
U.S. Treasury bills auctioned at the final auction prior to
the preceding June 1, plus 3.25% per annum (but not to
exceed 10% per annum); or
(5) for a loan made on or after
October 1, 1992 shall be adjusted annually, and for any
12-month period commencing on a July 1 shall be equal to
the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding
June 1, plus 3.1% per annum (but not to exceed 9% per
annum).
(1) for a loan made prior to July 23,
1992 is the applicable interest rate on the previous loan or, if
the previous loan is not a Stafford loan, 8% per annum or
(2) for a loan made on or before
July 23, 1992 shall be adjusted annually, and for any
twelve month period commencing on a July 1 shall be equal
to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding
June 1, plus 3.1% per annum but not to exceed:
7% per annum in the case of a Stafford loan made
to a borrower who has a loan described in clause (1)above;
8% per annum in the case of:
a Stafford loan made to a borrower who has a loan
described in clause (3) above,
a Stafford loan which has not been in repayment
for four years and which was made to a borrower who has a loan
described in clause (4) above,
a Stafford loan for which the first disbursement
was made prior to December 20, 1993 to a borrower whose
previous loans do not include a Stafford loan or an unsubsidized
Stafford loan;
9% per annum in the case of a Stafford loan made
to a borrower who has a loan described in clauses (2) or
(5) above or a Stafford loan for which the first disbursement
was made on or after December 20, 1993 to a borrower whose
previous loans do not include a Stafford loan or an unsubsidized
Stafford loan; and
10% per annum in the case of a Stafford loan
which has been in repayment for four years or more and which was
made to a borrower who has a loan described in clause (4)
above.
made on or after January 1, 1981, but before
October 1, 1981, is 9% per annum;
made on or after October 1, 1981, but before
November 1, 1982, is 14% per annum;
made on or after November 1, 1982, but
before July 1, 1987, is 12% per annum;
made on or after July 1, 1987, but before
October 1, 1992 shall be adjusted annually, and for any
12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 52-week U.S. Treasury bills
auctioned at the final auction prior to the preceding
June 1, plus 3.25% per annum (but not to exceed 12% per
annum);
made on or after October 1, 1992, but before
July 1, 1994, shall be adjusted annually, and for any
12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 52-week U.S. Treasury bills
auctioned at the final auction prior to the preceding
June 1, plus 3.1% per annum (but not to exceed 10% per
annum);
made on or after July 1, 1994, but before
July 1, 1998, is the same as that for a loan made on or
after October 1, 1992, but before July 1, 1994, except
that such rate shall not exceed 9% per annum;
made on or after July 1, 1998, but before
July 1, 2006, shall be adjusted annually, and for any
12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding
June 1, plus 3.1% per annum (but not to exceed 9% per
annum); or
the first disbursement of which is made on or
after July 1, 2006 will be 7.9%.
have outstanding indebtedness on student loans
made under the FFEL Program and/or certain other federal student
loan programs, and
be in repayment status or in a grace period, or
be a defaulted borrower who has made arrangements
to repay any defaulted loan satisfactory to the holder of the
defaulted loan.
during a period not exceeding three years while
the borrower is a member of the Armed Forces, an officer in the
Commissioned Corps of the Public Health Service or, with respect
to a borrower who first obtained a student loan disbursed on or
after July 1, 1987, or a student loan to cover the cost of
instruction for a period of enrollment beginning on or after
July 1, 1987, an active duty member of the National Oceanic
and Atmospheric Administration Corps;
during a period not in excess of three years
while the borrower is a volunteer under the Peace Corps Act;
during a period not in excess of three years
while the borrower is a full-time volunteer under the Domestic
Volunteer Act of 1973;
during a period not exceeding three years while
the borrower is in service, comparable to the service described
above as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code;
during a period not exceeding two years while the
borrower is serving an internship necessary to receive
professional recognition required to begin professional practice
or service, or a qualified internship or residency program;
during a period not exceeding three years while
the borrower is temporarily totally disabled, as established by
sworn affidavit of a qualified physician, or while the borrower
is unable to secure employment by reason of the care required by
a dependent who is so disabled;
during a period not to exceed twenty-four months
while the borrower is seeking and unable to find full-time
employment;
during any period that the borrower is pursuing a
full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan
disbursed on or after July 1, 1987, or a student loan to
cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, is pursuing at least a
half-time course of study for which the borrower has obtained a
loan under the FFEL Program), or is pursuing a course of study
pursuant to a graduate fellowship program or a rehabilitation
training program for disabled individuals approved by the
Secretary of Education;
during a period, not in excess of 6 months,
while the borrower is on parental leave; and
only with respect to a borrower who first
obtained a student loan disbursed on or after July 1, 1987,
or a student loan to cover the cost of instruction for a period
of enrollment beginning on or after July 1, 1987, during a
period not in excess of three years while the borrower is a
full-time teacher in a public or nonprofit private elementary or
secondary school in a teacher shortage area (as
prescribed by the Secretary of Education), and during a period
not in excess of 12 months for mothers, with preschool age
children, who are entering or re-entering the work force and who
are compensated at a rate not exceeding $1 per hour in excess of
the federal minimum wage.
during any period that the borrower is pursuing
at least a half-time course of study at an eligible institution
or a course of study pursuant to a graduate fellowship program
or rehabilitation training program approved by the Secretary of
Education;
during a period not exceeding three years while
the borrower is seeking and unable to find full-time employment;
and
during a period not in excess of three years for
any reason which the lender determines, in accordance with
regulations under the Higher Education Act, has caused or will
cause the borrower economic hardship. Economic hardship includes
working full time and earning an amount not in excess of the
greater of the minimum wage or the poverty line for a family of
two. Additional categories of economic hardship are based on the
relationship between a borrowers educational debt burden
and his or her income.
Date of Loans
Annualized SAP Rate
T-Bill Rate less Applicable Interest Rate + 3.5%
T-Bill Rate less Applicable Interest Rate + 3.25%
T-Bill Rate less Applicable Interest Rate + 3.1%
T-Bill Rate less Applicable Interest Rate +
3.1%(1)
T-Bill Rate less Applicable Interest Rate +
2.8%(2)
3 Month Commercial Paper Rate less Applicable(3)
Interest Rate + 2.34%
(1)
Substitute 2.5% in this formula while loans are
in-school, grace or deferment status.
(2)
Substitute 2.2% in this formula while such loans
are in-school, grace or deferment status.
(3)
Substitute 1.74% in this formula while such loans
are in-school, grace or deferment status.
Date of Loans
Annualized SAP Rate
T-Bill Rate less applicable Interest Rate + 3.1%
3 Month Commercial Paper Rate less applicable
Interest Rate + 2.64%
the reduction in reinsurance payments from the
Secretary of Education because of reduced reimbursement
percentages;
the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994;
the replacement of the administrative cost
allowance with a student loan processing and issuance fee equal
to 65 basis points (40 basis points for loans made on
or after October 1, 1993) paid at the time a loan is
guaranteed, and an account maintenance fee of 12 basis
points (10 basis points for fiscal years 2001-2003) paid
annually on outstanding guaranteed student loans;
the reduction in supplemental preclaims
assistance payments from the Secretary of Education; and
the reduction in retention by a guaranty agency
of collections on defaulted loans from 27% to 24% (23% beginning
on October 1, 2003).
abrogated certain rights of guaranty agencies
under contracts with the Secretary of Education relating to the
repayment of certain advances from the Secretary of Education,
authorized the Secretary of Education to withhold
reimbursement payments otherwise due to certain guaranty
agencies until specified amounts of such guaranty agencies
reserves had been eliminated,
added new reserve level requirements for guaranty
agencies and authorized the Secretary of Education to terminate
the Federal Reimbursement Contracts under circumstances that did
not previously warrant such termination,
expanded the Secretary of Educations
authority to terminate such contracts and to seize guaranty
agencies reserves, and
mandated the additional recall of guaranty agency
reserve funds.
Claims Rate
Federal Payment
100%
100% of claims up to 5%; 90% of claims 5% and over
100% of claims up to 5%; 90% of claims 5% and
over, up to 9%; 80% of claims 9% and over
the original principal amount of such loans that
have been fully repaid, and
the original amount of such loans for which the
first principal installment payment has not become due.
that completed loan applications be processed;
a determination of whether an applicant is an
eligible borrower attending an eligible institution under the
Higher Education Act be made;
the borrowers responsibilities under the
loan be explained to him or her;
the promissory note evidencing the loan be
executed by the borrower; and
that the loan proceeds be disbursed by the lender
in a specified manner.
JPMorgan
Banc of America Securities LLC
Credit Suisse First Boston
Morgan Stanley
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13.
Other
Expenses of Issuance and Distribution
The following table shows the costs and expenses,
other than underwriting discounts, payable in connection with
the sale and distribution of the securities being registered.
Except as otherwise noted, the registrant will pay all of these
amounts. All amounts except the Securities and Exchange
Commission Registration Fee and the National Association of
Securities Dealers, Inc. Filing Fee are estimated.
Item 14.
Indemnification
of Directors and Officers
Under the Nebraska Business Corporation Act, a
Nebraska corporation may provide indemnification to directors
and officers for judgments, fines, settlements and expenses,
including attorneys fees, incurred in connection with any
threatened, pending or completed action, suit or proceeding
other than an action by or in the right of the corporation. This
applies to any civil, criminal, investigative or administrative
action provided that the director or officer involved acted in
good faith, in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The corporation may
also provide indemnification to directors and officers for
judgments, fines, settlements and expenses, including
attorneys fees, incurred in connection with any
threatened, pending or completed action or suit by or in the
right of the corporation if such director or officer acted in
good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation. However,
no indemnification shall be made in respect of any claim, issue
or matter in which such person is adjudged to be liable for
negligence or misconduct in the performance of his duties to the
corporation unless the court in which the action is brought
deems indemnity proper. The grant of indemnification to a
director or officer shall be determined by a majority of a
quorum of disinterested directors, by a written opinion from
independent legal counsel or by the shareholders.
Indemnification shall be provided to any directors and officers
for expenses, including attorneys fees, actually and
reasonably incurred in the defense of any action, suit or
proceeding to the extent that he or she has been successful on
the merits.
The registrants amended and restated
articles of incorporation provide that the registrant shall, to
the maximum extent and in the manner permitted by the Nebraska
Business Corporation Act, indemnify each of its directors,
officers, employees and agents against expenses, including
attorneys fees, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any
proceeding arising by reason of the fact that such person is or
was an agent of the registrant. The registrant shall pay
expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is available in advance of
the final disposition of such action or proceeding, following
authorization thereof by the board of directors in the case of
an employee or agent, upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall
be ultimately determined by final judicial
In addition, the registrants amended and
restated articles of incorporation provide that the registrant
may
II-1
The registrants amended and restated
articles of incorporation also limit the personal liability of
the directors and officers of the registrant for breaches of
fiduciary duty to the registrant or its shareholders, except in
certain circumstances including (1) breach of the duty of
loyalty to the registrant or its shareholders, (2) acts or
omissions not in good faith or involving intentional misconduct
or a knowing violation of law, (3) acts or omissions for
which the Nebraska Business Corporation Act does not permit
indemnity for directors under Section 21-2018(2)(e) of the
Nebraska Business Corporation Act, which include intentional
infliction of harm on the registrant or its shareholders, voting
for or assenting to an unlawful distribution and intentional
violation of criminal law, or (4) any transaction from
which the director derived an improper personal benefit.
During the past three years, the Company has
issued unregistered securities in the transactions described
below.
Each of the sales of securities was made without
the use of an underwriter and the certificates evidencing the
shares bear a restricted legend permitting the transfer thereof
only upon registration of the shares or an exemption under the
Securities Act of 1933.
II-2
(a) Exhibits
See Exhibit Index beginning on
page II-5 of this registration statement.
(b) Financial Statement
Schedules
None.
II-3
$
14,886
20,500
210,600
1,000,000
1,750,000
800,000
11,000
193,014
$
4,000,000
Item 15.
Recent Sales of Unregistered
Securities.
1.
On May 25, 2001, the registrant issued
1,535,520 shares of Class A common stock to Farmers
& Merchants Investment Inc. for approximately $1.31 per
share, or an aggregate of $2,009,703. The securities issued in
this transaction were issued in reliance on an exemption from
registration under Section 4(2) of the Securities Act, as a
transaction by an issuer not involving any public offering. The
recipient of the securities represented its intentions to
acquire the securities for investment only and not with a view
to, or for sale or in connection with, any distribution thereof.
Appropriate legends were affixed to the certificates
representing the securities in such transaction.
2.
On March 12, 2003, the registrant issued an
aggregate of 331,800 shares of Class A common stock to
35 employees for $2.43 per share, or an aggregate of $806,274.
The securities issued in these transactions were issued in
reliance on an exemption from registration under
Section 4(2) of the Securities Act, as transactions by an
issuer not involving any public offering. The recipients of the
securities represented their intentions to acquire the
securities for investment only and not with a view to, or for
sale or in connection with, any distribution thereof.
Appropriate legends were affixed to the certificates
representing the securities in such transactions.
3.
On August 14, 2003, in connection with the
recapitalization effected pursuant to the registrants
amended and restated articles of incorporation, the registrant
issued an aggregate of 45,038,488 shares of its
Class A and Class B common stock to the holders of its
pre-recapitalization Class A voting common stock and
Class B non-voting common stock. The securities issued in
this transaction were issued in reliance on the exemption from
registration under Section 3(a)(9) of the Securities Act,
relating to securities exchanged by an issuer with its existing
security holders exclusively where no commission or other
remuneration is paid or given, directly or indirectly, for
soliciting such exchange.
Item 16.
Exhibits and Financial Statement
Schedules.
Item 17.
Undertakings.
(a)
The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b)
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted against
the registrant by such director, officer or controlling person
in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(c)
The undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2)
For the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this Pre-Effective
Amendment No. 5 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in
the city of Lincoln, State of Nebraska, on November 21,
2003.
Pursuant to the requirements of the Securities
Act of 1933, this Pre-Effective Amendment No. 5 to the
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
II-4
NELNET, INC.
By:
/s/ MICHAEL S. DUNLAP
Name: Michael S. Dunlap
Title:
Chairman and Co-Chief Executive
Officer (Co-Principal Executive Officer)
Signature
Title
Date
/s/ MICHAEL S. DUNLAP
Michael S. Dunlap
Chairman and
Co-Chief Executive Officer
(Co-Principal Executive Officer)
November 21, 2003
/s/ STEPHEN F. BUTTERFIELD
Stephen F. Butterfield
Vice Chairman and
Co-Chief Executive Officer
(Co-Principal Executive Officer)
November 21, 2003
/s/ TERRY J. HEIMES
Terry J. Heimes
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
November 21, 2003
*
Don R. Bouc
President and Director
November 21, 2003
*
James P. Abel
Director
November 21, 2003
*
Thomas E. Henning
Director
November 21, 2003
*
Lee E. Mikles
Director
November 21, 2003
*
Arturo Moreno
Director
November 21, 2003
*
Brian J. OConnor
Director
November 21, 2003
*
James H. VanHorn
Director
November 21, 2003
*By:
/s/ MICHAEL S. DUNLAP
Name: Michael S. Dunlap
Title: Attorney-in-Fact
EXHIBIT INDEX
II-5
II-6
II-7
II-8
II-9
II-10
II-11
II-12
II-13
II-14
II-15
II-16
Exhibit
No.
Description
1
.1
Form of Underwriting Agreement.
2
.1
Plan of Reorganization, Plan of Merger and Merger
Agreement, dated as of October 14, 1999, by and between
Union Financial Services, Inc. and National Education Loan
Network, Inc.
2
.2
Articles of Merger certified by Union Financial
Services, Inc., dated October 15, 1999.
2
.3
Agreement and Plan of Reorganization, dated as of
March 1, 2000, by and among UNIPAC Service Corporation,
NelNet, Inc. (subsequently renamed National Education Loan
Network, Inc.) and National Education Loan Network, Inc.
2
.4
Plan of Merger, dated as of March 1, 2000,
by and among NelNet, Inc. (subsequently renamed National
Education Loan Network, Inc.), National Education Loan Network,
Inc. and UNIPAC Service Corporation.
2
.5
Articles of Merger certified by NelNet, Inc.,
dated March 1, 2000.
2
.6
Letter Agreement relating to the purchase of the
stock of InTuition Holdings, Inc., dated as of June 15,
2000, between NELnet, Inc. (subsequently renamed National
Education Loan Network, Inc.) and Farmers & Merchants
Investment Inc.
2
.7
Transfer Agreement with Irrevocable Power of
Attorney, dated as of June 28, 2001, by and between
InTuition Development Holdings, LLC and InTuition Guarantee
Services II, Inc. (which subsequently became Nelnet
Guarantee Services Inc.) relating to the membership interests in
InTuition Guarantee Services, LLC (which subsequently became
GuaranTec LLP).
2
.8
Master Stock Purchase Agreement, dated as of
December 12, 2001, by and between EFS, Inc. and NELnet,
Inc. (subsequently renamed National Education Loan Network, Inc.)
2
.9
Stock Purchase Agreement, dated as of
January 24, 2002, by and among NELnet, Inc. (subsequently
renamed National Education Loan Network, Inc.) and Hilario
Arguinchona.
2
.10
Purchase Agreement, dated as of February 14,
2002, by and between InTuition Guarantee Services, LLC and
NELnet, Inc. (subsequently renamed National Education Loan
Network, Inc.)
2
.11
Stock Purchase Agreement, dated May 1, 2002,
by and among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.) and Nelnet, Inc. (subsequently renamed National
Education Loan Network, Inc.)
2
.12
Stock Purchase Agreement, dated as of May 1,
2002, by and between Farmers & Merchants Investment Inc. and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.)
2
.13
Stock Purchase Agreement, dated May 2, 2002,
by and among Packers Service Group, Inc. and Infovisa, Inc.
2
.14
Stock Purchase Agreement, dated as of May 9,
2002, among Thomas Morrill, James Callier, Michael Cruskie,
Dominic Rotondi and Nelnet, Inc. (subsequently renamed National
Education Loan Network, Inc.) concerning Charter Account
Systems, Inc.
2
.15
Senior Stock Purchase (Call) Option Agreement by
and between NELnet, Inc. (subsequently renamed National
Education Loan Network, Inc.) and Maine Educational Loan
Marketing Corporation, dated as of June 30, 2000.
2
.16
Purchase Agreement, dated as of July 3,
2003, by and between Nelnet Loan Services, Inc. (subsequently
renamed Nelnet, Inc.), Union Financial Services, Inc. and
Packers Service Group, Inc.
3
.1
Second Amended and Restated Articles of
Incorporation of Nelnet, Inc.
3
.2
Second Amended and Restated Bylaws of Nelnet, Inc.
4
.1
Form of Class A Common Stock Certificate of
Nelnet, Inc.
4
.2
Indenture of Trust by and between Nelnet Student
Loan Corporation-2 and Zions First National Bank, as Trustee,
dated as of June 1, 2000.
Exhibit
No.
Description
4
.3
Series 2000 Supplemental Indenture of Trust
by and between Nelnet Student Loan Corporation-2 and Zions First
National Bank, as Trustee, authorizing the issuance of
$1,000,000,000 NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes Series 2000, dated as of June 1,
2000.
4
.4
Indenture of Trust by and between Nelnet Student
Loan Trust 2002-1 and Zions First National Bank, as Trustee,
dated as of May 1, 2002.
4
.5
Indenture of Trust by and between Nelnet Student
Loan Trust 2002-2 and Zions First National Bank, as Trustee,
dated as of September 1, 2002.
4
.6
Indenture of Trust between Nelnet Student Loan
Trust 2003-1 and Zions First National Bank, as Trustee, dated as
of January 1, 2003.
4
.7
Indenture of Trust by and among Nelnet Education
Loan Funding, Inc., Wells Fargo Bank Minnesota, National
Association, as Indenture Trustee, and Wells Fargo Bank
Minnesota, National Association, as Eligible Lender Trustee,
dated as of June 1, 2003.
4
.8
Series 2003-1 Supplemental Indenture of
Trust by and between Nelnet Education Loan Funding, Inc. and
Wells Fargo Bank Minnesota, National Association, as Indenture
Trustee, authorizing the issuance of $1,030,000,000 Nelnet
Education Loan Funding, Inc. Student Loan Asset-Backed Notes
Series 2003-1, dated as of June 1, 2003.
4
.9
Instruments with respect to other long-term debt
of Nelnet, Inc. and its consolidated subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K
since the amount of debt authorized under each such omitted
instrument does not exceed 10 percent of the total assets
of Nelnet, Inc. and its subsidiaries on a consolidated basis.
Nelnet, Inc. hereby agrees to furnish a copy of any such
instrument to the Securities and Exchange Commission upon
request.
4
.10
Option Agreement, dated as of January 24,
2002, by and between NELnet, Inc. (subsequently renamed National
Education Loan Network, Inc.) and Hilario Arguinchona.
4
.11
Form of Registration Rights Agreement, by and
among Nelnet, Inc. and the shareholders of Nelnet, Inc.
signatory thereto.
4
.12
Nelnet, Inc. Restricted Stock Plan.
4
.13
Nelnet, Inc. Directors Stock Compensation Plan.
4
.14
Nelnet, Inc. Employee Share Purchase Plan.
5
.1
Opinion of Perry, Guthery, Haase & Gessford,
P.C., L.L.O. regarding the legality of the securities being
registered.
10
.1
Stockholders Agreement for UNIPAC Service
Corporation, dated as of March 2, 2000, by and among UNIPAC
Service Corporation, Farmers & Merchants Investment
Inc., Packers Service Group, Inc., Great Plains Financial, LLC,
New Horizon Holdings, LLC and the shareholders of UNIPAC Service
Corporation.
10
.2
Agreement to Terminate Stockholders Agreement,
dated as of August 4, 2003, by and among Nelnet Loan
Services, Inc. (f/k/a UNIPAC Service Corporation) (subsequently
renamed Nelnet, Inc.) and those stockholders party to the
Stockholders Agreement dated as of March 2, 2000.
10
.3
Warehouse Loan and Security Agreement among
NHELP-I, Inc., as the Borrower, Norwest Bank Minnesota, National
Association, as the Trustee, and Concord Minutemen Capital
Company, LLC, as the Lender, dated as of September 30, 1998.
10
.4
First Amendment to Warehouse Loan and Security
Agreement, among NHELP-I Inc., as the Borrower, Norwest Bank
Minnesota, National Association, as the Trustee, and Concord
Minutemen Capital Company, LLC, as the Lender, dated as of
December 15, 1998.
10
.5
Second Amendment to Warehouse Loan and Security
Agreement among NHELP-I, Inc., as the Borrower, Norwest Bank
Minnesota, National Association, as the Trustee, and Concord
Minutemen Capital Company, LLC, as the Lender, dated as of
September 29, 1999.
10
.6
Third Amendment to Warehouse Loan and Security
Agreement, dated as of November 16, 1999, among NHELP-I,
Inc., Concord Minutemen Capital Company, LLC and Norwest Bank
Minnesota, National Association.
Exhibit
No.
Description
10
.7
Fourth Amendment to Warehouse Loan and Security
Agreement, dated as of February 1, 2000, among NHELP-I,
Inc., Concord Minutemen Capital Company, LLC and Norwest Bank
Minnesota, National Association.
10
.8
Fifth Amendment to Warehouse Loan and Security
Agreement among NHELP-I, Inc., as the Borrower, Wells Fargo Bank
Minnesota, National Association, as the successor Trustee, and
Concord Minutemen Capital Company, LLC, as the Lender, dated as
of September 1, 2000.
10
.9
Sixth Amendment to Warehouse Loan and Security
Agreement, dated as of September 24, 2002, among NHELP-I,
Inc., Concord Minutemen Capital Company, LLC and Wells Fargo
Bank Minnesota, National Association.
10
.10
Warehouse Note Purchase and Security Agreement
among NHELP-III, Inc., as the Issuer, Norwest Bank Minnesota,
National Association, as the Trustee, Delaware Funding
Corporation, as a Note Purchaser, Three Rivers Funding
Corporation, as a Note Purchaser, Morgan Guaranty Trust Company
of New York, as DFC Agent and Administrative Agent, and Mellon
Bank, N.A., as TRFC Agent, dated as of September 1, 1999.
10
.11
First Amendment to Warehouse Note Purchase and
Security Agreement among NHELP-III, Inc., as the Issuer, Wells
Fargo Bank Minnesota, National Association, as the successor
Trustee, Delaware Funding Corporation, as a Note Purchaser,
Three Rivers Funding Corporation, as a Note Purchaser, Morgan
Guaranty Trust Company of New York, as DFC Agent and
Administrative Agent, and Mellon Bank, N.A., as TRFC Agent,
dated as of September 1, 2000.
10
.12
Second Amendment to Warehouse Note Purchase and
Security Agreement among NHELP-III, Inc., as the Issuer, Wells
Fargo Bank Minnesota, National Association, as the successor
Trustee, Delaware Funding Corporation, as a Note Purchaser,
Three Rivers Funding Corporation, as a Note Purchaser, JPMorgan
Chase Bank, as DFC Agent and Administrative Agent, and Mellon
Bank, N.A., as TRFC Agent, dated as of September 12, 2002.
10
.13
Amendment to Warehouse Note Purchase and Security
Agreement, dated as of June 1, 2003, by and among
NHELP-III, Inc., as the Issuer, Delaware Funding Corporation, as
Note Purchaser, Three Rivers Funding Corporation, as Note
Purchaser, JPMorgan Chase Bank (successor to Morgan Guaranty and
Trust Company of New York), as DFC Agent and Administrative
Agent, and Mellon Bank, N.A., as TRFC Agent.
10
.14
Warehouse Loan and Security Agreement among
NELnet Student Loan Warehouse Corporation-1, as Borrower, Zions
First National Bank, as Trustee, Thunder Bay Funding Inc., as
Lender, and Royal Bank of Canada, as Facility Agent and
Alternate Lender, dated as of February 1, 2002.
10
.15
Amended and Restated Warehouse Loan and Security
Agreement among Nelnet Education Loan Funding, Inc., as
Borrower, Wells Fargo Bank Minnesota, National Association, as
Eligible Lender Trustee, Zions First National Bank, as Trustee,
Thunder Bay Funding Inc., as Lender, and Royal Bank of Canada,
as Facility Agent and Alternate Lender, dated as of
April 28, 2003.
10
.16
Warehouse Note Purchase and Security Agreement
among Nelnet Education Loan Funding, as Borrower, Wells Fargo
Bank Minnesota, National Association, as Trustee, Wells Fargo
Bank Minnesota, National Association, as Eligible Lender
Trustee, Quincy Capital Corporation, as Bank of America Conduit
Lender, Bank of America, N.A., as Bank of America Alternate
Lender, Bank of America, N.A., as Bank of America Facility
Agent, Gemini Securitization Corp., as Deutsche Bank Conduit
Lender, Deutsche Bank AG, New York Branch, as Deutsche Bank
Alternate Lender, Deutsche Bank AG, New York Branch, as Deutsche
Bank Facility Agent, Barton Capital Corporation, as Societe
Generale Conduit Lender, Societe Generale, as Societe Generale
Alternate Lender, Societe Generale, as Societe Generale Facility
Agent, and Bank of America, N.A., as Administrative Agent, dated
as of May 1, 2003.
10
.17
Credit Agreement, dated as of January 11,
2002, by and among Nelnet Loan Services, Inc. (subsequently
renamed Nelnet, Inc.), Nelnet, Inc. (subsequently renamed
National Education Loan Network, Inc.) and Bank of America, N.A.
Exhibit
No.
Description
10
.18
First Amendment to Credit Agreement, dated as of
January 24, 2003, by and among Nelnet Loan Services, Inc.
(subsequently renamed Nelnet, Inc.), Nelnet, Inc. (subsequently
renamed National Education Loan Network, Inc.) and Bank of
America, N.A.
10
.19
Second Amendment to Credit Agreement and First
Amendment to Application and Agreement for Standby Letter of
Credit, dated as of August 18, 2003, by and among National
Education Loan Network, Inc. (formerly known as Nelnet, Inc.),
Nelnet, Inc. (formerly known as Nelnet Loan Services, Inc.) and
Bank of America, N.A.
10
.20
Security Agreement, dated as of January 11,
2002, by and between Nelnet Loan Services, Inc. (subsequently
renamed Nelnet, Inc.) and Bank of America, N.A.
10
.21
Guaranty Agreement, dated as of January 11,
2002, by and among Nelnet Loan Services, Inc. (subsequently
renamed Nelnet, Inc.), Nelnet, Inc. (subsequently renamed
National Education Loan Network, Inc.), Nelnet Corporation
(subsequently renamed Nelnet Corporate Services, Inc.), Nelnet
Marketing Solutions, Inc., ClassCredit, Inc., Nelnet Guarantee
Services, Inc., InTuition, Inc., EFS, Inc., EFS Services, Inc.,
EFS Finance Co., GuaranTec LLP and National Higher Education
Loan Program, Inc.
10
.22
Intercreditor Agreement, dated as of
January 11, 2002, by and among Farmers & Merchants
Investment Inc., Bank of America, N.A. and Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.)
10
.23
Irrevocable Letter of Credit in the amount of
$50,000,000, dated as of May 23, 2003, by and between
Nelnet, Inc. (subsequently renamed National Education Loan
Network, Inc.) and Bank of America, N.A.
10
.24
Continuing Guaranty, dated as of May 23,
2003, by and between Nelnet Loan Services, Inc. (subsequently
renamed Nelnet, Inc.) and Bank of America, N.A.
10
.25
Agreement Between 5280 Solutions and
Nelnet/Unipac, dated as of April 12, 2001.
10
.26
Employment Contract, dated as of May 1,
2001, by and between NHELP, Inc. and Richard H. Pierce.
10
.27
Marketing Expense Reimbursement Agreement, dated
as of January 1, 1999, by and between Union Bank and Trust
Company and National Education Loan Network, Inc.
10
.28
First Amendment of Marketing Expense
Reimbursement Agreement, dated as of April 1, 2001, by and
between Union Bank and Trust Company and NELnet, Inc. (f/k/a
National Education Loan Network, Inc.) (subsequently renamed
National Education Loan Network, Inc.)
10
.29
Second Amendment of Marketing Expense
Reimbursement Agreement, dated as of December 21, 2001, by
and between Union Bank and Trust Company and NELnet, Inc. (f/k/a
National Education Loan Network, Inc.) (subsequently renamed
National Education Loan Network, Inc.)
10
.30
Amended and Restated Participation Agreement,
dated as of June 1, 2001, by and between NELnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Union Bank and Trust Company.
10
.31
First Amendment of Amended and Restated
Participation Agreement, dated as of December 19, 2001, by
and between Union Bank and Trust Company and NELnet, Inc.
(subsequently renamed National Education Loan Network, Inc.)
10
.32
Second Amendment of Amended and Restated
Participation Agreement, dated as of December 1, 2002, by
and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a
NELnet, Inc.) (subsequently renamed National Education Loan
Network, Inc.)
10
.33
Alternative Loan Participation Agreement, dated
as of June 29, 2001, by and between NELnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Union Bank and Trust Company.
10
.34
Amended and Restated Agreement, dated as of
January 1, 1999, by and between Union Bank and Trust
Company and National Education Loan Network, Inc.
Exhibit
No.
Description
10
.35
Agreement to Amend, dated as of April 1,
2001, by and between NELnet, Inc. (f/k/a/ National Education
Loan Network, Inc.) (subsequently renamed National Education
Loan Network, Inc.) and Union Bank and Trust Company, relating
to the Amended and Restated Agreement dated as of
January 1, 1999.
10
.36
Guaranteed Purchase Agreement, dated as of
March 19, 2001, by and between NELnet, Inc. (subsequently
renamed National Education Loan Network, Inc.) and Union Bank
and Trust Company.
10
.37
First Amendment of Guaranteed Purchase Agreement,
dated as of February 1, 2002, by and between NELnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Union Bank and Trust Company.
10
.38
Second Amendment of Guaranteed Purchase
Agreement, dated as of December 1, 2002, by and between
Nelnet, Inc. (f/k/a/ NELnet, Inc.) (subsequently renamed
National Education Loan Network, Inc.) and Union Bank and Trust
Company.
10
.39
Underwriting Agreement by and among Union
Financial Services-1, Inc., PaineWebber Incorporated and the
other underwriters listed on Schedule A thereto, dated
June 30, 1999.
10
.40
Indemnity Agreement, dated as of June 30,
1999, among National Education Loan Network, Inc. (subsequently
renamed Nelnet, Inc.), PaineWebber Incorporated, Salomon Smith
Barney Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc.
10
.41
Underwriting Agreement by and among NELNET
Student Loan Corporation-2, PaineWebber Incorporated and the
other underwriters listed on Schedule A thereto, dated as
of May 24, 2000.
10
.42
Indemnity Agreement, dated as of May 24,
2000, among UNIPAC Service Corporation and PaineWebber
Incorporated, as representative for the underwriters listed on
Schedule A of the Underwriting Agreement, dated
May 24, 2000, between NELNET Student Loan Corporation-2 and
the underwriters party thereto.
10
.43
Underwriting Agreement by and between NELNET
Student Loan Corporation-2, Credit Suisse First Boston
Corporation and the other underwriters listed on Schedule A
thereto, dated as of March 9, 2001.
10
.44
Indemnity Agreement, dated as of March 9,
2001, among UNIPAC Service Corporation and Credit Suisse First
Boston Corporation, as representative for the underwriters
listed on Schedule A to the Underwriting Agreement, dated
March 9, 2001, between NELNET Student Loan Corporation-2
and the underwriters party thereto.
10
.45
Underwriting Agreement by and between NELNET
Student Loan Corporation-2, UBS PaineWebber Inc. and the other
underwriters listed on Schedule A thereto, dated as of
August 29, 2001.
10
.46
Indemnity Agreement, dated August 29, 2001,
among UNIPAC Service Corporation and UBS PaineWebber Inc., as
representative for the underwriters listed on Schedule A to
the Underwriting Agreement, dated August 29, 2001, among
NELNET Student Loan Corporation-2 and the underwriters party
thereto.
10
.47
Underwriting Agreement by and among NELNET
Student Loan Corporation-2, J.P. Morgan Securities Inc. and
Banc of America Securities LLC, dated as of March 20, 2002.
10
.48
Indemnity Agreement, dated as of March 20,
2002, among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.), Banc of America Securities LLC, as an
underwriter, and J.P. Morgan Securities Inc., as an
underwriter.
10
.49
Underwriting Agreement by and among Nelnet
Student Loan Funding, LLC, Banc of America Securities LLC, J.P.
Morgan Securities Inc. and the other underwriters listed on
Schedule A thereto, dated as of May 9, 2002.
10
.50
Indemnity Agreement, dated as of May 9,
2002, among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.) and Banc of America Securities LLC and
J.P. Morgan Securities Inc, as representatives for the
underwriters listed on Schedule A to the Underwriting
Agreement, dated May 9, 2002, between Nelnet Student Loan
Funding, LLC and the underwriters party thereto.
Exhibit
No.
Description
10
.51
Underwriting Agreement by and among Nelnet
Student Loan Funding, LLC, J.P. Morgan Securities Inc.,
Morgan Stanley & Co. Incorporated and the other
underwriters listed on Schedule A thereto, dated as of
September 26, 2002.
10
.52
Indemnity Agreement, dated as of
September 26, 2002, among Nelnet Loan Services, Inc.
(subsequently renamed Nelnet, Inc.), and J.P. Morgan
Securities Inc. and Morgan Stanley & Co. Incorporated,
as representatives of the underwriters listed on Schedule A
to the Underwriting Agreement, dated as of September 26,
2002, between Nelnet Student Loan Funding, LLC and the
underwriters party thereto.
10
.53
Underwriting Agreement by and among Nelnet
Student Loan Funding, LLC, Deutsche Bank Securities Inc., Banc
of America Securities LLC and the other underwriters listed on
Schedule A thereto, dated as of January 29, 2003.
10
.54
Indemnity Agreement, dated as of January 29,
2003, among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.) and Banc of America Securities LLC and Deutsche
Bank Securities Inc., as representatives of the underwriters
listed on Schedule A to the Underwriting Agreement, dated
January 29, 2003, among Nelnet Student Loan Funding, LLC
and the underwriters party thereto.
10
.55
Underwriting Agreement by and among Nelnet
Education Loan Funding, Inc., Banc of America Securities LLC and
Deutsche Bank Securities Inc., dated as of July 9, 2003.
10
.56
Indemnity Agreement, dated as of July 9,
2003, among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.), and Banc of America Securities LLC and Deutsche
Bank Securities Inc., as representatives of the underwriters
listed on Schedule A to the Underwriting Agreement, dated
July 9, 2003, among Nelnet Education Loan Funding, Inc. and
the underwriters party thereto.
10
.57
Underwriting Agreement by and among Nelnet
Student Loan Funding, LLC, J.P. Morgan Securities Inc.,
Morgan Stanley & Co. Incorporated and the other
underwriters listed on Schedule A thereto, dated as of
July 16, 2003.
10
.58
Indemnity Agreement, dated as of July 16,
2003, among Nelnet Loan Services, Inc. (subsequently renamed
Nelnet, Inc.), and J.P. Morgan Securities Inc. and Morgan
Stanley & Co. Incorporated, as representatives of the
underwriters listed on Schedule A to the Underwriting
Agreement, dated July 16, 2003, among Nelnet Student Loan
Funding, LLC and the underwriters party thereto.
10
.59
Trust Agreement, dated as of April 1, 2001,
among NELNET Student Loan Corporation-1, as Depositor, MELMAC
LLC, as Depositor, NELnet, Inc. (subsequently renamed National
Education Loan Network, Inc.), as Administrator, The Chase
Manhattan Bank, as Collateral Agent, Note Registrar and Note
Paying Agent, and Wilmington Trust Company, as Trustee,
Certificate Registrar and Certificate Paying Agent.
10
.60
Trust Agreement, dated as of December 1,
2001, among EMT Corp., as Depositor, NELnet, Inc. (subsequently
renamed National Education Loan Network, Inc.), as
Administrator, JPMorgan Chase Bank, as Collateral Agent, Note
Registrar and Note Paying Agent, and Wilmington Trust Company,
as Trustee, Certificate Registrar and Certificate Paying Agent.
10
.61
ISDA Master Agreement, dated as of
August 20, 2001, by and between Bank of America, N.A.,
UNIPAC Service Corporation and NELnet, Inc. (subsequently
renamed National Education Loan Network, Inc.)
10
.62
ISDA Master Agreement, dated as of May 20,
2002, by and between JPMorgan Chase Bank, Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.)
10
.63
ISDA Master Agreement, dated as of May 20,
2002, by and between Bank of America, N.A. and NELNET Student
Loan Trust 2002-1.
10
.64
ISDA Master Agreement, dated as of May 20,
2002, by and between JPMorgan Chase Bank and NELNET Student Loan
Trust 2002-1.
10
.65
ISDA Master Agreement, dated as of
October 8, 2002, by and between JPMorgan Chase Bank and
NELNET Student Loan Trust 2002-2.
Exhibit
No.
Description
10
.66
Interest Rate Swap Confirmation, dated as of
May 19, 2002, from Bank of America, N.A. to Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.),
relating to the ISDA Master Agreement among the same parties
dated August 20, 2001.
10
.67
Interest Rate Swap Confirmation, dated as of
May 20, 2002, from JPMorgan Chase Bank to Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.),
relating to the ISDA Master Agreement among the same parties
dated May 20, 2002.
10
.68
Interest Rate Swap Confirmation, dated as of
May 20, 2002, from JPMorgan Chase Bank to Nelnet Student
Loan Trust 2002-1, relating to the ISDA Master Agreement between
the same parties dated May 20, 2002.
10
.69
Interest Rate Swap Confirmation, dated as of
May 20, 2002, from Bank of America, N.A. to Nelnet Student
Loan Trust 2002-1, relating to the ISDA Master Agreement between
the same parties dated May 20, 2002.
10
.70
Interest Rate Swap Confirmation, dated as of
October 8, 2002, from JPMorgan Chase Bank to Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.),
relating to the ISDA Master Agreement among the same parties
dated May 20, 2002.
10
.71
Interest Rate Swap Confirmation, dated as of
October 8, 2002, from JPMorgan Chase Bank to Nelnet Student
Loan Trust 2002-2, relating to the ISDA Master Agreement between
the same parties dated October 8, 2002.
10
.72
Interest Rate Swap Confirmation, dated as of
October 8, 2002, from JPMorgan Chase Bank to Nelnet Student
Loan Trust 2002-2, relating to the ISDA Master Agreement between
the same parties dated October 8, 2002.
10
.73
Interest Rate Swap Confirmation, dated as of
July 25, 2003, from Bank of America, N.A. to Nelnet, Inc.
(subsequently renamed National Education Loan Network, Inc.) and
Nelnet Loan Services, Inc. (subsequently renamed Nelnet, Inc.),
relating to the ISDA Master Agreement among the same parties
dated August 20, 2001.
10
.74
Cap Confirmation, dated as of July 30, 2003,
from JPMorgan Chase Bank to Nelnet, Inc. (subsequently renamed
National Education Loan Network, Inc.), relating to the ISDA
Master Agreement among the same parties and Nelnet Loan
Services, Inc. (subsequently renamed Nelnet, Inc.) dated
May 20, 2002.
10
.75
Interest Rate Swap Confirmation, dated as of
August 13, 2003, from JPMorgan Chase Bank to Nelnet, Inc.,
relating to the ISDA Master Agreement among the same parties and
Nelnet, Inc. (subsequently renamed National Education Loan
Network, Inc.) dated May 20, 2002.
10
.76
Interest Rate Swap Confirmation, dated as of
August 26, 2003, from JPMorgan Chase Bank to Nelnet, Inc.,
relating to the ISDA Master Agreement among the same parties and
Nelnet, Inc. (subsequently renamed National Education Loan
Network, Inc.) dated May 20, 2002.
10
.77
Interest Rate Swap Confirmation, dated as of
August 28, 2003, from JPMorgan Chase Bank to Nelnet, Inc.,
relating to the ISDA Master Agreement among the same parties and
Nelnet, Inc. (subsequently renamed National Education Loan
Network, Inc.) dated May 20, 2002.
10
.78
Agreement For Use of Revolving Purchase Facility,
dated as of January 1, 1999, by and between Union Bank and
Trust Company and National Education Loan Network, Inc.
10
.79
Nelnet, Inc. Executive Officers Bonus Plan.
10
.80
First Amendment to Broker-Dealer Agreement among
Deutsche Bank Trust Company Americas, as Auction Agent, Nelnet
Student Loan Corporation-2, as Issuer, and Banc Of America
Securities LLC, as Broker-Dealer, relating to Nelnet Student
Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$75,500,000 Senior Class 1996A-6 Auction Rate
Securities
SM
(ARS
SM
), dated as of
October 1, 2003.
Exhibit
No.
Description
10
.81
Termination of Cap Transaction, dated as of
October 16, 2003, between JP Morgan Chase Bank and Nelnet,
Inc.
10
.82
Interest Rate Swap Confirmation Amended and
Restated, dated as of October 24, 2003, from JP Morgan
Chase Bank to Nelnet, Inc., relating to the ISDA Master
Agreement among the same parties and Nelnet, Inc. (subsequently
renamed National Education Loan Network, Inc.) dated
May 20, 2002.
10
.83
Share Retention Policy.
10
.84
Operating Agreement of FirstMark Services, LLC,
dated as of March 31, 2002.
10
.85
Credit Agreement by and among Nelnet, Inc.,
National Education Loan Network, Inc., M&I Marshall Ilsley
Bank, SunTrust Bank, First National Bank of Omaha and Fifth
Third Bank, Indiana, dated as of September 25, 2003.
10
.86
Guaranty Agreement, by and among Charter Account
Systems, Inc., ClassCredit, Inc., EFS, Inc., EFS Services, Inc.,
GuaranTec, LLP, Idaho Financial Associates, Inc., InTuition,
Inc., National Higher Educational Loan Program, Inc., Nelnet
Canada, Inc., Nelnet Corporation (subsequently renamed Nelnet
Corporate Services, Inc.), Nelnet Guarantee Services, Inc.,
Nelnet Marketing Solutions, Inc., Student Partner Services,
Inc., UFS Securities, LLC and Shockley Financial Corp., dated as
of September 25, 2003.
10
.87
Security Agreement, dated as of
September 25, 2003, by and between Nelnet, Inc. and M&I
Marshall & Ilsley Bank, as Agent.
10
.88
Security Agreement, dated as of
September 25, 2003, by and between National Education Loan
Network, Inc. and M&I Marshall & Ilsley Bank, as
Agent.
10
.89
Intercreditor Agreement, dated as of
September 25, 2003, by and among M&I
Marshall & Ilsley Bank, SunTrust Bank, First National
Bank of Omaha, Fifth Third Bank, Indiana and Bank of America,
N.A.
10
.90
Letter Agreement by and between Nelnet Education
Loan Funding, Inc. and Bank of America, N.A., dated as of
June 25, 2003, relating to the increase of the Warehouse
Note Purchase and Security Agreement dated as of May 1,
2003.
10
.91
Letter Agreement by and between Nelnet Education
Loan Funding, Inc. and Deutsche Bank AG, New York Branch, dated
as of June 25, 2003, relating to the increase of the
Warehouse Note Purchase and Security Agreement dated as of
May 1, 2003.
10
.92
Letter Agreement by and between Nelnet Education
Loan Funding, Inc. and Societe Generale, dated as of
June 25, 2003, relating to the increase of the Warehouse
Note Purchase and Security Agreement dated as of May 1,
2003.
10
.93
Third Amendment to Credit Agreement, dated
effective September 26, 2003, by and among National
Education Loan Network, Inc., Nelnet, Inc. and Bank of America,
N.A.
10
.94
Amendment to Application and Agreement for
Standby Letter of Credit, Loan Purchase Agreements and Standby
Student Loan Purchase Agreements, dated effective
October 21, 2003, by and among National Education Loan
Network, Inc., Nelnet, Inc., Nelnet Education Loan Funding,
Inc., Union Bank and Trust Company and Bank of America, N.A.
10
.95
Broker-Dealer Agreement by and among Bankers
Trust Company, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and Banc of America Securities LLC, as
Broker-Dealer, relating to NELNET Student Loan Corporation-2
Taxable Student Loan Asset-Backed Notes-$100,000,000 Senior
Class 2000A-12 Auction Rate Notes and $100,000,000 Senior
Class 2000A-13 Auction Rate Notes, dated as of June 1,
2000.
10
.96
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and Banc of America Securities LLC, as Broker Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$50,000,000 Senior Class 2000A-2
Auction Rate Notes, dated as of February 1, 2001.
Exhibit
No.
Description
10
.97
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$100,000,000 Senior Class 2001A-6
Auction Rate Notes, dated as of September 1, 2001.
10
.98
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and Banc of America Securities LLC, as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$100,000,000 Senior Class 2001A-5
Auction Rate Notes, dated as of September 1, 2001.
10
.99
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-1, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-1 Taxable Student
Loan Asset-Backed Notes-$48,300,000 Senior Class 1996A-2
Auction Rate Securities
SM
(ARS
SM
), dated as
of February 11, 2002.
10
.100
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-1, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-1 Taxable Student
Loan Asset-Backed Notes-$100,000,000 Senior Class 1998A-10
Auction Rate Securities
SM
(ARS
SM
),
$100,000,000 Senior Class 1998A-11 Auction Rate
Securities
SM
(ARS
SM
) and $100,000,000
Senior Class 1998A-12 Auction Rate Securities
SM
(ARS
SM
), dated as of February 11, 2002.
10
.101
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$100,000,000 Senior Class 2001A-7
Auction Rate Notes, dated as of February 11, 2002.
10
.102
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$50,000,000 Senior Class 2000A-3
Auction Rate Notes, $50,000,000 Senior Class 2000A-4
Auction Rate Notes, $75,000,000 Senior Class 2000A-8
Auction Rate Notes and $100,000,000 Senior Class 2000A-14
Auction Rate Notes, dated as of February 11, 2002.
10
.103
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and Banc of America Securities LLC, as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$70,500,000 Senior Class 2002A-1
Auction Rate Notes, $70,500,000 Senior Class 2002A-2
Auction Rate Notes, $70,500,000 Senior Class 2002A-3
Auction Rate Notes and $70,500,000 Senior Class 2002A-4
Auction Rate Notes, dated as of March 1, 2002.
10
.104
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$100,000,000 Senior Class 2002A-5
Auction Rate Notes, $100,000,000 Senior Class 2002A-6
Auction Rate Notes and $82,000,000 Senior Class 2002A-7
Auction Rate Notes, dated as of March 1, 2002.
10
.105
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$50,000,000 Senior Class 2001A-2
Auction Rate Notes, dated as of March 19, 2002.
10
.106
Broker-Dealer Agreement among Bankers Trust
Company, as Auction Agent, NELNET Student Loan Corporation-2, as
Issuer, and J.P. Morgan Securities Inc., as Broker-Dealer,
relating to NELNET Student Loan Corporation-2 Taxable Student
Loan Asset-Backed Notes-$50,000,000 Senior Class 2000A-7
Auction Rate Notes, dated as of April 1, 2002.
Exhibit
No.
Description
10
.107
Amended and Restated Broker-Dealer Agreement
among Deutsche Bank Trust Company Americas, as Auction Agent,
NELNET Student Loan Corporation-2, as Issuer, and J.P. Morgan
Securities Inc. and UFS Securities, L.L.C., as
Co-Broker-Dealers, relating to NELNET Student Loan Corporation-2
Taxable Student Loan Asset-Backed Notes-$100,000,000 Senior
Class 2002A-6 Auction Rate Notes, dated as of
August 1, 2002.
10
.108
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-1, as Issuer, and Banc of America Securities LLC, as
Broker-Dealer, relating to NELNET Student Loan Corporation-1
Taxable Student Loan Asset-Backed Notes-$48,300,000 Senior
Auction Rate Class 1996A-1 Auction Rate Securities
SM
(ARS
SM
), $73,700,000 Senior Auction Rate
Class 1996A-3 Auction Rate Securities
SM
(ARS
SM
) and $54,300,000 Senior Auction Rate
Class 1996A-4 Auction Rate Securities
SM
(ARS
SM
), dated as of October 15, 2002.
10
.109
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-1, as Issuer, and Banc of America Securities LLC, as
Broker-Dealer, relating to NELNET Student Loan Corporation-1
Taxable Student Loan Asset-Backed Notes-$75,500,000 Senior
Class 1996A-6 Auction Rate Securities
SM
(ARS
SM
), dated as of October 15, 2002.
10
.110
Broker-Dealer Agreement by and among Deutsche
Bank Trust Company Americas, as Auction Agent, NELNET Student
Loan Corporation-1, as Issuer, and Banc of America Securities
LLC, as Broker-Dealer, relating to NELNET Student Loan
Corporation-1 Taxable Student Loan Asset-Backed Notes-
$70,000,000 Subordinate Class 1998B-5 Auction Rate
Securities
SM
(ARS
SM
), dated as of
October 15, 2002.
10
.111
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-1, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-1 Taxable Student Loan Asset-Backed
Notes-$70,000,000 Senior Class 1999A-13 Auction Rate
Certificate Notes (ARCs), $70,000,000 Senior Class 1999A-14
Auction Rate Certificate Notes (ARCs), $70,000,000 Senior
Class 1999A-15 Auction Rate Certificate Notes (ARCs) and
$68,700,000 Senior Class 1999A-16 Auction Rate Certificate
Notes (ARCs), dated as of October 15, 2002.
10
.112
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$50,000,000 Subordinate Class B-1 Auction Rate Notes,
dated as of October 15, 2002.
10
.113
Broker-Dealer Agreement among J.P. Morgan
Securities Inc. and UFS Securities, L.L.C., as
Co-Broker-Dealers, and Deutsche Bank Trust Company Americas, as
Auction Agent, relating to $90,900,000 MELMAC LLC, Senior
Student Loan Revenue Bonds Series 1994A-1, 1994A-2 and
1994A-3 (Auction Rate Securities
SM
),
dated as of October 15, 2002.
10
.114
Broker-Dealer Agreement among J.P. Morgan
Securities Inc. and UFS Securities, L.L.C., as
Co-Broker-Dealers, and Deutsche Bank Trust Company Americas, as
Auction Agent, relating to $100,000,000 MELMAC LLC Senior
Student Loan Revenue Bonds Series 1996A-1 and 1996A-2
(Auction Rate Securities
SM
), dated as of
October 15, 2002.
10
.115
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$37,500,000 Subordinate Class 2001B-1 Auction Rate
Notes and $37,500,000 Subordinate Class 2001B-2 Auction
Rate Notes, dated as of October 15, 2002.
Exhibit
No.
Description
10
.116
Broker-Dealer Agreement by and among J.P. Morgan
Securities Inc. and UFS Securities, L.L.C., as
Co-Broker-Dealers, and Deutsche Bank Trust Company Americas, as
Auction Agent, relating to $100,000,000 MELMAC LLC Senior
Student Loan Revenue Bonds Series 1997A-1 and A-2 (Auction
Rate Securities
SM
) and $80,300,000 MEMAC LLC
Senior Student Loan Revenue Bonds Series 1999A-1 and A-2
(Auction Rate Securities
SM
), dated as of
October 15, 2002.
10
.117
Broker-Dealer Agreement by and among J.P. Morgan
Securities Inc. and UFS Securities, L.L.C., as
Co-Broker-Dealers, and Deutsche Bank Trust Company Americas, as
Auction Agent, relating to $19,700,000 MELMAC LLC Senior Student
Loan Revenue Bonds (Taxable Auction Rate Securities)
Series 1999A-3, Auction Rate Securities maturing
December 1, 2029, dated as of October 15, 2002.
10
.118
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, and J.P. Morgan Securities
Inc. and UFS Securities L.L.C., as Broker-Dealer, relating to
$350,000,000 EMT Corp. Student Loan Asset-Backed Notes-1998
Senior Series A-1, 1998 Senior Series A-2, 1998 Senior
Series A-3, 1998 Senior Series A-4 and 1998 Senior
Subordinate Series B, dated as of October 15, 2002.
10
.119
Broker-Dealer Agreement between Deutsche Bank
Trust Company Americas, as Auction Agent, and Banc of America
Securities LLC, as Broker-Dealer, relating to $175,000,000 EMT
Corp. Student Loan Asset-Backed Notes-1999 Senior
Series A-7, 1999 Senior Series A-8 and 1999 Senior
Series A-9, dated as of October 15, 2002.
10
.120
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, and J.P. Morgan Securities
Inc. and UFS Securities, L.L.C., as Co-Broker-Dealers, relating
to EMT Corp. Student Loan Asset-Backed Auction Rate
Notes-$70,000,000 2000 Senior Series A-10, $70,000,000 2000
Senior Series A-11, $70,000,000 2000 Senior
Series A-12 and $15,000,000 2000 Senior Subordinate
Series B-2, dated as of October 15, 2002.
10
.121
Broker-Dealer Agreement between Deutsche Bank
Trust Company Americas, as Auction Agent, and Banc of America
Securities LLC, as Broker-Dealer, relating to EMT Corp.
$50,000,000 2000 Senior Series A-13 and $50,000,000 2000
Senior Series A-14, dated as of October 15, 2002.
10
.122
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent and J.P. Morgan Securities
Inc. and UFS Securities, L.L.C., as Co-Broker-Dealers, relating
to EMT Corp. $98,000,000 2000-I Senior Series A-16,
$98,000,000 2000-I Senior Series A-17, $98,000,000 2000-I
Senior Series A-18, $98,000,000 2000-I Senior
Series A-19, $98,000,000-2000-I Senior Series A-20 and
$48,000,000 2000-I Senior Subordinate Series B-3, dated as
of October 15, 2002.
10
.123
Broker-Dealer Agreement between Deutsche Bank
Trust Company Americas, as Auction Agent, and Banc of America
Securities LLC, as Broker-Dealer, relating to EMT Corp. Student
Loan Asset Backed Auction Rate Notes-$49,000,000 2000-I Senior
Series A-21 and $49,000,000 2000-I Senior Series A-22,
dated as of October 15, 2002.
10
.124
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-1, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Broker-Dealer, relating to NELNET
Student Loan Corporation-1 Taxable Student Loan Asset-Backed
Notes-$48,300,000 Senior Auction Rate Class 1996A-2 Auction
Rate Securities
SM
(ARS
SM
), dated as of
November 1, 2002.
10
.125
Broker-Dealer Agreement by and among Deutsche
Bank Trust Company Americas, as Auction Agent, NELNET Student
Loan Corporation-1, as Issuer, and J.P. Morgan Securities Inc.
and UFS Securities, L.L.C., as Co-Broker-Dealers, relating to
NELNET Student Loan Corporation-1 Taxable Student Loan
Asset-Backed Notes-$100,000,000 Senior Class 1998A-10
Auction Rate Securities
SM
(ARS
SM
),
$100,000,000 Senior Class 1998A-11 Auction Rate
Securities
SM
(ARS
SM
) and $100,000,000
Senior Class 1998A-12 Auction Rate Securities
SM
(ARS
SM
), dated as of November 1, 2002.
Exhibit
No.
Description
10
.126
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$100,000,000 Senior Class 2001A-7 Auction Rate Notes,
dated as of November 1, 2002.
10
.127
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$50,000,000 Senior Class 2001A-2 Auction Rate Notes,
dated as of November 1, 2002.
10
.128
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, NELNET Student Loan
Corporation-2, as Issuer, and J.P. Morgan Securities Inc. and
UFS Securities, L.L.C., as Co-Broker-Dealers, relating to NELNET
Student Loan Corporation-2 Taxable Student Loan Asset-Backed
Notes-$100,000,000 Senior Class 2002A-5 Auction Rate Notes
and $82,000,000 Senior Class 2002A-7 Auction Rate Notes,
dated as of November 1, 2002.
10
.129
Broker-Dealer Agreement between Deutsche Bank
Trust Company Americas, as Auction Agent, and Banc of America
Securities LLC, as Broker-Dealer, relating to Nelnet Education
Loan Funding, Inc. Student Loan Asset-Backed Notes-$100,000,000
Senior Class 2003A-2 Auction Rate Notes, $100,000,000
Senior Class 2003A-4 Auction Rate Notes, $75,000,000 Senior
Class 2003A-6 Auction Rate Notes, $75,000,000 Senior
Class 2003A-8 Auction Rate Notes, $75,000,000 Senior
Class 2003A-10 Auction Rate Notes, $75,000,000 Senior Class
2003A-12 Auction Rate Notes and $15,000,000 Subordinate Class
2003B-2 Auction Rate Notes, dated as of June 1, 2003.
10
.130
Broker-Dealer Agreement among Deutsche Bank Trust
Company Americas, as Auction Agent, and J.P. Morgan Securities
Inc. and UFS Securities L.L.C., as Co-Broker-Dealers, relating
to Nelnet Student Loan Trust 2003-2 Student Loan Asset-Backed
Notes-$95,000,000 Senior Class A-5 Auction Rate Notes,
$95,000,000 Senior Class A-6 Auction Rate Notes and
$25,885,000 Subordinate Class B Auction Rate Notes, dated
as of July 1, 2003.
10
.131
First Amendment to Broker-Dealer Agreement
between Deutsche Bank Trust Company Americas, as Auction Agent,
and Banc of America Securities LLC, as Broker-Dealer, relating
to Nelnet Education Loan Funding, Inc. Student Loan Asset-Backed
Notes-$100,000,000 Senior Class 2003A-2 Auction Rate Notes,
$100,000,000 Senior Class 2003A-4 Auction Rate Notes,
$75,000,000 Senior Class 2003A-6 Auction Rate Notes,
$75,000,000 Senior Class 2003A-8 Auction Rate Notes,
$75,000,000 Senior Class 2003A-10 Auction Rate Notes,
$75,000,000 Senior Class 2003A-12 Auction Rate Notes and
$15,000,000 Subordinate Class 2003B-2 Auction Rate Notes,
dated as of October 1, 2003.
10
.132
First Amendment to Broker-Dealer Agreement
between Deutsche Bank Trust Company Americas, as Auction Agent,
and Banc of Americas Securities LLC, as Broker-Dealer, relating
to Student Loan Asset Backed Auction Rate Notes-$49,000,000
2000-I Senior Series A-21 and $49,000,000 2000-1 Senior
Series A-22, dated as of October 1, 2003.
10
.133
First Amendment to Broker-Dealer Agreement
between Deutsche Bank Trust Company Americas, as Auction Agent,
and Banc of America Securities LLC, as Broker-Dealer, relating
to $175,000,000 EMT Corp. Student Loan Asset-Backed Notes-1999
Senior Series A-7, 1999 Senior Series A-8 and 1999
Senior Series A-9, dated October 1, 2003.
10
.134
First Amendment to Broker-Dealer Agreement
between Deutsche Bank Trust Company Americas, as Auction Agent,
and Banc of America Securities LLC, as Broker-Dealer, relating
to EMT Corp. $50,000,000 2000 Senior Series A-13 and
$50,000,000 2000 Senior Series A-14, dated as of
October 1, 2003.
Exhibit
No.
Description
10
.135
First Amendment to Broker-Dealer Agreement among
Deutsche Bank Trust Company Americas, as Auction Agent, NELNET
Student Loan Corporation-1, as Issuer, and Banc of America
Securities LLC, as Broker-Dealer, relating to NELNET Student
Loan Corporation-1 Taxable Student Loan Asset-Backed
Notes-$48,300,000 Senior Auction Rate Class 1996A-1 Auction
Rate Securities
SM
(ARS
SM
), $73,700,000
Senior Auction Rate Class 1996A-3 Auction Rate
Securities
SM
(ARS
SM
) and $54,300,000
Senior Auction Rate Class 1996A-4 Auction Rate
Securities
SM
(ARS
SM
), dated as of
October 1, 2003.
10
.136
First Amendment to Broker-Dealer Agreement among
Deutsche Bank Trust Company Americas, as Auction Agent, Nelnet
Student Loan Corporation-1, as Issuer, and Banc Of America
Securities LLC, as Broker-Dealer, relating to Nelnet Student
Loan Corporation-1 Taxable Student Loan Asset-Backed
Notes-$70,000,000 Subordinate Class 1998B-5 Auction Rate
Securities
SM
(ARS
SM
), dated as of
October 1, 2003.
10
.137
First Amendment to Broker-Dealer Agreement among
Deutsche Bank Trust Company Americas, as Auction Agent, Nelnet
Student Loan Corporation-1, as Issuer, and Banc Of America
Securities LLC, as Broker-Dealer, relating to Nelnet Student
Loan Corporation-1 Taxable Student Loan Asset-Backed
Notes-$100,000,000 Senior Class 2001A-5 Auction Rate Notes,
dated as of October 1, 2003.
21
.1
Subsidiaries of Nelnet, Inc.
23
.1
Consent of KPMG LLP, Independent Auditors.
23
.2
Consent of Perry, Guthery, Haase & Gessford,
P.C., L.L.O. (included in Exhibit 5.1).
24
.1
Powers of Attorney authorizing execution of
registration statement on Form S-1 on behalf of certain
directors and officers of Nelnet, Inc.
Previously filed.
II-17
EXHIBIT 1.1
_________________ SHARES
NELNET, INC.
CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
DATED , 2003
TABLE OF CONTENTS
SECTION 1. REPRESENTATIONS AND WARRANTIES............................. 3 (a) Compliance with Registration Requirements........................ 3 (b) Offering Materials Furnished to Underwriters..................... 3 (c) Distribution of Offering Material By the Company................. 3 (d) The Underwriting Agreement....................................... 4 (e) Authorization of the Common Shares............................... 4 (f) No Applicable Registration or Other Similar Rights............... 4 (g) No Material Adverse Change....................................... 4 (h) Independent Accountants.......................................... 4 (i) Preparation of the Financial Statements.......................... 4 (j) Incorporation and Good Standing of the Company and its Subsidiaries ................................................ 5 (k) Capitalization and Other Capital Stock Matters................... 5 (l) No Prior Sales of Common Stock................................... 5 (m) Stock Exchange Listing........................................... 5 (n) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required ............................ 5 (o) No Material Actions or Proceedings............................... 6 (p) Intellectual Property Rights..................................... 6 (q) All Necessary Permits, etc....................................... 7 (r) Title to Properties.............................................. 7 (s) Tax Law Compliance............................................... 7 (t) Company Not an "Investment Company".............................. 7 (u) Insurance........................................................ 7 (v) No Price Stabilization or Manipulation........................... 8 (w) Related Party Transactions....................................... 8 (x) No Unlawful Contributions or Other Payments...................... 8 (y) Company's Accounting System...................................... 8 (z) ERISA Compliance................................................. 8 (aa) Brokers..................................................... 9 (bb) No Outstanding Loans or Other Indebtedness.................. 9 (cc) Compliance with Laws........................................ 9 (dd) Statistical and Market Data................................. 9 (ee) Directed Share Program...................................... 9 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES........... 9 The Firm Common Shares............................................... 9 The First Closing Date............................................... 10 The Optional Common Shares; the Second Closing Date.................. 10 Public Offering of the Common Shares................................. 10 Payment for the Common Shares........................................ 11 Delivery of the Common Shares........................................ 11 Delivery of Prospectus to the Underwriters........................... 11 SECTION 3. ADDITIONAL COVENANTS....................................... 11 (a) Representatives' Review of Proposed Amendments and Supplements... 11 (b) Securities Act Compliance........................................ 12 (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters .................................... 12 (d) Copies of any Amendments and Supplements to the Prospectus....... 12 (e) Blue Sky Compliance.............................................. 12 (f) Use of Proceeds.................................................. 13 |
(g) Transfer Agent................................................... 13 (h) Earnings Statement............................................... 13 (i) Periodic Reporting Obligations................................... 13 (j) Company to Provide Interim Financial Statements.................. 13 (k) Directed Share Program........................................... 13 (l) New York Stock Exchange Listing.................................. 13 (m) Company to Provide Copy of the Prospectus in Form That May be Downloaded from the Internet ........................ 13 (n) Agreement Not to Offer or Sell Additional Securities............. 14 (o) Future Reports to the Representatives............................ 14 (p) Investment Limitation............................................ 14 (q) No Manipulation of Price......................................... 15 SECTION 4. PAYMENT OF EXPENSES........................................ 15 SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.......... 15 (a) Accountants' Comfort Letter...................................... 16 (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD ................................... 16 (c) No Material Adverse Change or Ratings Agency Change.............. 16 (d) Representations and Warranties................................... 16 (e) Opinions of Counsel for the Company.............................. 17 (f) Opinion of Counsel for the Underwriters.......................... 17 (g) Officers' Certificate............................................ 17 (h) Bring-down Comfort Letter........................................ 17 (i) Lock-Up Agreement from Certain Securityholders of the Company.... 18 (j) No Legal Impediment to Issuance.................................. 18 (k) Good Standing.................................................... 18 (l) New York Stock Exchange Listing.................................. 18 (m) Additional Documents............................................. 18 SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.................... 18 SECTION 7. EFFECTIVENESS OF THIS AGREEMENT............................ 19 SECTION 8. INDEMNIFICATION............................................ 19 (a) Indemnification of the Underwriters.............................. 19 (b) Indemnification of the Company, its Directors and Officers....... 20 (c) Notifications and Other Indemnification Procedures............... 20 (d) Settlements...................................................... 21 (e) Indemnification for Directed Shares.............................. 21 SECTION 9. CONTRIBUTION............................................... 21 SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS......... 23 SECTION 11. TERMINATION OF THIS AGREEMENT.............................. 23 SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY........ 24 SECTION 13. NOTICES.................................................... 24 SECTION 14. SUCCESSORS................................................. 25 SECTION 15. PARTIAL UNENFORCEABILITY................................... 25 SECTION 16. GOVERNING LAW PROVISIONS................................... 25 SECTION 17. GENERAL PROVISIONS......................................... 25 SCHEDULE A. UNDERWRITERS............................................... A-1 EXHIBIT A-1. FORM OF OPINION OF CAHILL GORDON & REINDEL LLP ............ A-1-1 EXHIBIT A-2. LETTER OF CAHILL GORDON & REINDEL LLP ..................... A-2-1 EXHIBIT A-3. FORM OF OPINION OF PERRY, GUTHERY, HAASE & GESSFORD, P.C., L.L.O ................................... A-3-1 EXHIBIT A-4. LETTER OF PERRY, GUTHERY, HAASE & GESSFORD, P.C., L.L.O. .............................................. A-4-1 |
EXHIBIT B. FORM OF LOCK-UP LETTER..................................... B-1 |
UNDERWRITING AGREEMENT
, 2003
BANC OF AMERICA SECURITIES LLC
J.P. MORGAN SECURITIES INC.
CREDIT SUISSE FIRST BOSTON LLC
MORGAN STANLEY & CO. INCORPORATED
As Representatives of the several Underwriters
C/O
BANC OF AMERICA SECURITIES LLC
9 West 57th Street
New York, New York 10019
AND
J.P. MORGAN SECURITIES INC.
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
INTRODUCTORY. Nelnet, Inc., a Nebraska corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of ________ shares (the "Firm
Common Shares") of its Class A Common Stock, par value $0.01 per share
(the "Class A Common Stock"). In addition, the Company has granted to the
Underwriters an option to purchase up to an additional _________ shares
(the "Optional Common Shares") of Class A Common Stock, as provided in
Section 2. The Firm Common Shares and, if and to the extent such option is
exercised, the Optional Common Shares are collectively called the "Common
Shares". The Class A Common Stock and the Company's Class B Common Stock,
par value $0.01 per share, are collectively called the "Common Stock".
Banc of America Securities LLC ("BAS") and J.P. Morgan Securities Inc.
("JPMSI") have agreed to act as joint book-running managers in connection
with the offering and sale of the Common Shares and BAS, JPMSI, Credit
Suisse First Boston LLC and Morgan Stanley & Co. Incorporated have agreed
to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the
Common Shares.
The Company and the Underwriters agree that up to ______ of the Firm Common Shares to be purchased by the Underwriters (the "Directed Shares") shall be reserved for sale by the Underwriters to certain eligible directors, officers and employees of the Company and persons having business relationships with the Company (collectively, the "Participants"), as part of the distribution of the Common Shares by the Underwriters (the "Directed Share Program") subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. One of the Underwriters (the "Designated Underwriter") shall be selected to process the sales to the Participants under the Directed Share Program. To the extent that such Directed Shares are not orally confirmed for purchase by the Participants by the end of the first business day after the date of this Agreement, such Directed Shares may be offered to the public as part of the public offering contemplated hereby.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form
S-1 (File No. 333-108070), which contains a form of prospectus to be used
in connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements and
exhibits thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness
pursuant to Rule 430A or Rule 434 under the Securities Act, is called the
"Registration Statement". Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of
filing of the Rule 462(b) Registration Statement, the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. Such
prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus"; provided, however, if the
Company has, with the consent of the Representatives, elected to rely upon
Rule 434 under the Securities Act, the term "Prospectus" shall mean the
Company's prospectus subject to completion (each, a "preliminary
prospectus") dated [___] (such preliminary prospectus is called the "Rule
434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under
Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term
Sheet. All references in this Agreement to the Registration Statement, the
Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of
the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR").
The Company hereby confirms its agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has delivered to each Representative one complete manually signed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification and contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof in the Prospectus. The issuance of the Common Shares is not subject to any preemptive or similar rights.
(f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement except for such rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business or entered into any material transaction or agreement not in the ordinary course of business; (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock or repurchase or redemption by the Company of any class of its capital stock; and (iv) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses from fire, explosion, flood, earthquake, accident or other calamity, whether or not covered by insurance.
(h) Independent Accountants. KPMG LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement and included in the Prospectus, are, to the knowledge of the Company after due inquiry, independent public accountants as required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus conform in all material respects to the requirements of the Securities Act and present fairly in all material respects the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated therein. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Consolidated
Financial Data", "Selected Consolidated Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and, to the extent a subsidiary is a corporation, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and, except for minority interests in certain subsidiaries, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus). The outstanding Common Stock conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock was issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those described in the Prospectus. The description of the Company's employee stock purchase plan set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plan.
(l) No Prior Sales of Common Stock. Except as described in the Registration Statement, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act.
(m) Stock Exchange Listing. The Common Shares have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance.
(n) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, deed of trust, loan or credit agreement, note, contract, franchise, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation by the Company of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action on the part of the Company and will not result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other party to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any of its subsidiaries, except for such violations as would not, individually or in the aggregate, result in Material Adverse Change. No consent, approval, authorization or other order of, or registration, qualification or filing with, any court or other governmental or regulatory authority or agency is required for the Company's execution, delivery and performance of this Agreement and consummation by the Company of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD.
(o) No Material Actions or Proceedings. There are no legal or governmental actions, investigations, suits or proceedings pending or threatened or, to the Company's knowledge, contemplated (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any executive officer or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the Company's knowledge, is threatened or imminent.
(p) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, domain names, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") necessary to conduct their respective businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Prospectus and are not described in all material respects.
None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company's knowledge, any of its officers, directors or employees or otherwise in violation of the rights of any persons, which violations would, individually or in the aggregate, result in a Material Adverse Change.
(q) All Necessary Permits, etc. The Company and each subsidiary possess such valid and current material licenses, certificates, authorizations or permits issued by, and have made all material declarations and filings with, the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such license, certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change.
(r) Title to Properties. The Company and each of its subsidiaries have good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property, do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary and could not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary.
(s) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them, except as may be being contested in good faith and by appropriate proceedings. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1 (i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined.
(t) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act.
(u) Insurance. Each of the Company and its subsidiaries is insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change.
(v) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares.
(w) Related Party Transactions. There are no relationships or related-party transactions involving the Company or any of its subsidiaries or any other person required to be described in the Prospectus which have not been described as required.
(x) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law which violation is required to be disclosed in the Prospectus.
(y) Company's Accounting System. The Company and its subsidiaries maintain
systems of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or any of its subsidiaries, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA). None of
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification, which could reasonably be
expected, individually or in the aggregate, to result in a Material Adverse
Change.
(aa) Brokers. There is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any transactions contemplated by this Agreement.
(bb) No Outstanding Loans or Other Indebtedness. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the executive officers or directors of the Company, except as disclosed in the Prospectus to the extent required to be so disclosed.
(cc) Compliance with Laws. The Company has not been advised, and has no reason to believe, that it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where failure to be so in compliance would not result in a Material Adverse Change.
(dd) Statistical and Market Data. Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Prospectus is not based on or derived from sources that are reliable and accurate in all material respects.
(ee) Directed Share Program. (i) The Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States, except where the failure to be so in compliance would not result in a Material Adverse Change. The Company has not offered, or caused the Underwriters to offer, any Common Shares to any person pursuant to the Directed Share Program with the intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products.
Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein.
The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 5 hereof, counsel to the Company and counsel to the Underwriters, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to
purchase from the Company the respective number of Firm Common Shares set forth opposite their names on Schedule A. The purchase price per Firm Common Share to be paid by the several Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefore shall be made at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York (or such other place as may be agreed to by the Company and the Representatives) at 9:00 a.m. New York time, on [___], or such other time and date not later than 1:30 a.m. New York time, on [___] as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10 hereof.
The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of _______ Optional Common Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Common Shares. The Representatives may cancel the option at any time prior to its exercise by giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed as the Representatives, in their judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. Either or both of BAS and JPMSI, individually and not as a Representative of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by such Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefore. The Company shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefore. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on the second business day following the date the Common Shares are first released by the Underwriters for sale to the public, the Company shall deliver, or cause to be delivered, copies of the Prospectus in such quantities and at such places as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
The Company further covenants and agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective, (iv) of the occurrence of any event within the Prospectus Delivery Period as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading, and (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or, to the Company's knowledge, the threatening or initiation of any proceedings for any of such purposes. The Company will use its best efforts to prevent the issuance of any such order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any preliminary prospectus or the Prospectus or suspending any such qualification of the Shares and, if any such order is issued, will use its reasonable best efforts to obtain as soon as possible the withdrawal thereof. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, such amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may reasonably request.
(e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or Canadian provincial Securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to
general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders an earnings statement (which need not be audited) covering the year ending December 31, 2004 that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder.
(i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the New York Stock Exchange all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds from the issuance of the Common Shares as may be required under Rule 463 under the Securities Act.
(j) Company to Provide Interim Financial Statements. Prior to the Closing Date, the Company will furnish the Underwriters, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus.
(k) Directed Share Program. In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. The Designated Underwriter will notify the Company as to which Participants' Directed Shares will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Directed Shares, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(l) New York Stock Exchange Listing. The Company will use its best efforts to list, subject to notice of issuance, the Common Shares on the New York Stock Exchange.
(m) Company to Provide Copy of the Prospectus in Form That May be Downloaded from the Internet. The Company shall cause to be prepared and delivered, at its expense, within one business day from the date of this Agreement, to BAS and JPMSI an "electronic Prospectus" to be used by certain of the Underwriters in connection with the offering and sale of the Common Shares. As used herein, the term "electronic Prospectus" means a form of
Prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to BAS and JPMSI, that may be transmitted electronically by certain of the Underwriters to offerees and purchasers of the Common Shares for at least the Prospectus Delivery Period; (ii) it shall disclose the same information as the paper Prospectus and Prospectus filed pursuant to EDGAR, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic Prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to BAS and JPMSI, that will allow investors to store and have continuously ready access to the Prospectus at any future time, without charge to investors (other than any fee charged for subscription to the Internet as a whole and for on-line time). Such electronic Prospectus may consist of a Rule 434 preliminary prospectus, together with the applicable Term Sheet, provided that it otherwise satisfies the format and conditions described in the immediately preceding sentence.
(n) Agreement Not to Offer or Sell Additional Securities. During the
period commencing on the date hereof and ending on the 180th day following the
date of the Prospectus, the Company will not, without the prior written consent
of BAS and JPMSI (which consent may be withheld at the sole discretion of either
BAS or JPMSI), directly or indirectly, sell, offer, contract or grant any option
to sell, pledge, transfer or establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement under
the Securities Act in respect of, any shares of Common Stock, options or
warrants to acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares), except for
(i) the registration of the Common Shares and the sales to the Underwriters
pursuant to this Agreement, (ii) issuances of Common Stock pursuant to any stock
purchase plan, restricted stock plan or arrangement described in the Prospectus
and (iii) issuances of Common Stock in connection with any acquisition of any
entity, whether through merger or otherwise, or the acquisition of any assets of
any entity; provided, however, that, in that case of this clause (iii), the
recipient of such Common Stock shall execute a lock-up agreement substantially
in the form of Exhibit B hereto.
(o) Future Reports to the Representatives. During the period of two years hereafter, so long as the Common Shares are outstanding, the Company will furnish to BAS at 9 West 57th Street, New York, NY 10022, Attention:[ ] and JPMSI at 277 Park Avenue, New York, New York 10172, Attention: [ ]: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. Notwithstanding the foregoing, no such report, statement or other document will be furnished to BAS or JPMSI to the extent it is available on EDGAR or on the Company's website.
(p) Investment Limitation. The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Common Shares in such a manner as
would require the Company or any of its subsidiaries to register as an investment company under the Investment Company Act.
(q) No Manipulation of Price. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock of the Company.
BAS and JPMSI, jointly on behalf of the several Underwriters, may, in their discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the Company's authorization,
issuance, sale and delivery of the Common Shares (including all printing and
engraving costs), (ii) all fees and expenses of the registrar and transfer agent
of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes
in connection with the issuance and sale of the Common Shares to the
Underwriters, (iv) all fees and expenses of the Company's counsel, independent
public or certified public accountants and other advisors, (v) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement (including financial statements,
exhibits, consents and certificates of experts), each preliminary prospectus and
the Prospectus, and all amendments and supplements thereto, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with listing the Common
Shares on the New York Stock Exchange, (ix) all expenses incurred by the Company
in connection with any "road show" presentation to potential investors, (x) all
other fees, costs and expenses referred to in Item 13 of Part II of the
Registration Statement and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Directed Shares which are designated by
the Company for sale to Participants. Except as provided in this Section 4,
Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own
expenses, including the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from KPMG LLP, independent public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act)
in the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment
to the Registration Statement containing the information required by such
Rule 430A, and such post-effective amendment shall have become effective;
or, if the Company elected to rely upon Rule 434 under the Securities Act
and obtained the Representatives' consent thereto, the Company shall have
filed a Term Sheet with the Commission in the manner and within the time
period required by such Rule 424(b);
(ii) all requests by the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representatives;
(iii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and
(iv) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date:
(i) in the judgment of the Representatives there shall not have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any securities of the Company or any of its subsidiaries by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(d) Representations and Warranties. The respective representations and warranties of the Company contained herein shall be true and correct on the date hereof and on and as of
the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date; and the statements of the Company and its officers made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the First Closing Date, and with respect to the Optional Common Shares, the Second Closing Date.
(e) Opinions of Counsel for the Company. On each of the First Closing Date and the Second Closing Date the Representatives shall have received (i) the favorable opinion and letter of Cahill Gordon & Reindel llp, counsel for the Company, dated as of such Closing Date, forms of which are attached hereto as Exhibit A-1 and A-2 and (ii) the favorable opinion and letter of Perry, Guthery, Haase & Gessford, P.C., L.L.O., Nebraska counsel for the Company, dated as of such Closing Date, forms of which are attached hereto as Exhibit A-3 and A-4 (and the Representatives shall have received additional conformed copies of each such legal opinion and letter for each of the several Underwriters).
(f) Opinion of Counsel for the Underwriters. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received the
favorable opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated
as of such Closing Date, with respect to the matters set forth in paragraphs
(i), (ii), (iii) and (v) (with respect to the caption "Underwriting" under
subparagraph (i) only) in Exhibit A-1, and in Exhibit A-2 (and the
Representatives shall have received additional conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(g) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by one of the Co-Chief Executive Officers of the Company
and by the Chief Financial Officer of the Company, in the capacity as such
officers, dated as of such Closing Date, to the effect set forth in subsections
(b)(iii) and (c)(ii) of this Section 5, and further to the effect that, to the
knowledge of such officers:
(i) for the period from and after the date of this Agreement and up to and including such Closing Date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the Company set forth in Section 1 hereto are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and
(iii) the Company has complied with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date.
(h) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from KPMG LLP, independent public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than five business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters).
(i) Lock-Up Agreement from Certain Securityholders of the Company. On or prior to the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit B hereto from each director, each executive officer and each beneficial owner of Common Stock (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty day period shall be used rather than the sixty day period set forth therein), and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date.
(j) No Legal Impediment to Issuance. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, prevent the issuance or sale of the Common Shares; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, prevent the issuance or sale of the Common Shares.
(k) Good Standing. The Representatives shall have received on and as of the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, satisfactory evidence of the good standing of the Company and each of its subsidiaries which is a "significant subsidiary" within the meaning of Rule 405 under the Securities Act in their respective jurisdictions of organization and their good standing as foreign entities in such other jurisdictions as the Representatives may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions.
(l) New York Stock Exchange Listing. The Common Shares to be delivered on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance.
(m) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 5 hereof, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand, for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall become effective upon the execution of this Agreement by the parties hereto.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act from and against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter, officer, employee or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to reimburse each Underwriter and each such controlling person for any and all expenses (including, without limitation, the fees and disbursements of counsel chosen by BAS and JPMSI) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 hereof and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set
forth in this Section 8(a) shall be in addition to any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the second paragraph and in the third, sixth, seventh, eighth, twelfth, thirteenth, seventeenth and eighteenth paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party or parties (JPMSI and BAS in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent (x) includes an unconditional release of such indemnified party, in form and substance reasonably satisfactory to such indemnified party, from all liability on claims that are the subject matter of such action, suit or proceeding and (y) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) Indemnification for Directed Shares. The Company agrees to indemnify and hold harmless the Designated Underwriter, its officer and employees, and each person, if any, who controls the Designated Underwriter within the meaning of the Securities Act or the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Designated Underwriter or such controlling person may become subject, which is caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. The indemnity agreement set forth in this paragraph shall be in addition to any liabilities that the Company may otherwise have.
SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8 hereof is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages,
liabilities or expenses referred to therein (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Underwriters, on the other hand, from the offering of the Common
Shares pursuant to this Agreement or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the offering of the Common Shares pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company, and the total underwriting
discounts received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is used,
the corresponding location on the Term Sheet) bear to the aggregate initial
public offering price of the Common Shares as set forth on such cover. The
relative fault of the Company, on the one hand, and the Underwriters, on the
other hand, shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company, on the one hand, or the Underwriters, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c) hereof, any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) hereof with respect to notice of commencement of any action shall
apply if a claim for contribution is to be made under this Section 9; provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under Section 8(c) hereof for purposes of
indemnification.
The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting discounts received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives in their absolute discretion by notice given to the Company if at any time (i) trading or quotation in any of the securities issued or guaranteed by the Company shall have been suspended or limited by the Commission or on any exchange or in any over-the-counter market or trading in securities generally on the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on such stock exchange; (ii) a general banking moratorium shall have been declared by any of federal, New York or Nebraska authorities; or (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Section 4 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representatives:
Banc of America Securities LLC
9 West 57th Street
New York, NY 10019
Facsimile: 212-933-2217
Attention: Trevor Ganshaw/Thomas Morrison
with a copy to:
Banc of America Securities LLC
9 West 57th Street
New York, NY 10019
Facsimile: 212-583-8567
Attention: Nicholas T. Ganz, Esq.
and
J.P. Morgan Securities Inc.
277 Park Avenue
New York, NY 10172
Facsimile: 212-
Attention: Equity Capital Markets
with a copy to:
J.P. Morgan Securities Inc.
277 Park Avenue
New York, NY 10172
Facsimile: 212-270-7487
Attention: Travis Epes, Esq.
If to the Company:
Nelnet, Inc.
121 South 13th Street, Suite 201
Lincoln, NE 68508
Facsimile: 402-458-2399
Attention: Terry J. Heimes, Chief Financial Officer
With a copy to:
Cahill Gordon and Reindel llp
80 Pine Street
New York, NY 10005
Facsimile: 212-269-5420
Attention: Gerald S. Tanenbaum, Esq.
and
Perry, Guthery, Haase & Gessford, P.C., L.L.O.
233 South 13th Street, Suite 1400
Lincoln, NE 68508
Facsimile: 402-476-0094
Attention: Daniel F. Kaplan, Esq.
Any party hereto may change the address for receipt of communications by giving written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9 hereof, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the
Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9 hereof, and is fully informed regarding said provisions. Each of the
parties hereto further acknowledges that the provisions of Sections 8 and 9
hereto fairly allocate the risks in light of the ability of the parties to
investigate the Company, its affairs and its business in order to assure that
adequate disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or employees of any Underwriter, any person controlling any Underwriter, the Company, the officers or employees of the Company, or any person controlling the Company, (ii) acceptance of the Common Shares and payment for them hereunder and (iii) termination of this Agreement.
If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.
Very truly yours,
NELNET, INC.
By:__________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in New York, New York as of the date first above written.
BANC OF AMERICA SECURITIES LLC
J.P. MORGAN SECURITIES INC.
CREDIT SUISSE FIRST BOSTON LLC
MORGAN STANLEY & CO. INCORPORATED
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: BANC OF AMERICA SECURITIES LLC
By:__________________________
By: J.P. MORGAN SECURITIES INC.
By:__________________________
SCHEDULE A
NUMBER OF FIRM COMMON SHARES UNDERWRITERS TO BE PURCHASED ------------ --------------- Banc of America Securities LLC............................ [___] J.P. Morgan Securities Inc................................ [___] Credit Suisse First Boston LLC ........................... [___] Morgan Stanley & Co. Incorporated ........................ [___] [___] .................................................... [___] Total............................................ [___] |
EXHIBIT A-1
Opinion of Cahill Gordon & Reindel llp, counsel for the Company, to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A-1 include any supplements thereto at the First Closing Date (or the Second Closing Date, as the case may be).
(i) The Underwriting Agreement has been duly executed and delivered by the Company.
(ii) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule
462(b) Registration Statement, if any, has been issued under the
Securities Act and no proceedings for such purpose have been instituted or
are pending or are contemplated or threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and
within the time period required by such Rule 424(b).
(iii) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus, and each amendment or supplement to the Registration Statement and the Prospectus, as of their respective effective or issue dates (other than the financial statements included therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act.
(iv) The statements in the Prospectus under the captions "Shares Eligible for Future Sale -- Sales of Restricted Shares" and "Certain United States Income Tax Considerations," insofar as such statements constitute matters of law, summaries of legal matters, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein.
(v) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation by the Company of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD.
A-1-1
(vi) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act.
In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the Business Corporation Law of the State of New York or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel reasonably satisfactory to counsel for the Underwriters and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials.
A-1-2
EXHIBIT A-2
Letter of Cahill Gordon & Reindel llp, counsel for the Company, to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A-2 include any supplements thereto at the First Closing Date (or the Second Closing Date, as the case may be).
Such counsel shall state that they have participated in conferences with certain officers and other representatives of the Company, with representatives of the independent auditors for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed. Although such counsel has made certain inquiries and investigations in connection with the preparation of the Registration Statement, the limitations inherent in the role of outside counsel are such that such counsel cannot and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, except as provided in clause (iv) of Exhibit A-1. Subject to the foregoing, such counsel advises you that, in connection with their work on this matter, no facts have come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or other financial or statistical data derived therefrom included in the Registration Statement or the Prospectus or any amendments or supplements thereto).
A-2-1
EXHIBIT A-3
Opinion of Perry, Guthery, Haase & Gessford, P.C., L.L.O., Nebraska counsel for the Company, to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A-3 include any supplements thereto at the First Closing Date (or the Second Closing Date, as the case may be).
(i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Nebraska.
(ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change.
(iv) Each significant subsidiary of the Company (as defined in Rule 405 under the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change.
(v) The Company has an authorized capitalization as set forth in the Prospectus under the heading "Capitalization." All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and, to knowledge of such counsel, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. The form of certificate used to evidence the Class A Common Stock is in due and proper form and complies with all applicable requirements of the charter
A-3-1
and by-laws of the Company and the Business Corporation Act of the State of Nebraska.
(vi) No stockholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (i) by operation of the charter or by-laws of the Company or the Business Corporation Act of the State of Nebraska or, (ii) to the knowledge of such counsel, otherwise.
(vii) The Company has full right, power and authority to execute and deliver the Underwriting Agreement and to perform its obligations thereunder; and all action required to be taken for the due and proper authorization, execution and delivery of the Underwriting Agreement and the consummation by the Company of the transactions contemplated thereby have been duly and validly taken.
(viii) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable.
(ix) The outstanding Common Stock conforms to the description thereof contained in the Prospectus. The Common Shares, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will conform to the description thereof in the Prospectus.
(x) The statements (i) in the Prospectus under the captions
"Management -- Employee Share Purchase Plan," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale" and
(ii) in Items 14 and 15 of the Registration Statement, insofar as such
statements constitute terms of stock, matters of law, summaries of legal
matters, the charter or by-laws of the Company, documents or legal
proceedings, or legal conclusions, has been reviewed by such counsel and
fairly present and summarize, in all material respects, the matters
referred to therein.
(xi) To the knowledge of such counsel, except as described in the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject which, individually or in the aggregate, if determined adversely to the
A-3-2
Company or any of its subsidiaries, could reasonably be expected to result in a Material Adverse Change; and to the knowledge of such counsel, no such investigations, actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others.
(xii) To the knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein.
(xiii) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation by the Company of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD.
(xiv) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations under
the indemnification and contribution sections of the Underwriting
Agreement, as to which no opinion need be rendered) (i) have been duly
authorized by all necessary corporate action on the part of the Company;
(ii) will not result in any violation of the provisions of the charter or
by-laws of the Company or any of its subsidiaries; (iii) will not
constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to any Existing
Instrument, except for such breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change; or (iv) to the knowledge of such counsel, will
not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any of its
subsidiaries, except for such violations as would not, individually or in
the aggregate, result in a Material Adverse Change.
(xv) Except as disclosed in the Prospectus, to the knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement, except for such rights as have been duly waived.
(xvi) To the knowledge of such counsel, neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or any
A-3-3
law, administrative regulation or administrative or court decree applicable to the Company or any of its subsidiaries or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change.
In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the Business Corporation Act of the State of Nebraska or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel reasonably satisfactory to counsel for the Underwriters, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials.
A-3-4
EXHIBIT A-4
Letter of Perry, Guthery, Haase & Gessford, P.C., L.L.O., Nebraska counsel for the Company, to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A-4 include any supplements thereto at the First Closing Date (or the Second Closing Date, as the case may be).
Such counsel shall state that they have participated in conferences with certain officers and other representatives of the Company, with representatives of the independent auditors for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed. Although such counsel has made certain inquiries and investigations in connection with the preparation of the Registration Statement, such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, except as provided in clauses (ix) and (x) of Exhibit A-3. Subject to the foregoing, such counsel advises you that, in connection with their work on this matter, no facts have come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or other financial or statistical data derived therefrom included in the Registration Statement or the Prospectus or any amendments or supplements thereto).
A-4-1
EXHIBIT B
, 2003
Banc of America Securities LLC
J.P. Morgan Securities Inc.
Joint Book-Running Managers
RE: Nelnet Loan Services, Inc. (to be renamed Nelnet, Inc) (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock"). The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. However, the undersigned recognizes that whether or not the Offering takes place depends on a variety of factors and that you are under no obligation to enter into such underwriting arrangements.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Banc of America
Securities LLC and J.P. Morgan Securities Inc. (which consent may be withheld in
their sole discretion), directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended, but only including shares of Common Stock over which the
undersigned has the power to control the disposition) by the undersigned, or
publicly announce an intention to do any of the foregoing, for a period
commencing on the effective date of the registration statement relating to the
Offering and continuing through the close of trading on the date 180 days after
the date of the final prospectus for the Offering. The foregoing sentence shall
not apply to (i) any shares of Common Stock acquired as part of the Offering,
(ii) any shares of Common Stock or other securities acquired in open market
transactions after commencement of the Offering, (iii) bona fide gifts or
distributions (including if the undersigned is a partnership, to its partners)
without consideration to persons who, as a result of such gift or distribution,
will not be required to make a filing under Section 16(a) of the Securities
Exchange Act of 1934, as amended, prior to the expiration of the 180-day period
referenced above, (iv) transfers which occur by operation of law, (v) the
conversion of one class of Common Stock into another class of Common Stock or
(vi) the transfer of any or all of the shares of Common Stock owned by the
undersigned either during his or her lifetime or on death, by gift, will or
intestate succession to the immediate family of the undersigned or to a trust
the beneficiaries of which are exclusively the undersigned and/or a member or
members of his or her immediate family; provided, however, that in any such case
described in (iii), (iv) or (vi) it shall be a condition to such transfer that
the transferee executes and delivers to Banc of America Securities LLC and J.P.
Morgan Securities Inc. an agreement stating that the transferee is receiving and
holding the Common Stock subject to the provisions of this letter agreement. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common
Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of 1933, as amended, of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. This agreement shall terminate upon the earlier to occur of (i) the expiration of the 180-day period referenced above and (ii) such time as the Company or Banc of America Securities LLC and J.P. Morgan Securities Inc. determine to abandon or terminate the Offering.
Printed Name of Holder
By:
Printed Name of Person Signing
(and indicate capacity of person signing if signing as custodian, trustee or on behalf of an entity)
EXHIBIT 3.1
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION
OF
NELNET, INC.
Pursuant to the provisions of Section 21-20,116 Neb.Rev.Stat. (Reissue 1997) the above corporation adopts the following Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is Nelnet, Inc.
2. The following amendments to the Articles of Incorporation were adopted by the Stockholders of the corporation in the manner prescribed by the Nebraska Business Corporation Act:
A. The Amended and Restated Articles of Incorporation are hereby deleted in their entirety and the Second Amended and Restated Articles of Incorporation shall replace and supersede them.
3. The number of shares of the Corporation's common stock outstanding at the time of adoption of the above amendment was 31,015,034.4 shares of Class A voting Common Stock, and 14,023,453.5 shares of Class B Common Stock; the number of shares entitled to vote thereon was 31,015,034.4 shares of Class A voting Common Stock, and 14,023,453.5 shares of Class B Common Stock. The number of votes of each voting group indisputably represented at the meeting on November 3,2003, was 16,739,423.2 shares of Class A Common Stock and 12,322,453.5 shares of Class B Common Stock.
4. The date that the amendments as set forth above were adopted was November 3, 2003.
5. The number of votes cast for the amendments set forth above by the Class A Common Stock shareholders and the Class B Common Stock shareholders entitled to vote, the common stock holders, was sufficient for approval by this voting group.
Dated as of this 3rd day of November, 2003.
Nelnet, Inc.
By: /s/ Michael S. Dunlap ---------------------------------------- Michael S. Dunlap, President and Co-CEO |
ARTICLES OF RESTATEMENT
Nelnet, Inc. (the "Corporation"), a corporation organized and existing under the laws of the State of Nebraska, does hereby certify as follows, pursuant to Section 21-20,122(4) Neb.Rev.Stat. (Reissue 1997) of the Nebraska Business Corporation Act:
1. The name of the Corporation is Nelnet, Inc.
2. The text of the Second Amended and Restated Articles of Incorporation adopted by the Corporation is marked as Exhibit A, attached hereto and incorporated herein by this reference.
3. The Second Amended and Restated Articles of Incorporation contain amendments to the articles of incorporation requiring shareholder approval.
4. The text of each amendment adopted by the Corporation is set forth in the Second Amended and Restated Articles of Incorporation, attached hereto and incorporated herein by this reference.
5. The date of each amendment's adoption was November 3, 2003.
6. The number of shares of the Corporation's common stock outstanding at the time of adoption of the above amendment was 31,015,034.4 shares of Class A voting Common Stock, and 14,023,453.5 shares of Class B Common Stock; the number of shares entitled to vote thereon was 31,015,034.4 shares of Class A voting Common Stock, and 14,023,453.5 shares of Class B Common Stock. The number of votes of each voting group indisputably represented at the meeting on November 3, 2003, was 16,739,423.2 shares of Class A Common Stock and 12,322,453.5 shares of Class B Common Stock.
7. The number of votes cast for the amendments set forth above by Class A Common Stock shareholders and Class B Common Stock shareholders entitled to vote was sufficient for approval was sufficient for these voting groups.
Dated as of this 3rd day of November, 2003.
Nelnet, Inc.
By: /s/ Michael S. Dunlap ---------------------------------------- Michael S. Dunlap President and Co-Chief Executive Officer |
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
NELNET, INC.
(FORMERLY NELNET LOAN SERVICES, INC.)
ARTICLE I.
NAME
The name of the Corporation shall be Nelnet, Inc.
ARTICLE II.
PRINCIPAL AND REGISTERED OFFICES
The principal and registered offices of the Corporation shall be at 121 South 13th Street, Suite 201, Lincoln, Nebraska 68508, or such other place or places as the Corporation may establish and maintain in the State of Nebraska or elsewhere as the Board of Directors may deem prudent, necessary or expedient from time to time. The Corporation's initial registered agent at such registered office shall be Terry J. Heimes.
ARTICLE III.
PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the Nebraska Business Corporation Act (the "Nebraska Act"). The Corporation shall have all powers that may now or hereafter be lawful for a corporation to exercise under the Nebraska Act and under the laws of the State of Nebraska generally. The Corporation shall have perpetual existence.
ARTICLE IV.
CAPITAL STOCK
4.1. Total Number of Shares of Stock. The total number of shares of capital stock of all classes that the Corporation shall have authority to issue is 665,000,000 shares. The authorized capital stock is divided into (i) 50,000,000 shares of preferred stock, with par value of $0.01 per share (the "Preferred Stock"); (ii) 600,000,000 shares of Class A Common Stock (the "Class A Common Stock"), with par value of $0.01 per share; and (iii) 15,000,000 shares of Class B Common Stock (the "Class B Common Stock"), with par value of $0.01 per share. The number of authorized shares of any of the Preferred Stock, Class A Common Stock or Class B Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative votes of the holders of a majority in voting power of the stock of the Corporation entitled to vote thereon irrespective of any provision of the Nebraska Act now or hereafter in effect, and no vote of the holders of the Preferred Stock, the Class A Common Stock
or the Class B Common Stock voting separately as a class shall be required therefor. None of the Class A Common Stock or Class B Common Stock may be subdivided, consolidated, reclassified or otherwise changed in any manner unless the other class is subdivided, consolidated, reclassified or otherwise changed in the same manner and proportion.
4.2. Preferred Stock. Subject to limitations of applicable law, the Board of Directors is hereby expressly authorized, by resolution or resolutions, to provide, out of the unissued shares of Preferred Stock, for one or more series of Preferred Stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Such rights and restrictions as referred to above shall include, without limitation, dividend rights, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series.
4.3. Class A Common Stock. Each holder of Class A Common Stock shall be entitled to one (1) vote for each share of Class A Common Stock held of record by such holder on all matters on which shareholders generally are entitled to vote.
4.4. Class B Common Stock. Each holder of Class B Common Stock shall be entitled to ten (10) votes for each share of Class B Common Stock held of record by such holder on all matters on which shareholders generally are entitled to vote except as may otherwise expressly be provided for herein.
4.5. Class Voting. Subject to limitations of applicable law, Class A Common Stock and Class B Common Stock shall vote as a single class on all matters to be voted on including, without limitation, any consolidation or merger of the Corporation into or with any other corporation or the sale or transfer of all or substantially all of its assets; provided, however, that the vote of a majority of the shares of Class B Common Stock, voting separately as a class, shall be required to lower the number of votes per share that each share of Class B Common Stock entitles its holder to have.
4.6. Conversion. Class A Common Stock is not convertible. Each
share of Class B Common Stock is convertible at any time at the holder's option
into one (1) share of Class A Common Stock. Each share of Class B Common Stock
shall automatically convert into one (1) share of Class A Common Stock, without
any action by the Corporation or further action by the holder thereof, upon the
Transfer (as defined below) of such share, other than the following Transfers:
(i) to any other holder of Class B Common Stock or to any natural person or
business organization that, directly or indirectly, controls, is controlled by
or is under common control with such holder ("business organization" shall mean
any corporation, limited liability company, partnership or like entity); (ii) to
a spouse, sibling, parent, grandparent or descendant, whether natural or
adopted, of a holder of Class B Common Stock; (iii) to any charitable foundation
or other organization qualified under Section 501(c)(3) of the Internal Revenue
Code of 1986, as
amended, or the corresponding provision of any subsequent federal tax law; (iv) to a trust all of the beneficiaries of which are holders of Class B Common Stock each of whom is a natural person, natural persons described in clause (ii) hereof and/or entities described in clause (iii) hereof; (v) by will to any transferee described in clause (ii), (iii) or (iv) hereof; (vi) pursuant to the laws of descent and distribution to a spouse, sibling, parent, grandparent and/or descendant, whether natural or adopted, of a holder of Class B Common Stock; or (vii) to the Corporation. Notwithstanding the foregoing, a share of Class B Common Stock shall automatically convert into one (1) share of Class A Common Stock, without any action by the Corporation or further action by the holder thereof, upon any Transfer of such share pursuant to a divorce or separation agreement, decree or order. "Transfer" means a sale, assignment, transfer, gift, encumbrance or other disposition, other than a bona fide pledge for collateral security purposes.
In the event at any time the shares of the Class B Common Stock outstanding constitute less than 50% of the Class B Common Stock outstanding as of the date of the final prospectus relating to the Corporation's initial public offering (as adjusted for any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities, the issuance of warrants or other rights to purchase shares or other securities, or other similar capitalization change), each remaining share of Class B Common Stock outstanding shall automatically be converted into one (1) share of Class A Common Stock.
The Corporation will reserve and at all times keep available out of its authorized but unissued shares of Class A Common Stock or its shares of treasury stock of such class a sufficient number of shares of Class A Common Stock to satisfy the conversion requirements of all outstanding shares of Class B Common Stock.
4.7 Dividend Rights. Holders of Class A Common Stock and Class B Common Stock shall be entitled to receive ratably dividends payable in cash, in stock or otherwise, as and when declared by the Board of Directors out of assets legally available therefor, subject to any preferential rights of any outstanding Preferred Stock.
4.8 Other Rights. Upon liquidation, dissolution or winding up of the Corporation, after payment in full of the amounts required to be paid to the holders of any outstanding Preferred Stock, all holders of Class A Common Stock and Class B Common Stock are entitled to receive ratably any assets available for distribution to holders thereof after the payment of all debts and other liabilities of the Corporation. No shares of the Class A Common Stock or the Class B Common Stock shall have preemptive rights to purchase additional shares. The rights, preferences and privileges of holders of Class A Common Stock and Class B Common Stock shall be subject to, and may be adversely affected by, the rights of holders of outstanding Preferred Stock. All shares of Class A Common Stock, Class B Common Stock and Preferred Stock which are acquired by the Corporation shall be available for re-issuance by the Corporation at any time.
4.9 Rights With Respect to Future Issuances and Sales. The Board of Directors shall be authorized to create and issue by one or more resolutions, whether or not in connection with the issuance and sale of any of the Corporation's securities or properties, rights entitling the holders thereof to purchase securities issued by the Corporation or any other entity. The times at and the terms upon which such rights are to be issued are to be determined by the Board of Directors
and set forth in contracts or other instruments which evidence such rights. The authority of the Board of Directors with respect to such rights shall include, without limitation, the determination of the initial purchase price, the times and circumstances under which such rights may be exercised, provisions denying such holders of a specified percentage of the Corporation's outstanding capital stock the right to exercise such rights and provisions to permit the Corporation to redeem or exchange such rights.
4.10 Recapitalization Plan; Exchange of Certificates. Each share of the Corporation's Class B (nonvoting) Common Stock owned by Michael S. Dunlap, Terri Dunlap, Stephen F. Butterfield and Union Financial Services, Inc., and each share of the Corporation's Class A (voting) Common Stock issued and outstanding or held in treasury, immediately prior to the filing of the Amended and Restated Articles of Incorporation with the Nebraska Secretary of State on August 14, 2003, was, upon such filing and thereafter, exchanged for and classified as 210 shares of the Corporation's Class B Common Stock. Each share of the Corporation's Class B (nonvoting) Common Stock issued and outstanding or held in treasury immediately prior to the filing of the Amended and Restated Articles of Incorporation on August 14, 2003 (other than shares of Class B (nonvoting) Common Stock owned by Michael S. Dunlap, Terri Dunlap, Stephen F. Butterfield and Union Financial Services, Inc.), was, upon such filing and thereafter, exchanged for and classified as 210 shares of the Corporation's Class A Common Stock. Promptly after the filing of the Amended and Restated Articles of Incorporation on August 14, 2003, each holder of the Corporation's issued and outstanding capital stock surrendered, or is entitled to surrender, to the Corporation all certificates representing all such shares of the Corporation's capital stock, properly endorsed for transfer to the Corporation, which certificates were in any event deemed cancelled at the time of such filing, and the Corporation thereupon issued and delivered, or will issue and deliver, to such holder certificates representing the number of shares of the Corporation's capital stock that such holder was, or is, entitled to receive pursuant to the recapitalization plan set forth above.
ARTICLE V.
BOARD OF DIRECTORS
5.1. Powers of Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors which shall consist of not less than three (3) members. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Nebraska, the Board of Directors is expressly authorized to:
(a) adopt, amend, alter, change or repeal the By-laws of the Corporation; provided, however, that no By-laws hereafter adopted shall invalidate any prior act of the directors that would have been valid if such new By-laws had not been adopted;
(b) determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, appoint and empower the officers and other agents of the Corporation, and to determine the time and place of, the notice requirements for, Board meetings, as well as quorum and voting requirements for, and the manner of taking, Board action; and
(c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the Nebraska Act, these Second Amended and Restated Articles of Incorporation and the By-laws of the Corporation.
5.2. Number of Directors. Subject to Section 5.1, the number of directors constituting the Board of Directors shall be determined from time to time exclusively by a vote of a majority of the Board of Directors in office at the time of such vote.
5.3. Vacancies. Any vacancies in the Board of Directors for any reason and any newly created directorship resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, and any directors so appointed shall hold office until removed or until the next election at the next annual shareholder's meeting and until their successors are elected and qualified.
5.4. Removal of Directors. Any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class.
ARTICLE VI.
SHAREHOLDER ACTIONS AND MEETINGS OF SHAREHOLDERS
Special meetings of shareholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office, except as may otherwise be required by the Nebraska Act. Elections of officers need not be by written ballot, unless otherwise provided in the By-laws. For purposes of all meetings of shareholders, a quorum shall consist of shares constituting a majority of the voting power of all the shares of the capital stock of the Corporation entitled to vote at such meeting of shareholders, unless otherwise required by law.
ARTICLE VII.
LIMITATION ON LIABILITY OF DIRECTORS
No person shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, including without limitation directors serving on committees of the Board of Directors; provided, however, that the foregoing shall not eliminate or limit the liability of a director for (i) any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts or omissions which the Nebraska Act does not permit indemnity for directors under Section 21-2018(2)(e) of the Nebraska Act or otherwise; or (iv) any transaction from which the director derived an improper personal benefit. If the Nebraska Act is amended hereafter to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Nebraska Act, as so amended. Any
amendment, repeal or modification of this Article VII shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal or modification.
ARTICLE VIII.
INDEMNIFICATION OF DIRECTORS, OFFICERS
EMPLOYEES AND OTHER AGENTS
8.1. Indemnification of Directors and Officers. The Corporation
shall, to the maximum extent and in the manner permitted by the Nebraska Act,
indemnify each of its directors and officers against expenses (as defined in
Section 21-20,102 of the Nebraska Act), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 21-20,102 of the Nebraska Act) arising by reason of the fact
that such person is or was an agent of the Corporation. For purposes of this
Article VIII, a "director" or "officer" of the Corporation includes any person
(i) who is or was a director or officer of the Corporation, (ii) who is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was a director or officer of a corporation which was a predecessor corporation
of the Corporation or of another enterprise at the request of such predecessor
corporation.
8.2. Indemnification of Others. The Corporation shall have the power, to the extent and in the manner permitted by the Nebraska Act, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 21-20,102 of the Nebraska Act) judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 21-20,102 of the Nebraska Act) arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Article VIII, an "employee" or "agent" of the Corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the Corporation, (ii) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation.
8.3. Payment of Expenses in Advance. Expenses incurred in defending
any civil or criminal action or proceeding for which indemnification is required
pursuant to Section 8.1 or for which indemnification is permitted pursuant to
Section 8.2 following authorization thereof by the Board of Directors, shall be
paid by the Corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of the indemnified
party to repay such amount if it shall ultimately be determined by final
judicial decision, from which there is not further right of appeal, that the
indemnified party is not entitled to be indemnified as authorized in this
Article VIII.
8.4. Indemnity Not Exclusive. The indemnification provided by this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-law of the Corporation, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity
while holding such office, to the extent that such additional rights to indemnification are authorized in this Article VIII.
8.5. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the Corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VIII.
8.6. Conflicts. No indemnification or advance shall be made under this Article VIII, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears that:
(a) it would be inconsistent with a provision of this Article VIII, the By-laws of the Corporation, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or
(b) it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
ARTICLE IX.
AMENDMENT OF AMENDED AND RESTATED
ARTICLES OF INCORPORATION
The Corporation hereby reserves the right to amend, alter, change or repeal any provision contained in these Second Amended and Restated Articles of Incorporation in any manner permitted by the Nebraska Act and all rights and powers conferred upon shareholders, directors and officers herein are granted subject to this reservation; provided, however, that the affirmative vote of the holders of a majority of the voting power of all the shares of the capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with Section 4.9, Article VI or this proviso.
ARTICLE X.
SEVERABILITY
In the event that any of the provisions of these Second Amended and Restated Articles of Incorporation (including any provision within a single Section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law.
ARTICLE XI.
INCORPORATOR
The name and street address of the incorporator is: Jay L. Dunlap, 111 Oenida, Milford, Nebraska.
Dated as of November 3, 2003.
/s/ Michael S. Dunlap ---------------------------------------- Name: Michael S. Dunlap Title: Co-Chief Executive Officer |
EXHIBIT 3.2
SECOND AMENDED AND RESTATED BYLAWS OF
NELNET, INC.
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the shareholders shall be held in May of each year on a date and time fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. Annual meetings shall be held in the principal office of the corporation or at such other place, either within or without the State of Nebraska, as shall be determined by the Board of Directors. The time of such annual meeting shall be determined by the Board of Directors and stated in the notice.
Section 2. Special Meetings. Special meetings of the shareholders may be called only by the Board of Directors by a majority of the members of the Board of Directors then in office, except as may otherwise be required by applicable law. Special meetings shall be held at such place, either within or without the State of Nebraska, and at such date and time as shall be stated in the notice.
Section 3. Notice of Meeting. Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed delivered when deposited in the United States mails addressed to the shareholder at the address appearing on the stock transfer books of the corporation, postage prepaid.
Section 4. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.
Section 5. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each. For a period of ten (10) days prior to such meeting, the list shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such record, or a duplicate thereof, shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such record or transfer books or to vote at any meeting of shareholders.
Section 6. Quorum. A majority of the outstanding shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The holders (or their representatives) of a majority of the shares present at a meeting, even though less than a majority of the shares outstanding, may adjourn the meeting from time to time without notice other than an announcement at the meeting, until such time as a quorum is present. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number is required by law.
Section 7. Proxies. At all meetings of the shareholders, a shareholder may vote either in person or by proxy executed in writing by a shareholder or his or her duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy.
Section 8. Voting of Shares. Subject to the provisions of Sections 9 and 10 of this Article 1, each shareholder entitled to vote shall be entitled to the voting rights (as set forth in the articles of incorporation) for each share of stock held by him or her upon each matter submitted to vote at a meeting of shareholders.
Section 9. Voting of Shares by Certain Holders. Neither treasury shares nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation is held by this corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time.
Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by the trustee either in person or by proxy, but no trustee shall be entitled to vote shares without a transfer of such shares into the trustee's name.
Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority to do so be contained in an appropriate order of the court by which such receiver was appointed.
Section 10. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Such consent shall have the same force and effect as a unanimous vote of shareholders and may be stated as such in any articles or document filed with the Secretary of State under applicable state law.
ARTICLE II
DIRECTORS
Section 1. Number and Qualification. The business and affairs of the corporation shall be managed by a Board of Directors consisting of a number determined by the Board of Directors from time to time, but in any event, no less than three (3) directors. The directors need not be residents of the State of Nebraska, nor shareholders of the corporation. Although the number and qualifications of the directors may be changed from time to time by amendment to these Bylaws, no change shall affect the incumbent directors during the terms for which they were elected.
Section 2. Election and Tenure. At the first meeting of the shareholders and at each annual meeting thereafter, the shareholders shall elect directors who shall hold office until the next succeeding annual meeting and until their successors have been elected and qualified unless their service is earlier terminated because of death, resignation or removal. Upon acceptance of the subscriptions to shares by the incorporator(s), the corporation shall be deemed to have shareholders for the purposes of the first meeting of shareholders of the corporation.
Section 3. Vacancies. Any directorship to be filled for any reason, and any newly created directorship resulting by reason of an increase in the number of directors, shall be filled by the affirmative vote of a majority of the remaining director(s), though less than a quorum of
the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office.
Section 4. Removal. At a meeting of the shareholders called expressly for that purpose, directors may be removed in the manner hereinafter provided. Any director, or the entire Board of Directors, may be removed, with or without cause, by a vote of the holders of a majority of the voting power of all the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class.
Section 5. Quorum. A majority of the number of directors fixed by the Bylaws shall constitute a quorum for the transaction of any business at any meeting of the Board of Directors. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If less than a quorum is present at any meeting, the majority of those present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
Section 6. Annual Meeting. The annual meeting of the Board of Directors shall be held without notice other than this Bylaw immediately following adjournment of the annual meeting of shareholders and shall be held at the same place as the annual meeting of shareholders unless some other place is agreed upon by vote of a majority of the then elected Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman, the President or a majority of the Board of Directors, and shall be held at the principal office of the corporation or at such other place, either within or without the State of Nebraska, and at such date and time, as the notice may state.
Section 8. Notice. Notice of special meetings shall be delivered, mailed, emailed or sent by telecopy to each director at his or her last known address at least two (2) days prior to the date of holding said meetings. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
Section 9. Action Without a Meeting. Any action required to be taken at a meeting of the Board of Directors, or of any committee, may be taken without a meeting, if a consent in writing, setting forth the action so taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be. Such consent shall have the same effect as a unanimous vote. The consent may be executed by the directors in counterparts.
Section 10. Voting. At all meetings of the Board of Directors, each director shall have one vote irrespective of the number of shares he or she may hold.
Section 11. Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 12. Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.
Section 13. Committees. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, appoint an executive committee and one or more other committees, each committee to consist of two or more directors of the corporation, which committees shall, to the extent permitted by law, have and may exercise such powers of the Board of Directors in the management of the business and affairs of the corporation as shall be delegated to them.
If an executive committee is appointed, it shall, during the intervals between meetings of the Board of Directors, have and exercise all of the powers of the Board of Directors in the management of the business and affairs of the corporation, subject only to such restrictions or limitations as the Board of Directors may from time to time specify, or as limited by law.
Section 14. Telephonic Meetings. Members of the Board of Directors or any committee appointed by the Board of Directors may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
Section 15. Shareholder Nominations for Directors. Shareholders may nominate one or more persons for election as directors at a meeting of shareholders or propose business to be brought before a meeting of shareholders, or both, only if such shareholder has given timely notice in proper written form of such shareholder's intent to make such nomination or nominations or to propose such business. To be timely, a shareholder's notice must be received by the Secretary of the Corporation not later than ninety (90) days prior to such meeting. To be in proper written form a shareholder's notice to the Secretary shall set forth (i) the name and address of the shareholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the shareholder is a holder of record of stock of the Corporation that intends to vote such stock at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable,
a description of all arrangements or understandings between the shareholder and
each nominee or any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (iv) such other information regarding each nominee or each matter
of business to be proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission pursuant to the securities Exchange Act
of 1934 had the nominee been nominated, or intended to be nominated, or the
matter been proposed, or intended to be proposed, by the Board of Directors of
the Corporation; and (v) the written consent of each nominee to serve as
director of the Corporation if so elected. The chairman of a meeting of
shareholders may refuse to acknowledge the nomination of any person or the
proposal of any business not made in compliance with the foregoing procedure. A
nomination of a person for election as a director need not be placed in the
Corporation's proxy statement or notice of meeting if it differs from the slate
of nominees proposed by the Nominations and Governance Committee of the
Corporation. A notice, from any shareholder other than a person who holds Class
B Common Stock of the Corporation, regarding any business, including nomination
of directors, to be brought before an annual shareholders meeting must contain
(a) a brief description of the business desired to be brought before the annual
meeting and the reason for conducting such business at the annual meeting; (b)
the name and address of the shareholder proposing such business; (c) the class
and number of shares of the Corporation's stock beneficially owned by such
shareholder; and (d) any material interest of the shareholder in such business.
ARTICLE III
OFFICERS
Section 1. Number and Qualification. The officers of the corporation shall be a President, one or more Vice Presidents (as the Board of Directors shall determine), a Secretary and a Treasurer and such other officers and agents as may be deemed necessary by the Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election and Tenure. The officers of the corporation shall be elected by the Board of Directors at its annual meeting. Each officer shall hold office for a term of one year or until his or her successor shall have been duly elected and shall have become qualified, unless his or her service is terminated sooner because of death, resignation or otherwise.
Section 3. Removal. Any officer or agent of the corporation, elected or appointed by the Board of Directors, may be removed by the Board of Directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.
Section 4. Vacancies. Vacancies occurring in any office by reason of death, resignation or otherwise may be filled by the Board of Directors at any meeting.
Section 5. Duties and Authority of Officers.
(a) Chief Executive Officer. The Chief Executive Officer shall be responsible for general management of the affairs of the Corporation and shall perform all duties incidental to such person's office which may be required by law and all other such duties as may be required properly by the Board of Directors. There may be more than one Chief Executive Officer serving concurrently in such office.
(b) President. The President shall be the principal executive officer of the corporation and, subject to the control of the Board of Directors, shall in general supervise and control all of the business and affairs of the corporation. The President shall, when present, preside at all meetings of the shareholders and of the Board of Directors. The President may sign, with the Secretary or any other proper officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation or shall be required by law to be otherwise signed or executed; and in general, shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.
(c) Vice President. In the absence of the President or in the event of his or her death, inability or refusal to act, the Vice President (or in the event there shall be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or the absence of any such designation then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign with the Secretary or an Assistant Secretary, certificates for shares of the corporation; and shall perform such other duties as from time to time may be assigned by the President or by the Board of Directors.
(d) Chief Financial Officer. The Chief Financial Officer shall be the chief accounting officer of the Corporation; shall keep full and accurate accounts of all assets, liabilities, commitments, revenues, costs and expenses, and other financial transactions of the Corporation in books belonging to the Corporation, and conform them to sound accounting principles with adequate internal control; shall cause regular audits of these books and records to be made; shall see that all expenditures are made in accordance with procedures duly established, from time to time, by the Corporation, shall render financial statements upon the request of the Board of Directors; and, in general, shall perform a11 the duties as may be assigned him or her by the Board of Directors.
(e) Secretary. The Secretary shall attend and keep minutes of the meetings of the shareholders and of the Board of Directors in one or more books provided for that purpose, see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law, be the custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized, keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder, sign with the President or a Vice President certificates for shares of the corporation the issuance of which shall be authorized by resolution of the Board of Directors, have general charge of the stock transfer books of the corporation, and in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President or by the Board of Directors.
(f) Treasurer. The Treasurer shall have charge and custody and be responsible for all funds and securities of the corporation, receive and give receipts for all securities and monies due and payable to the corporation from any source whatsoever, deposit all such monies in the name of the corporation in such banks, trust companies, or in other depositories as shall be collected in accordance with the provisions of these Bylaws, and in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine.
(g) Assistant Secretary and Assistant Treasurer. The Assistant Secretary, when authorized by the Board of Directors, may sign with the President or a Vice President certificates for shares of the corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Secretary shall, in the absence of the Secretary or in the event of his or her death, inability or refusal to act, perform the duties of Secretary and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary. The Assistant Treasurer shall, in the absence of the Treasurer or in the event of his or her death, inability or refusal to act, perform the duties of Treasurer and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. The Assistant Treasurer shall, if required by the Board of Directors, give bonds for the faithful discharge of his or her duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretary and Assistant Treasurer, in general, shall perform such duties as shall be assigned to them by the Secretary or Treasurer, respectively, or by the President or the Board of Directors. There may be more than one Assistant Secretary and more than one Assistant Treasurer.
(h) Chairman and Vice Chairman. The Chairman shall be responsible for the general management of the affairs of the Board of Directors and presiding over meetings of the Board of Directors. In the absence of the Chairman, the Vice Chairman shall perform the duties of the Chairman, and when so acting shall have all the powers of and be subject to all the restrictions upon the Chairman.
Section 6. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that the officer is also a director of the corporation.
ARTICLE IV
STOCK CERTIFICATES
Section 1. Form. Certificates of stock, signed by the Secretary and either a Co-Chief Executive Officer or President in a form approved by the Board of Directors in accordance with law, shall be issued to the holders of the stock of the corporation. Notwithstanding the preceding sentence, certificates of stock for which the subscriptions and payments were accepted by the incorporators shall be valid as signed by the incorporators, and issued to the subscribers therefor.
Section 2. Transfer. Transfer of the stock shall be made in person or by attorney only on the books of the corporation in a transfer book kept for that purpose and upon the surrender of the old certificate.
Section 3. Loss or Destruction. In case of loss or destruction of a certificate of stock, no new certificate shall be issued in lieu thereof except upon satisfactory proof to the Board of Directors of such loss or destruction, and upon the giving of satisfactory security by bond or otherwise against loss to the corporation.
ARTICLE V
DIVIDENDS AND BANK ACCOUNT
Section 1. Dividends. In addition to other dividends authorized by law, the Board of Directors, by resolution, may from time to time declare dividends to be paid out of the unreserved and unrestricted earned surplus of the corporation, but no dividend shall be paid when the corporation is insolvent, when the payment thereof would render the corporation insolvent or when otherwise prohibited by law.
Section 2. Bank Account. The funds of the corporation shall be deposited in such banks, trust funds or depositories as the Board of Directors may designate and shall be withdrawn upon the signature of the President and/or upon the signatures of such other person or persons as the directors may by resolution authorize.
ARTICLE VI
AMENDMENTS
Except as otherwise provided by law or by specific provisions of these Bylaws, the Bylaws may be amended or repealed by the Board of Directors or by the shareholders at any annual, regular or special meeting of the Board of Directors or of the shareholders.
ARTICLE VII
WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or director of the corporation under the provisions of the Articles of Incorporation, these Bylaws or the Nebraska Business Corporation Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS, OFFICERS
EMPLOYEES AND OTHER AGENTS
Indemnification of Directors, Officers and others shall be as specified in the Corporation's Articles of Incorporation.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be from the 1st day of January to the 31st day of December in each year.
Nelnet, Inc.
By: /s/ Edward P. Martinez -------------------------------------- Secretary |
Exhibit 4.1
[GRAPHIC OF NELNET(R) COMPANY STOCK CERTIFICATE]
[LOGO FOR POSITION ONLY]
[NELNET(R) LOGO]
CLASS A COMMON STOCK CLASS A COMMON STOCK
NELNET, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEBRASKA
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR IN NEW YORK, NY OR RIDGEFIELD PARK, NJ CERTAIN DEFINITIONS CUSIP 64031N 10 8 This certifies that |
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF
NELNET, INC.
(hereinafter called the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon the surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are subject to the laws of the State of Nebraska and to provisions of the Articles of Incorporation and the By-laws of the corporation and all amendments thereto. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile signatures of the duly authorized officers of the corporation.
Dated: /s/ Michael Dunlap /s/ Edward P. Martinez CO-CHIEF EXECUTIVE OFFICER SECRETARY |
COUNTERSIGNED AND REGISTERED
MELLON INVESTOR SERVICES LLC
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
The Corporation shall furnish without charge to any shareholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or any series thereof and the qualifications, limitations or restriction of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation or to the Transfer Agent and Registrar.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to the applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenant by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT- Custodian ------------ ----------- (Cust) (Minor) |
under Uniform Gifts to Minors
Additional abbreviations may also be used though not in the above list.
For Value Received, -------------- hereby sell, assign and transfer unto
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED:
Exhibit 4.11
REGISTRATION RIGHTS AGREEMENT
DATED AS OF [ ], 2003 BY AND AMONG NELNET, INC.
AND
THE SHAREHOLDERS OF NELNET, INC. SIGNATORY HERETO
REGISTRATION RIGHTS AGREEMENT, dated as of [ ], 2003 (the "Agreement"), among Nelnet, Inc., a Nebraska corporation (the "Company"), and the shareholders of the Company signatory hereto.
WHEREAS, the Company and the Shareholders desire to provide the Shareholders with rights to register shares of Class A Common Stock (as defined below) under the Securities Act (as defined below).
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. The following capitalized terms have the following meanings:
"Class A Common Stock" means the Company's Class A Common Stock, par value $0.01 per share.
"Class A Common Stock Equivalent" means any securities of any Person convertible into or exchangeable or exercisable for Class A Common Stock.
"Class B Common Stock" means the Company's Class B Common Stock, par value $0.01 per share.
"Code" means the U.S. Internal Revenue Code of 1986, as amended.
"Commission" means the U.S. Securities and Exchange Commission or any other United States federal agency administering the Securities Act.
"Common Stock" means the Class A Common Stock and the Class B Common Stock, collectively.
"Common Stock Equivalent" means any securities o f any Person convertible into or exchangeable or exercisable for Common Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, as in effect from time to time.
"Exempt Transfer" means a transfer of shares of Class B Common Stock that does not result in the automatic conversion of such shares of Class B Common Stock into shares of Class A Common Stock pursuant to the terms of the Company's Second Amended and Restated Articles of Incorporation; provided, however, that no such transfer shall constitute an "Exempt Transfer" unless (a) the transferee agrees in writing to be bound by this Agreement as if such transferee were a Shareholder hereunder and (b) the transfer is a transaction that is exempt from the registration and qualification requirements of federal and state securities laws and, if reasonably requested, the Company receives an opinion of counsel reasonably acceptable to the Company that such transfer is made in compliance with applicable federal and state securities laws.
"Initial Public Offering" means the closing of a underwritten public offering of Class A Common Stock registered with the Commission under the Securities Act.
"NASD" means the National Association of Securities Dealers, Inc. and any successor organization.
"Person" means an individual, corporation, partnership, association, joint-stock company, trust where the interests of the beneficiaries are evidenced by a security, unincorporated organization, estate, governmental or political subdivision thereof or governmental agency.
"Qualified Shareholder" means any Shareholder that is the beneficial holder of (a) Registrable Securities or (b) in the case of any Registrable Securities specified in clause (b) of the definition of "Registrable Securities," Class B Common Stock.
"Registrable Securities" means (a) shares of Class A Common Stock and
(b) shares of Class A Common Stock issuable upon conversion of Class B Common
Stock; provided, however, that a Registrable Security shall cease to be a
Registrable Security at such time that the Registrable Security has been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering it or transferred pursuant to Rule 144
under the Securities Act (or any successor provision then in force).
"Registration Statement" means a registration statement provided for in
Section 6 of the Securities Act under which securities are registered under the
Securities Act, together with any preliminary, final or summary prospectus
contained therein, any amendment or supplement thereto, and any document
incorporated by reference therein.
"Securities Act" means the Securities Act of 1933 and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time.
"Shareholder" means the shareholders signatory to this Agreement and any transferee of such shareholder pursuant to an Exempt Transfer.
2. Demand Registration.
(a) Right to Demand. If the Company shall receive a written request from one or more Qualified Shareholders (a "Demand Registration Notice") that the Company register with the Commission, under and in accordance with the provisions of the Securities Act, all or part of their Registrable Securities (a "Demand Registration"), with respect to Registrable Securities
that will provide net proceeds, after deduction of underwriting discounts and commissions, to such Qualified Shareholders of not less than $5.0 million, the Company shall have twenty-one (21) days to determine whether to file a registration statement for the offer and sale of securities for its own account. If during such twenty-one (21) day period, the Company in good faith determines to undertake or is undertaking such an offering on its own behalf (a "Company Offering") and to file a registration statement for a Company Offering and provides written notice to such Qualified Shareholders of such decision, the Company shall have no obligation to register any Registrable Securities except pursuant to and in accordance with Section 3 until the completion of such Company Offering and the request made by such Qualified Shareholders shall not be counted as a Demand Registration for the purposes of Section 2(a)(iii); provided, however, that the Company is actively employing in good faith all reasonable efforts to cause such registration statement for a Company Offering to become effective. If the Company determines not to undertake a Company Offering, the Company shall, no later than ten (10) days after the expiration of such twenty-one (21) day period, send written notice to each Shareholder of such decision and its intention to comply with the Demand Registration Notice and, subject to Section 2(c), to include in such registration all Registrable Securities of Qualified Shareholders with respect to which the Company has received written requests for inclusion therein within twenty (20) days after the Company's giving of such notice. Once a Demand Registration Notice has been delivered by a Qualified Shareholder, no other Demand Registration Notice may be delivered by any other Qualified Shareholder or be effective until, (x) if the Company has elected to undertake or is undertaking a Company Offering in compliance with the foregoing requirements, such Company Offering is completed or abandoned, or (y) if the Company has not so elected and is not so undertaking, the delivered Demand Registration Notice has been withdrawn or ninety (90) days after the effective date of the registration statement relating to such Demand Registration (or such shorter period as may be agreed to by the managing underwriter or underwriters). Once a Demand Registration Notice has been delivered by a Qualified Shareholder, unless it has elected to undertake or is undertaking a Company Offering in compliance with the foregoing provisions, the Company will not effect a public sale or distribution of its equity securities or securities convertible into or exercisable or exchangeable for such equity securities under the Securities Act after such Demand Registration Notice has been delivered until (1) such Demand Registration Notice has been withdrawn or (2) ninety (90) days after the effective date of the registration statement relating to such Demand Registration (or such shorter period as may be agreed to by the managing underwriter or underwriters). Any registration that involves a shelf registration statement shall be deemed one Demand Registration for the purposes of clause (iii) below. A Demand Registration may be either a long-form registration or, if the Company is then eligible to use Form S-3, a short-form registration. All Demand Registrations shall be short-form registrations whenever the Company is eligible to use any applicable short-form for registrations. All requests made pursuant to this Section 2(a) will specify the aggregate number of Registrable Securities requested to be registered and will also specify the intended methods of disposition thereof; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2(a):
(i) prior to the date which is twelve (12) months following the effective date of the Initial Public Offering;
(ii) prior to the date which is twelve (12) months following the date of receipt by the Company of any Demand Registration Notice from a Qualified Shareholder, pro-
vided, however, that the Qualified Shareholder has not withdrawn such Demand Registration Notice;
(iii) after the Company has effected two (2) Demand Registrations requested by Qualified Shareholders; or
(iv) if the Company shall furnish to the Qualified Shareholders a certificate, signed by the President of the Company, stating that in the good faith judgment of the "independent" members of the Board of Directors of the Company it would be detrimental to best interests of the Company for a Registration Statement to be filed at such time. In such event, the Company's obligation to use all reasonable efforts to register, qualify or comply under this Section 2(a) shall be deferred for a single period not to exceed ninety (90) days from the date of receipt of the Demand Registration Notice by the Qualified Shareholders.
A registration requested pursuant to this Section 2(a) shall not be deemed to have been effected for purposes of clause (iii) above, (1) unless a registration statement with respect thereto has become effective (unless the Demand Registration has been withdrawn by the Qualified Shareholders that gave the applicable Demand Registration Notice), (2) if the registration statement does not remain effective for a period of at least ninety (90) days (or, in the case of a shelf registration statement, nine (9) months) (as applicable, the "Effective Period") and all of the shares included in such registration have not been sold prior to the expiration of the Effective Period, (3) if, after it has become effective, but before all of the shares included in such registration have been sold prior to the expiration of the Effective Period, such registration is subject to any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court that permanently prevents the sale of the Registrable Securities that were to have been registered for any reason not attributable to the actions or omissions of the holders of such Registrable Securities or (4) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied and no such closing occurs, other than by reason of some act or omission by the holders of the Registrable Securities that were to have been registered.
(b) Selection of Underwriters. The underwriters of any offering pursuant to a Demand Registration shall be one or more nationally-recognized investment banking firms selected by the Qualified Shareholders which requested such Demand Registration, subject, however, to the Company's approval, which shall not be unreasonably withheld.
(c) Priority in Demand Registrations. If the managing underwriter advises the Company in writing that, in its opinion, the number of Registrable Securities requested to be included in a Demand Registration exceeds what can be sold in such offering without having a material adverse effect on the success of the offering (including, without limitation, an adverse impact on the selling price or the number of Registrable Securities that any participating Qualified Shareholder may sell within a range acceptable to the Qualified Shareholders which requested such Demand Registration), then the Company will include in such Demand Registration the number of Registrable Securities requested to be included in such Demand Registration which the Company is so advised can be sold in such offering without having a material adverse effect on the success of such offering, pro rata among the holders thereof requesting such registration on the
basis of the number of Registrable Securities requested to be included by such holders; provided, however, that the Company will include in any Demand Registration, prior to the inclusion of any Registrable Securities which are not held by the Qualified Shareholders which requested such Demand Registration, the number of Registrable Securities which are held by the Qualified Shareholders which requested such Demand Registration which the Company is so advised can be sold in such offering, pro rata among such Qualified Shareholders, if necessary.
(d) Withdrawal. A Demand Registration may be withdrawn by (i) the Qualified Shareholder who requested such demand Registration or (ii) if more than one Qualified Shareholder requested such Demand Registration, those Qualified Shareholders holding a majority of the Registrable Securities included in the Demand Registration Notice without the demand counting as a Demand Registration hereunder.
3. Piggyback Registration.
(a) Right to Piggyback. Beginning on the date hereof, if the Company at any time proposes to register any of its Common Stock or Common Stock Equivalents (the "Piggyback Securities") under the Securities Act (other than registrations on Form S-4 or S-8 under the Securities Act or the equivalents thereof) with respect to an underwritten public offering solely for its own account and the form of Registration Statement to be used may be used for the registration of Registrable Securities, the Company will give prompt written notice (a "Piggyback Registration Notice") to all Shareholders upon the earlier of (i) forty-five (45) days prior to the anticipated filing date or (ii) promptly following its decision to file or its intent to file such a registration statement, which notice shall specify the proposed offering price (or reasonable range thereof), the kind and number of securities to be registered, the distribution arrangements and such other information at the time appropriate to include in such notice. Within thirty (30) days after receipt of a Piggyback Registration Notice, any Qualified Shareholder may, by written notice to the Company, request the registration by the Company under the Securities Act of Registrable Securities in connection with such proposed registration by the Company under the Securities Act of its Piggyback Securities (a "Piggyback Registration"). Such written notice to the Company shall specify the Registrable Securities intended to be disposed of by such Qualified Shareholder. Upon receipt of such request, the Company will use its best efforts to register under the Securities Act all Registrable Securities which the Company has been so requested to register, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that if at any time after giving notice of its intent to register Piggyback Securities and before the effective date of the Registration Statement filed in connection with such Piggyback Registration, the Company determines for any reason not to register or to delay registration of such Piggyback securities, the Company may, at its election, give notice of such determination to the Qualified Shareholder(s), and, thereupon, (1) in the case of a determination not to register, the Company shall be relieved of its obligation to register any Registrable Securities in connection with such Piggyback Registration (but not from its obligation to pay registration expenses pursuant to Section 5 hereof), and (2) in the case of a determination to delay registering, the Company may delay registering any Registrable Securities for the same period as the delay in registering such Piggyback Securities.
(b) Selection of Underwriters. The underwriters of any offering pursuant to a Piggyback Registration shall be one or more nationally-recognized investment banking firms selected by the Company.
(c) Priority in Piggyback Registrations. If the managing underwriter informs the Company in writing of its judgment that including the Registrable Securities in the Piggyback Registration creates a substantial risk that the proceeds or price per unit to be received from such offering might be reduced or that the number of Registrable Securities to be registered is too large to be reasonably sold, then the Company will include in such Piggyback Registration, to the extent of the number which the Company is so advised can be sold in such offering: first, all Piggyback Securities proposed by the Company to be sold for its own account; second, such Registrable Securities requested by any Qualified Shareholder to be included in such Piggyback Registration pro rata on the basis of the number of shares of such Registrable Securities so proposed to be sold and so requested to be included and third, such other securities requested by any other shareholder to be included in such Piggyback Registration pro rata on the basis of the number of shares of such securities so proposed to be sold and so requested to be included.
(d) Withdrawal. A request for Piggyback Registration may be withdrawn by any Qualified Shareholder making such request within ten (10) days before such Piggyback Registration becomes effective.
4. Registration Procedures.
(a) Company Covenants. Whenever the Company is hereunder required to use its best efforts to effect the registration under the Securities Act of any Registrable Securities as provided in Section 2 or 3, the Company will:
(i) prepare and file with the Commission the requisite Registration Statement to effect such registration and thereafter use its best efforts to cause such Registration Statement to become effective, provided that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 3(a), its securities which are Registrable Securities) at any time prior to the effective date of the Registration Statement relating thereto;
(ii) prepare and file with the commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement until such securities have been disposed of by the sellers thereof set forth in such Registration Statement;
(iii) furnish to each seller of Registrable Securities covered by such Registration Statement such number of conformed copies of the Registration Statement, and of each amendment and supplement thereto, such number of copies of the prospectus contained in such Registration Statement and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request;
(iv) use its best efforts to register or qualify all securities covered by such Registration Statement under such other securities or blue sky laws of U.S. jurisdictions as each seller thereof shall reasonably request, to keep such registration or qualification in effect for so long as the Registration Statement remains in effect, and to take any other action which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to (a) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not be obligated to be so qualified but for the requirements of this subsection or (b) consent to general service of process in any such jurisdiction;
(v) use its best efforts to cause all Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities of United States jurisdictions as may be necessary to enable the seller thereof to consummate the disposition of such Registrable Securities;
(vi) furnish to each seller of Registrable Securities a signed counterpart, addressed to such seller and the underwriters, of:
(x) an opinion of counsel for the Company dated the effective date of the Registration Statement (and dated the closing date under the underwriting agreement), reasonably satisfactory in form and substance to such seller, and
(y) a customary "comfort letter" dated the effective date of the Registration Statement (and dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such Registration Statement,
covering substantially the same matters with respect to such Registration Statement and, in the case of the "comfort letter," with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities, and, in the case of the legal opinion, such other legal matters, and, in the case of the "comfort letter," such other financial matters, as such seller or the underwriter may reasonably request;
(vii) at any time when a prospectus relating thereto is required to be delivered under the Securities Act, notify each seller of Registrable Securities covered by such Registration Statement promptly after the Company discovers that the prospectus included in such Registration Statement as then in effect includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made;
(viii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission;
(ix) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such Registration Statement from and after a date not later than the effective date of such Registration Statement;
(x) advise the selling Qualified Shareholders, promptly after it receives notice or obtains knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of the registration statement or the initiation or threatening of any proceeding for such purpose and promptly use all reasonable efforts to the prevent the issuance of any stop order or to obtain its withdrawal if any such stop order should be issued; and
(xi) use its best efforts to list or cause to be quoted all Registrable Securities covered by such Registration Statement on any securities exchange on which or in any market in which similar securities issued by the Company are then listed or quoted.
The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may reasonably request for the purpose of effecting such registration. Any Person participating in any Demand Registration or Piggyback Registration must (a) agree to sell their securities on the basis provided in the underwriting agreement and (b) complete and execute all documents required under this Agreement or the underwriting agreement.
Each Qualified Shareholder agrees that upon receipt of any notice from
the Company of the happening of any event of the kind described in Section
4(a)(vii), such Qualified Shareholder will discontinue immediately such
Qualified Shareholder's disposition of securities pursuant to the Registration
Statement until such Qualified Shareholder receives copies of the supplemented
or amended prospectus contemplated by such Section 4(a)(vii) and, if so directed
by the Company, will deliver to the Company all copies, other than permanent
file copies, then in such holder's possession of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice.
(b) Underwriting Agreements. The Company will enter into an underwriting agreement with the underwriters for any offering pursuant to a Demand Registration or Piggyback Registration if requested by the underwriters to do so. The underwriting agreement will contain such representations and warranties by the Company and such other terms as are generally prevailing at such time in underwriting agreements. The holders of Registrable Securities to be distributed by the underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations, warranties, and other agreements by the Company to and for the benefit of the underwriters also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. No Qualified Shareholder shall be required to make representations or warranties to, or agreements with, the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities, such holder's intended method of distribution, any representations required by law and any other customary representations.
(c) Holdback Agreements. (i) Each Shareholder agrees not to effect any public sale or distribution of any Common Stock or Common Stock Equivalents during the 180 days after the Initial Public Offering has become effective and during the 90 days after any Demand Registration or Piggyback Registration has become effective, except as part of such Initial Public Offering, Demand Registration or Piggyback Registration, as the case may be, unless the managing underwriter of the Initial Public Offering, Demand Registration or Piggyback Registration otherwise agrees to such sale or distribution.
(ii) The Company agrees not to effect any public sale or
distribution of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven
(7) days prior to and the 90 days after any Demand Registration or
Piggyback Registration has become effective, except as part of such
Demand Registration or Piggyback Registration, as the case may be, and
except pursuant to registrations on Form S-4 or S-8 under the
Securities Act or any successor or similar forms thereto.
(d) Preparation; Reasonable Investigation. In connection with the preparation and filing of each Registration Statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities to be registered under such Registration Statement, the underwriters and their respective counsel and accountants, the opportunity to participate in preparing the Registration Statement. The Company will also give each of such Persons such access to its books and records and opportunities to discuss the business of the Company with the Company's officers and independent public accountants who have certified the Company's financial statements as shall, in the opinion of such holders' and such underwriters' respective counsel, be necessary to conduct a reasonable investigation within the meaning of the Securities Act.
(e) Rule 144. If the Company files a Registration Statement pursuant to the Securities Act or Section 12 of the Exchange Act, the Company will also file the reports required to be filed by it under the Securities Act and the Exchange Act to enable the Shareholders to sell their Registrable Securities without registration under the Securities Act and within the exemptions provided under the Securities Act by Rule 144 or any similar rule or regulation hereafter adopted by the Commission.
5. Registration Expenses. The Company will bear all expenses incident to the Company's compliance with this Agreement, including, without limitation, registration, filing and fees with the Commission and the NASD, securities and blue sky compliance fees and expenses, word processing expenses, duplicating expenses, printing expenses, engraving expenses, messenger and delivery expenses, Company general and administrative expenses, counsel and accountants (including, without limitation, the reasonable fees and disbursements of not more than one counsel selected by the selling Qualified Shareholders to represent such selling Qualified
Shareholders in connection with a Demand Registration), special audit costs,
financial statement and reconstruction costs, comfort letter costs, underwriter
fees and disbursements customarily paid by issuers or sellers of securities
(including fees paid to a "qualified independent underwriter" required by the
rules of the NASD in connection with a distribution), "road show" expenses and
allocations and the expense for other Persons retained by the Company, but
excluding (x) fees and disbursements of the Qualified Shareholders' counsel,
accountants or other representatives (except as otherwise provided in this
Section 5), and (y) discounts, commissions or fees of underwriters, selling
brokers, dealer managers, sales agents or similar securities industry
professionals relating to the distribution of Registrable Securities and
applicable transfer taxes, if any, which shall be borne by the sellers of the
Registrable Securities being registered in all cases.
6. Indemnification.
(a) Indemnification by the Company. In the event of any Demand Registration or Piggyback Registration of any Registrable Securities under the Securities Act, the Company shall, and hereby does, indemnify and hold harmless each seller of any Registrable Securities covered by the Registration Statement with respect thereto, such seller's partners, directors and officers, each underwriter (including any "qualified independent underwriter" required by the rules of the NASD) of the offering or sale of such securities, and each Person who controls such seller or underwriter within the meaning of the Securities Act, against any uninsured losses, claims, damages or liabilities to which such seller, partner, director, officer, underwriter or controlling Person, as the case may be, may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of material fact contained in the Registration Statement under which such Registrable Securities were sold or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse each such indemnified Person for expenses reasonably incurred by it in connection with defending such loss, claim, damage, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case for any losses, claims, damages, liabilities (or actions or proceedings in respect thereof) or expenses which arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made by the Company in such Registration Statement in reliance upon information furnished to the Company in writing by such Person for inclusion in the Registration Statement; and provided further, however, that the Company shall not be liable to and does not indemnify any underwriter in the offering or sale of Registrable Securities, or any Person who controls an underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities, if such statement or omission was in the prospectus. This indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of an indemnified party, and shall survive the transfer of such Registrable Securities by the seller thereof.
(b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any Registration Statement, that the Company receive an
undertaking satisfactory to it from the prospective seller(s) of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 6(a)) the Company, its directors, its officers, and each other Person who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such Registration Statement, if such statement or alleged statement or omission or alleged omission was made in reliance upon information furnished to the Company in writing by such seller for inclusion in the Registration Statement. If applicable, the prospective sellers' obligation to indemnify will be several, not joint and several, among such sellers. In no event shall the liability of any seller hereunder or under any underwriting agreement be greater in amount than net proceeds received by such seller upon the sale of the Registrable Securities (before deducting expenses) giving rise to such indemnification obligation. The Company shall also be entitled to receive indemnities from underwriters, selling brokers, dealer mangers, and similar securities industry professionals participating in the distribution, asset forth in the underwriting agreement governing such registration statement. This indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company, its directors, officers or controlling Persons, and shall survive the transfer of such Registrable Securities by the seller thereof.
(c) Notices of Claims, Etc. Promptly after receipt by an indemnified party of notice of the commencement of any action, suit, investigation or proceeding involving a claim referred to in Sections 6(a) or (b), such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action. The failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 6, except to the extent that the indemnifying party is materially prejudiced by the failure to give such notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified party and the indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable for any settlement made by the indemnified party without the indemnifying party's consent (which consent will not be unreasonably withheld) or for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
(d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 6 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act.
(e) Indemnification Payments. The indemnification required by this
Section 6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
(f) Contribution. If the indemnification provided for in this Agreement is for any reason unavailable or insufficient to indemnify an indemnified party under Section 6(a), (b) or (d) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, or referred to therein, then each indemnifying party shall, in lieu of indemnifying such party, contribute to the amount payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, in a proportion which reflects: (i) the relative benefits received on the one hand by the Company and on the other hand by the holders of the Registrable Securities included in the offering; (ii) the relative fault with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, on the one hand of the Company and on the other hand of the holders of the Registrable Securities included in the offering; and (iii) any other relevant equitable considerations.
The relative benefits received shall be deemed to be in the same proportion which the sum of the total subscription price paid to the Company in respect of the Registrable Securities plus the total net proceeds from the offering of the securities (before deducting expenses) received by the Company bears to the amount by which the total net proceeds from the offering of the securities (before deducting expenses) received by the holders of the Registrable Securities with respect to such offering exceeds the subscription price paid to the Company in respect of the Registrable Securities, and in each case, the net proceeds received from such offering shall be determined as set forth on the table of the cover page of the prospectus.
The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the holders of the Registrable Securities; the intent of the parties; the parties' relative knowledge; the parties' access to information; and the parties' opportunity to correct or prevent such statement or omission. The Company and the Shareholders agree that it would not be just and equitable if contribution pursuant to this Section 6 is determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein.
The amount paid or payable by an indemnified party as a result of the
loss, claim, damage or liability, or action in respect thereof, referred to in
this Subsection 6(f) shall be deemed to include, for purposes of this Subsection
6(f), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any action or claim. No person
guilty of "fraudulent misrepresentation" within the meaning of Section 11 of the
Securities Act shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. Miscellaneous.
(a) Amendments and Waivers. This Agreement may be amended or waived by consent of the Company and the Shareholders holding a majority of the Registrable Shares. Each Shareholder shall be bound by any consent authorized by this Section 7(a), whether or not any
certificates representing shares of Common Stock shall have been marked to indicate such consent.
(b) Notices. All consents, notices and other communications provided for hereunder shall be in writing shall be deemed to be duly given when received if personally delivered; upon confirmation of transmission if transmitted by telecopy, electronic or digital transmission method; the day after it is sent if sent via overnight delivery service; and upon receipt if sent by registered or certified mail. Communications to a Shareholder must be addressed to such Shareholder according to the shareholder records of the Company or at such other address as such Shareholder communicates to the Company. Communications to the Company must be addressed to: Nelnet, Inc. 121 South 13th Street, Suite 201, Lincoln, Nebraska 68505, Attention: [ ], Facsimile (402) 458-[ ].
(c) Assignment. This Agreement is personal to the parties hereto and not assignable and may not be enforced by any subsequent holder of securities of the Company; [provided, however, that this Agreement shall be assignable to, and shall bind and inure to the benefit of, each transferee of shares of Common Stock pursuant to an Exempt Transfer.]
(d) Additional Rights. If the Company at any time grants to any other holders of Common Stock or Common Stock Equivalents any rights to request the Company to effect the registration under the Securities Act of any such shares of Common Stock or Common Stock Equivalents on terms more favorable to such holders than the terms set forth herein, the terms of this Agreement shall be deemed amended or supplemented to the extent necessary to provide the Shareholders with the same more favorable terms. The Company shall not grant any other Person rights to register securities of the Company on terms which could restrict in any way the ability of the Company to fully perform its obligations to the Shareholders pursuant to this Agreement.
(e) Descriptive Headings. The descriptive headings of the sections and paragraphs of this Agreement are for reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Nebraska.
(g) Submission to Jurisdiction; Service of Process.
(i) Each of the parties hereto irrevocably submits to the
jurisdiction of the [ ] of the State of Nebraska, County of
[ ], the U.S. District Court for the [ ] and any appellate
court or body thereto, over any suit, action or proceeding arising out
of or relating to this Agreement. In addition, each party hereto
irrevocably submits to the jurisdiction of the state and federal courts
located in the jurisdiction in which such party has been organized or
is domiciled in connection with any such suit, action or proceeding
that may be brought against such party as a defendant. Each party
hereto irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in such
court has been brought in an inconvenient forum, and further agrees
that a final judgment in any such suit, action or proceeding brought in such court shall be conclusive and binding upon such party.
(ii) Each party hereto hereby irrevocably consents to the service of any process, pleading, notices or other appears by the mailing of copies thereof by registered, certified or first class mail, postage prepaid, to such party at such party's address set froth herein, or by any other method provided or permitted under Nebraska law.
(h) Counterparts. This Agreement may be executed in any number of counterparts. Each counterpart is an original, but all counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written.
NELNET, INC.
By: ________________________________________
Name:
Title:
SHAREHOLDERS:
By: ________________________________________
Michael S. Dunlap
By: ________________________________________
Stephen F. Butterfield
By: ________________________________________
Terri Dunlap
By: ________________________________________
Union Financial Services, Ltd.
By: ________________________________________
Union Bank as Trustee for the Michael
S. Dunlap Grantor Retained Annuity Trust
By: ________________________________________
Union Bank as Trustee for the Stephen
F. Butterfield Grantor Retained Annuity
Trust
SCHEDULE OF SHAREHOLDERS
SHAREHOLDER NUMBER OF INITIAL REGISTRABLE SECURITIES Michael S. Dunlap 4,542,513 Stephen F. Butterfield 4,193,250 Terri Dunlap 1,701,000 Union Financial Services, Inc. 1,586,691 Union Bank as Trustee for the Michael S. Dunlap Grantor Retained Annuity Trust 1,400,000 Union Bank as Trustee for the Stephen F. Butterfield Grantor Retained Annuity Trust 600,000 |
EXHIBIT 4.12
NELNET, INC.
RESTRICTED STOCK PLAN
1. Purpose.
The purpose of the Nelnet, Inc. Restricted Stock Plan are to advance the interests of Nelnet, Inc. and its shareholders by providing a means to attract, retain, and motivate employees of Nelnet, Inc. and its subsidiaries and affiliates upon whose judgment, initiative and efforts the continued success, growth and development of Nelnet, Inc. is dependent.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan; provided, however, that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of equity interests of such entity or at least 20% of the ownership interests in such entity.
(b) "Award" means any Restricted Share granted to an Eligible Employee under the Plan.
(c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
(d) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Eligible Employee in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Eligible Employee, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits.
(e) "Board" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder.
(g) "Committee" means the Compensation Committee of the Board, or such other Board committee (which may include the entire Board) as may be designated by the Board to administer the Plan; provided, however, that, unless otherwise determined by the Board, the Committee shall consist of two or more directors of the Company, each of whom is a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act; provided further, however, that the mere fact that the Committee shall fail to qualify under either of the foregoing requirements shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan.
(h) "Company" means Nelnet, Inc., a corporation organized under the laws of Nebraska, or any successor corporation.
(i) "Eligible Employee" means an employee of the Company, a Subsidiary or an Affiliate, including any director who is also an employee. Notwithstanding any provisions of this Plan to the contrary, an Award may be granted to an employee in connection with his or her hiring or retention prior to the date the employee first performs services for the Company, a Subsidiary or an Affiliate; provided, however, that any such Award shall not become vested prior to the date the employee first performs such services.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and regulations thereunder.
(k) "Fair Market Value" means, with respect to Shares or other property, the fair market value of such Shares or other property determined by such methods or procedures as shall be established from time to time by the Committee. If the Shares are listed on any established stock exchange or a national market system, unless otherwise determined by the Committee in good faith, the Fair Market Value of Shares shall mean the closing price per Share on the date in question (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange or market system on which the Shares are traded, as such prices are officially quoted on such exchange.
(l) "Participant" means an Eligible Employee who has been granted an Award under the Plan.
(m) "Plan" means this Nelnet, Inc. Restricted Stock Plan.
(n) "Restricted Shares" means an Award of Shares under Section 5 hereof that may be subject to certain restrictions and to a risk of forfeiture.
(o) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act.
(p) "Shares" means Class A common stock, $.01 par value per share, of the Company.
(q) "Subsidiary" means any entity (other than the Company) in an unbroken chain of entities beginning with the Company if each of the entities (other than the last entity in the unbroken chain) owns shares possessing 50% or more of the total combined voting power of all classes of equity interests in one of the other entities in the chain.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the Committee, and the Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan:
(i) to select Eligible Employees to whom Awards may be granted;
(ii) to designate Affiliates;
(iii) to determine the number of Awards to be granted, the number of Shares to which an Award may relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, and waiver or accelerations thereof, and waivers of performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what circumstances an Award may be settled in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, exchanged, or surrendered;
(v) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee or at the election of the Eligible Employee;
(vi) to prescribe the form of each Award Agreement, which need not be identical for each Eligible Employee;
(vii) to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement or other instrument hereunder;
(ix) to accelerate the vesting of all or any portion of any Award;
(x) to determine whether uncertificated Shares may be used in satisfying Awards and otherwise in connection with the Plan; and
(xi) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall have sole discretion in exercising its authority under the Plan. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, Subsidiaries, Affiliates, Eligible Employees, any person claiming any rights under the Plan from or through any Eligible Employee and shareholders of any of the foregoing. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to other members of the Board or officers or managers of the Company or any Subsidiary or Affiliate the authority, subject to such terms as the Committee shall determine, to perform administrative functions with respect to the Plan. Notwithstanding any provision of the Plan to the contrary, the Co-Chief Executive Officers of the Company (the "Co-CEOs") shall have the power and authority, subject to the terms and conditions of the Plan, to make awards under the Plan to employees who are not officers or directors of the Company for purposes of Section 16(b) of the Exchange Act; provided, however, that the authority of the Co-CEOs to make such awards shall be subject to limitations as may be imposed from time to time by the Committee.
(c) Limitation of Liability. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any Subsidiary or Affiliate, the Company's independent certified public accountants or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, and no officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect
to the Plan, and all members of the Committee and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation.
4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 4(b) hereof, the total number of Shares reserved for issuance in connection with Awards under the Plan shall be 1,000,000. No Award may be granted if the number of Shares to which such Award relates, when added to the number of Shares previously issued under the Plan exceeds the number of Shares reserved under the applicable provisions of the preceding sentence. If any Awards are forfeited, canceled, terminated, exchanged or surrendered, or such Award is settled in cash or otherwise terminates without a distribution of Shares to the Participant, any Shares counted against the number of Shares reserved and available under the Plan with respect to such Award shall, to the extent of any such forfeiture, settlement, termination, cancellation, exchange or surrender, again be available for Awards under the Plan.
(b) In the event that the Committee shall determine that any
dividend in Shares, recapitalization, Share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase or
share exchange, or other similar corporate transaction or event, affects the
Shares such that an adjustment is appropriate in order to prevent dilution or
enlargement of the rights of Eligible Employees under the Plan, then the
Committee shall make such equitable changes or adjustments as it deems
appropriate and, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares which may thereafter be issued under the Plan,
and (ii) the number and kind of shares, other securities or other consideration
issued or issuable in respect of outstanding Awards. In addition, the Committee
is authorized to make adjustments in the terms and conditions of, and the
criteria and performance objectives, if any, included in, Awards in recognition
of unusual or non-recurring events (including, without limitation, events
described in the preceding sentence) affecting the Company or any Subsidiary or
Affiliate or the financial statements of the Company or any Subsidiary or
Affiliate, or in response to changes in applicable laws, regulations, or
accounting principles.
(c) Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or treasury Shares including Shares acquired by purchase in the open market or in private transactions.
5. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in this Section 5. In addition, the Committee may impose on any Award, at the date of grant or thereafter (subject to Section 7(d) hereof), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine.
(b) Restricted Shares. The Committee is authorized to grant Restricted Shares to Eligible Employees on the following terms and conditions:
(i) Issuance and Restrictions. Restricted Shares shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments or otherwise, as the Committee may determine. Except to the extent restricted under the Award Agreement relating to the Restricted Shares, an Eligible Employee granted Restricted Shares shall have all of the rights of a shareholder including, without limitation, the right to vote Restricted Shares and the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of service during the applicable restriction period, Restricted Shares and any accrued but unpaid dividends that are at that time subject to restrictions shall be forfeited; provided, however, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Shares.
(iii) Certificates for Shares. Restricted Shares granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Eligible Employee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company shall retain physical possession of the certificate.
(iv) Dividends. Dividends paid on Restricted Shares shall be either paid at the dividend payment date, or deferred for payment to such date as determined by the Committee, in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends. Shares distributed in connection with a Share split or dividend in Shares, and other property distributed as a dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed.
6. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted to Eligible Employees either alone or in addition to, in tandem with, or in exchange or substitution for, any other Award granted under the Plan or any award granted under any other plan or agreement of the Company, any Subsidiary or Affiliate, or any business entity to be acquired by the Company or a Subsidiary or Affiliate, or any other right of an Eligible Employee to receive payment from the Company or any Subsidiary or Affiliate. Awards may be granted in addition to or in tandem with such other Awards or awards, and may be granted either as of the same time as or a different time from the grant of such other Awards or awards.
(b) Form of Payment Under Awards. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a Subsidiary or Affiliate upon the grant or maturation of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Shares, notes, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments, and the Committee may require deferral of payment under an Award if, in the sole judgment of the Committee, it may be necessary in order to avoid nondeductibility of the payment under Section 162(m) of the Code.
(c) Nontransferability. Unless otherwise set forth by the Committee in an Award Agreement, Awards shall not be transferable by an Eligible Employee except by will or the laws of descent and distribution (except pursuant to a Beneficiary designation). An Eligible Employee's rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to claims of the Eligible Employee's creditors.
(d) Noncompetition. The Committee may, by way of the Award Agreements or otherwise, establish such other terms, conditions, restrictions and/or limitations, if any, of any Award, provided they are not inconsistent with the Plan, including, without limitation, the requirement that the Participant not engage in competition with the Company.
7. General Provisions.
(a) Compliance with Legal and Trading Requirements. The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan and any Award Agreement, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under any Award until completion of such stock exchange or market system listing or registration or qualification of such Shares or other required action under any state or federal law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under federal, state or foreign law. The Shares issued under the Plan may be subject to such other restrictions on transfer as determined by the Committee.
(b) No Right to Continued Employment or Service. Neither the Plan nor any action taken thereunder shall be construed as giving any employee the right to be retained in the employ of the Company or any of its Subsidiaries or Affiliates, nor shall it interfere in any way with the right of the Company or any of its Subsidiaries or Affiliates to terminate any employee's employment at any time.
(c) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to an Eligible Employee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Eligible Employees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of an Eligible Employee's tax obligations; provided, however, that the amount of tax withholding to be satisfied by withholding Shares shall be limited to the minimum amount of taxes, including employment taxes, required to be withheld under applicable Federal, state, local and foreign law.
(d) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue, or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of shareholders of the Company or Participants, except that any such amendment or alternation shall be subject to the approval of the Company's
shareholders to the extent such shareholder approval is required under the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted; provided, however, that, without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation, or termination of the Plan may materially and adversely affect the rights of such Participant under any Award theretofore granted to him or her. The Committee may waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue or terminate, any Award theretofore granted, prospectively or retrospectively; provided, however, that, without the consent of a Participant, no amendment, alteration, suspension, discontinuation or termination of any Award may materially and adversely affect the rights of such Participant under any Award theretofore granted to him or her.
(e) No Rights to Awards; No Shareholder Rights. No Eligible Employee or employee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Employees and employees. No Award shall confer on any Eligible Employee any of the rights of a shareholder of the Company unless and until Shares are duly issued or transferred to the Eligible Employee in accordance with the terms of the Award.
(f) Unfunded Status of Awards. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant.
(g) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, and such arrangements may be either applicable generally or only in specific cases.
(h) Not Compensation for Benefit Plans. No Award payable under this Plan shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company for the benefit of its employees unless the Company shall determine otherwise.
(i) No Fractional Shares. Unless otherwise determined by the Committee, no fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan, and any Award Agreement shall be determined in accordance with the laws of the State of Nebraska, without giving effect to principles of conflict of laws thereof.
(k) Effective Date; Plan Termination. The Plan shall become effective as of November 13, 2003 (the "Effective Date"). The Plan shall terminate as to future awards on the date which is ten (10) years after the Effective Date.
(l) Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
EXHIBIT 4.13
NELNET, INC.
DIRECTORS STOCK COMPENSATION PLAN
1. PURPOSES.
The purposes of this Nelnet, Inc. Directors Stock Compensation Plan are to advance the interests of Nelnet, Inc. and its shareholders by providing a means to attract, retain and motivate members of the Board of Directors of Nelnet, Inc. upon whose judgment, initiative and efforts the continued success, growth and development of Nelnet, Inc. is dependent.
2. DEFINITIONS.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder.
(c) "Company" means Nelnet, Inc., a corporation organized under the laws of Nebraska, or any successor corporation.
(d) "Director" means a non-employee member of the Board.
(e) "Fair Market Value" means, with respect to Shares on any day, the following:
(i) If the Shares are at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Shares on the day preceding the date in question on the stock exchange which is the primary market for the Shares, as such price is officially quoted on such exchange. If there is no reported sale of Shares on such exchange on such date, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists; and
(ii) If the Shares are not at the time listed or admitted to trading on any stock exchange but are traded in the over-the-counter market, the Fair Market Value shall be the closing selling price per share of Shares on the day preceding the date in
question, as such price is reported by the National Association of Securities Dealers through the NASDAQ National Market System or any successor system. If there is no reported closing selling price for Shares on such date, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value.
(f) "Participant" means a Director who has elected to receive Shares or defer compensation under the Plan.
(g) "Plan" means this Nelnet, Inc. Directors Stock Compensation Plan, as amended from time to time.
(h) "Plan Year" means the calendar year.
(i) "Shares" means Class A Common Stock, $.01 par value per share, of the Company.
3. ADMINISTRATION.
The Plan shall be administered by the Board. Subject to the express provisions of the Plan, the Board shall have full and exclusive authority to interpret the Plan, to make all determinations with respect to the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable in the implementation and administration of the Plan. The Board's interpretation and construction of the Plan shall be conclusive and binding on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to adjustment as provided in Section 6(g), the total number of Shares reserved for issuance under the Plan shall be 100,000.
(b) Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury Shares, including Shares acquired by purchase in the open market or in private transactions.
5. SHARE ELECTION.
(a) Each Director may make an election in writing on or prior to each December 31 to receive the Director's annual retainer fees payable in the following Plan Year in the form of Shares instead of cash. Unless the Director makes a deferral election pursuant to Section 6 below, any Shares elected shall be payable at the time cash retainer fees are otherwise payable. The number of Shares distributed shall be equal to the amount of the annual retainer
fee otherwise payable on such payment date divided by 85% the Fair Market Value
of a Share on such payment date. Notwithstanding the foregoing, a Director who
is first elected or appointed to the Board may make an election under this
Section 5 within 60 days of such election or appointment to the Board in respect
of annual retainer fees payable after the date of the election. Any election
made under this Section 5 shall remain in effect unless and until a new election
is made in accordance with the provisions of this Plan.
(b) Notwithstanding any provision of this Plan to the contrary, no elections will be available to any Director under Sections 5(a) or 6 with respect to the Director's annual retainer fee payable for calendar year 2004. The annual retainer fee for each Director for calendar year 2004 shall be paid as soon as practicable following the consummation of the Company's initial public offering and registration of the Shares issuable hereunder, and such annual retainer fee shall be paid in the form of Shares, the number of which shall be determined by dividing the amount of the annual retainer fee by 85% of the price paid per Share by the initial purchasers in the Company's initial public offering.
6. DEFERRAL ELECTION.
(a) A Director who has elected to receive Shares pursuant to Section 5 above may make an irrevocable election on or before the December 31 immediately preceding the beginning of a Plan Year of the Company, by written notice to the Company, to defer delivery of all or a designated percentage of the Shares otherwise payable as his or her annual retainer for service as a Director for the Plan Year. Notwithstanding the foregoing, a Director who is first elected or appointed to the Board may make an election under this Section 6(a) within 60 days of such election or appointment to the Board in respect of annual retainer fees payable after the date of the election.
(b) Deferrals of Shares hereunder shall continue until the Director notifies the Company in writing, on or prior to the December 31 immediately preceding the commencement of any Plan Year, that he wishes to change his election hereunder.
(c) All shares which a Director elects to defer pursuant to this Section 6 shall be credited in the form of share units to a bookkeeping account maintained by the Company in the name of the Director. Each such unit shall represent the right to receive one Share at the time determined pursuant to the terms of the Plan.
(d) As of each date on which a cash dividend is paid on Shares, there shall be credited to each account that number of units (including fractional units) determined by: (i) multiplying the amount of such dividend per Share by the number of units in such account; and (ii) dividing the total so determined by the Fair Market Value of a Share on the date of payment of such cash dividend. The additions to a Director's account pursuant to this Section 6(d) shall continue until the Director's account is fully paid.
(e) The account of a Director shall be distributed (in the form of one Share for each Share unit) either (x) in a lump sum at the time of termination of the Director's service on the Board or (y) in up to five annual installments commencing at the time of termination of the director's service on the Board, as elected by the Director. Each Director's distribution election must be made in writing within the later of (A) 60 days after the Effective Date of this Plan, or (B) 60 days after the Director first becomes eligible to participate in the Plan; provided, however, that a Director may make a new distribution election with respect to the entire portion of his or her account subject to this Section 6(e) so
long as such election is made at least one year in advance of the Director's termination of service on the Board. In the case of an account distributed in installments, the amount of Shares distributed in each installment shall be equal to the number of Share units in the Director's account subject to such installment distribution at the time of the distribution divided by the number of installments remaining to be paid.
(f) The right of a Director to amounts described under this Section 6 shall not be subject to assignment or other disposition by him or her other than by will or the laws of descent and distribution. In the event that, notwithstanding this provision, a Director makes a prohibited disposition, the Company may disregard the same and discharge its obligation hereunder by making payment or delivery as though no such disposition had been made.
(g) Adjustments. In the event that any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or Share exchange, or other such change, affects the Shares such that they are increased or decreased or changed into or exchanged for a different number or kind of Shares, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Directors and preserve the value of the Directors' Share units, (i) there shall automatically be substituted for each Share unit a new unit representing the number and kind of Shares, other securities or other consideration into which each outstanding Share shall be changed, and (ii) the number and kind of shares available for issuance under the Plan shall be equitably adjusted in order to take into account such transaction or other change. The substituted units shall be subject to the same terms and conditions as the original Share units.
7. GENERAL PROVISIONS.
(a) Compliance with Legal and Trading Requirements. The Plan shall be subject to all applicable laws, rules and regulations, including, but not limited to, U.S. federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under the Plan until completion of such stock exchange or market system listing or registration or qualification of such Shares or other required action under any U.S. federal or state law, rule or regulation or under laws, rules or regulations of other jurisdictions as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under U.S. federal or state law or under the laws of other jurisdictions.
(b) No Right to Continued Service. Neither the Plan nor any action taken thereunder shall be construed as giving any Director the right to be retained in the service of the Company or any of its subsidiaries or affiliates, nor shall it interfere in any way with the right of the Company or any of its subsidiaries or affiliates to terminate any Director's service at any time.
(c) Taxes. The Company is authorized to withhold from any Shares delivered under this Plan any amounts of withholding and other taxes due in connection therewith, and to take such other action as the Company may deem advisable to enable the Company and a Participant to satisfy obligations for the payment of any withholding taxes and other tax obligations relating thereto. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations.
(d) Amendment. The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of shareholders of the Company or Participants, except that any such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company's shareholders if such shareholder approval is required by any U.S. federal law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted; provided, however, that, without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation or termination of the Plan may impair the rights or, in any other manner, adversely affect the rights of such Participant under any award theretofore granted to him or her or compensation previously deferred by him or her hereunder.
(e) Unfunded Status of Awards. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to a deferral election, nothing contained in the Plan shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company; provided, however, that the Company may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, or other property pursuant to any award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Company otherwise determines with the consent of each affected Participant.
(f) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other compensation arrangements as it may deem desirable, and such arrangements may be either applicable generally or only in specific cases.
(g) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan. Cash shall be paid in lieu of such fractional Shares.
(h) Governing Law. The validity, construction, and effect of the Plan shall be determined in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws thereof.
(i) Effective Date; Plan Termination. The Plan as amended and restated shall become effective as of October 21, 2003 (the "Effective Date"). The Plan shall terminate as to future awards, at such time as no Shares remain available for issuance pursuant to Section 4, and the Company has no further obligations with respect to any compensation deferred under the Plan.
(j) Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
EXHIBIT 4.14
NELNET, INC.
EMPLOYEE SHARE PURCHASE PLAN
1. PURPOSE.
The purpose of the Nelnet, Inc. Employee Share Purchase Plan
is to provide eligible employees the opportunity to purchase Nelnet, Inc. Class
A Common Stock on a basis that qualifies for the tax treatment prescribed by
Section 423 of the Code.
2. DEFINITIONS.
The following terms, when used in the Plan, shall have the following meanings:
(a) "Board" or "Board of Directors" means the Board of Directors of the Company, as constituted from time to time.
(b) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to a particular section of the Code include any successor provisions.
(c) "Committee" means the Compensation Committee of the Board, or such other committee appointed by the Board of Directors to administer the Plan pursuant to the provisions of Section 3(a) below.
(d) "Common Stock" means Class A Common Stock, par value $.01 per share, of the Company.
(e) "Company" means Nelnet, Inc., a Nebraska corporation, or any successor corporation.
(f) "Fair Market Value" on a particular date means the mean between the highest and lowest sales prices of a share of Common Stock on the principal stock exchange or stock market on which the Common Stock may be listed or admitted to trading. If there were no sales on such date, the respective prices on the most recent prior day on which sales were reported shall be used. If the foregoing method of determining fair market value should be inconsistent with Section 423 of the Code, "Fair Market Value" shall be determined by the Committee in a manner consistent with Section 423 of the Code and shall mean the value as so determined.
(g) "Offering" means a period, designated by the Committee in accordance with the provisions of Section 6 hereof, on the first day of which options will be granted to eligible employees pursuant to Section 8(a) hereof and on the last day of which such options will be deemed exercised or will expire, as applicable, in accordance with Section 8(b) hereof.
(h) "Participant" or "Participating Employee" means an employee of the Company or a Participating Subsidiary who is eligible to participate in an Offering under the Plan pursuant to Section 5 below and who elects to participate in such Offering in accordance with Section 6 below.
(i) "Participating Subsidiary" means, with respect to an Offering under the Plan, a Subsidiary the employees of which are authorized by the Committee as provided in Section 5 below to participate in such Offering.
(j) "Plan" means the Nelnet, Inc. Employee Share Purchase Plan, as amended from time to time.
(k) "Parent" means a parent corporation as defined in
Section 424(e) of the Code, including a corporation which becomes such a parent
in the future.
(l) "Subsidiary" means a subsidiary corporation as defined in Section 424(f) of the Code, including a corporation which becomes such a subsidiary in the future.
(m) "Total Compensation" means, with respect to any Offering, the cash compensation paid to a Participating Employee by the Company or a Participating Subsidiary during the Offering for services, including overtime, premium pay, commissions and annual bonus, in each case prior to reduction for pre-tax contributions made to a plan or salary reduction contributions made to a plan excludable from income under Sections 125 or 402(g) of the Code; provided, however, that "Total Compensation" shall not include severance pay, stay-on bonuses, retirement income, welfare benefits or income derived from stock options, stock appreciation rights or other equity-based compensation.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Compensation Committee of the Board, or if designated by the Board such other committee of the Board consisting of two or more directors.
(b) Subject to the provisions of the Plan, the powers of the Committee shall include having the authority, in its discretion, to:
(i) define, prescribe, amend and rescind rules, regulations, procedures, terms and conditions relating to the Plan; and
(ii) interpret, administer and construe the Plan and make all other determinations necessary or advisable for the administration of the Plan, including but not limited to correcting defects, reconciling inconsistencies and resolving ambiguities.
(c) The interpretation by the Committee of the terms and conditions of the Plan, and its administration of the Plan, and all action taken by the Committee, shall be final, binding and conclusive on the Company, its stockholders, Subsidiaries, all Participants and employees, and upon their respective successors and assigns, and upon all other persons claiming under or through any of them.
(d) Members of the Board, members of the Committee and persons to whom authority is delegated under Section 3(e) below acting under this Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability except for gross or willful misconduct in the performance of their duties.
(e) The Committee may delegate its authority to administer the Plan to any individuals as the Committee may determine and such individuals shall serve solely at the pleasure of the Committee. Any individuals who are authorized by the Committee to administer the Plan shall have the full power to act on behalf of the Committee, but shall at all times be subordinate to the Committee and the Committee shall retain ultimate authority for the administration of the Plan.
4. STOCK SUBJECT TO THE PLAN.
(a) Subject to paragraph (c) below, the aggregate number of shares of Common Stock which may be sold under the Plan is 1,000,000 shares of Common Stock.
(b) If the number of shares of Common Stock that Participating Employees become entitled to purchase is greater than the number of shares of Common Stock that are offered in a particular Offering or that remain available under the Plan, the available shares of Common Stock shall be allocated by the Committee among such Participating Employees in such manner as it deems fair and equitable.
(c) In the event of any change in the Common Stock, through recapitalization, merger, consolidation, stock dividend or split, combination or exchange of shares, spinoff or otherwise, the Committee may make such equitable adjustments in the Plan and the then outstanding Offerings as it deems necessary and appropriate including, but not limited to, changing the number of shares of Common Stock reserved under the Plan, and the purchase price of shares in the current Offering; provided that any such adjustments shall be consistent with Sections 423 and 424 of the Code.
(d) Shares of Common Stock which are to be delivered under the Plan may be obtained by the Company from its treasury, by purchasing such shares on the open market or from private sources, or by issuing authorized but unissued shares of Common Stock. Shares of authorized but unissued Common Stock may not be delivered under the Plan if the purchase price thereof is less than the par value (if any) of the Common Stock at the time. The Committee may (but need not) provide at any time or from time to time (including
without limitation upon or in contemplation of a change in control) for a number of shares of Common Stock equal in number to the number of shares then subject to options under this Plan to be issued or transferred to, or acquired by, a trust (including but not limited to a grantor trust) for the purpose of satisfying the Company's obligations under such options, and, unless prohibited by applicable law, such shares held in trust shall be considered authorized and issued shares with full dividend and voting rights, notwithstanding that the options to which such shares relate might not be exercisable at the time.
5. ELIGIBILITY.
All employees of the Company and any Subsidiaries designated
by the Committee from time to time will be eligible to participate in the Plan,
in accordance with and subject to such rules and regulations as the Committee
may prescribe; provided, however, that (a) such rules shall comply with the
requirements of the Code (including but not limited to Section 423(b)(3), (4)
and (8) thereof), (b) no employee shall be eligible to participate in the Plan
if his or her customary employment is 20 hours or less per week or for not more
than five months in any calendar year, unless the Committee determines otherwise
on a uniform and non-discriminatory basis, (c) the Committee may (but need not)
in its discretion exclude employees who have been employed by the Company or a
Participating Subsidiary less than two years and/or highly compensated employees
within the meaning of Section 414(q) of the Code from being eligible to
participate in the Plan or any Offering, but unless and until otherwise
determined by the Committee, only employees who have been employed less than six
months will be excluded, (d) no employee may be granted an option under the Plan
if such employee, immediately after the option is granted, owns stock possessing
5% or more of the total combined voting power or value of all classes of stock
of his employer corporation or any Parent or Subsidiary (with the rules of
Section 424(d) of the Code applicable in determining the stock ownership of an
employee, and stock which the employee may purchase under outstanding options,
whether or not such options qualify for the special tax treatment afforded by
Section 421 (a) of the Code, shall be treated as stock owned by the employee),
and (e) all Participating Employees shall have the same rights and privileges
except as otherwise permitted by Section 423(b)(5) of the Code.
6. OFFERINGS; PARTICIPATION.
The Company may make Offerings of up to 27 months' duration each, to eligible employees to purchase shares of Common Stock under the Plan, until all shares authorized to be delivered under the Plan have been exhausted or until the Plan is sooner terminated by the Board. Subject to the preceding sentence, the number, commencement date and duration of any Offerings shall be determined by the Committee in its sole discretion; provide, however, that, unless the Committee determines otherwise, (a) the first Offering shall commence as soon as practicable following the effectiveness of the Company's initial public offering and shall extend through June 30, 2004, and (b) a new six-month Offering will commence immediately after the end of the previous Offering. The duration of any Offering need not be the same as the duration of any other Offering, and more than one Offering may commence or
terminate on the same date if the Committee so provides. Subject to such rules and procedures as the Committee may prescribe, an eligible employee may elect to participate in an Offering at such time(s) as the Committee may permit by authorizing a payroll deduction for such purpose in one percent increments of up to a maximum of twenty percent (20%) of his or her Total Compensation with respect to such Offering or such lesser amount as the Committee may prescribe. Participant elections may be made in any manner deemed appropriate by the Committee from time to time, including by voice response or through the Internet. The Committee may (but need not) permit employee contributions to be made by means other than payroll deductions; provided, however, that in no event shall an employee's contributions (excluding interest, if any, credited pursuant to Section 7(a) below) from all sources in any Offering exceed twenty percent (20%) of his or her Total Compensation with respect to such Offering or such lesser amount as the Committee may prescribe. The Committee may at any time suspend or accelerate the completion of an Offering if required by law or deemed by the Committee to be in the best interests of the Company, including in the event of a change in ownership or control of the Company or any Subsidiary.
7. PAYROLL DEDUCTIONS.
(a) The Company will maintain payroll deduction accounts on its books for all Participating Employees, and may (but need not) credit such accounts with interest if (and only if) the Committee so directs at such rate (if any) as the Committee may prescribe. All employee contributions and any interest thereon which the Committee may authorize in accordance with the preceding sentence shall be credited to such accounts. Employee contributions and any interest credited to the payroll deduction accounts of Participating Employees need not be segregated from other corporate funds and may be used for any corporate purpose.
(b) At such times as the Committee may permit and subject to such rules and procedures as the Committee may prescribe, a Participating Employee may suspend his or her payroll deduction during an Offering, or may withdraw the balance of his or her payroll deduction account and thereby withdraw from participation in an Offering.
(c) Any balance remaining in an employee's payroll
deduction account after shares have been purchased in an Offering pursuant to
Section 8(b) below will be refunded to the Participating Employee. Upon
termination of the Plan, all amounts in the accounts of Participating Employees
shall be carried forward into their payroll deduction accounts under a successor
plan, if any, or refunded to them, as the Committee may decide.
(d) In the event of the termination of a Participating Employee's employment for any reason, his or her participation in any Offering under the Plan shall cease, no further amounts shall be deducted pursuant to the Plan and the balance in such employee's account shall be paid as soon as practicable following such termination of employment to the employee, or, in the event of such employee's death, to such employee's beneficiary
designated under this Plan or, in the absence of such a beneficiary designation, to such employee's estate.
8. PURCHASE; LIMITATIONS.
(a) Subject to Section 5 above and within the limitations of Section 8(d) below, each person who is an eligible employee of the Company or a Participating Subsidiary on the first day of an Offering under the Plan is hereby granted an option, on the first day of such Offering, to purchase up to a number of whole shares of Common Stock at the end of such Offering determined by dividing twenty percent (or such lesser percentage as may be specified by the Committee as the maximum employee contribution percentage in such Offering) of such employee's Total Compensation with respect to such Offering, plus such interest (if any) as the Committee may authorize to be credited during such Offering in accordance with Section 7(a) above, by 85 percent of the Fair Market Value of a share of Common Stock on the first date of such Offering or on the last date of such Offering; provided, however, provided that in no event shall the number of shares of Common Stock that may be purchased under any such option exceed 2500 shares or such higher or lower number of shares as the Committee may have specified in advance of such Offering as the maximum amount of stock which may be purchased by an employee in such Offering. The purchase price of such shares under such options shall be determined in accordance with Section 8(c) below. The Company's obligation to sell and deliver Common Stock in any Offering or pursuant to any such option shall be subject to the approval of any governmental authority whose approval the Committee determines it is necessary or advisable to obtain in connection with the authorization, issuance, offer or sale of such Common Stock.
(b) As of the last day of the Offering, the payroll deduction account of each Participating Employee shall be totaled. Subject to the provisions of Section 7(b) above and 8(d) below, if such account contains sufficient funds as of that date to purchase one or more whole shares of Common Stock at the price determined under Section 8(c) below, the Participating Employee shall be conclusively deemed to have exercised the option granted pursuant to Section 8(a) above for as many whole shares of Common Stock as the amount of his or her payroll deduction account (including any contributions made by means other than payroll deductions and including any interest credited to the account) at the end of the Offering can purchase (but in no event for more than the total number of shares that are subject to the option); such employee's account will be charged for the amount of the purchase and for all purposes under the Plan the employee will be deemed to have acquired the shares on that date; and either a stock certificate representing such shares will be issued to him or her, or the Company's record keeper will make an entry on its books and records evidencing that such shares have been duly issued or transferred as of that date, as the Committee may direct. Any option granted pursuant to Section 8(a) above which is not deemed exercised as of the last day of the Offering in accordance with the foregoing provisions of this Section 8(b) shall expire on that date.
(c) Unless the Committee determines before the first day of an Offering that a higher price that complies with Section 423 of the Code shall apply, the price at which shares of Common Stock may be purchased under each option granted pursuant to Section 8(a) above shall be the lesser of (i) an amount equal to 85 percent of the Fair Market Value of the Common Stock at the time such option is granted, or (ii) an amount equal to 85 percent of the Fair Market Value of the Common Stock at the time such option is exercised.
(d) In addition to any other limitations set forth in the Plan, no employee may be granted an option under the Plan which permits his or her rights to purchase stock under the Plan, and any other stock purchase plan of his or her employer corporation and its Parent and Subsidiary that is qualified under Section 423 of the Code, to accrue at a rate which exceeds $25,000 of the Fair Market Value of such stock (determined at the time such option is granted) for each calendar year in which the option is outstanding at any time. The Committee may further limit the amount of Common Stock which may be purchased by any employee during an Offering in accordance with Section 423(b)(5) of the Code.
9. HOLDING PERIOD.
Unless the Committee should determine otherwise, all Common Stock acquired under the Plan is subject to a two year holding period. For purposes of measuring a given two year holding period, the commencement date shall be the date which is one day after the last day of an Offering. During the holding period, no shares acquired through the Plan may be sold, transferred or otherwise disposed, other than by will, the laws of descent and distribution, or if Participant is no longer employed by the Company or its Subsidiaries.
10. NO TRANSFER.
(a) No option, right or benefit under the Plan may be transferred by any employee, whether by will, the laws of descent and distribution, or otherwise, and all options, rights and benefits under the Plan may be exercised during an employee's lifetime only by such employee.
(b) Book entry accounts and certificates for shares of Common Stock purchased under the Plan may be maintained or registered, as the case may be, only in the name of the Participating Employee or, if such employee so indicates on his or her payroll deduction authorization form, in his or her name jointly with a member of his or her family, with right of survivorship.
11. EFFECTIVE DATE AND DURATION OF PLAN.
The Plan shall become effective when adopted by the Board; provided, however, that the stockholders of the Company approve it within 12 months thereafter. If not so approved by shareholders, the Plan shall be null, void and of no force or effect. If so approved, the Plan shall remain in effect until all shares authorized to be issued or transferred hereunder have been exhausted or until the Plan is sooner terminated by the Board of Direc-
tors, and may continue in effect thereafter with respect to any options outstanding at the time of such termination if the Board of Directors so provides.
12. AMENDMENT AND TERMINATION OF THE PLAN.
The Plan may be amended by the Board of Directors, without shareholder approval, at any time and in any respect, unless shareholder approval of the amendment in question is required under Section 423 of the Code or under the rules and regulations of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. The Plan may also be terminated at any time by the Board of Directors.
13. GENERAL PROVISIONS.
(a) Nothing contained in this Plan shall be deemed to confer upon any person any right to continue as an employee of or to be associated in any other way with the Company for any period of time or at any particular rate of compensation.
(b) No person shall have any rights as a stockholder of the Company with respect to any shares optioned under the Plan until such shares are issued or transferred to him or her.
(c) All expenses of adopting and administering the Plan shall be borne by the Company, and none of such expenses shall be charged to any employee.
(d) The Plan shall be governed by and construed under the laws of the State of New York, without giving effect to the principles of conflict of laws of that State.
(e) The Plan and each Offering under the Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. Every provision of the Plan shall be administered, interpreted and construed to carry out such intention.
EXHIBIT 10.79
NELNET, INC.
EXECUTIVE OFFICERS BONUS PLAN
1. PURPOSE.
Nelnet, Inc. has established this Nelnet, Inc. Executive Officers Bonus Plan in order to provide the Company's Co-Chief Executive Officers and its President with an opportunity to earn annual bonus compensation based upon the Company's consolidated net income before taxes, as an incentive and reward for their leadership, ability and exceptional services.
2. DEFINITIONS.
For purposes of the Plan, the flowing terms shall be defined as set forth below:
(a) "Award" means the amount of bonus compensation to which an Eligible Employee is entitled for each Plan Year in accordance with Sections 4 and 5 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended, including applicable regulations thereunder.
(d) "Committee" means the Compensation Committee of the Board.
(e) "Company" means Nelnet, Inc., a Nebraska corporation, or any successor corporation.
(f) "Eligible Employee" means each of the Co-Chief Executive Officers and the President of the Company.
(g) "Plan" means the Nelnet, Inc. Executive Officers Bonus Plan, as amended from time to time.
(h) "Plan Year" means a calendar year or such other period established by the Committee.
3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall deem advisable and to interpret the terms and provisions of the Plan. All determinations made by the Committee with respect to the Plan and Awards thereunder shall be final and binding on all persons, including the Company and all Eligible Employees.
4. DETERMINATION OF AWARDS.
The amount of the Award payable to each Eligible Employee for each Plan Year shall be 0.85% of the Company's consolidated net income before taxes for the Plan Year, computed in accordance with generally accepted accounting principles; provided, however, that the maximum award for any Plan Year payable to the President shall be $500,000.
5. PAYMENT OF AWARD.
The Award of each Eligible Employee for a Plan Year shall be paid in cash after the end of the Plan Year. If an Eligible Employee dies after the end of a Plan Year but before receiving payment of any Award, the amount of such Award shall be paid to a designated beneficiary or, if no beneficiary has been designated, to the Eligible Employee's estate, in the form of a lump sum payment in cash as soon as practicable after the Award for the Plan Year has been determined.
6. NONTRANSFERABILITY.
No Award or rights under this Plan may be transferred or assigned other than by will or by the laws of descent and distribution.
7. AMENDMENTS AND TERMINATION.
The Board may terminate the Plan at any time and may amend it from time to time; provided, however, that no termination or amendment of the Plan shall adversely affect the rights of an Eligible Employee or a beneficiary to a previously earned Award.
8. GENERAL PROVISIONS.
(a) Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements. Neither the adoption of the Plan or any Award hereunder shall confer upon an Eligible Employee any right to continued employment.
(b) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board or the Committee and all officers or employees or the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.
9. EFFECTIVE DATE.
The Plan shall be effective as of January 1, 2003.
EXHIBIT 10.83
NELNET, INC.
SHARE RETENTION POLICY
1. COVERED OFFICERS
This Nelnet, Inc. Share Retention Policy applies to all of the officers of Nelnet, Inc. ("Nelnet") or any of its direct or indirect subsidiaries who are at or above the level of executive director (the "Covered Officers").
2. SHARE RETENTION REQUIREMENTS
No Covered Officer may sell or dispose of a number of shares of Nelnet common stock in any calendar year in excess of one-third of the number of shares of Nelnet common stock beneficially owned by the Covered Officer on the first day of the calendar year. The share retention requirements under this policy apply to Covered Officers during and following their employment by Nelnet; provided, however, that after five years from the closing date of Nelnet's initial public offering, Covered Officers will be free to sell or otherwise dispose of all or any of their shares of Nelnet common stock.
3. EXCEPTIONS
The following exceptions apply to the Share Retention Policy set forth above:
(a) Transfers to family members and family-owned partnerships or other family-owned entities will not be prohibited, so long as such transfers are effected only for estate planning purposes and the transferee(s) agrees to comply with this Share Retention Policy (treating the transferee(s) as the transferring Covered Officer).
(b) Any Covered Officer may sell or otherwise dispose of up to $500,000 in value of shares of Nelnet common stock during any calendar year.
(c) All restrictions under the Share Retention Policy shall cease in the event of the death or retirement at normal retirement age of a Covered Officer. For this purpose normal retirement age means age 65.
ACKNOWLEDGEMENT AND AGREEMENT
I hereby acknowledge that I have read and understand this Nelnet, Inc. Share Retention Policy, and I hereby agree to be bound by such policy both during my employment with Nelnet and following my employment, in accordance with the terms set forth above.
Exhibit 23.1
The Board of Directors
Nelnet, Inc.:
We consent to the use of our report dated March 21, 2003, except as to note 20, which is as of August 14, 2003, and notes 7, 11 and 19, which are as of November 10, 2003, in Pre-Effective Amendment No. 5 to the registration statement on Form S-1 of Nelnet, Inc., with respect to the consolidated balance sheets of Nelnet, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, included herein and to the reference to our firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP Lincoln, Nebraska November 21, 2003 |