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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER 333-104736
NELNET EDUCATION LOAN FUNDING, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0809600
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 SOUTH 13TH STREET, SUITE 201 68508
LINCOLN, NEBRASKA (Zip Code)
(Address of principal executive offices)
(402) 458-2370
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 31, 2004, there are 111 shares of common stock, $100 par value,
outstanding.
The registrant meets the condition set forth in General Instructions H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
NELNET EDUCATION LOAN FUNDING, INC.
FORM 10-Q
INDEX
June 30, 2004
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements ......................................................................... 2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 13
Item 4. Controls and Procedures ...................................................................... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................ 14
Item 2. Changes in Securities and Use of Proceeds .................................................... 14
Item 3. Defaults Upon Senior Securities .............................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 14
Item 5. Other Information ............................................................................ 14
Item 6. Exhibits and Reports on Form 8-K ............................................................. 15
Signatures .................................................................................................... 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Balance Sheets
June 30, 2004 December 31, 2003
---------------- -------------------
(unaudited)
(dollars in thousands, except share data)
Assets:
Student loans receivable (net of allowance for loan losses of
$29 and $2,574, respectively) ....................................... $ 4,944,857 $ 3,213,660
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party ............. 6,916 9,150
Cash and cash equivalents - held at a related party ................. 1,744 --
----------- -----------
Total cash and cash equivalents ........................................ 8,660 9,150
Restricted cash - held by trustee ...................................... 143,162 90,726
Restricted investments - held by trustee ............................... 205,159 73,676
Accrued interest receivable ............................................ 91,110 58,091
Other assets ........................................................... 16,151 6,722
----------- -----------
Total assets ........................................................ $ 5,409,099 $ 3,452,025
=========== ===========
Liabilities:
Bonds and notes payable ................................................ $ 5,140,537 $ 3,378,050
Accrued interest payable ............................................... 11,345 3,790
Other liabilities, including deferred taxes ............................ 104,119 54,207
Income taxes payable to parent ......................................... 44,571 259
----------- -----------
Total liabilities ................................................... 5,300,572 3,436,306
----------- -----------
Stockholder's equity:
Common stock, $100 par value. Authorized 1,000 shares; issued
and outstanding 111 shares .......................................... 11 11
Additional paid-in capital ............................................. 12,294 5,652
Retained earnings ...................................................... 96,222 10,056
----------- -----------
Total stockholder's equity .......................................... 108,527 15,719
----------- -----------
Total liabilities and stockholder's equity .......................... $ 5,409,099 $ 3,452,025
=========== ===========
See accompanying notes to financial statements.
2
NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Statements of Income
(unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- -------- --------- --------
(dollars in thousands)
Interest income:
Loan interest .............................................. $ 159,056 $ 14,113 $ 189,631 $ 26,874
Investment interest ........................................ 932 867 1,803 1,642
--------- -------- --------- --------
Total interest income .................................... 159,988 14,980 191,434 28,516
Interest expense:
Interest on bonds and notes payable ........................ 18,176 7,902 33,188 13,978
--------- -------- --------- --------
Net interest income ...................................... 141,812 7,078 158,246 14,538
Less provision (recovery) for loan losses .................... (3,335) 100 (2,185) 150
--------- -------- --------- --------
Net interest income after provision (recovery) for
loan losses ............................................ 145,147 6,978 160,431 14,388
--------- -------- --------- --------
Other income (expense):
Derivative market value adjustment ......................... (1,374) -- (2,205) --
Other ...................................................... 236 99 465 196
--------- -------- --------- --------
Total other income (expense) ............................. (1,138) 99 (1,740) 196
--------- -------- --------- --------
Operating expenses:
Trustee and other debt related fees ...................... 1,045 615 2,295 1,165
Loan servicing fees to related party ..................... 8,008 3,432 14,697 6,348
Loan servicing fees ...................................... 117 104 208 206
Administrative fees to parent ............................ 2,749 1,603 5,055 2,890
Professional services .................................... 42 27 112 79
--------- -------- --------- --------
Total operating expenses ............................... 11,961 5,781 22,367 10,688
--------- -------- --------- --------
Income before income tax expense ............................. 132,048 1,296 136,324 3,896
Income tax expense ........................................... 48,724 466 50,158 1,402
--------- -------- --------- --------
Net income ............................................. $ 83,324 $ 830 $ 86,166 $ 2,494
========= ======== ========= ========
See accompanying notes to financial statements.
3
NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Statements of Cash Flows
(unaudited)
Six months ended
June 30,
----------------------------
2004 2003
----------- -----------
(dollars in thousands)
Net income ..................................................................................... $ 86,166 $ 2,494
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization, including premiums and deferred origination costs ........................... 6,191 2,813
Derivative market value adjustment ........................................................ 2,205 --
Deferred income tax expense (benefit) ..................................................... 5,847 (2,903)
Provision (recovery) for loan losses ...................................................... (2,185) 150
Increase in accrued interest receivable ................................................... (33,019) (13,338)
Increase in other assets .................................................................. (9,324) (2,676)
Increase in accrued interest payable ...................................................... 7,555 844
Increase in other liabilities ............................................................. 44,065 6,672
Increase in income taxes payable to parent ................................................ 44,312 3,753
----------- -----------
Net cash provided by (used in) operating activities .................................... 151,813 (2,191)
----------- -----------
Cash flows from investing activities:
Originations, purchases, and consolidations of student loans, including premiums and
deferred origination costs ............................................................. (2,104,785) (733,898)
Net proceeds from student loan principal payments and loan consolidations ................. 203,814 115,746
Purchases of student loans, including premiums, from affiliates ........................... (95,589) (1,113,935)
Proceeds from sales of student loans to affiliates ........................................ 230,428 998,510
Proceeds (payments) on loan participations ................................................ 31,556 (24,104)
Increase in restricted cash - held by trustee ............................................. (52,436) (31,357)
Purchases of restricted investments - held by trustee ..................................... (362,825) (105,680)
Proceeds from maturities of restricted investments - held by trustee ...................... 231,342 137,050
----------- -----------
Net cash used in investing activities .................................................. (1,918,495) (757,668)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of bonds and notes payable ......................................... 2,027,700 1,087,873
Payments on bonds and notes payable ....................................................... (265,213) (326,603)
Payment for debt issuance costs ........................................................... (2,937) (1,161)
Proceeds from capital contributions from parent ........................................... 11,202 11,035
Payments for return of capital to parent .................................................. (4,560) (7,178)
Dividends paid to parent .................................................................. -- (7,344)
----------- -----------
Net cash provided by financing activities .............................................. 1,766,192 756,622
----------- -----------
Net decrease in cash and cash equivalents .............................................. (490) (3,237)
Cash and cash equivalents, beginning of period ................................................. 9,150 9,294
----------- -----------
Cash and cash equivalents, end of period ....................................................... $ 8,660 6,057
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ............................................................................. $ 25,006 12,882
=========== ===========
See accompanying notes to financial statements.
4
NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Notes to Financial Statements
(Information at June 30, 2004 and for the three and six months ended
June 30, 2004 and 2003 is unaudited)
1. Basis of Presentation
Nelnet Education Loan Funding, Inc. (the "Company") is a wholly-owned subsidiary
of National Education Loan Network, Inc. ("NELN" or the "Parent") and a
wholly-owned indirect subsidiary of Nelnet, Inc ("Nelnet"). The Parent is a
holding company organized for the purpose of establishing and owning the stock
of corporations like the Company engaged in the securitization of financial
assets. The Parent also provides managerial and administrative support to the
Company. The Company contracts the majority of its loan servicing with Nelnet.
In addition, the Company files a consolidated tax return with Nelnet, the legal
parent of NELN. The financial statements reflect income taxes computed as if the
Company filed a separate tax return. Current income tax liabilities are recorded
by the Company to its Parent as if the Company were a separate tax-paying
entity.
The accompanying unaudited financial statements of the Company as of June 30,
2004 and for the three and six months ended June 30, 2004 and 2003 have been
prepared on the same basis as the audited financial statements for the year
ended December 31, 2003 and, in the opinion of the Company's management, the
unaudited financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of results of
operations which might be expected for the entire year. The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Operating results for the three and
six months ended June 30, 2004 are not necessarily indicative of the results for
the year ending December 31, 2004. The unaudited financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2003. Certain amounts from 2003 have been reclassified to
conform to the current period presentation.
2. Deferred Income
A portion of the Company's Federal Family Education Loan Program ("FFELP" or
"FFEL Program") loan portfolio is comprised of loans that are currently or were
previously financed with tax-exempt obligations issued prior to October 1, 1993.
Based upon provisions of the Higher Education Act of 1965, as amended, and
related interpretations by the U.S. Department of Education (the "Department"),
the Company is entitled to receive special allowance payments on these loans
providing the Company with a 9.5% minimum rate of return. In May 2003, the
Company sought confirmation from the Department regarding whether it was allowed
to recognize the income based on the 9.5% minimum rate of return. While pending
satisfactory resolution of this issue with the Department, the Company deferred
recognition of the interest income that was generated by these loans in excess
of income based upon the standard special allowance rate. In June 2004, after
consideration of certain clarifying information received in connection with the
guidance it had sought, including written and verbal communications with the
Department, the Company concluded that the earnings process had been completed
related to the special allowance payments on these loans and recognized $123.9
million of interest income. At December 31, 2003 and March 31, 2004, the amount
of deferred excess interest income on these loans was approximately $43 million
and approximately $79 million, respectively, and was included in other
liabilities on the Company's balance sheet. In future periods, the Company will
recognize the income from the special allowance payments on these loans as it is
earned.
3. Allowance for Loan Losses
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.
The allowance for the Company's federally insured loan portfolio is based on
periodic evaluations of the Company's loan portfolio considering past
experience, trends in student loan claims rejected for payment by guarantors,
changes to federal student loan programs, current economic conditions, and other
relevant factors. The federal government guarantees 98% of principal and
interest of federally insured student loans, which limits the Company's loss
exposure to 2% of the outstanding balance of the Company's federally insured
portfolio.
5
Effective June 1, 2004, Nelnet was designated as an Exceptional Performer by the
Department in recognition of its exceptional level of performance in servicing
FFEL Program loans. As a result of this designation, Nelnet's servicing
customers receive 100% reimbursement on all eligible FFEL Program default claims
submitted for reimbursement beginning June 1, 2004 and are not subject to the 2%
risk sharing loss for eligible claims submitted after that date. Only FFEL
Program loans that are serviced by Nelnet, as well as loans owned by the Company
and serviced by other service providers designated as Exceptional Performers by
the Department, are subject to the 100% reimbursement. At June 30, 2004, the
majority of the Company's loans were serviced by a service provider designated
as an Exceptional Performer. The majority of these loans (95%) are serviced by
Nelnet. The Company is entitled to receive this benefit as long as its service
providers continue to meet the required servicing standards published by the
Department. Compliance with such standards is assessed on a quarterly basis. In
June 2004, the Company's allowance for loan loss balance was reduced by $3.7
million and the provision for loan losses was similarly reduced to account for
the estimated effects of the Exceptional Performer designations achieved by the
Company's service providers.
4. Bonds and Notes Payable and Accounting for Derivatives
On January 15, 2004 and April 29, 2004, the Company consummated debt offerings
of student loan asset-backed notes of $1.0 billion each, with final maturity
dates ranging from 2009 through 2039. The majority of notes issued in these
transactions have variable interest rates based on a spread to LIBOR or reset
under auction procedures. In conjunction with these offerings, the Company
entered into certain interest rate cap financial instruments. The Company
executed a 5.25% interest rate cap, effective January 30, 2004, with a notional
amount of $800.0 million that terminates in February 2006. In addition, the
Company executed two interest rate caps, effective April 29, 2004, with notional
amounts of $450.0 million and $651.0 million that terminate in May 2006 and
August 2019, respectively. The interest rate caps on these derivatives are 5.0%
and 7.10%, respectively.
The Company accounts for these interest rate caps under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes 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 an asset or liability on the balance sheet and measure
them at fair value. The fair value of the Company's interest rate caps are
determined from market quotes from independent security brokers. At June 30,
2004, the fair market value of the Company's outstanding interest rate caps was
$6.2 million, which is included in other assets on the accompanying balance
sheet.
The Company incorporates the use of derivative instruments to minimize the
economic effect of interest rate volatility. The Company's goal is to manage
interest rate sensitivity by modifying the repricing characteristics of certain
liabilities so that movements in interest rates do not, on a material basis,
adversely affect interest expense. The Company views this strategy as a prudent
management of interest rate sensitivity. Management believes its derivative
transactions are economically effective; however, they do not qualify for hedge
accounting under SFAS No. 133. Changes in the fair value of derivative
instruments that do not qualify for hedge accounting are reported in current
period earnings. For the three and six months ended June 30, 2004, the Company
recorded losses of $1.4 million and $2.2 million, respectively, related to the
change in fair value of its outstanding interest rate caps.
By using derivative instruments, the Company is exposed to credit and market
risk. If the counterparty fails to perform, credit risk is equal to the extent
of the fair value gain in a derivative. When the fair value of a derivative
contract is positive, this generally indicates that the counterparty would owe
the Company if the derivative was terminated. When the fair value of a
derivative contract is negative, the Company would owe the counterparty if the
derivative was terminated and, therefore, it has no credit risk. The Company
minimizes the credit (or repayment) risk in derivative instruments by entering
into transactions with high-quality counterparties that are reviewed
periodically by the Company's risk committee. The Company also maintains a
policy of requiring that an International Swaps and Derivative Association
Master Agreement govern all derivative contracts.
Market risk is the adverse effect that a change in interest rates, or implied
volatility rates, has on the value of a financial instrument. The Company
manages market risk associated with interest rates by establishing and
monitoring limits as to the types and degree of risk that may be undertaken.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
results of operations and financial condition of the Company. The discussion
should be read in conjunction with the Company's financial statements for the
year ended December 31, 2003 included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
This report contains forward-looking statements and information that are based
on management's current expectations as of the date of this document. When used
in this report, the words "anticipate," "believe," "estimate," "intend,"
"expect," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks,
uncertainties, assumptions, and other factors that may cause the actual results
to be materially different from those reflected in such forward-looking
statements. These factors include, among others, changes in the terms of student
loans and the educational credit marketplace arising from the implementation of
applicable laws and regulations and from changes in these laws and regulations,
which may reduce the volume, average term, and costs of yields on student loans
under the Federal Family Education Loan Program ("FFEL Program" or "FFELP") or
result in loans being originated or refinanced under non-FFELP programs or may
affect the terms upon which banks and others agree to sell FFELP loans to the
Company. The Company could also be affected by changes in the demand for
educational financing or in financing preferences of lenders, educational
institutions, students and their families; changes in the general interest rate
environment, and in the securitization markets for education loans, which may
increase the costs or limit the availability of financings necessary to
initiate, purchase, or carry education loans; losses from loan defaults; and
changes in prepayment rates and credit spreads. The reader should not place
undue reliance on forward-looking statements, which speak only as of the date of
this Quarterly Report on Form 10-Q. The Company is not obligated to publicly
release any revisions to forward-looking statements to reflect events after the
date of this Quarterly Report on Form 10-Q or unforeseen events.
The Company
The Company is a bankruptcy remote, special purpose corporation formed under the
laws of the State of Nebraska. The Company was organized in 1998 to acquire the
student loan assets and liabilities of Nebraska Higher Education Loan Program,
Inc., a non-profit corporation that had previously operated as a qualified
scholarship funding corporation under Section 150(d) of the Internal Revenue
Code. In connection with that transaction, the Company assumed the obligations
of Nebraska Higher Education Loan Program, Inc. to pay the principal and
interest due on its outstanding student loan revenue bonds. When those
obligations were assumed, the Company also received from Nebraska Higher
Education Loan Program, Inc. an assignment of all of the student loans and other
assets that had been pledged to secure their repayment, and certain other
related assets. Since completing that transaction, the Company has issued
additional series of student loan asset-backed notes and used the proceeds of
those notes to finance additional portfolios of student loans.
The Company is a wholly owned subsidiary of National Education Loan Network,
Inc., which is a wholly owned subsidiary of Nelnet, Inc., a reporting company
under the Securities Exchange Act of 1934. Prior to April 21, 2003, the Company
was named NEBHELP, INC.
General Description of the Business of the Company
The Company is a special purpose corporation formed to engage in the business of
originating, acquiring, financing, holding, and managing guaranteed education
loans made to students and to parents of students under the Higher Education Act
of 1965, as amended (the "Higher Education Act"). As a special purpose
corporation, the Company may not engage in any activity other than:
o originating, acquiring, financing, holding, and managing student loans and
the other related assets, and the proceeds there from;
o issuing bonds and notes; and
o engaging in other activities related to the activities listed above.
As of June 30, 2004, the Company held a student loan portfolio of $4.9 billion,
consisting entirely of loans originated under the FFEL Program. As of June 30,
2004, the Company had issued and outstanding $5.1 billion of debt
7
obligations, the proceeds of which were used to finance its student loan
portfolio. The Company's student loans, and certain other assets, are pledged to
secure payment of its debt obligation under various indentures of trust.
The Company originates new student loans for its portfolio, participates in
student loans, and purchases student loans from other holders, including
affiliated companies. When the Company originates student loans or when it
acquires student loans from other holders, the Company engages one or more
"eligible lenders," as defined in the Higher Education Act, to act as trustees
to hold title to all such originated and acquired student loans. These eligible
lender trustees hold the legal title to the student loans, and the Company holds
100% of the beneficial interests in those loans.
Significant Drivers and Trends
The Company's earnings and earnings growth are directly affected by the size of
its portfolio of student loans, the interest rate characteristics of its
portfolio, the costs associated with financing and managing its portfolio, and
the costs associated with the origination and acquisition of the student loans
in the portfolio. In addition to the impact of growth of the Company's student
loan portfolio, the Company's results of operations and financial condition may
be materially affected by, among other things, changes in:
o applicable laws and regulations that may affect the volume, terms,
effective yields, or refinancing options of education loans;
o demand for education financing and competition within the student loan
industry;
o the interest rate environment, funding spreads on the Company's financing
programs, and access to capital markets; and
o prepayment rates on student loans, including prepayments relating to loan
consolidations.
Results of Operations
The Company's results of operations consist of the following components:
Net Interest Income
The Company generates the majority of its earnings from the spread between the
yield the Company receives on its portfolio of student loans and the cost of
funding these loans. This spread income is reported on the Company's income
statement as net interest income. While the spread between the yield the Company
receives on its student loan portfolio and the cost of funding those loans may
vary due to fluctuations in interest rates, special allowance payments from the
federal government ensure that the Company receives a minimum yield on its
student loans, so long as certain requirements are met. 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 the Company's income
statement. The amortization and write-offs of bond issuance costs are included
in interest expense on the Company's income statement.
The Company's 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 U.S. Department of Education (the "Department,") 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,
the loan's repayment status, and funding sources for the loan. 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. The more drastic
the reduction in rates subsequent to the July 1 annual borrower interest rate
reset date, the greater the Company's opportunity to earn variable-rate floor
income. In declining interest rate environments, the Company can earn
significant amounts of such income. Conversely, as the decline in rates abates,
or in environments where interest rates are rising, the Company's opportunity to
earn variable-rate floor income can be reduced, in some cases substantially.
Since the borrower rates are reset annually, the Company views earnings on
variable-rate floor income as temporary and not necessarily sustainable. The
Company's 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 the Company cannot assure the nature of such environment in
the future. Based upon provisions of the Higher Education Act, loans previously
financed with tax-exempt obligations issued prior to October 1, 1993 are
entitled to receive special allowance payments equal to a 9.5% minimum rate of
return.
8
Because the Company generates the majority of its earnings from the spread
between the yield the Company receives on its portfolio of student loans and the
cost of financing these loans, the interest rate sensitivity of the Company's
balance sheet is very important to its operations. The current and future
interest rate environment can and will affect the Company's interest earnings,
net interest income, and net income.
On those student loans with fixed to term borrower rates, primarily
consolidation loans, the Company earns interest at the greater of the borrower
rate or a variable rate based on the SAP formula. Since the Company finances the
majority of its student loan portfolio with variable-rate debt, the Company may
earn excess spread on these loans for an extended period of time.
On most consolidation loans, the Company must pay a 1.05% per year rebate fee to
the Department. 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 the Company's loan portfolio, there will be a lower
yield on the Company's loan portfolio in the short term. However, due to the
extended terms of consolidation loans, the Company expects to earn the yield on
these loans for a longer duration, making them beneficial to the Company in the
long term.
A portion of the Company's FFELP loan portfolio is comprised of loans that are
currently or 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 Department, the Company is entitled to receive
special allowance payments on these loans providing the Company with a 9.5%
minimum rate of return. In May 2003, the Company sought confirmation from the
Department regarding whether it was allowed to recognize the income based on the
9.5% minimum rate of return. While pending satisfactory resolution of this issue
with the Department, the Company deferred recognition of the excess interest
income that was generated by these loans. In June 2004, after consideration of
certain clarifying information received in connection with the guidance it had
sought, including written and verbal communications with the Department, the
Company concluded that the earnings process had been completed related to the
special allowance payments on these loans and recognized $123.9 million of
interest income. At December 31, 2003 and March 31, 2004, the amount of deferred
excess interest income on these loans was approximately $43 million and
approximately $79 million, respectively. In future periods, the Company will
recognize the income from the special allowance payments on these loans as it is
earned.
Investment interest income includes income from restricted cash and investments
and income from unrestricted interest-earning deposits and funds pledged to
secure repayment of the bonds and notes payable.
Provision for Loan Losses
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. The
Company maintains an allowance for loan losses associated with its student loan
portfolio at a level that is based on the performance characteristics of the
underlying loans.
The allowance for the federally insured loan portfolio is based on periodic
evaluations of the Company's loan portfolios considering past experience, trends
in student loan claims rejected for payment by guarantors, changes to federal
student loan programs, current economic conditions, and other relevant factors.
The federal government guarantees 98% of principal and interest of federally
insured student loans, which limits the Company's loss exposure to 2% of the
outstanding balance of the Company's federally insured portfolio.
Effective June 1, 2004, Nelnet was designated as an Exceptional Performer by the
Department in recognition of its exceptional level of performance in servicing
FFEL Program loans. As a result of this designation, Nelnet's servicing
customers receive 100 percent reimbursement on all eligible FFEL Program default
claims submitted for reimbursement beginning June 1, 2004 and are not subject to
the 2% risk sharing loss for eligible claims submitted after that date. Only
FFEL Program loans that are serviced by Nelnet, as well as loans owned by the
Company and serviced by other service providers designated as Exceptional
Performers by the Department, are subject to the 100% reimbursement. At June 30,
2004, the majority of the Company's loans were serviced by a service provider
designated as an Exceptional Performer. The majority of these loans (95%) are
serviced by Nelnet. The Company is entitled to receive this benefit as long as
its service providers continue to meet the required servicing standards
published by the Department. Compliance with such standards is assessed on a
quarterly basis. In June 2004, the Company's allowance for loan loss balance was
reduced by $3.7 million and the provision for loan losses was similarly reduced
to account for
9
the estimated effects of the Exceptional Performer designations achieved by the
Company's service providers. The Company anticipates lower provision expense for
loan losses compared to historical periods as a result of its service providers'
Exceptional Performer designations.
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 that management believes is adequate to cover
probable losses inherent in the loan portfolio.
Other Income (Expense)
Other income (expense) primarily includes the derivative market value adjustment
related to the Company's interest rate caps.
Operating Expenses
Operating expenses include costs incurred to manage and administer the Company's
student loan portfolio and its financing transactions, costs incurred to
generate and acquire student loans, and administrative expenses.
The Company does not believe inflation has a significant effect on its
operations.
Results of Operations
Three months ended June 30, 2004 compared to the three months ended June 30,
2003
Three months ended
June 30,
-------------------------
2004 2003 $ Change % Change
--------- -------- --------- --------
(dollars in thousands)
Interest income:
Loan interest, excluding variable-rate floor income ......... $ 162,121 $ 14,709 $ 147,412 1,002.2%
Variable-rate floor income ................................... -- 838 (838) (100.0)
Amortization of loan premiums and deferred origination
costs ...................................................... (3,065) (1,434) (1,631) 113.7
Investment interest .......................................... 932 867 65 7.5
--------- -------- --------- --------
Total interest income ...................................... 159,988 14,980 145,008 968.0
Interest expense:
Interest on bonds and notes payable .......................... 18,176 7,902 10,274 130.0
--------- -------- --------- --------
Net interest income ........................................ 141,812 7,078 134,734 1,903.6
Less provision (recovery) for loan losses ....................... (3,335) 100 (3,435) (3,435.0)
--------- -------- --------- --------
Net interest income after provision (recovery)
for loan losses .......................................... 145,147 6,978 138,169 1,980.1
--------- -------- --------- --------
Other income (expense):
Derivative market value adjustment ........................... (1,374) -- (1,374) (100.0)
Other ........................................................ 236 99 137 138.4
--------- -------- --------- --------
Total other income (expense) ............................... (1,138) 99 (1,237) (1,249.5)
--------- -------- --------- --------
Operating expenses:
Trustee and other debt related fees ........................ 1,045 615 430 69.9
Loan servicing fees to related parties ..................... 8,008 3,432 4,576 133.3
Loan servicing fees ........................................ 117 104 13 12.5
Administrative fees to parent .............................. 2,749 1,603 1,146 71.5
Professional services ...................................... 42 27 15 55.6
--------- -------- --------- --------
Total operating expenses ................................. 11,961 5,781 6,180 106.9
--------- -------- --------- --------
Income before income tax expense ......................... 132,048 1,296 130,752 10,088.9
Income tax expense .............................................. 48,724 466 48,258 10,355.8
--------- -------- --------- --------
Net income ............................................... $ 83,324 $ 830 $ 82,494 9,939.0%
========= ======== ========= ========
Net interest income. Total loan interest, including variable-rate floor income
and amortization of loan premiums and deferred origination costs, increased as a
result of an increase in the size of the student loan portfolio and recognition
of the special allowance yield adjustment, offset by changes in the interest
rate environment and in the pricing characteristics of the Company's student
loan assets. Recognition of the special allowance yield adjustment of $123.9
10
million, offset by lower interest rates during the three months ended June 30,
2004, caused an increase in the student loan net yield to 14.36% from 4.18% in
the comparable period in 2003. The special allowance yield adjustment increased
the student loan net yield 11.19% during the three months ended June 30, 2004.
Variable-rate floor income decreased in 2004 compared to 2003 due to the timing
and relative change in interest rates during the periods. Essentially,
prevailing interest rates declined drastically subsequent to the July 1, 2002
annual borrower interest rate reset date compared to their less substantial
decline following the reset of rates on July 1, 2003. Consequently, the Company
realized no variable-rate floor income during the three months ended June 30,
2004 as compared to $0.8 million during the comparable period in 2003. The
weighted average interest rate on the student loan portfolio increased during
the three months ended June 30, 2004 due to recognition of the special allowance
yield adjustment, offset by lower interest rates and the increase in the number
of lower yielding consolidation loans. The higher weighted average loan interest
rate resulted in an increase in loan interest income of approximately $35.7
million. Consolidation loan activity increased the amortization and write-offs
of amortization of premiums and deferred origination costs and increased the
consolidation rebate fee, reducing loan interest income approximately $9.3
million. The increase in loan interest income was also a result of an increase
in the Company's portfolio of student loans. The average student loan portfolio
increased by $3.1 billion, or 228.3%, at June 30, 2004 as compared to June 30,
2003, which, coupled with the recognition of the special allowance yield
adjustment, increased loan interest income by approximately $119.2 million.
Interest expense on bonds and notes payable increased due to an increase in
average total debt of approximately $3.3 billion, specifically an increase in
average variable-rate debt, which increased interest expense by approximately
$10.8 million during the three months ended June 30, 2004 as compared to the
comparable period in 2003. The increase in average debt also resulted in an
increase in amortization of bond issuance costs of approximately $162,000. The
reduction in interest rates, specifically LIBOR and auction rates, decreased the
Company's average cost of funds to 1.54% during the three months ended June 30,
2004 from 2.18% during the comparable period in 2003, which decreased interest
expense on existing variable-rate debt approximately $435,000. The Company
reduced average fixed-rate debt by $11.1 million during the three months ended
June 30, 2004 as compared to the comparable period in 2003, which decreased the
Company's interest expense by approximately $175,000.
Net interest income, excluding the effects of variable-rate floor income and
recognition of the special allowance yield adjustment, increased approximately
$11.7 million to approximately $17.9 million during the three months ended June
30, 2004 from approximately $6.2 million during the comparable period in 2003.
Provision for loan losses. The provision for loan losses for student loans
decreased $3.4 million from an expense of $0.1 million for the three months
ended June 30, 2003 to a recovery of $3.3 million during the three months ended
June 30, 2004 as a result of the Exceptional Performer designations previously
discussed.
Other income (expense). The company began utilizing interest rate caps in
January 2004. The Company recorded a loss of $1.4 million related to the change
in fair value of its outstanding interest rate caps for the three months ended
June 30, 2004.
Operating expenses. Total operating expenses increased during the three months
ended June 30, 2004 as compared to the comparable period in 2003 as a result of
the growth in the Company's assets and liabilities. Trustee and other debt
related fees increased as result of the increase in average total debt
outstanding. Loan servicing fees to related parties and administrative fees to
parent increased as a result of the increase in average student loans
outstanding.
Income tax expense. Income tax expense increased due to the increase in income
before income taxes. The Company's effective tax rate was 36.9% during the three
months ended June 30, 2004 and 36.0% during the three months ended June 30,
2003.
11
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
Six months ended
June 30,
--------------------------
2004 2003 $ Change % Change
--------- -------- --------- --------
(dollars in thousands)
Interest income:
Loan interest, excluding variable-rate floor income .......... $ 195,133 $ 27,998 $ 167,135 597.0%
Variable-rate floor income ................................... 62 1,437 (1,375) (95.7)
Amortization of loan premiums and deferred origination
costs ...................................................... (5,564) (2,561) (3,003) 117.3
Investment interest .......................................... 1,803 1,642 161 9.8
--------- -------- --------- --------
Total interest income ..................................... 191,434 28,516 162,918 571.3
Interest expense:
Interest on bonds and notes payable .......................... 33,188 13,978 19,210 137.4
--------- -------- --------- --------
Net interest income ....................................... 158,246 14,538 143,708 988.5
Less provision (recovery) for loan losses ...................... (2,185) 150 (2,335) (1,556.7)
--------- -------- --------- --------
Net interest income after provision (recovery) for
loan losses ............................................. 160,431 14,388 146,043 1,015.0
--------- -------- --------- --------
Other income (expense):
Derivative market value adjustment ........................... (2,205) -- (2,205) (100.0)
Other ........................................................ 465 196 269 137.2
--------- -------- --------- --------
Total other income (expense) .............................. (1,740) 196 (1,936) (987.8)
--------- -------- --------- --------
Operating expenses:
Trustee and other debt related fees ....................... 2,295 1,165 1,130 97.0
Loan servicing fees to related parties .................... 14,697 6,348 8,349 131.5
Loan servicing fees ....................................... 208 206 2 1.0
Administrative fees to parent ............................. 5,055 2,890 2,165 74.9
Professional services ..................................... 112 79 33 41.8
--------- -------- --------- --------
Total operating expenses ............................... 22,367 10,688 11,679 109.3
--------- -------- --------- --------
Income before income tax expense ....................... 136,324 3,896 132,428 3,399.1
Income tax expense ............................................. 50,158 1,402 48,756 3,477.6
--------- -------- --------- --------
Net income ............................................. $ 86,166 $ 2,494 $ 83,672 3,354.9%
========= ======== ========= ========
Net interest income. Total loan interest, including variable-rate floor income
and amortization of loan premiums and deferred origination costs, increased as a
result of recognition of an increase in the size of the student loan portfolio
and the special allowance yield adjustment, offset by changes in the interest
rate environment and in the pricing characteristics of the Company's student
loan assets. Recognition of the special allowance yield adjustment of $123.9
million, offset by lower interest rates during the six months ended June 30,
2004, caused an increase in the student loan net yield to 9.45% from 4.84% in
the comparable period in 2003. The special allowance yield adjustment recognized
in June 2004 increased the student loan net yield 6.18% during the six months
ended June 30, 2004. Variable-rate floor income decreased in 2004 compared to
2003 due to the timing and relative change in interest rates during the periods.
Essentially, prevailing interest rates declined drastically subsequent to the
July 1, 2002 annual borrower interest rate reset date compared to their less
substantial decline following the reset of rates on July 1, 2003. Consequently,
the Company realized approximately $62,000 in variable-rate floor income during
the six months ended June 30, 2004 as compared to $1.4 million during the
comparable period in 2003. The weighted average interest rate on the student
loan portfolio increased during the six months ended June 30, 2004 due to
recognition of the special allowance yield adjustment, offset by lower interest
rates and the increase in the number of lower yielding consolidation loans. The
higher weighted average loan interest rate resulted in an increase in loan
interest income of approximately $28.3 million. Consolidation loan activity
increased the amortization and write-offs of premiums and deferred origination
costs and increased the consolidation rebate fee, reducing loan interest income
approximately $17.9 million. The increase in loan interest income was also a
result of an increase in the Company's portfolio of student loans. The average
student loan portfolio increased by $2.9 billion, or 261.2%, at June 30, 2004 as
compared to June 30, 2003, which, coupled with the recognition of the special
allowance yield adjustment, increased loan interest income by approximately
$153.6 million.
Interest expense on bonds and notes payable increased due to an increase in
average total debt of approximately $3.1 billion, specifically an increase in
average variable-rate debt, which increased interest expense by approximately
$20.2 million during the six months ended June 30, 2004 as compared to the same
period in 2003. The increase in average debt also resulted in an increase in
amortization of bond issuance costs of approximately $375,000. The reduction in
12
interest rates, specifically LIBOR and auction rates, decreased the Company's
average cost of funds to 1.54% during the six months ended June 30, 2004 from
2.26% during the comparable period in 2003, which decreased interest expense on
existing variable rate debt approximately $980,000. The Company reduced average
fixed-rate debt by $11.1 million during the six months ended June 30, 2004 as
compared to the comparable period in 2003, which decreased the Company's
interest expense by approximately $350,000.
Net interest income, excluding the effects of variable-rate floor income and the
recognition of the special allowance yield adjustment, increased approximately
$21.2 million to approximately $34.3 million during the six months ended June
30, 2004 from approximately $13.1 million during the comparable period in 2003.
Provision for loan losses. The provision for loan losses for student loans
decreased $2.3 million from an expense of $0.1 million during the six months
ended June 30, 2003 to a recovery of $2.2 million for the six months ended June
30, 2004 as a result of the Exceptional Performer designations previously
discussed.
Other income (expense). The company began utilizing interest rate caps in
January 2004. The Company recorded a loss of $2.2 million related to the change
in fair value of its outstanding interest rate caps for the six months ended
June 30, 2004.
Operating expenses. Total operating expenses increased during the six months
ended June 30, 2004 as compared to the comparable period in 2003 as a result of
the growth in the Company's assets and liabilities. Trustee and other debt
related fees increased as result of the increase in average total debt
outstanding. Loan servicing fees to related parties and administrative fees to
parent increased as a result of the increase in average student loans
outstanding.
Income tax expense. Income tax expense increased due to the increase in income
before income taxes. The Company's effective tax rate was 36.8% during the six
months ended June 30, 2004 and 36.0% during the six months ended June 30, 2003.
Student Loan Spread Analysis
Maintenance of the spread on assets is a key factor in maintaining and growing
the Company's income. The following table analyzes the student loan spread on
the Company's portfolio of student loans during the three and six months ended
June, 2004 and 2003, and represents the spread on assets earned in conjunction
with the liabilities used to fund the assets.
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Student loan yield........................................ 15.49% 5.14% 10.59% 5.74%
Consolidation rebate fees................................. (0.85) (0.53) (0.86) (0.44)
Premium amortization...................................... (0.28) (0.43) (0.28) (0.46)
---------- ---------- ---------- ----------
Student loan net yield.................................... 14.36 4.18 9.45 4.84
Student loan cost of funds................................ (1.54) (2.18) (1.54) (2.26)
---------- ---------- ---------- ----------
Student loan spread....................................... 12.82 2.00 7.91 2.58
Variable-rate floor income................................ -- (0.25) -- (0.26)
Special allowance yield adjustment (a).................... (11.19) -- (6.18) --
---------- ---------- ---------- ----------
Core student loan spread.................................. 1.63% 1.75% 1.73% 2.32%
========== ========== ========== ==========
Average balance of student loans (in thousands)........... $4,427,712 $1,348,811 $4,011,006 $1,110,575
(a) On June 30, 2004, the Company recognized $123.9 million of excess interest
income that had previously been deferred. At December 31, 2003 and March 31,
2004, the amount of deferred excess interest income on these loans was $42.9
million and $78.8 million, respectively. In future periods, the Company will
recognize the income from the special allowance payments on these loans as it is
earned.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable under General Instruction H-2.
13
ITEM 4. CONTROLS AND PROCEDURES
Under supervision and with the participation of certain members of the Company's
management, including the principal executive officer and principal financial
officer, the Company completed an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended).
Based on this evaluation, the Company's principal executive officer and
principal financial officer believe that the disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q with respect to timely communication to them and other members of
management responsible for preparing periodic reports and material information
required to be disclosed in this Quarterly Report on Form 10-Q as it relates to
the Company.
There was no change in the Company's internal control over financial reporting
during the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
The effectiveness of the Company's or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of judgment
in designing, implementing, and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that the Company's disclosure controls and procedures will prevent all
errors or fraud or ensure that all material information will be made known to
appropriate management in a timely fashion. By their nature, the Company's or
any system of disclosure controls and procedures can provide only reasonable
assurance regarding management's control objectives.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is 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 the Company's management that the
disposition or ultimate determination of these claims, lawsuits, and proceedings
will not have a material adverse effect on the Company's business, financial
position, or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable under General Instruction H-2.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable under General Instruction H-2.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable under General Instruction H-2.
ITEM 5. OTHER INFORMATION
Nothing to report.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
No. Description
- ------- -----------
3.1 Amended Articles of Incorporation of the Company are incorporated
by reference to the Company's registration statement on Form S-3
(File No. 333-104736).
3.2 Bylaws of the Company are incorporated by reference to the
Company's registration statement on Form S-3 (File No.
333-104736).
4.1 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
is incorporated by reference to Exhibit 4.7 to the registration
statement of Nelnet, Inc. (File No. 333-108070).
4.2 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 is incorporated by reference to Exhibit
4.8 to the registration statement of Nelnet, Inc. (File No.
333-108070).
4.3 Indenture of Trust among Nelnet Education Loan Funding, Inc. and
Wells Fargo Bank Minnesota, National Association, as Indenture
Trustee and Eligible Lender Trustee, dated January 1, 2004, is
incorporated by reference to Exhibit 4.11 to the Annual Report on
Form 10-K of Nelnet, Inc. for the year ended December 31, 2003.
4.4 Indenture of Trust among Nelnet Education Loan Funding, Inc. and
Wells Fargo Bank, National Association, as Indenture Trustee and
Eligible Lender Trustee, dated as of April 1, 2004, is
incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed by the Company on May 5, 2004.
Instruments with respect to other long-term debt of Nelnet
Education Loan Funding, Inc. 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%
of the total assets of Nelnet Education Loan Funding, Inc. Nelnet
Education Loan Funding, Inc. hereby agrees to furnish a copy of
such instruments to the Securities and Exchange Commission upon
request.
10.1 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 is incorporated by
reference to Exhibit 10.15 to the registration statement of
Nelnet, Inc. (File No. 333-108070).
10.2 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 is incorporated by
reference to Exhibit 10.16 to the registration statement of
Nelnet, Inc. (File No. 333-108070).
10.5 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 is incorporated by
reference to Exhibit 10.90 to the registration statement of
Nelnet, Inc. (File No. 333-108070).
10.6 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 is incorporated by
reference to Exhibit 10.91 to the registration statement of
Nelnet, Inc. (File No. 333-108070).
15
10.7 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 is incorporated by reference to
Exhibit 10.92 to the registration statement of Nelnet, Inc. (File
No. 333-108070).
10.8 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. is incorporated by reference to Exhibit
10.94 to the registration statement of Nelnet, Inc. (File No.
333-108070).
10.9 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Deutsche Bank AG, dated as of February 20, 2004 is incorporated
herein by reference to Exhibit 10.56 of the Annual Report on Form
10-K of Nelnet, Inc. for the year ended December 31, 2003.
10.10 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Bank of America, N.A., dated as of February 20, 2004 is
incorporated herein by reference to Exhibit 10.57 of the Annual
Report on Form 10-K of Nelnet, Inc. for the year ended December
31, 2003.
10.11 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Societe Generale, dated as of February 20, 2004 is incorporated
herein by reference to Exhibit 10.58 of the Annual Report on Form
10-K of Nelnet, Inc. for the year ended December 31, 2003.
10.12 February 2004 Amendment to Application and Agreement for Standby
Letter of Credit, Loan Purchase Agreements and Standby Student
Loan Purchase Agreements, dated as of February 20, 2004, among
National Education Loan Network, Inc., Nelnet, Inc., Nelnet
Education Loan Funding, Inc., Union Bank and Trust Company and
Bank of America, N.A. Incorporated by reference to Exhibit 10.62
to the Annual Report on Form 10-K of Nelnet, Inc. for the year
ended 2003.
10.13 Amendment to Application and Agreement for Standby Letter of
Credit, Loan Purchase Agreements and Standby Student Loan
Purchase Agreements, dated effective November 20, 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. Incorporated by reference to Exhibit 10.63
to the Annual Report on Form 10-K of Nelnet, Inc. for the year
ended 2003.
10.14 Amendment to Application and Agreement for Standby Letter of
Credit, Loan Purchase Agreements and Standby Student Loan
Purchase Agreements, dated effective December 19, 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. Incorporated by reference to Exhibit 10.64
to the Annual Report on Form 10-K of Nelnet, Inc. for the year
ended 2003.
10.15 April 2004 Amendment to Application and Agreement for Standby
Letter of Credit, Loan Purchase Agreements and Standby Purchase
Agreements, dated effective April 15, 2004, among Bank of
America, N.A., Nelnet Education Loan Funding, Inc., National
Education Loan Network, Inc., Nelnet, Inc., and Union Bank and
Trust Company is incorporated by reference to Exhibit 10.67 of
the Quarterly Report on Form 10-Q of Nelnet, Inc. for the three
months ended March 31, 2004.
10.16 Agreement to Extend Termination Date for the Warehouse Note
Purchase and Security Agreement, dated as of May 1, 2004, among
Nelnet Education Loan Funding, Inc., Bank of America, N.A.,
Deutsche Bank AG, New York Branch, and Societe Generale is
incorporated by reference to Exhibit 10.71 of the Quarterly
Report on Form 10-Q of Nelnet, Inc. for the three months ended
March 31, 2004.
31.1* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Principal Executive Officer.
31.2* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Principal Financial Officer.
32** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted,
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------
* Filed herewith
** Furnished herewith
16
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on May 4, 2004, for the purpose
of filing copies of certain documents executed and delivered in connection with
issuance by the Company of $817,700,000 of Student Loan Asset-Backed Rate Notes.
The Company filed a current report on Form 8-K on July 2, 2004 announcing that
effective June 30, 2004, it will begin to recognize income related to student
loan portfolios funded from the proceeds of tax-exempt bonds, including amounts
previously deferred through that date.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NELNET EDUCATION LOAN FUNDING, INC.
Date: August 16, 2004 By: /s/ Terry J. Heimes
---------------------------------
Name: Terry J. Heimes
Title: President
(Principal Executive Officer)
By: /s/ James D. Kruger
---------------------------------
Name: James D. Kruger
Title: Secretary and Treasurer
(Principal Financial Officer)
18