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, 2008

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 001-31924
 
 
NELNET, INC.
(Exact name of registrant as specified in its charter)
 
NEBRASKA
84-0748903
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
68508
(Address of principal executive offices)
(Zip Code)

(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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 
 
Large accelerated filer x
  
Accelerated filer o
Non-accelerated filer o
  
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 31, 2008, there were 37,969,493 and 11,495,377 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,058,604 shares of Class A Common Stock held by a wholly owned subsidiary).
 
 
 
NELNET, INC.
FORM 10-Q
INDEX
June 30, 2008

 
 
2
 
29
 
65
 
71
   
 
 
71
 
73
 
74
 
76
 
77
   
78


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

   
As of
  
As of
  
   
June 30, 2008
  
December 31, 2007
  
   
(unaudited)
      
Assets:
              
Student loans receivable (net of allowance for loan losses of $47,909 and $45,592, respectively)
  
$
25,993,307
    
26,736,122
 
Cash and cash equivalents:
              
Cash and cash equivalents - not held at a related party
    
15,629
   
38,305
 
Cash and cash equivalents - held at a related party
    
122,825
   
73,441
 
Total cash and cash equivalents
    
138,454
   
111,746
 
               
Restricted cash
    
912,252
   
842,020
 
Restricted investments
    
95,061
   
85,227
 
Restricted cash - due to customers
    
29,543
   
81,845
 
Accrued interest receivable
    
501,544
   
593,322
 
Accounts receivable, net
    
45,986
   
49,084
 
Goodwill
    
175,178
   
164,695
 
Intangible assets, net
    
90,163
   
112,830
 
Property and equipment, net
    
46,429
   
55,797
 
Other assets
    
108,662
   
107,624
 
Fair value of derivative instruments
    
295,346
   
222,471
 
Total assets
  
$
28,431,925
   
29,162,783
 
             
Liabilities:
              
Bonds and notes payable
  
$
27,530,237
    
28,115,829
 
Accrued interest payable
    
86,496
   
129,446
 
Other liabilities
    
162,761
   
220,899
 
Due to customers
    
29,543
   
81,845
 
Fair value of derivative instruments
    
38,846
   
5,885
 
Total liabilities
    
27,847,883
   
28,553,904
 
               
Shareholders' equity:
              
Preferred stock, $0.01 par value. Authorized 50,000,000 shares;no shares issued or outstanding
    
—
   
—
 
Common stock:
              
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 37,952,246 shares as of June 30, 2008 and 37,980,617 shares as of December 31, 2007
    
380
   
380
 
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,495,377 shares as of June 30, 2008 and December 31, 2007
    
115
   
115
 
Additional paid-in capital
    
99,854
   
96,185
 
Retained earnings
    
485,739
   
515,317
 
Employee notes receivable
    
(2,046
)
  
(3,118
)
Total shareholders' equity
    
584,042
   
608,879
 
Commitments and contingencies
              
Total liabilities and shareholders' equity
  
$
28,431,925
    
29,162,783
 

See accompanying notes to consolidated financial statements.

2

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)

   
Three months
  
Six months
  
   
ended June 30,
  
ended June 30,
  
   
2008
  
2007
  
2008
  
2007
  
Interest income:
                          
Loan interest
  
$
296,686
    
417,086
    
626,672
    
814,140
  
Investment interest
    
9,116
    
18,783
    
20,796
    
40,208
  
Total interest income
    
305,802
    
435,869
    
647,468
    
854,348
  
Interest expense:
                          
Interest on bonds and notes payable
    
232,464
    
367,893
    
557,605
    
718,388
  
Net interest income
    
73,338
    
67,976
    
89,863
    
135,960
  
Less provision for loan losses
    
6,000
    
2,535
    
11,000
    
5,288
  
Net interest income after provision for loan losses
    
67,338
    
65,441
    
78,863
    
130,672
  
                           
Other income (expense):
                          
Loan and guaranty servicing income
    
24,904
    
31,610
    
51,017
    
62,076
  
Other fee-based income
    
40,817
    
38,262
    
86,730
    
78,291
  
Software services income
    
4,896
    
5,848
    
11,648
    
11,596
  
Other income
    
1,646
    
1,927
    
3,056
    
7,020
  
Gain (loss) on sale of loans
    
48
    
1,010
    
(47,426
)
  
2,796
  
Derivative market value, foreign currency, and put option adjustments and derivative settlements, net
    
20,192
    
10,743
    
3,594
    
2,853
  
Total other income
    
92,503
    
89,400
    
108,619
    
164,632
  
                           
Operating expenses:
                          
Salaries and benefits
    
43,549
    
59,761
    
97,392
    
121,465
  
Other operating expenses:
                          
Impairment expense
    
—
    
—
    
18,834
    
—
  
Advertising and marketing
   
16,143
    
15,456
    
32,346
    
29,449
  
Depreciation and amortization
    
10,603
    
10,647
    
21,437
    
21,657
  
Professional and other services
    
8,478
    
10,514
    
16,585
    
18,883
  
Occupancy and communications
    
4,914
    
5,032
    
10,755
    
10,251
  
Postage and distribution
    
2,743
    
5,624
    
6,560
    
10,143
  
Trustee and other debt related fees
    
2,464
    
2,785
    
4,854
    
5,628
  
Other
    
9,028
    
10,827
    
17,996
    
24,399
  
Total other operating expenses
    
54,373
    
60,885
    
129,367
    
120,410
  
                           
Total operating expenses
    
97,922
    
120,646
    
226,759
    
241,875
  
                           
Income (loss) before income taxes
    
61,919
    
34,195
    
(39,277
)
  
53,429
  
Income tax expense (benefit)
    
19,195
    
13,306
    
(12,176
)
  
20,570
  
                           
Income (loss) from continuing operations
    
42,724
    
20,889
    
(27,101
)
  
32,859
  
Income (loss) from discontinued operations, net of tax
    
981
    
(6,135
)
  
981
    
(3,325
)
                           
Net income (loss)
  
$
43,705
    
14,754
    
(26,120
)
  
29,534
  
                           
Earnings (loss) per share, basic and diluted:
                          
Income (loss) from continuing operations
    
0.87
    
0.42
    
(0.55
)
  
0.66
  
Income (loss) from discontinued operations
    
0.02
    
(0.12
)
  
0.02
    
(0.07
)
                           
Net income (loss)
  
$
0.89
    
0.30
    
(0.53
)
  
0.59
  

See accompanying notes to consolidated financial statements.

3

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share data)
(unaudited)

                                       
Accumulated
      
   
Preferred
              
Class A
  
Class B
  
Additional
      
Employee
  
other
  
Total
  
   
stock
  
Common stock shares
  
Preferred
  
common
  
common
  
paid-in
  
Retained
  
notes
  
comprehensive
  
shareholders’
  
   
shares
  
Class A
  
Class B
  
stock
  
stock
  
stock
  
capital
  
earnings
  
receivable
  
income
  
equity
  
                                                                     
Balance as of March 31, 2007
    
—
    
38,097,623
    
11,495,377
  
$
—
    
381
    
115
    
105,345
    
507,596
    
(2,701
)
  
382
    
611,118
  
Comprehensive income:
                                                                    
Net income
   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
14,754
    
—
    
—
    
14,754
  
Other comprehensive income:
                                                                    
Foreign currency translation
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(574
)
  
(574
)
Non-pension postretirement benefit plan
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
192
    
192
  
Total comprehensive income
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
14,372
  
Cash dividend on Class A and Class B common stock - $0.07 per share
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(3,440
)
  
—
    
—
    
(3,440
)
Issuance of common stock, net of forfeitures
    
—
    
39,182
    
—
    
—
    
1
    
—
    
880
    
—
    
—
    
—
    
881
  
Compensation expense for stock based awards
    
—
    
—
    
—
    
—
    
—
    
—
    
772
    
—
    
—
    
—
    
772
  
Repurchase of common stock
    
—
    
(998
)
  
—
    
—
    
—
    
—
    
(22
)
  
—
    
—
    
—
    
(22
)
Acquisition of enterprise under common control
    
—
    
(474,426
)
  
—
    
—
    
(5
)
  
—
    
(12,502
)
  
—
    
—
    
—
    
(12,507
)
Reduction of employee stock notes receivable
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
4
    
—
    
4
  
Balance as of June 30, 2007
    
—
    
37,661,381
    
11,495,377
  
$
—
    
377
    
115
    
94,473
    
518,910
    
(2,697
)
  
—
    
611,178
  
                                                                     
Balance as of March 31, 2008
    
—
    
37,912,773
    
11,495,377
  
$
—
    
379
    
115
    
97,875
    
442,034
    
(2,296
)
  
—
    
538,107
  
Comprehensive income:
                                                                    
Net income
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
43,705
    
—
    
—
    
43,705
  
Total comprehensive income
                                                                
43,705
  
Issuance of common stock, net of forfeitures
    
—
    
53,467
    
—
    
—
    
1
    
—
    
310
    
—
    
—
    
—
    
311
  
Compensation expense for stock based awards
    
—
    
—
    
—
    
—
    
—
    
—
    
1,848
    
—
    
—
    
—
    
1,848
  
Repurchase of common stock
    
—
    
(13,994
)
  
—
    
—
    
—
    
—
    
(179
)
  
—
    
—
    
—
    
(179
)
Reduction of employee stock notes receivable
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
250
    
—
    
250
  
Balance as of June 30, 2008
    
—
    
37,952,246
    
11,495,377
  
$
—
    
380
    
115
    
99,854
    
485,739
    
(2,046
)
  
—
    
584,042
  
                                                                     
Balance as of December 31, 2006
    
—
    
39,035,169
    
13,505,812
  
$
—
    
390
    
135
    
177,678
    
496,341
    
(2,825
)
  
131
    
671,850
  
Comprehensive income:
                                                                    
Net income
   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
29,534
    
—
    
—
    
29,534
  
Other comprehensive income:
                                                                    
Foreign currency translation
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(322
)
  
(322
)
Non-pension postretirement benefit plan
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
191
    
191
  
Total comprehensive income
                                                                
29,403
  
Cash dividend on Class A and Class B common stock - $0.14 per share
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(6,904
)
  
—
    
—
    
(6,904
)
Adjustment to adopt provisions of
                                                                    
FASB Interpretation No. 48
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(61
)
  
—
    
—
    
(61
)
Issuance of common stock, net of forfeitures
    
—
    
152,273
    
—
    
—
    
2
    
—
    
3,219
    
—
    
—
    
—
    
3,221
  
Compensation expense for stock based awards
    
—
    
—
    
—
    
—
    
—
    
—
    
1,530
    
—
    
—
    
—
    
1,530
  
Repurchase of common stock
    
—
    
(3,062,070
)
  
—
    
—
    
(30
)
  
—
    
(75,452
)
  
—
    
—
    
—
    
(75,482
)
Conversion of common stock
    
—
    
2,010,435
    
(2,010,435
)
  
—
    
20
    
(20
)
  
—
    
—
    
—
    
—
    
—
  
Acquisition of enterprise under common control
    
—
    
(474,426
)
  
—
    
—
    
(5
)
  
—
    
(12,502
)
  
—
    
—
    
—
    
(12,507
)
Reduction of employee stock notes receivable
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
128
    
—
    
128
  
Balance as of June 30, 2007
    
—
    
37,661,381
    
11,495,377
  
$
—
    
377
    
115
    
94,473
    
518,910
    
(2,697
)
  
—
    
611,178
  
                                                                     
Balance as of December 31, 2007
    
—
    
37,980,617
    
11,495,377
  
$
—
    
380
    
115
    
96,185
    
515,317
    
(3,118
)
  
—
    
608,879
  
Comprehensive income:
                                                                    
Net loss
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(26,120
)
  
—
    
—
    
(26,120
)
Total comprehensive income (loss)
                                                                
(26,120
)
Cash dividend on Class A and Class B common stock - $0.07 per share
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
(3,458
)
  
—
    
—
    
(3,458
)
Issuance of common stock, net of forfeitures
    
—
    
33,687
    
—
    
—
    
—
    
—
    
1,073
    
—
    
—
    
—
    
1,073
  
Compensation expense for stock based awards
    
—
    
—
    
—
    
—
    
—
    
—
    
3,263
    
—
    
—
    
—
    
3,263
  
Repurchase of common stock
    
—
    
(62,058
)
  
—
    
—
    
—
    
—
    
(667
)
  
—
    
—
    
—
    
(667
)
Reduction of employee stock notes receivable
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
    
1,072
    
—
    
1,072
  
Balance as of June 30, 2008
    
—
    
37,952,246
    
11,495,377
  
$
—
    
380
    
115
    
99,854
    
485,739
    
(2,046
)
  
—
    
584,042
  

See accompanying notes to consolidated financial statements.

4

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

   
Six months ended June 30,
  
   
2008
  
2007
  
             
Net income (loss)
  
$
(26,120
)
  
29,534
  
Income (loss) from discontinued operations
    
981
    
(3,325
)
Income (loss) from continuing operations
    
(27,101
)
  
32,859
  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities, net of business acquisitions:
              
Depreciation and amortization, including loan premiums and deferred origination costs
    
74,312
    
150,465
  
Derivative market value adjustment
    
(47,462
)
  
(20,374
)
Foreign currency transaction adjustment
    
88,530
    
24,974
  
Change in value of put options issued in business acquisitions
    
538
    
1,983
  
Proceeds from termination of derivative instruments
    
7,547
    
—
  
Payments to terminate floor contracts
    
—
    
(8,100
)
Impairment expense
    
18,834
    
—
  
Loss on sale of business
    
—
    
9,041
  
Loss (gain) on sale of student loans
    
47,426
    
(2,796
)
Non-cash compensation expense
    
4,372
    
2,591
  
Deferred income tax benefit
    
(24,237
)
  
(921
)
Provision for loan losses
    
11,000
    
5,288
  
Other non-cash items
    
344
    
(2,906
)
Decrease (increase) in accrued interest receivable
    
91,778
    
(81,421
)
Decrease (increase) in accounts receivable
    
3,098
    
(6,698
)
Decrease in other assets
    
9,419
    
6,491
  
Decrease in accrued interest payable
    
(42,950
)
  
(1,545
)
(Decrease) increase in other liabilities
    
(28,351
)
  
5,667
  
Net cash flows from operating activities - continuing operations
    
187,097
    
114,598
  
Net cash flows from operating activities - discontinued operations
    
—
    
(4,467
)
Net cash provided by operating activities
    
187,097
    
110,131
  
               
Cash flows from investing activities, net of business acquisitions:
              
Originations, purchases, and consolidations of student loans, including loan premiums and deferred origination costs
    
(1,480,305
)
  
(3,390,016
)
Purchases of student loans, including loan premiums, from a related party
    
(212,888
)
  
(191,003
)
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
    
1,061,510
    
1,060,117
  
Proceeds from sale of student loans
    
1,267,826
    
89,311
  
Purchases of property and equipment, net
    
(3,721
)
  
(13,830
)
(Increase) decrease in restricted cash
    
(70,232
)
  
279,349
  
Purchases of restricted investments
    
(170,512
)
  
(239,691
)
Proceeds from maturities of restricted investments
    
160,678
    
261,597
  
Purchases of equity method investments
    
(2,988
)
  
—
  
Distributions from equity method investments
    
—
    
434
  
Business acquisitions, net of cash acquired
    
(18,000
)
  
2,211
  
Proceeds from sale of business, net of cash sold
    
—
    
7,551
  
Net cash flows from investing activities - continuing operations
    
531,368
    
(2,133,970
)
Net cash flows from investing activities - discontinued operations
    
—
    
(294
)
Net cash provided by (used in) investing activities
    
531,368
    
(2,134,264
)
               
Cash flows from financing activities:
              
Payments on bonds and notes payable
    
(5,444,408
)
  
(1,435,054
)
Proceeds from issuance of bonds and notes payable
    
4,761,143
    
3,601,480
  
Proceeds (payments) from issuance of notes payable due to a related party, net
    
9,269
    
(55,715
)
Payments of debt issuance costs
    
(14,634
)
  
(5,899
)
Dividends paid
    
(3,458
)
  
(6,904
)
Proceeds from issuance of common stock
    
423
    
951
  
Repurchases of common stock
    
(667
)
  
(75,482
)
Payments received on employee stock notes receivable
    
575
    
128
  
Net cash flows from financing activities - continuing operations
    
(691,757
)
  
2,023,505
  
Net cash flows from financing activities - discontinued operations
    
—
    
—
  
Net cash (used in) provided by financing activities
    
(691,757
)
  
2,023,505
  
               
Effect of exchange rate fluctuations on cash
    
—
    
548
  
               
Net increase (decrease) in cash and cash equivalents
    
26,708
    
(80
)
               
Cash and cash equivalents, beginning of period
    
111,746
    
106,086
  
               
Cash and cash equivalents, end of period
  
$
138,454
    
106,006
  
               
Supplemental disclosures of cash flow information:
              
Interest paid
  
$
589,578
    
630,175
  
Income taxes paid, net of refunds
  
$
14,126
    
12,130
  

See accompanying notes to consolidated financial statements.

5

NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2008 and for the three months and six months ended
June 30, 2008 and 2007 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2007 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results for the year ending December 31, 2008. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Certain amounts from 2007 have been reclassified to conform to the current period presentation.

2. Discontinued Operations 
 
On May 25, 2007, the Company sold EDULINX Canada Corporation (“EDULINX”), a Canadian student loan service provider and a subsidiary of the Company, for initial proceeds of $19.0 million. The Company recognized an initial net loss of $9.0 million related to this transaction. During the three months ended June 30, 2008, the Company earned $2.0 million ($1.0 million net of tax) in additional consideration as a result of the sale of EDULINX. This payment represented contingent consideration earned by the Company based on EDULINX meeting certain performance measures. As a result of the sale of EDULINX, the results of operations for EDULINX, including the contingent payment earned during the current period, are reported as discontinued operations in the accompanying consolidated statements of operations.

The components of income (loss) from discontinued operations are presented below.

   
Three months ended June 30,
  
Six months ended June 30,
  
   
2008
  
2007
  
2008
  
2007
  
                           
Operating income of discontinued operations
  
$
—
    
4,864
    
—
    
9,278
  
Income tax on operations
    
—
    
(1,958
)
  
—
    
(3,562
)
Gain (loss) on disposal
    
1,966
    
(8,151
)
  
1,966
    
(8,151
)
Income tax on disposal
    
(985
)
  
(890
)
  
(985
)
  
(890
)
Income (loss) from discontinued operations, net of tax
  
$
981
    
(6,135
)
  
981
    
(3,325
)

The following operations of EDULINX have been segregated from continuing operations and reported as discontinued operations through the date of disposition. Interest expense was not allocated to EDULINX and, therefore, all of the Company’s interest expense is included within continuing operations.

   
Three months ended
  
Six months ended
  
   
June 30, 2007
  
June 30, 2007
  
               
Net interest income
  
$
53
    
124
  
Other income
    
12,480
    
31,511
  
Operating expenses
    
(7,669
)
  
(22,357
)
Income before income taxes
    
4,864
    
9,278
  
Income tax expense
    
1,958
    
3,562
  
               
Operating income of discontinued operations, net of tax
  
$
2,906
    
5,716
  

6

As a result of the contingent consideration received during the second quarter 2008, the Company earned $0.8 million of foreign tax credits available to offset future U.S. federal income taxes. Under current tax law, these tax credits expire in 2018. The Company established a valuation allowance for these tax credits due to the Company’s assessment that this deferred tax asset did not meet the more-likely-than-not recognition criteria of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes.

3. Restructuring Charges

Legislative Impact

On September 6, 2007, the Company announced a strategic initiative to create efficiencies and lower costs in advance of the enactment of the College Cost Reduction Act, which impacted the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) in which the Company participates. In anticipation of the federally driven cuts to the student loan programs, management initiated a variety of strategies to modify the Company’s student loan business model, including lowering the cost of student loan acquisition, creating efficiencies in the Company’s asset generation business, and decreasing operating expenses through a reduction in workforce and realignment of operating facilities. Implementation of the plan began immediately and was completed as of December 31, 2007. As a result of these strategic decisions, the Company recorded restructuring charges of $15.0 million and $5.3 million in the third and fourth quarters of 2007, respectively.

Information related to the remaining restructuring accrual, which is included in “other liabilities” on the consolidated balance sheet, follows:

   
Employee
          
   
termination
  
Lease
      
   
benefits
  
terminations
  
Total
  
                     
Restructuring accrual as of December 31, 2007
  
$
1,193
    
3,682
    
4,875
  
                     
Adjustment from initial estimated charges
    
(191
)
  
—
    
(191
)
                     
Cash payments
    
(868
)
  
(358
)
  
(1,226
)
                     
Restructuring accrual as of March 31, 2008
    
134
    
3,324
    
3,458
  
                     
Cash payments
    
(134
)
  
(45
)
  
(179
)
                     
Restructuring accrual as of June 30, 2008
  
$
—
    
3,279
    
3,279
  

Capital Markets Impact

On January 23, 2008, the Company announced a plan to further reduce operating expenses related to its student loan origination and related businesses as a result of disruptions in the credit markets. Management developed a restructuring plan related to its asset generation and supporting businesses which reduced marketing, sales, service, and related support costs through a reduction in workforce of approximately 300 positions and realignment of certain operating facilities. Implementation of the plan began immediately and was completed as of June 30, 2008. As a result of these strategic decisions, the Company recorded restructuring charges of $26.5 million during the three months ended March 31, 2008 and income of $0.4 million during the three months ended June 30, 2008 to recognize adjustments from initial estimates.

7

Selected information relating to the restructuring charge follows:

   
Employee
              
   
termination
  
Lease
  
Write-down
      
   
benefits
  
terminations
  
of assets
  
Total
  
                           
Restructuring costs recognized during the three month period ended March 31, 2008
  
$
6,095
(a)
  
1,573
(b)
  
18,834
(c)
  
26,502
  
                           
Write-down of assets to net realizable value
    
—
    
—
    
(18,834
)
  
(18,834
)
                           
Cash payments
    
(4,952
)
  
—
    
—
    
(4,952
)
                           
Restructuring accrual as of March 31, 2008
    
1,143
    
1,573
    
—
    
2,716
  
                           
Adjustment from initial estimated charges
    
(190)
(a)
  
(175)
(b)
  
—
    
(365
)
                           
Cash payments
    
(792
)
  
(369
)
  
—
    
(1,161
)
                           
Restructuring accrual as of June 30, 2008
  
$
161
    
1,029
    
—
    
1,190
  

(a) Employee termination benefits are included in "salaries and benefits" in the consolidated statements of operations.
 
(b) Lease termination costs are included in "occupancy and communications" in the consolidated statements of operations.
 
(c) Costs related to the write-down of assets are included in "impairment expense" in the consolidated statements of operations.

Selected information relating to the restructuring charge by operating segment and Corporate Activity and Overhead follows:

   
Restructuring costs
                          
   
recognized during
              
Adjustment
          
   
the three month
  
Write-down of
      
Restructuring
  
from initial
      
Restructuring
  
   
period ended
  
assets to net
  
Cash
  
accrual as of
  
estimated
  
Cash
  
accrual as of
  
Operating segment
  
March 31, 2008
  
realizable value
  
payments
  
March 31, 2008
  
charges
  
payments
  
March 31, 2008
  
                                             
Student Loan and Guaranty Servicing
  
$
6,010
    
(5,074
)
  
(430
)
  
506
    
(104
)
  
(352
)
  
50
  
                                             
Tuition Payment Processing and Campus Commerce
    
—
    
—
    
—
    
—
    
—
    
—
    
—
  
                                             
Enrollment Services and List Management
    
312
    
—
    
(291
)
  
21
    
(15
)
  
(19
)
  
(13
)
                                             
Software and Technical Services
    
518
    
—
    
(472
)
  
46
    
(8
)
  
—
    
38
  
                                             
Asset Generation and Management
    
11,287
    
(9,351
)
  
(1,806
)
  
130
    
(52
)
  
(72
)
  
6
  
                                             
Corporate Activity and Overhead
    
8,375
    
(4,409
)
  
(1,953
)
  
2,013
    
(186
)
  
(718
)
  
1,109
  
                                             
   
$
26,502
    
(18,834
)
  
(4,952
)
  
2,716
    
(365
)
  
(1,161
)
  
1,190
  

4. Legal, Industry, and Legislative Developments

Legal Proceedings

General

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 student loan borrowers disputing the manner in which their student loans have been processed and disputes with other business entities. 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.

Municipal Derivative Bid Practices Investigation

On February 8, 2008, Shockley Financial Corp. (“SFC”), an indirect wholly owned subsidiary of the Company with two associates that provides investment advisory services for the investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury subpoena issued by the U.S. District Court for the Southern District of New York upon application of the Antitrust Division of the U.S. Department of Justice. The subpoena seeks certain information and documents from SFC in connection with the Department of Justice’s ongoing criminal investigation of the bond industry with respect to possible anti-competitive practices related to awards of guaranteed investment contracts (“GICs”) and other products for the investment of proceeds from bond issuances. The Company and SFC are cooperating with the investigation.

8

In addition, on March 5, 2008, SFC received a subpoena from the Securities and Exchange Commission (the “SEC”) related to an ongoing industry-wide investigation concerning the bidding of municipal GICs. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 6, 2008, SFC received a subpoena from the New York Attorney General (the “NYAG”) relating to the NYAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 12, 2008, SFC received a subpoena from the Florida Attorney General (the “FLAG”) relating to the FLAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

SFC has also been named as a defendant in a total of eight substantially identical purported class action lawsuits. In each of the lawsuits, a large number of financial institutions and financial service providers, including SFC, are named as defendants. The complaints allege that the defendants engaged in a conspiracy not to compete and to fix prices and rig bids for municipal derivatives (including GICs) sold to issuers of municipal bonds. All the complaints assert claims for violations of Section 1 of the Sherman Act and fraudulent concealment, and three complaints also assert claims for unfair competition and violation of the California Cartwright Act. On June 16, 2008, the United States Judicial Panel on Multidistrict Litigation issued an order transferring the cases then before it to the U.S. District Court for the Southern District of New York which consolidated several cases under the caption Hinds County, Mississippi v. Wachovia Bank, N.A. et al. SFC intends to vigorously contest these purported class action lawsuits.

SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to predict the ultimate outcome of the investigations or the class action lawsuits.
 
Industry Inquiries and Investigations

On January 11, 2007, the Company received a letter from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into preferred lender list activities. Since January 2007, a number of state attorneys general, including the NYAG, and the U.S. Senate Committee on Health, Education, Labor, and Pensions also announced or are reportedly conducting broad inquiries or investigations of the activities of various participants in the student loan industry, including activities which may involve perceived conflicts of interest. A focus of the inquiries or investigations has been on any financial arrangements among student loan lenders and other industry participants which may facilitate increased volumes of student loans for particular lenders. Like many other student loan lenders, the Company received requests for information from certain state attorneys general and the Chairman of the U.S. Senate Committee on Health, Education, Labor, and Pensions in connection with their inquiries or investigations. In addition, the Company received subpoenas for information from the NYAG, the New Jersey Attorney General, and the Ohio Attorney General. In each case the Company is cooperating with the requests and subpoenas for information that it has received.

On July 31, 2007, the Company announced that it had agreed with the NYAG to adopt the NYAG’s Code of Conduct, which is substantially similar to the Company's previously adopted Nelnet Student Loan Code of Conduct. As part of the agreement, the Company agreed to contribute $2.0 million to a national fund for educating high school seniors and their parents regarding the financial aid process.

On October 10, 2007, the Company received a subpoena from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into direct-to-consumer marketing practices of student lenders. The Company is cooperating with the subpoena.

While the Company cannot predict the ultimate outcome of any inquiry or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations.
 
Department of Education Review
 
The Department of Education periodically reviews participants in the FFEL Program for compliance with program provisions. On June 28, 2007, the Department of Education notified the Company that it would be conducting a review of the Company’s administration of the FFEL Program under the Higher Education Act. The Company understands that the Department of Education has selected several schools and lenders for review. Specifically, the Department is reviewing the Company’s practices in connection with the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher Education Act and the associated regulations which allow borrowers to have a choice of lenders. The Company has responded to the Department of Education’s requests for information and documentation and is cooperating with their review.

9

While the Company cannot predict the ultimate outcome of the review, the Company believes its activities have materially complied with the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations.

Department of Justice

In connection with the Company’s settlement with the Department of Education in January 2007 to resolve the Office of Inspector General of the Department of Education (the “OIG”) audit report with respect to the Company’s student loan portfolio receiving special allowance payments at a minimum 9.5% interest rate, the Company was informed by the Department of Education that a civil attorney with the Department of Justice had opened a file regarding the issues set forth in the OIG report, which the Company understands is common procedure following an OIG audit report. The Company has engaged in discussions with and provided information to the Department of Justice in connection with the review.

While the Company is unable to predict the ultimate outcome of the review, the Company believes its practices complied with applicable law, including the provisions of the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations.

Internal Revenue Service

In October 2007, the Company received a letter from the Internal Revenue Service (“IRS”) revoking a previously issued Private Letter Ruling retroactive to September 30, 2003 concerning the Company’s arbitrage and excess interest calculations on certain of its tax-exempt bonds. The IRS letter provided procedures for the Company to follow to appeal the retroactive application of the revocation. The Company responded to the IRS in November 2007 requesting relief from retroactivity. In March 2008, the IRS responded with a final determination that the revocation of the Private Letter Ruling will apply prospectively beginning on July 1, 2008. Management believes that a July 1, 2008 prospective application of the Private Letter Ruling will not have a significant impact on the Company’s operating results.

Legislative Developments

On May 7, 2008, the President signed into law H.R. 5715, the Ensuring Continued Access to Student Loans Act of 2008 (“HR 5715”). This legislation contains provisions that expand the federal government’s support of financing the cost of higher education. Among other things, HR 5715:

 
·
Increases statutory limits on annual and aggregate borrowing for FFELP loans; and
 
·
Allows the Department to act as a secondary market and enter into forward purchasing agreements with lenders.

As a result of this legislation, the Departments of Education and Treasury developed a plan. Among other things, this plan:

 
·
Offers to purchase loans from lenders for the 2008-2009 academic year and offers lenders access to short-term liquidity; and
 
·
Commits to continue working with the FFELP community to explore programs to reengage the capital markets in the long-run.

On May 22, 2008, the Company announced that, as a result of the above plan, it will continue originating new federal student loans for the 2008-2009 academic year to all students regardless of the school they attend.

On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from lenders. See note 7 for information related to the Department’s programs.
 
On August 6, 2008, having passed in identical form in both the House of Representatives and the Senate, the Higher Education Opportunity Act was sent to the President. Upon the President’s approval, this legislation will become law. The Higher Education Opportunity Act amends the Higher Education Act of 1965 (“HEA”) to revise and reauthorize HEA programs. In addition, among other items, this legislation:

 
·
Contains lender and school code of conduct requirements applicable to FFELP and private education lenders;
 
·
Contains additional provisions and reporting requirements for lenders and schools participating in preferred lender arrangements; and
 
·
Contains additional disclosures that FFELP lenders must make to borrowers as well as added FFELP loan servicing requirements for lenders.
 
10
 

5. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:

   
As of
  
As of
  
   
June 30, 2008
  
December 31, 2007
  
           
Federally insured loans
  
$
25,332,173
    
26,054,398
  
Non-federally insured loans
    
279,953
    
274,815
  
     
25,612,126
    
26,329,213
  
Unamortized loan premiums and deferred origination costs
    
429,090
    
452,501
  
Allowance for loan losses - federally insured loans
    
(24,084
)
  
(24,534
)
Allowance for loan losses - non-federally insured loans
    
(23,825